E-commerce News and Insights
May 28, 2020

The Perfect Rate of Returns: What If a Higher Rate of Returns Were a Good Thing for Your Business?

Okay, we lied—there is no perfect rate of returns. But trust us, there is a much better way to look at returns. A way that will allow you to optimize for the overall success of your business, and not just how often your customers request returns.

This isn’t to say that you shouldn’t monitor your returns, optimize the process, and compare your business with industry benchmarks. You absolutely should. But, looking at your business’ return rate compared to industry benchmarks—or even your direct competitors—is not, in and of itself, a telling measurement.

While it’s easy to reach the simple conclusion that a return rate lower than the industry average is a good sign for your business, without more context it can be misleading, and even detrimental to your growth.

Think about how a business analyzes costs. Sure, in isolation, costs going down seems like a positive indicator. But, what if increased costs lead to faster growth—perhaps a superior product offering from research and development, or greater sales and marketing?

Any experienced CFO would tell you that ROI is a much more telling indicator than costs alone. For example, if a business knows that every additional dollar of marketing spend will lead to two dollars of new revenue, it would be irresponsible to NOT increase costs.

So… how does this relate to returns? Simple, you need to look at more than the rate or volume of returns to determine if your business is handling returns well, or not. This is most clearly evidenced by more and more brands making the intentional choice to increase returns.

You may ask, “why would a merchant want to increase returns?” It’s because they’re using returns as a growth driver. They’ve figured out, for their respective businesses, that a higher rate of returns actually nets out to an increase in sales and repeat purchasing. So much so, that the overall uptick in business far outweighs the increased costs of more frequent returns.

Brands like Warby Parker, La Perla, and Mott & Bow have adopted “try-before-you-buy” options for customers. These brands are actually shipping products to customers in advance of payment (or shipping multiple sizes for the price of one to try out) and only charging customers in the event that they decide to keep the items.

Obviously, a shift from a traditional “pay-before-you-get-your-items” approach to “try-before-you-buy” will result in a spike in returns for a business. And, if we were to evaluate these brands on a narrow “perfect rate of returns” mindset, we’d come to the conclusion that they are handling returns “poorly.” But, this is far from the truth.

Let’s look at a quick example. Say, my business, we’ll call it Luigi’s Hats, has an average order value of $100 with 1000 orders per month, a return rate of 7%, and a cost of $15 for every return it processes. Now, let’s say that I decide to introduce a new policy where I allow customers to place orders, receive their orders, and only charge them if they have not requested a return within 7 days of receiving their item. Even if this results in a 50% increase in my rate of returns, just a 5% increase in total orders is enough to outweigh the added costs of significantly higher returns.

With the proper promotion, I actually think that my store could see a much greater increase in total orders. If I were to achieve a 15% increase in overall order volume (a more reasonable boost based on proper promotion), I’d see a 10% increase in net profit, even with the 50% increase in return rate.

So, when we think about the “perfect rate,” what we should do is look at the growth of total revenue, total order volume, and customer retention alongside the rate of returns. If all of these other metrics are flat—or worse, going down—and your return rate is rising, then you have a problem. However, if revenue and customer retention are rising as well, a rising return rate could be an indicator of growth.

Ultimately, just like how you’d gauge the costs for running a business, the return rate is also an important metric to monitor, but it’s also not a strong indicator of performance on its own. So, what really is the perfect rate of returns?

It’s a balance that is distinct and unique to each individual business. A “great” return rate for one business may not be so optimal for another. As you evaluate your business’s return rate and return policies, you need to evaluate any changes in a broader context. You should consider how a change in your return policy will impact conversion rates, cart sizes, and customer retention and satisfaction.

So, if there is no one “perfect rate of returns,” how can you determine how your business is performing and what your optimal rate should be?

Don’t worry. We didn’t come empty-handed. To start, let’s look at where the industry averages stand today. Based on Shippo’s span across over 50K merchants, the industry averages are:

Remember, this is only a starting point. We recommend looking deeper and accessing the overall impact of your return policy and operations on your business.

First, what is the state of your current return policy and how do you communicate and promote it to your customers and prospects?

If you have a generally restrictive policy—maybe you only allow returns on certain items or under certain conditions and/or you have an intentionally complex or difficult process to facilitate return requests—you’ll hopefully fall below the average rate for your industry. But more importantly, you could be missing out, both on higher conversion rates and more repeat business.

Based on data from our partners, ShipBob, 95% of customers will purchase again from a merchant following a positive returns experience—over 3x more than following a negative returns experience. Moreover, 93% of customers report that a free return policy is an important factor in purchasing decisions. So, if your low return rate comes at the expense of customer experience, the net result could be far worse for your business than taking on a higher volume of returns.

If you’re on the other end of the spectrum—you’ve got the most liberal and customer-friendly return policy—you, more likely than not, will land above the average rate of returns for your business. But again, this may not be a bad thing.

To really understand whether your perceived “better customer experience” is resulting in a net positive impact for your business, you can look at the rate of repeat purchases from customers that you’ve processed returns for. If customers are still coming back after an initial return, it is a very strong indicator for your business. As I’ve written about before, optimizing for long-term customer relationships over simple transitions is absolutely the way to go.

Another element you should consider when evaluating the effectiveness of your return policy—and how close to “perfect” your rate of returns stands—is how your metrics have changed over time. Especially if you’ve adopted changes to your returns policy, the promotion of, and the associated costs.

For example, if you shifted over to “free returns” from a “customer-pays-shipping” model, your return volume and costs will almost certainly have gone up. However, if you promoted and executed these changes well, you hopefully have seen an increase in conversion rates (and thus, overall order volume) and maybe, even more, repeat purchasing. You can use a model like the one in the example from Luigi’s hats to determine whether these changes resulted in net positive results for your business.

Comparing pre- vs. post-change metrics is good. Running a randomized A/B test is even better. That way, you avoid other forms of bias like seasonality in your analysis. If you have the resources and the time, you can actually test different levels of the returns experience and evaluate the overall impacts before rolling out a full-scale update.

In the event that you have made big changes to your return policy and process, but haven’t seen the results that you were hoping for, that’s okay. Optimization is often not a straight path. Ask yourself: did you do enough to promote and communicate your updates? Did you truly deliver positive experiences for your customers? (And, did you ask them?) Take these learnings and keep on testing.

Or, if you find that a super liberal return policy really is not a good fit for your business, that’s okay, too. Remember, the whole point here is that there is no one-size-fits-all “perfect rate of returns” or perfect return policy for all e-commerce businesses.

While it would be easy for me to tell that “5.32% is the perfect rate of returns for your business,” it would be a lie (or a very, very lucky and coincidental guess). And it’s not just me. The truth is that without deeply understanding your business and looking at the metrics and customer feedback first-hand, no one can actually pinpoint the “perfect rate of returns” for your business.

Instead, I’ve outlined the next best thing, a methodology and process for how you can determine what is best for your business—and hopefully, make customers happy and put a few extra dollars of profit in your pocket at the same time.

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Mario Paganini
likes running and eating vegetables. Previously worked at Shippo.

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