Online Returns: A Best Practice Guide

Just about everybody has bought something from a physical retail store, and asked the cashier what the returns policy was. Despite the added benefit of “trying before you buy”, for various reasons a certain percentage of goods will need to be returned. The online world is no different, however, given your customer might be literally thousands of kilometres away, it certainly adds a new degree of complexity.

To illustrate a best practice example, my wife the other day brought a jacket online from prominent US clothing retailer Victoria’s Secret. Sent via UPS, the goods arrived in about three days but she soon learned that an Australian small size equates to an American extra small size. The package included a pre-printed form with instructions of what to do if the goods were the wrong size, colour or unsuitable for the customer along with a UPS shipping label and a number to call to organise a collection. My wife followed the instructions, and about a week later she received a new coat in the correct size. Needless to say, her positive customer experience encouraged her to shop with them again.

Given that a Free Delivery and Returns policy was included in the coat’s $299 retail price and my industry data shows the sales costs of delivery and return could range from $50 to $150, this raises an interesting conundrum on how to offer best practice returns without cannibalising your profits. This is something we regularly advise our clients on, so here are a few tips:

Firstly, work out what percentage of your sales equates to a return. Depending on what you’re selling (clothes and shoes will always be the highest), we typically see ranges from 1% at the lower end to 30% at the higher end. Next, work out what your average cost of return is, and together with your return ratio average that cost across your annual orders. For example, a retailer offering free returns with a 2% return rate and a $10 average shipping cost, across 1000 annual orders (meaning 20 would be returned) would only be costing them 20 cents per order. Even if the return rate was ten times higher (20%), it would still only be $2 per order – which as percentage of gross profit is unlikely to be something to worry about.

However, implementing the above as a cost effective policy is contingent on two things – cheap return shipping prices, and no manual labour. This is the most common trap we see retailers falling into in the market. If you are trading directly with a carrier, it is highly likely you do not have reciprocal or “all ports” rates, as most carriers typically issue rates from your sending locations only. What this means is that what might cost you $10 to get it there could cost you $30 to get it back! Not to mention the further costs and challenges of getting them a shipping label.

This was a major problem for one of our clients Medion, a major electronics distributor to Aldi Supermarkets. Aldi offers an unconditional 60 day, no questions asked return policy, and the distributor is required to both organise and pay for the returns charged. The solution the implemented was a service portal that was pre-populated with the items and return address, meaning that the customer only had to input their address and nominate a date of collection, allowing the instantaneous generation of a shipping label online that the customer can simply print using any normal printer. Behind the scenes, the solution also defaulted to the cheapest available service from our reciprocal rates and automatically booked the collection with the courier, minimising return and labour costs. I can’t stress the importance of automation enough. Australia’s relatively high wage levels means anything involving a human being is likely to add a significant cost component to that activity.

Online consumers are getting exposed to all sorts of best practice mechanisms these days, so every element of their user experience needs to be hassle free. If done right, your customers will return too.

2 thoughts on “Online Returns: A Best Practice Guide

  1. Nice article I wonder Australia Post would offer reciprocal rates?

    • May
    • 9th November

    Should customers always have to let the company know that they want to return an item which was purchased online and if they do, is online initiation best practice in the retail industry or not?


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