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How to calculate your ecommerce return rate: 2020 statistics and best practices

illustration of a person holding up a graph

It’s impossible to talk about ecommerce without talking about returns. As ecommerce return rates continue to skyrocket, this leaves many merchants scratching their heads and wondering whether they can survive the ‘new normal’.

2020 saw $428 billion in merchandise returned to retailers (10.% percent of total U.S. retail sales) while online returns had more than doubled compared with 2019.

But before we can talk about ways to lower your return rate, you need to understand how return rates are calculated – and why your ecommerce return rate should never be taken at face value. 

What is an ecommerce return rate?

Your ecommerce return rate refers to the frequency that customers return items at your online store. Ecommerce return rates are represented as a percentage of the total number of products sold within a specified timeframe. 

The rate of online returns can differ widely between retailers, depending on the generosity of their returns policy and the products they’re selling. This is why return rates in ecommerce should never be taken at face value.

Unfortunately, this is exactly what many commentators do when talking about the ‘plague of returns’ in online shopping. We see lots of scary statistics, such as the Wall Street Journal talking about ecommerce returns jumping 70% last year compared with 2019, but little discussion about the causes.

That’s why it’s important to situate your return rate statistics in the context of consumer behavior and returns management strategies. It’s only by understanding why returns are happening that merchants can achieve effective returns optimization.

How do you calculate your ecommerce return rate?

Calculating your ecommerce return rate is quite simple. It’s a measure of how many units were returned within a certain period versus the total number sold. 

So, if you sold 15,000 units within six months and had 5000 units returned, your return rate would be:

5000 / 15,000 x 100 = 33%

However, your Rate of Return is a very high-level metric. As we mentioned above, it doesn’t answer the question of ‘how’ or ‘why’ returns are taking place.

For example, your Rate of Return doesn’t tell you how many of these returns were preventable, or your conversion rate for changing returns into exchanges. This is why your ecommerce return rate should always be looked at alongside more detailed metrics, such as:

Your refund rate

Your refund rate is exactly what it sounds like, the total number of refunds versus your total number of returns.

So, if we continue with the above example with 5000 returned units and 1000 refunds, your refund rate would be expressed like this:

1000 / 5000 x 100 = 20%

Returns and refunds are often conflated in discussions about returns management. But it’s important to understand that they represent very different things. 

Just because a customer has returned a product doesn’t necessarily mean they’ve gotten a refund. For example, if a customer has swapped a pair of sneakers for a different size, this would be considered an exchange. 

So, if a customer does want a refund, this could indicate a much deeper issue. 

If they’re received a defective product or the product didn’t meet their expectations, they could very fall out of your sales funnel for good. That’s why it’s important to keep a close eye on your refund rate as a measure of customer retention. 

Your Exchange Rate

In retail, converting returns into exchanges is always the best possible outcome. 

Your exchange rate is calculated by dividing your exchanges by the total number of returned orders. So, with 5000 returned units and 4000 exchanges, your exchange rate would be

4000 / 5000 x 100 = 80%

In an ideal world, your exchange rate should always be higher than your refund rate. This is because if a product is the wrong size or color, it should be a straightforward process to swap it for the correct item. 

As well as saving you from losing revenue, seamless exchanges add a huge amount of value to the customer experience. An easy exchange process with expert recommendations shows your customers that you care about offering a positive post-purchase experience, thus increasing brand loyalty.

By tracking your exchange rate, you can understand whether your brand is successful in steering customers towards more desirable return behaviors. 

So, if 80% of returns involved some form of exchange activity while 20% were refunded, this indicates customers are interested in maintaining a relationship with your brand.

What is the average return rate for ecommerce?

Ecommerce has always boasted a higher return rate than brick and mortar stores. This is partly due to the inability of consumers to view and try products in advance. However, key differences in the online shopping journey also mean that consumer behaviors are very different than offline.

For example, many online retailers use free shipping thresholds to entice customers to spend more money. But if an online store also offers free returns, this enables customers to add additional items to their cart to qualify with the intent of returning. Other popular practices include bracketing, where consumers buy multiple versions of the same item to avoid having to make exchanges.

Return rates can also be skewed by peaks such as the holiday season, which typically create a huge spike in return activity.

Return rates across selling channels

Ecommerce return rates don’t look quite so apocalyptic when averaged as the total sum of all product categories. Yet this gives no context to how return rates vary hugely between different types of products. This means that some ecommerce businesses will require more sophisticated returns management strategies than others.

Ecommerce return rates by category

When we break down return rates by product type, this is where things get a bit more interesting:

chart of percentage of US consumers who returns a product in the category in the last 12 months: clothing, electronics, footwear, health, home improvement/diy, food/drink, furniture/furnishings, appliances, beauty/grooming, books/music/games.

It shouldn’t come as a surprise that clothing sees some of the highest return rates in ecommerce, while beauty and home furnishings have some of the lowest. Even with the best product photos on your ecommerce site, it’s impossible to avoid the scenario of consumers trying on a purchased garment and finding that it’s not to their liking. 

At first glance, beauty and home furnishings might not appear to have much in common. But they both provide excellent case studies for how retailers can lower their return rates using AR technology.

From Sephora’s Virtual Artist to L’Oreal’s multi-brand Makeup Genius app, cosmetics brands were among the first to embrace the power of virtual ‘try-ons’. Likewise, brands like Home Depot and Wayfair have made it easy for consumers to ‘place’ items from mirrors to couches within their own homes to aid purchasing decisions.

In sum, AR allows consumers to be certain that an item is suitable before they click ‘purchase’, thereby reducing one of the most common reasons for returns. In fact, over half of consumers (61%) say they prefer to make purchases from sites that offer AR technology.

On that note, let’s take a closer look at why consumers choose to make returns. 

Top reasons for ecommerce returns

By utilizing 2019 returns data from Narvar, we can once again see how reasons for returning affect some product categories more than others:

chart of return reasons for Amazon products and product returns to other retailers
Source: Narvar consumer report 2019

For example, “the size, fit, or color being wrong” is clearly going to affect clothing and apparel brands the most, while having practically no effect on something like electronics.

We can also see how there are some reasons for returning that online sellers can’t do much to combat, such as “I didn’t like it” or “I changed my mind.” However, other reasons such as damaged items, inaccurate product descriptions, and late delivery are very much within your control.

So, if you’re wanting to combat avoidable reasons for product returns, here are a few areas to focus on:

  • Making it easy for customers to make exchanges
  • Adding comprehensive product descriptions and high-quality product photos to your product pages
  • Ensuring that products are being packed securely
  • Offering both standard and expedited shipping options
  • Creating an easy-to-understand return policy (read our dedicated guide.)
  • Proactively engaging with customers about their shopping experience

The real cost of ecommerce returns

Just as there’s no such thing as free shipping, there’s no such thing a free returns or exchanges either. Somebody has to foot the bill for reverse logistics – and it’s usually the merchant.

To make matters worse, the cost of returns is only getting more expensive over time. 

Why?

Because customer expectations for the returns process have never been higher. Let’s take a look at some stats:

  • 72% expect a refund within 5 days of returning an item.
  • 69% don’t want to pay for return shipping or packaging.
  • 8 out of 10 will check a return policy before purchasing 
  • 52% have abandoned an online purchase due to fears of a difficult return process.

Matters have been made tougher by the COVID-19 pandemic, which has caused consumers to rely more heavily on ecommerce to fulfill their needs. 

With many consumers either unwilling or unable to shop in person, some 40% of retailers have responded by relaxing their returns policies and turning free return shipping into a standard offering. With peak season surcharges by major carriers now the norm, this is adding significantly to retailer’s return costs.

To calculate the true cost of your returns, you also need to consider the following:

  • Processing costs
  • Restocking costs
  • Labor costs
  • Packaging/shipping costs
  • Loss of profit margins

What is a ‘good’ product return rate?

This might seem like an odd question given what we’ve just been talking about. Is there such thing as a ‘good’ return rate in ecommerce? Shouldn’t returns ideally be as low as possible?

Here’s the thing; just because your return rate is lower than average for your product, it doesn’t mean that you’re offering a positive customer experience.

If you put in place a deliberately complex return policy to discourage customers from making returns, your refund rate will drop. But so too will your retention rate.

For example, practices such as forcing customers to take store credit instead of a refund will certainly boost your exchange rate. But if you’re not empowering returners to actively choose this option, it ends up being an artificial metric. Such hardball tactics are likely to push them away from your business once that credit is redeemed.

After all, why would an online shopper want to support a business that doesn’t support them?

But by looking at returns as a tool for growth, they can become a fantastic driver of profit and customer loyalty. Because contrary to popular belief, serial returners CAN be good for your business.

As the CEO and co-founder of Happy Returns, David Sobie, said in a recent podcast, data shows that a retailer’s most profitable customers are those who make returns more often than average. They buy a lot, but they also return a lot – and most importantly, they keep coming back. 

So, while it seems counterintuitive, the bottom line is that hassle-free return policies are the key to customer retention. 

Why? Because consumers want to support brands who make their lives easier – not harder. If your customers have confidence in your returns process, they won’t hesitate to purchase from you again. A whopping 92% of shoppers say they will buy again from a retailer if the returns process was easy.

In sum, your return rate should never be taken as a reflection of the health of your business. As we mentioned earlier in this post, having a high return and exchange rate indicates a positive returns experience. It shows that you’re maximizing revenue opportunities – and creating happy customers.

How should I handle my returns?

So, what does all this mean in regards to how you should be handling online returns?

No merchant wants to see their ecommerce sales disappearing down the drain, but it’s important to take a long-term view of your returns activity. 

A customer who returns an item and accepts store credit might make another purchase immediately, in three months – or not at all. 

Your returns management strategy has a massive influence over which category your customer falls into, and whether they will decide to purchase from you again in the future.

That’s why you should take a proactive approach to returns management by making the end-to-end process not just a positive experience for your customers, but genuinely valuable to your business.

Offering in-store return options

In-store return options were once in minority for ecommerce returns, with many brands choosing to silo their returns processes to prevent O2O (online-to-offline) activity. 

However, this has undergone a huge change as a result of the pandemic, with consumers showing an increasing preference to return items in person. According to Narvar, 31% of consumers wish they could return items in convenient locations, such as grocery stores or pharmacies – up from just 17% in 2019.

In-store returns offer both businesses and consumers notable advantages. It dramatically reduces return shipping costs by allowing you to ship items in bulk for returns processing, while also ensuring faster refunds for your customers. 

By partnering with a returns management provider like Happy Returns, you can set up a network of ‘return bars’ in convenient locations for your customers, giving them greater flexibility in their return journeys.  

Using returns management software to assist with exchanges

Being able to facilitate seamless exchanges is the key to keeping your refund rate down and your customer retention high. But your brand cannot make an exchange take place within a single transaction, you’re adding a lot of friction to the returns experience that’s completely avoidable.

Utilizing a returns tool such as Loop or Returnly allows your customers to facilitate easy, one-click exchanges for different colors or sizes – no tireless searching through your website catalog required. Moreover, data collected from the returns process gives your brand advanced insights into the reasons for customer returns, allowing you to take steps to optimize your returns experience.

Partnering with a 3PL experienced in reverse logistics

Outsourcing your ecommerce fulfillment is one of the best ways to ensure that you’re combating online returns at the source. Partnering with an advanced fulfillment provider like Whiplash allows you to automate the initial fulfillment process to prevent costly order errors and coordinate a streamlined returns management process – from processing to resale. 

Take advantage of our SmartRate Selection tool to access the most cost-effective return shipping rates for your business. Leverage our built-in integrations of the biggest returns management tools – Happy Returns, Loop, and Returnly – to give your customers the most seamless returns experience. 

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