Returns are inevitable for online retailers. They simply can’t be avoided.
However, there’s plenty of opportunity for you to use eCommerce reverse logistics to increase conversions, build customer loyalty and enhance your brand’s reputation.
What’s more, your returns process plays a key role in creating both a positive customer experience and an efficient order management strategy.
In this article, we discuss the growing problem of eCommerce returns, how to improve your reverse logistics, whether or not you should outsource your returns management and the hidden costs involved with reverse logistics.
The growing problem of eCommerce returns
Did you know that eCommerce returns are at an all-time high?
In fact, the average online returns rate is 15%, while in-store is between 5-10%.
And that’s not all.
During peak selling periods (such as holidays) online returns can increase to more than 40%.
In a Gartner research study of three hundred retailers, it was found that only 48% of the products that are returned can be resold at full price, creating a double hit to the bottom line – the cost of reverse logistics and the reduced value for the items to be resold.
One of the main problems with this is that the cost of returns is generally high, adding an estimated 8-10% to the cost price of a product. In fact, reverse logistics cost almost one and a half times more than regular forward logistics.
On top of this, if a customer has to return an item to your business then there is a higher than average chance that they won’t purchase from you again.
Not only does this create customer churn, meaning that your business loses the lifetime value of that customer, but you also lose out on the cost of acquiring the customer.
However, despite reverse logistics creating a huge headache for online retailers, returns policies are a necessity in order to influence potential buyers to make a purchase with you.
In fact, a recent report shows that 89% of online shoppers state that return policies impact their decision to shop with an online business – for better or for worse.
An additional study by Narvar surveyed 1,300 online shoppers and found the following:
- 69% do not buy online if they have to pay for return shipping
- 67% are unlikely to buy if subject to restocking fees
- 96% will shop at a retailer again based on easy or very easy returns
- 40% believe returning an item in-store is easier than posting it
Therefore, if an easy, efficient and free returns policy is key to staying competitive and maintaining customer satisfaction, online retailers must find a way to streamline the overall operation and reduce reverse logistics costs.
So, what is eCommerce reverse logistics?
As you’ll likely know, reverse logistics is concerned with the returning of products.
Most eCommerce retailers view reverse logistics as a way to get a product that has been returned by a customer back to the vendor. Manufacturers, on the other hand, see it as the process of receiving defective products back from the user.
In other words, reverse logistics is about moving goods from their point of consumption back to their point of origin, in order to recapture value or dispose of them.
As such, reverse logistics includes all the operations it takes to manage the physical movement and cost of returned items.
Why should you focus on reverse logistics?
There are a number of reasons that you may choose to focus on eCommerce reverse logistics. Here are a handful of them:
Conform to legislation and governmental pressure
As the climate crisis continues to spiral, governments are putting increasing amounts of pressure on corporations to adhere to their sustainability goals.
Around £5 billion of returned goods are sent to landfills each year in the USA alone, contributing 15 million metric tons of carbon dioxide into the atmosphere.
In addition, many retail companies don’t have the right technology in place to handle nuances in returns (e.g. a hole in a t-shirt compared to wrongly fitting shoes) so often sell items on at low cost to discounters via a web of shipping, driving and flying.
This, of course, increases an online retailer’s carbon footprint.
Concepts such as cradle to grave, cradle to cradle and extended producer responsibility are terms that have been adopted by governments in order to push companies into a more environmentally friendly way of coping with the waste from their products.
One legislative illustration of this is the Waste Electrical and Electronic Equipment Directive (WEEE) which has a big impact on the electronics industry.
WEEE sets out collection, recycling and recovery targets for all electrical goods and became European Law in February 2003.
Improve customer experience
As we have touched on briefly already, your reverse logistics process is integral to perfecting the customer experience.
Online shoppers around the world believe that a responsive, smooth and low cost or free returns management process can be a purchasing differentiator as well as a factor for repeat purchasing.
Create a source of additional revenue
You may find that eCommerce reverse logistics holds significant revenue opportunities.
Reclaiming revenue by repairing, remanufacturing or reconfiguring product returns.
You may also be able to extrapolate value from recycling product returns that have reached their end-of-life and marketing the output materials.
Reduce operational costs
Although smoothing out your reverse logistics process may take some time, once it’s well established then the reverse flow can create efficiencies in production, logistics and distribution costs.
For instance, you could combine the forward logistics product drop-off with a reverse logistics pick-up, saving you money and other resources in the long run.
Enhance brand reputation
A streamlined reverse logistics flow creates the image that your brand is customer-focused and as such enhances your brand’s reputation.
Although an easier returns process may mean you receive more returns, knowing that it’s hassle-free can encourage repeat purchasing and customer loyalty in the future.
Hidden costs within the reverse logistics supply chain
Often seen as an afterthought by online retailers, reverse logistics flows tend to start off unplanned, becoming difficult to manage and highly inefficient as a business grows.
As sellers haven’t focused on this part of the supply chain before, it’s not uncommon to find online retailers lacking the skills and know-how to work out the true cost of their returns.
Why is this a problem?
Well, for starters, product returns tend to be grossly more expensive than product delivery.
In fact, “to pick and deliver an order for a coat costs between £3 and £10 in the United Kingdom – it could cost double or treble that to be processed on the way back”, says Ian Prince, Supply Chain Director, KPMG UK.
Here are a few hidden costs within a returns supply chain:
Item collection, managing claims, re-working and/or cleaning stock
Re-working and cleaning stock to put back in your warehouse (e.g. receive return, quality assurance, putaway, re-pick, pack and deliver) can be pretty challenging as identification labels are usually removed by the customer when they open the original delivery.
There is a surprising amount of work involved when it comes to reverse logistics.
In fact, you’re likely to incur several costs at the beginning when the returns process hasn’t been automated. Specific costs to do with labor include:
- Customer relations labor costs (high customer attrition rates due to poor returns)
- Customer service labor costs (determining warranty policies and service contracts)
- Financial reconciliation costs (issuing credits)
- Sales labor costs (return rate forecasts, account management, revenue recognition)
- Traffic and shipping labor costs (managing carriers, damage incurred in transit, etc)
- Receiving and warehousing labor costs (overtime pay)
In a reverse logistics flow, there are several transport charges to think about.
Reverse logistics looks at more than just how long it takes to return products. In fact, it examines less obvious angles such as the cost of taking unsold products from retail stores or the cost of recycling packaging parts.
Pallets, crates and displays are large packaging elements that will need to be accounted for when moving products because these items are recycled for use with subsequent sales.
Repairs and recalls
Repairs (such as adding extra parts to process returned items effectively) and recalls are more examples of unplanned cost drivers, also affecting the disposition and sortation processes.
Disposition costs include stock returns, original equipment manufacturer returns, secondary market liquidation, item repair and reshipping, spare parts, recycle and destruction.
Interaction with suppliers
When products are defective, damaged or not to specification, communicating with your suppliers can be both challenging and frustrating.
After all, each supplier has its own unique process, policies and requirements for dealing with returned items. If your supplier is located overseas then the complexity is magnified – returns flow lead times are much longer, which adds more expense into the equation.
On top of this, you may struggle to get foreign suppliers to even recognize and acknowledge returned goods simply because it’s such a high cost endeavor.
Should you outsource your reverse logistics?
As you’ll have guessed by now, reverse logistics can take up a huge chunk of your time, money and other resources. On the upside, you don’t have to always go it alone.
In fact, there are many reputable third-party reverse logistics companies that can take care of this part your business for you. Hiring specialists – who deal with returns day in and day out – means that you can spare yourself from a potential logistical nightmare.
What are the benefits to outsourced reverse logistics?
Outsourcing to a third-party reverse logistics company (3PRLP) has been identified as one of the most important management strategies for reverse logistics in recent years
What’s more, there are many advantages to outsourcing your reverse logistics flow – not least because sorting it yourself is becoming increasingly complicated.
Here are some of them:
Improve company reputation
A strong brand reputation is key to repeat business and increasing revenue in the long-run.
Nowadays, customers expect a simple, hassle-free returns process. By outsourcing your reverse logistics, you give your customers a single contact point for all returns, repairs, warranty replacements and other needs.
The benefit of this is that it boosts the customer service level of your retail company. As a dedicated team is working on all your reverse logistics needs, you can be sure that all customer needs are met and dealt with in a positive light.
Reduce business costs
When dealing with returns yourself, you’ll need to store returned products that are being repaired and sacrifice storage for goods that are waiting to be recycled.
Of course, this requires space that you could be using to store new products and it also eats away at your potential profits.
However, when you outsource this process, your third-party provider will take on all costs related to storage, management and fulfillment of reverse logistics processes.
As a result, your team can focus solely on your key business operations and improve efficiency elsewhere in the company.
Simplified inventory management
Outsourcing your reverse logistics means that you can achieve better inventory levels.
As you won’t be concentrating on returns management, you will have more time to focus on your actual inventory and will not need to worry about SKU numbers, storage and transport related to reverse logistics.
What’s more, you’ll experience fewer errors and less delays in shipping new products in time to meet delivery windows – improving the customer experience.
In the eCommerce world, the ability to respond and adapt to changes quickly is often seen as a key factor for success. Thanks to the rise of the internet and social media, customers can change their minds at the drop of a hat.
In order to meet these growing demands, most modern retail businesses need flexibility.
So, how exactly does outsourcing to a 3PRLP help you out?
To start with, reverse logistics companies are built on the changing business of their partners and clients.
As such, these organisations can help retail companies increase flexibility without necessarily increasing their budget.
What are the disadvantages to outsourced reverse logistics?
Of course, just as there are advantages to outsourcing, there are also disadvantages.
Here are a couple of them:
Loss of control
Whenever you outsource an element of your business, there’s a risk of loss of control.
This is particularly apparent in reverse logistics when the third-party provider does not communicate or interact with your customers and suppliers in enough depth and detail.
One way you can reduce this risk is to manage suppler relationships more effectively.
Lack of proper documentation
Another risk factor involved with 3PRLPs is a lack of proper process documentation.
If the third-party provider is new to the scene and doesn’t provide sufficient documentation, then you may face the following problems:
- The process becomes far more complicated than it needs to be
- It will become challenging to keep track of such processes
Avoid this potential pitfall by researching your reverse logistics provider in great detail and ensure you get direct answers as to the level of documentation that will be shared.
Streamline your eCommerce reverse logistics for success
Perfecting your eCommerce reverse logistics can bring your business several benefits, such as a better customer experience, maximizing operational efficiency and even as an additional revenue stream in the right circumstances.
While sorting your returns management may not be a top priority for new online sellers, it will be in the future – especially if you want to create an effective and efficient order management flow and successful eCommerce empire.