In e-commerce, understanding and managing returns is critical to maintaining a healthy business. Returns rate is a key performance indicator (KPI) that quantifies the proportion of items returned by customers.
It provides critical insight into several aspects of your business, including product quality, customer satisfaction, and the effectiveness of your returns policy. Properly monitoring and leveraging this metric can help companies reduce returns and improve their bottom line and customer relationships.
Key Takeaways
- Definition: Percentage Returned is a key performance indicator (KPI) that quantifies the percentage of items returned by customers in e-commerce.
- Calculation: Percentage Returned is calculated by dividing returns revenue by net store revenue and multiplying the result by 100.
- Strategic Importance: Percentage Returned provides critical insight into product quality, customer satisfaction, returns policy effectiveness, financial planning, and supply chain management.
- Optimization Strategies: To reduce Percentage Returned, companies can improve product descriptions and images, implement a robust quality control system, provide excellent customer service, analyze feedback, and optimize returns policies.
- Limitations: Percentage Returned may not reflect customer satisfaction, can be influenced by short-term promotions, does not provide insight into reasons for returns or differentiate between different product types, relies on data accuracy, and does not directly indicate profitability.
- Complementary metrics: Percentage Returned should be evaluated alongside metrics such as Net Promoter Score (NPS), Customer Lifetime Value (CLV), and Conversion Rate for a complete view of business performance.
Why does Percentage Returned matter for your business?
Understanding the percentage of returned items can offer a plethora of benefits to your ecommerce business:
- Quality Control: Identifying products with a high return rate can spotlight quality issues, enabling improvements and reducing future returns.
- Customer Satisfaction: A high return rate may indicate dissatisfaction among your customer base. Addressing the root causes of returns can enhance customer satisfaction and foster loyalty.
- Financial Planning: Returns involve additional costs including processing and possibly reshipping. Monitoring the percentage returned assists in budgeting for these associated costs.
- Supply Chain Management: Insights from the return rate can aid in refining supply chain management, helping to forecast inventory needs more accurately.
- Policy Adjustment: A high return rate might indicate a need to revisit and perhaps amend your return and refund policies to better suit your business dynamics and customer preferences.
How to calculate Percentage Returned ?
Explanation of the parts of the formula:
- Returns Revenue refers to the total monetary value that is regained through returned products. It is the accumulation of the value of all individual products that have been returned by customers.
- Shop Net Revenue stands for the total revenue earned by the ecommerce business in a given time period. This encompasses all sales, excluding returns, discounts, allowances, and other such reductions.
- The division operation in the formula helps in finding the proportion of the returns revenue with respect to the net revenue of the shop. It will yield a decimal value which represents the part of the total revenue that comes from returns.
- Multiplying the resulting decimal value by 100 converts it to a percentage, thereby indicating the percentage of the net revenue that is accounted for by returns.
Understanding the “Percentage Returned” metric helps businesses gauge the portion of their revenue that is affected by product returns. A lower percentage indicates fewer returns, which generally suggests customer satisfaction and product-market fit, whereas a higher percentage could indicate issues with product quality or customer satisfaction that might need to be addressed.
Example Scenario
Imagine that in a particular quarter:
- Your ecommerce store generated a net revenue of $500,000.
- During the same period, the revenue regained through product returns was $50,000.
To find the percentage returned during this quarter, insert the given values into the formula:
- Percentage Returned = ($50,000 / $500,000) × 100
- Percentage Returned = 0.1 × 100
- Percentage Returned = 10%.
This signifies that 10% of your shop’s net revenue for the quarter came from the revenue regained through returned products. Keeping track of this percentage can offer insights into the efficacy of your return policy, the quality of your products, and the satisfaction of your customers, facilitating more informed business decisions.
Tips and recommendations for reducing Percentage Returned
Improve product descriptions and imagery
Improving product descriptions and imagery is critical to reducing the rate of returns. By providing detailed and accurate product descriptions, customers have a better understanding of what they are purchasing, which leads to fewer instances of purchasing incorrect or unsatisfactory products. In addition, using high-quality images that accurately represent the product can help manage customer expectations and reduce the likelihood of returns.
Implement a robust quality control system
Implementing a robust quality control system is essential to ensuring that only products that meet your quality standards are shipped to customers. By establishing rigorous quality control processes at various stages of production, you can minimize the likelihood of defective or substandard products reaching customers. This proactive approach can significantly reduce the need for returns due to product quality issues.
Provide excellent customer service
Providing excellent customer service plays a critical role in reducing returns. By having a responsive and knowledgeable customer service team, you can promptly address customer concerns, answer product-related questions, and provide assistance when needed. This proactive approach helps manage customer expectations, resolves issues before they escalate, and ultimately reduces the likelihood of returns due to unmet expectations or misunderstandings.
Feedback analysis
Regularly analyzing feedback from customers who have returned products is critical to identifying and addressing recurring issues. By understanding the most common reasons for returns, you can take proactive steps to address these issues. This could include making improvements to product design, packaging, or other factors that contribute to a high return rate. By analyzing feedback, you can continually improve your products and processes to reduce returns over time.
Optimize your return policy
Optimizing your return policy can have a significant impact on reducing fraud while protecting customer rights. A fair and transparent return policy should clearly communicate the terms and conditions for returning a product, including timeframes, requirements, and any associated costs. By striking the right balance between customer convenience and protecting your business interests, you can minimize frivolous returns and discourage abuse, while still providing customers with a satisfactory return experience when necessary.
Examples of use
Product Listing Optimization
- Scenario: An ecommerce store notices a high return rate on a specific category of products.
- Use Case Application: The store might opt to revise the product listings in this category, enhancing descriptions, and adding detailed size guides to reduce confusion and the likelihood of returns.
Quality Assurance Policies
- Scenario: A business is encountering an increasing number of returns due to product damages.
- Use Case Application: The business can reform its quality assurance policies, introducing stringent checks to ensure that only flawless products are shipped to customers.
Return Policy Review
- Scenario: A company observes a surge in returns following a change in its return policy, which now allows returns for any reason.
- Use Case Application: The company could review and perhaps modify its return policy, introducing reasonable limitations on returns to discourage misuse while maintaining customer trust.
Customer Feedback Analysis
- Scenario: An online fashion retailer receives feedback from customers that items look different in person compared to the pictures online.
- Use Case Application: The retailer might initiate a revamp of its product photography process, ensuring that images accurately represent the products to reduce returns.
Customer Education Campaigns
- Scenario: An ecommerce platform selling tech gadgets faces returns due to customers not understanding how to use the products.
- Use Case Application: The platform can launch educational campaigns, creating tutorials and guides to help customers understand how to use the products effectively, thus reducing returns.
Percentage Returned SMART goal example
Specific – Reduce the return rate by 5% from the current rate of 10%. This includes reducing the amount of revenue recaptured through product returns, which is currently $50,000 per quarter, indicating a reduction in returns to a monetary value of $25,000.
Measurable – The percentage of returns will be monitored on a quarterly basis, comparing before and after implementing strategies to reduce product returns. This could include improving product quality, improving the accuracy of product descriptions on the Web site, or providing better customer service to help customers make informed choices.
Achievable – Yes, through measures such as improving product quality, providing clear and comprehensive product information on the Web site, implementing tighter quality control processes, and improving customer service.
Relevant – Yes. Reducing the percentage of returns is consistent with the company’s goal of increasing customer satisfaction and retaining a greater portion of revenue, ultimately leading to profit growth. Lower return rates can potentially lead to higher customer satisfaction and better reviews, which can foster customer loyalty and attract new customers.
Timed – Within the next two fiscal quarters, allowing time to implement improvements and for customers to respond to the changes, thereby gradually reducing the percentage of returns. This timeframe also allows for proper analysis of return data to understand whether the strategies implemented are effective in reducing the return rate.
Limitations of using Percentage Returned
While the Percentage Returned is a crucial metric for tracking the effectiveness of sales and the satisfaction of customers in an e-commerce environment, it does come with its own set of limitations:
- Doesn’t Always Reflect Customer Satisfaction: A low Percentage Returned rate may not always indicate high customer satisfaction. Customers might be unsatisfied but choose not to return products due to cumbersome return processes or other personal preferences.
- Can Be Influenced by Short-term Promotions or Sales: During sales or promotions, customers might buy impulsively, leading to a higher number of returns once they reassess their purchases. Thus, the Percentage Returned can fluctuate significantly based on promotional activities, which might not reflect the standard buying behavior.
- No Insight into the Reasons for Returns: The metric does not provide insights into why customers are returning products. Understanding the reasons behind returns is critical in addressing the underlying issues, which can be multifaceted, including product quality, mismatched expectations, or delivery issues.
- Doesn’t Differentiate Between Different Types of Products: Some products may naturally have higher return rates compared to others. The Percentage Returned metric does not differentiate between these, which can potentially mask issues specific to particular product categories.
- Dependent on the Quality of Data: The accuracy of the Percentage Returned metric heavily relies on the quality of data available. Inaccuracies or inconsistencies in data recording can lead to misleading results.
- Not Indicative of Profitability: A lower Percentage Returned rate doesn’t always correlate to higher profitability. It can sometimes be a result of stricter return policies, which might deter customers from making purchases in the first place, potentially affecting sales negatively.
- Requires Contextual Analysis: Similar to other metrics, the Percentage Returned needs to be analyzed in context with other key performance indicators to get a full understanding of its implications. Analyzing it in isolation can lead to misguided strategies.
In summary, while percentage returned is an important metric in e-commerce analytics, it must be interpreted with caution and in conjunction with other metrics to provide a complete picture of business performance. Companies should delve deeper into the reasons behind returns and not just focus on reducing the percentage returned to ensure customer satisfaction and maintain profitability.
KPIs and metrics relevant to Percentage Returned
- Net Promoter Score (NPS): This KPI gauges customer satisfaction and loyalty. A high return rate might negatively influence your NPS.
- Customer Lifetime Value (CLV): A high return rate can diminish CLV as it often leads to lower customer satisfaction and repeat purchase rates.
- Conversion Rate: Understanding the conversion rate alongside the return rate can offer insights into your business health. A high return rate can be a signal of lost potential conversions.
Final thoughts
The percentage of returns KPI is critical to maintaining a thriving e-commerce business. By understanding the reasons behind returns and actively working to reduce them, businesses can increase customer satisfaction, improve product quality, and promote a healthier bottom line. This is a metric not to be overlooked in your ecommerce strategy.
Percentage Returned FAQ
What is the Percentage Returned KPI?
The percentage returned is a KPI that indicates the ratio of items returned to the net revenue generated in a specific period.
Why is it important to monitor the Percentage Returned KPI?
Monitoring this KPI helps in identifying issues with product quality, optimizing return policies, and enhancing customer satisfaction, ultimately aiding in better financial planning and management.
How can I reduce the Percentage Returned KPI?
You can reduce this KPI by enhancing product descriptions, improving quality control measures, offering excellent customer service, analyzing customer feedback, and optimizing your return policy.
Are there any other metrics that I should monitor alongside Percentage Returned?
Yes, monitoring metrics such as Net Promoter Score (NPS), Customer Lifetime Value (CLV), and conversion rate alongside the percentage returned can provide a well-rounded view of your business health.