Returns & Exchanges: Your P&L Gold Mine
When trying to accelerate growth, many merchants focus most of their efforts and attention on customer acquisition and retention because the two largest cost centers are products and marketing. We ignore many other areas of our Profit & Loss (P&L) statement because we think there isn’t much we can do about them. That’s where you might be surprised.
For merchants in the apparel space, returns are commonly overlooked. Why? Because they’re generally viewed as an ‘Operations task’ where we just need to make sure it’s running smoothly. Here’s why that’s a problem and huge missed opportunity for your business.
Consider the following example:
Let’s say a customer that places an order for 2 items totaling $100 and they decide to return one of them. The merchant has a gross margin of 60% (which is pretty good) and pays for shipping (let’s assume $5). In this scenario our initial profit (not including the cost to acquire the customer) is $55.
If the customer returns one product (which we often cannot resell without a lot of additional cost) and then we ship the customer another product, the new gross margin is now $25.
Yep. You read that right. In this scenario, our gross margin has been cut in half and with the additional cost to get the order (plus our general overhead), it’s very likely that we are now losing money on this deal.
Here’s why that matters: if your return or exchange rates are more than 5% that’s a huge sunk cost for your business. You need to take a closer look at the data to get at the underlying causes, which may include the following:
- Poor Product Market Fit: if customers are returning a product at a high rate and not exchanging it, then you may have an issue with product fit. You’ll want to work closely with your product, marketing and customer success teams to identify whether that stems from the customers you are targeting, the perceived value of your product, or both.
- Sizing: high rates of returns and exchanges can indicate that you are not doing a good job of explaining how your sizing runs on your website. This is a very common reason for returns in the online space for apparel companies.
To help address this issue, you can generate a Sankey chart (see example below) that shows you what people ordered and what they exchanged for.
Most times, we see straight lines which indicates that customers are exchanging for the same product, and often times, a larger size.
Making a change as simple as the sizing chart on your site can help your customers better select the right size when they order. This will be a huge improvement to not only your bottom line but the life-time value for those customers.