Lost Sales Are Eating Your Revenue - Here's What to Do About It
As a retail business, one of the fundamental metrics for measuring success comes down to gross sales. While it has traditionally been a good indicator of the state of a company, it fails to account for failed sales, i.e., the number of products returned by customers after purchase.
This highlights the idea of net sales as a more accurate measure of trade reporting. And with net sales comes a more sobering reality: it’s not just about lost revenue — the business absorbs the full cost of those failed sales. Here, the brand not only misses out on the revenue from the returned items but also incurs the added costs of processing the returns and re-stocking them.
Look closer, and a failed sale isn’t only about return processing — it also includes the full cost of fulfillment, from picking and packing to shipping and labor. Think about it: a customer fills their shopping cart with two shirts, two pairs of pants, and a pair of shoes. That sale goes through and looks great from the gross sales perspective, as it boosts numbers and makes it seem like the items are in high demand. But if any of that gets returned, it’s not just a reversal of revenue; it’s a sign that the sale didn’t succeed the way the numbers suggested.
Returns can skew sales data, as a business can see a spike in sales and assume demand is strong. However, with a steady stream of returns incoming, revisiting data 30 or 60 days later can put merchandising teams in a spot of bother.
Identifying patterns from historical data to forecast lost sales
With returns growing at a faster pace compared to net sales across most retail verticals, it is safe to say that returns from consumers are quickly becoming the largest source of products for a majority of retailers. While common sense suggests that this supply can be channeled into inventories for resale, the process is not straightforward.
Ideally, a company would not over-order and tie up inventory if it could anticipate a certain percentage of products being returned. However, understanding when and how much of the product gets returned is still an unsolved problem for many businesses. Overestimating returns — a very negative forecast — can lead the business to scrap the product altogether. Underestimating returns can lead to inventory bloat. As with everything, balance is key.
Historical data should be the first thing companies must look at when planning a returns forecast, even if it gives them a high-level pattern. For example, they might find that 20-25% of sales from a certain product category end up being returned every year. While a broad insight, it can still help guide smarter inventory decisions.
With experience, businesses can look at more granular patterns. For instance, when a customer buys the same shirt in two different colors, there’s a high likelihood that one will be returned. Buyer behavior can also be deduced from historical data. Loyal or frequent customers tend to return less, while a first-time buyer ordering a broad mix of products is more likely to generate returns.
Most brands do not want to create high barriers for returns, as this can turn off customers and prompt them to switch to a competitor with a smoother experience. But analyzing such data can help a business strike a balance — one that protects margins without hurting customer loyalty.
The management mindset shift to managing lost sales
To create a well-oiled returns management system, a major mindset shift is needed at the management level. The first step is to accept ownership of lost sales, rather than outsourcing returns management to a 3PL. Management needs to understand that distancing itself from the problem will inevitably hurt operations.
That said, change is in the air. Companies are beginning to look at returns not necessarily as an opportunity, but as an area of the business where there’s significant cost — and therefore, potential for savings. Setting a goal, such as reducing reserve logistics costs by 10% annually, can prompt a more strategic approach.
It is about finding a balance with maintaining a strong customer experience while addressing the return problem head-on. This begins with a deeper understanding of the customer base: who are the loyal customers? What’s their purchase history? How often do they return items?
Just as important is to identify and target costly areas, such as fraudulent returns. This is a cost sink, and real progress can be made by reducing risk and exposure. On the logistics side, companies must find ways to streamline operations and make them more efficient, rather than throwing more labor and resources at the problem.
Constantly backing up decisions with historical data will help companies stay on course to tackle return reasons and related costs efficiently. For instance, if a business launches a new product and sees high returns, it needs to ask why this is happening. It could be a manufacturing issue, where the size or color may not accurately reflect the description, the delivery process may be inadequate, or the product may not meet customer expectations in real life. Identifying the cause early lets the business address it quickly, rather than waiting until it snowballs into a larger problem.
Ultimately, treating returns as a strategic priority — not a sunk cost — empowers businesses to protect profitability, build customer trust, and create a more resilient retail operation. In a market with tightening margins and rising customer expectations, being on top of returns management can be the edge that sets leading retailers apart.
