10 Metrics for Measuring Product Returns Costs
The inability to address a costly problem is a powerless feeling. This is especially acute for a retail or eCommerce business, where every dollar counts and must be tracked, measured, and, in some cases, defended. When sales are going strong, there may be less attention on expenses, but when sales slow, it becomes a race to uncover and eliminate extra costs throughout the organization.
And yet, few companies pay attention to the enormous costs that go into managing product returns: A shockingly low percentage know the dollars they are putting into returns. This is especially surprising considering how returns impact gross sales; if you’re not factoring return costs into your net returns, your sales numbers are significantly inaccurate.
Fewer than one-third of retailers state that they have visibility of all related returns management costs when it comes to loss in inventory value in storage.Gartner
77% of companies surveyed don’t know what products returns cost them.ReverseLogix Reverse Logistics Technology Study
Three Reasons Return Costs are Hard to Calculate
Comprehensive return metrics can be hard to gather and calculate. Yes, the volume of returns coming in can usually be easily determined based on the customer’s return initiation activity, but deeper numbers like reasons why, returns at the category or SKU level, and detailed returns management KPIs are much harder to calculate because of three main factors:
- Returns management technology has traditionally been left out of the tech stack. Instead of a single software solution to track metrics, returns are managed by a patchwork of WMS, OMS or ERP.
- One leader or one department doesn’t oversee returns. Without a single person at the helm to break down and measure data, no one has to take responsibility for owning, measuring and tracking costs. In other words: No one’s paying attention because no one owns it.
- Many companies’ increased commitment to sustainability goals has introduced new and more complicated metrics.
10 Metrics for Measuring your True Returns Costs
Uncovering the total cost of product returns will give you a more accurate net sales number and may reveal areas for significant process and improvements. Here are 10 metrics to track for measuring the cost of your product returns:
- Cycle time: How long does it take for an item to get through your returns processes and to its final destination? Be sure to track this metric according to whether an item can be resold, returned to vendor, recycled or thrown away.
- Total product reclaimed and resold: Reselling items will help recoup some or all of the COGS.
- Value from resale/recapture revenue: Measure how much you are recouping, plus any profit.
- Per-item handling costs: Every time someone touches an item warehouse, there is a cost. Break down this metric by department or location, so you can compare and identify areas where teams are shining.
- Lost sales commissions (depending on the marketplace): If you sell on a third-party marketplace, know how much a returned item costs you in terms of commissions, fees and marketing.
- Marketing costs: Can you tie ad spend or marketing efforts to a specific item or product category? That is a lost cost if the item is returned.
- Disposal costs: If an item can’t be recycled or resold, measure the disposal cost and be sure to include the cost of preparation, storage and transportation.
- Waste, energy and recycling metrics: Identify how much of your product can be recycled, how much is sent to landfills or incinerated, how far each product must travel in the returns process, and how much energy is consumed in returns.
- Transportation costs: This includes fuel, drivers, vehicle wear and tear, etc.
- Packaging costs: What is it costing you to recycle or throw away the packaging that a returned item arrives in? Are returned packages different sizes and shapes, which makes it less efficient to handle and store them? What is the cost to package up returns for dispositioning? If an item is exchanged, be sure to factor in the packaging cost of the new item sent to the customer.
These 10 costs, factored into your return rates, will give you two essential results
- Per-item handling costs: In addition to knowing your per-item handling costs, you should have the data to break down costs by product category or type. If you have multiple facilities, you may also want to calculate the per-item cost per facility to find areas to improve. Plot this cost throughout the year to determine any seasonality to your costs.
- Total product cost: You are already tracking the cost of goods sold, but to get a true sense of the cost to your business, you need a “total cost of ownership” metric that includes COGS, initial shipping, returns processing, return shipping, marketing, and disposition costs minus any money you can get for resale or disposal (such as return-to-vendor).
Knowing this information will help you improve product offerings, create better online listings, choose higher quality vendors (if you experience a high volume of returns for errors), and improve the customer’s returns process.
How a Returns Management System Measures Returns’ Hidden Costs
Only a returns management system (RMS) can help you comprehensively measure and track the hidden costs of your product returns. Unlike a warehouse management system (WMS), an RMS is purpose-built to orchestrate and manage the entire returns lifecycle, from start to finish.
An RMS will track and answer questions such as:
- How much does it cost to manage a return?
- Does that cost change depending on whether it was returned at a store, in the mail, at a third-party location, or through a marketplace?
- Where do most of my returns originate? Can I determine the reason for that?
- Are there ways I could prevent returns and improve post-purchase behavior?
Because an RMS integrates with other supply chain software like your WMS, TMS, OMS, and many commerce and POS systems, it can eliminate the messiness of relying on several point systems to manage returns. Instead, an RMS serves up a clear, end-to-end view of your returns management metrics. Break down data by location, uncover trends, and get the insight you need to improve how you sell, position and restock.
If you don’t know your costs, you can’t figure out how to lower them. ReverseLogix technology shines a light on this with real-time tracking and visibility into every step of the returns process.
“Before ReverseLogix, we had no transparency in the process at all. Now with reports about reason coding, how often returns are happening and how many products are in bad shape, we’re getting control of the process. We can help brands decide what needs to be improved and reduce the number of returns in general.”Kai Bahlman, Amer Sports