When it comes to returns KPIs, you likely have a lot of questions floating around in your mind. What should I be measuring? How do I know if my returns strategy is successful? How do we stack up to our competition? We’re here to address all these questions and put your mind at ease.
The ecommerce returns KPIs you need to measure
There are generally two approaches brands can take when it comes to measuring returns metrics: the old way or the new way. We’ll break down both below.
The old way
Brands that adopt the old way of thinking assume that all returns are refunds. In other words, they view returns as a cost center and will do anything they can to minimize the amount of money they lose in this area. Here are the metrics that support the old way of thinking:
- Return rate. This is an important metric, but it doesn’t provide a comprehensive picture. When brands focus all their efforts on driving down the return rate, they frequently engage in behaviors that come at the expense of the customer. For instance, many businesses try to bury their return policies to reduce the return rate but create a terrible customer experience in the process.
- Time spent per return. The time of your customer support team is important, but it shouldn’t be the focus of your return strategy. Every returns platform is going to help you save time, but the benefits of this are marginal compared to other metrics – as we’ll explain in the next section.
- Cost per return. With the old way of thinking, brands want to pass the buck when it comes to shipping costs. Again, while shipping costs are important, they’re not as impactful to your bottom line as you might think.
The new way
Now let’s explore the new way of thinking. Brands in this school of thought don’t view returns and refunds as the same thing. They recognize that there are actually three types of events that make up what we call the return composition:
- Return rate. Yes, the return rate is still important with the new approach. But the difference is that you need to break down the various components of the return rate. Specifically, we want to look at the next two.
- Refund ratio. This measures the percentage of returns that end up being refunded to the original form of payment. These types of returns are not likely to return to shop with you again and for all intents and purposes should be considered lost revenue.
- Exchange ratio. This measures the percentage of returns where the customer decides to turn the existing product they have into a new product. This is important to look at because a healthy returns experience should be driving customers to revenue retaining and customer retaining exchanges.
- Conversion rate. I bet you didn’t expect to see this metric on a returns KPI post. An effective return policy and experience reduce the perceived risk of making a purchase. This is an important metric to measure because 67% of shoppers check a return policy before making a purchase. The easier and more customer-friendly your returns experience is, the higher your conversion rate will be.
If you want to see an example of a top ecommerce brand that adopts this new approach to measuring returns metrics, check out our podcast episode with Chubbies. Their CFO, Dave Wardell, shares how they use their returns experience to maximize the brand’s profitability.
How the new approach to ecommerce returns KPIs delivers value
OK, this is a lot of hypothetical information. To demonstrate the difference between the old way and the new way of thinking, let’s build up a hypothetical. Below you are going to see a few ways to bucket “value” and evaluate the impact on your business.
Savings you can realize
Opportunity you can focus on
Take a look at the cost savings bucket. For this section, we used a $5M brand that experiences 10,000 returns every year. With a $10 average shipping cost, that means the brand has a $100,000 shipping problem. Seems like a lot of money, right? It is, but it also requires some perspective.
We want to open your eyes to the retained revenue rate. Let’s assume the same return volume with an AOV of $100. If we apply the industry average refund ratio, which assumes that 80% of total returns are refunds, this means you have an $800,000 refund problem. What if you could take that refund ratio down to 60%? That would net $200,000 in extra retained revenue.
Are you better off focusing on a $100,000 in savings on shipping costs, or generating an additional $220,000 in retained revenue?
Now if you have to prioritize where you invest your time and money, which ROI bucket does it make sense to optimize for? The $100,000 shipping cost problem or the $200,000 retained revenue opportunity and an additional $20,000 in upsell?
We didn’t even look at conversion rate as a KPI
When you look at your return policy as a marketing asset you start to see how it impacts purchase behavior. It’s not just about what happens when someone returns, you want to look at how it impacts someone’s decision to buy.
Let’s assume that the brand above now offers a more generous return window and pays for exchanges. This makes customers feel more confident buying and increases the conversion rate from 2% to 2.5%, that small change has a $1,000,000 impact.
This impact on conversion rate is why so many customer-focused brands have become hyper critical of the experiences they are creating post-purchase and how they can integrate them into their messaging.
These hypotheticals demonstrate how paying attention to the right KPIs can significantly improve your approach to returns. We’ve helped brands of all sizes and industries use these new KPIs to retain more revenue, keep more customers, and grow their businesses with a smart returns strategy. You can learn more by downloading our Ecommerce Returns Benchmark Report