Understanding Rate of Returns: An Important KPI in eCommerce Business

The flow of content:

Introduction

What is KPI?

What is the rate of returns

Its importance

Curating data from Rate of Returns

Conclusion

 

Introduction

Quantifying your progress is one of the most important factors linked with the growth of your company. Quantification helps you understand your steps towards your end goal in your business. Businesses are not as simple as going to college, giving exams, and passing to get your certification.

Businesses are complex. They have multiple processes running at the same time, working in coordination with each other to reach the end goal. These so-called processes can be evaluated with the help of Key Performance Indicators. Rate of Returns is one such KPI for warehouse and order fulfillment performance measurement. In fact, Rate of Returns helps in identifying the performance of any eCommerce business. 

Before discussing the Rate of Returns, let’s know in detail what is a Key Performance Indicator or (KPI) and how it is essential.

 

What is KPI?

Key performance indicators or KPIs are one of the most commonly used key metrics to evaluate the performance of any process within the organization.

Measuring KPI in your warehouse or in a retail shop is crucial because it is the first step towards optimizing your order fulfillment processes. In a typical eCommerce business, a lot of processes are happening at the same time. For example, goods are coming in, finished products going out, picking and packing, etc. Whenever a process is measured, it is better understood and could be improved in the near future.

KPI is useful for – 

• Analyzing set objectives and standards of a retailer or a manufacturer
• Making optimal decisions based on data captured

One such KPI is known as Rate of Returns or RoR. Let’s understand what it is in detail and why it is included in the order fulfillment process as a prime performance KPI.

 

What is Rate of Returns

Returns are inevitable in ecommerce businesses. According to a study,

“At least 30% of the products ordered online are returned”

Depending on your business, customer satisfaction, and services provided, this number can vary. 

Simple and vital KPI for measuring warehouse and order management performance, rate of return does exactly what it sounds like. It measures how often items are returned by customers.  

The formula of rate of returns = (units returned)/(units sold) x 100  

 

Importance of Rate of Returns

Okay, until now, we have seen what rate of return is and why it is an essential part of measuring order management and warehouse management performance. But, why do we need to calculate it in the first place itself? 

Knowing about the rate of returns obviously helps in having good insight into your customer satisfaction. However, it’s not why it is primarily calculated for. 

The primary reason to calculate ROR is to determine the reason for return and use that valuable information for segmentation by reason for return. In this way, the operations manager can identify the exact reasons for returns and plan out strategies to resolve the issues. 

 

Curating data from Rate of Returns

The major question that could be asked is, Why is it important to pay attention to returns so much? Returns don’t generate any profitability to our business, so what is the need to study them? What sort of data can be extracted by studying the rate of returns?

Well, returns might not generate any financial gains in our favor, but it will subtract a big portion of your profit if not paid attention to. Hence, it is important to handle the Rate of Returns for your business. 

Processing returns can be a costly and time-consuming venture without proper planning. Here are few ways to get around with the rate of return for effective order and warehouse management.

1. Identify the Number of Returns

From the rate of returns KPI, firstly separate two aspects that are important. Return categories and the rate of return expected per week. The following table shows the typical return rates (as a percentage of demand) for consumer e-commerce categories.

 

Category	Return Rate
Hard-Goods, Gifts	1% – 5%
Home Décor	5% – 9%
Shoes	10% – 25%
Casual Apparel	10% – 20%
High-Tech Products	15% – 20%
Fitted Apparel	20% – 30%
High Fashion	25% – 40%

 

2. Identify Return Costs

Every returning sale will consume a part of the company’s operational costs. These operational costs are as follows:

• Processing

Loading and unloading of the return goods, processing of the return through the customer service deposition centers.

• Refurbishing

Products such as garments require processing before they could be resold. We need to repack and rebox the product too.

• Processing new customer shipment

If the customer asked for an exchange, processing that could incur labor charges, packing material charges, and shipping costs. 

• Merchandise expense

Damage costs if the item is damaged during the fulfillment process. You need to pay the merchandise for the lost item.

• Loss of margin on a sale

If the customer simply returned and asked for money back, you lose your margin on your sale.

• Customer loyalty

Returns can cost something more than just financial losses i.e., your loyal customers. If the service you provide is not upto the mark, you could end up losing your regular customers.

 

Conclusion

Sometimes the only way to tackle a problem is to just run right through it.

Return is never going to mysteriously disappear. If you are in the ecommerce market, you need to embrace it for the better. 

“All problems become smaller when you confront them instead of dodging them.”

– William F. Halsey

Through the article, I shed light on the need for KPI and its importance in Rate of Returns. We also saw how we can access data through a rate of return that could help us understand the hidden processing cost of the returns. 

I hope the information provided in this blog could help you in analyzing your business and make appropriate strategies based on return reasons or customer feedback. You being the owner of your business, knows what best for your organization. After all only a sailor knows the capabilities of his own boat. 

Yet if you feel looking for suggestions, you can go through the relevant links down below. In case of any query about the topic, make yourself at home in the comments section down below.

 

Relevant links:

• https://www.interlakemecalux.com/blog/kpi-warehouse-measure
• https://articles.cyzerg.com/warehouse-operations-optimizing-the-reverse-logistics-process
• https://www.klipfolio.com/resources/kpi-examples/supply-chain/rate-of-return
• https://www.fcbco.com/blog/ecommerce-returns-peak-season-readiness
• https://www.veeqo.com/blog/warehouse-management-kpis
• https://legacyscs.com/warehouse-kpis-to-measure/