How to stay ahead of your competitors

It starts with understanding contra revenue: all deductions from your GMV before arriving at your net revenue. The larger this slice of your GMV "pie," the more work you have ahead of you. This is how contra revenue is typically structured for e-commerce companies:

• Payment provider fees: ~2.5%
• Cancellations: ~2.5%
• Return costs: ~5%
• Shipping costs: ~10%
• Marketing & discounts: ~20%
• Refunds: ~60%

The percentage of contra revenue within your GMV is a valuable metric for assessing an e-commerce company's operational excellence and customer acquisition efficiency. It doesn't tell the whole story, but for investors, it is often a logical starting point for gauging a company's professionalism.

Back to my main point: to make a real difference in your bottom line, you need to address your refund rate directly. Reducing the total value of your refunds is an excellent place to start.

It’s actually less complicated than it sounds. Refunds primarily stem from two sources:

• Returns
• Not offering replacements or exchanges to customers

The work therefore breaks down into two core areas:

• Reduce your return rate by ensuring customers get the right product the first time.
• Do everything possible to prevent refunds by offering exchanges, replacements, or store credit.

Offer free exchanges, but charge for returns
Clearly communicating this policy in your sales funnel has an immediate impact. It sends the message: "We're happy to help, but let's not make returning a habit."

Identify underperforming products quickly
Just like in other areas of your business, a small set of issues often has a disproportionately large impact on your numbers. When it comes to return rates, focusing on your worst-performing products can significantly reduce returns. Dive into your sales and return data or use a returns management platform for continuous insight. By adjusting product descriptions, size charts, and pricing—or even removing problematic products from your assortment—you improve both customer satisfaction and your bottom line.

Understand which 'loyal' customers aren't loyal for the right reasons
This is a sensitive topic, but identifying customers with the wrong intentions is crucial. Addressing this small group can drastically reduce return-related costs. For example, one client reduced return costs by 16%—over €1 million per year—by blocking just 0.8% of their customer base.

Implement per-item return fees
‍Charging a small fee for returns above a certain threshold (e.g., three or more items) targets customers who order carelessly. It also helps offset the costs associated with buy-now-pay-later methods, which often lead to higher order values but inflated return rates. With this approach, a drop in your return rate is virtually guaranteed.

Once customers decide to return items, you can still reduce the total refund value. A simple but effective solution is offering exchanges. In 2023, it is almost counterproductive not to offer customers the ability to get the right product at the right time.

Ask yourself: have you ever returned an item online and immediately bought the right size or color from the same store? Probably not—it's often too much hassle. That leads to unnecessary loss: marketing costs, payment provider fees, shipping, restocking, and the missed opportunity to sell that item to another customer.

Fortunately, tools now make it easy to offer the right product at the right time during the return process. Combining exchanges with store credit incentives helps you further retain revenue. For instance, offering a €5 bonus for choosing store credit over a refund keeps customers happy while increasing your profitability.

Companies that actively prioritize profitability over pure growth are more likely to survive and thrive in their industry. At Returnista, we have seen brands reduce their return rates by 45% and their total refund value by as much as 80%.

Many of these strategies can be implemented without extra tools. But if you're curious about how a returns management platform can accelerate your path to profitability, we'd be happy to help.