Sales challenges for e-commerce businesses and the overlooked impact of refund rates

This past summer was challenging for many e-commerce businesses, with most reporting a 20-30% drop in sales compared to the previous year, especially in July and August. While things have picked up since late September, this slump has triggered a shift in mindset across the industry. It’s as though everyone has woken up to reassess what the future holds—a healthy shift, in my opinion.

For years, e-commerce entrepreneurs focused on growing gross merchandise volume (GMV) at nearly any cost. Profitability and margins were often an afterthought. However, the number-one topic in e-commerce boardrooms across Northwestern Europe today is: how do we become more profitable?

In this article, I’ll share thoughts on a commonly overlooked aspect of profitability: the refund rate. Believe it or not, tackling this can be your secret weapon in achieving profitability and outpacing competitors.

Why is the refund rate so important?

It starts with understanding contra revenue, which includes all deductions from your GMV before you arrive at your net revenue. The larger this portion of your GMV “pie,” the more work lies ahead. Here’s how contra revenue typically breaks down for e-commerce businesses:

• Payment gateway 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. While it doesn’t tell the whole story, it’s often a logical starting point for investors evaluating a company’s professionalism.

Now back to my main point: to make a real difference in your bottom line, you need to address your refund rate head-on. Reducing the total value of refunds is an excellent starting point.

Reducing your refund rate: where to begin?

It’s actually not as complex as it sounds. Refunds primarily stem from two sources:

1. Returns
2. Failure to offer replacements or exchanges to customers

Thus, the work can be split into two key areas:

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

Strategies to lower your return rate

1. Offer free exchanges but charge for returns
   Clearly communicating this policy in your sales funnel makes an immediate impact. It sends the message: “We’re here to help, but let’s not make returning items a habit.”
2. Identify poorly performing products quickly
   Just as in other areas of business, a small set of issues often disproportionately affects your metrics. For return rates, focusing on your worst-performing products can significantly reduce returns. Dive into your sales and return data or leverage a returns management platform to gain continuous insights. Adjusting product descriptions, sizing guides, and pricing—or even discontinuing problematic products—can improve customer satisfaction and your bottom line.
3. Understand which ‘loyal’ customers aren’t loyal for the right reasons
   This can be sensitive, but identifying customers with bad intentions is critical. Addressing this small group can drastically cut return-related costs. For example, one client reduced return costs by 16%—over €1 million annually—by blocking just 0.8% of their customer base.
4. Introduce a return fee per item
   Charging a small fee for returns beyond a defined threshold (e.g., after three 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 almost guaranteed.

Reducing the total value of refunds

Once customers decide to return items, you can still lower the overall refund value. A simple yet impactful solution is offering exchanges. In 2023, it’s almost counterproductive not to provide customers with the opportunity to get the right product at the right time.

Ask yourself: have you ever returned an item online and immediately purchased the correct size or color from the same store? Likely not—it’s often too much hassle. This creates unnecessary loss: marketing costs, payment gateway fees, shipping, restocking, and the lost opportunity to sell that item to another customer.

Luckily, tools now make it easy to offer the right product at the right moment during the return process. Pairing exchanges with store credit incentives can further retain revenue. For instance, offering a €5 bonus for choosing store credit over a refund can keep customers happy while boosting your profitability.

The bottom line: profitability as a competitive edge

Businesses that actively prioritize profitability over pure growth are more likely to survive and thrive in their industries. At Returnista, we’ve seen brands reduce their return rates by 45% and their total refund value by up to 80%.

Many of these strategies can be implemented without any additional tools. However, if you’re curious about how a returns management platform can accelerate your path to profitability, we’re here to help.

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