⚡ Signal - eCommerce Returns
A proposed solution to the $500 Billion dollar problem that desperately needs to be addressed.
|Sep 18, 2020|
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🚀 Startup Labs
// A business idea, explored
This is an idea I’ve been wrestling with for a while: How to make the eCommerce returns solution more efficient.
The first formal business I ever started was an eCommerce store. I learnt Wordpress, and built it using WooCommerce. We sold items in the outdoor apparel industry that were very fit-specific. So a big problem for us was returns.
Because I started the business as a student, with literally zero money, we obviously didn’t have any brick-and-mortar locations for people to try on. Returns were quite an expense, and we found that customers really didn’t like paying for return shipping.
And eCommerce is just getting bigger:
With the virus having a huge effect on physical retail locations, it’s expected that this trend will continue to grow throughout 2020. The dramatic rise of Amazon is testament to this.
DigitalCommerce360 reports that online spend in the US increased 30.1% for quarter 2 of 2020, compared with the same period in 2019. That is HUGE.
eCommerce is here to stay.
And one of the biggest costs for the industry is returns. Not only is reverse logistics complicated and expensive, there are also associated costs with damaged goods, inventory restocking and warehousing administration, among others.
Statista estimates the delivery (only!) cost of eCommerce returns will be $550 billion by the end of 2020. That doesn’t account for any of the other expenses mentioned above.
And consumers are much more likely to return goods bought online, simply because it’s more convenient.
⚡ The Opportunity
eCommerce Returns Solution
Companies like Klarna, Affirm and AfterPay are increasing eCommerce companies’ bottom lines by improving conversion rates. Their data indicates that when customers have the option of delaying, or splitting up payments, conversion rates increase.
If we estimate the total cost of returns to be $500 Billion (in the US alone), then by decreasing the cost of eCommerce returns by just 1%, you’re suddenly got a $5 Billion revenue opportunity. If you’re making even 10% gross margin, that’s $500 Million USD.
So we’re essentially tackling the other element on the gross profit line: Costs. If Klarna, Affirm and AfterPay have built massive companies increasing revenue, there’s an opportunity to do the same on the other side of the equation with the same net result: Reduce costs.
But, how to do it?
Well, first, we need to find out what makes it so expensive.
Shopify estimates the average return cost of a label across three main providers in the US (USPS, UPS and FedEx) to be $6.75 per label. That is using the traditional model of returns:
Customer generates return
Customer repackages product
Customer prints packing slip
Courier picks up from customer and returns to warehouse
Return Magic’s survey data from over 1000 businesses and over 800 000 Shopify customers indicates the reason for returns are as follows:
Size too small: 30%
Size too large: 22%
Changed my mind: 12%
Not as described: 5%
Other or not specified: 18%
So, sizing is responsible for more than half of all returns.
Immediately, you could think of a way to improve fitting guidelines. But this is on the radar of most big eCom stores already. Companies like EasySize are doing this plus a whole host of in-house specific solutions.
We’re going to focus on the logistics itself.
eCommerce is all about customer attraction and retention. Companies are paying a huge amount of money to acquire customers. That means they need to consistently delight them to keep them loyal.
Slick returns are part of that process.
So this solution needs to be customer-friendly for it to work. If you can’t sell it to customers, and show online retailers that customers are happy to use the solution, it’s not going to work.
Start in your local city. There’s no use trying to solve a nationwide problem without proof of concept first. You need to see if the model works on a small scale before looking further afield.
The expensive part about eCommerce returns is the specific pickup locations. The singularity of picking up one parcel from multiple destinations is expensive.
It is much more efficient to have a driver visit one destination, pickup multiple parcels and then go to another central destination. That means, no waiting around while people repackage parcels, or any missed pick-ups. It also means a pre-defined route that can be driven at the most efficient times (and less frequently).
So, the process would look as follows:
Customer initiates return on the website.
Based on delivery address, the customer is pointed towards the nearest local locker/drop off location. They’re also able to put in their work location to see if it is more convenient to drop off near work. It is prominently displayed as “2 minute drive away” and “You can do your groceries here too”.
They are given the option for an at-home pick up, which they’re able to pay for at an additional cost. The additional cost will be around the cost of an Uber Eats delivery. It will essentially require a gig-economy worker to collect from the house and then drop off at the locker/drop-off. They can do it en-route to other trips to make it more financially attractive.
“You’ve got a potential pickup nearby. Drop off only 3km away at gas station”
Lockers are the most efficient way of handling the ‘central drop-off’ problem. The only caveat to them is they fill up quickly. Because they are often placed at gas stations and similar convenience-type stores, they can’t be massive.
Lockers also require a bit of capital too. But it’s likely that if you’re going to try solve this problem, you’re not going to go at it half-hearted. You’ll need to raise money to start.
Another way of doing it is partnering with strategic stores. Find brands that resonate with your customer base, and then ask them to manage the process (for a fairly nominal) fee, in exchange for the increase in foot traffic.
The trick is to make sure the pickup radius is not more than 5km away from any customer living in a city. It’ll be pretty easy to take your customer data and map out the addresses throughout a particular city to see where the blind-spots are.
Delayed Return to Warehouse
To further decrease the costs, the step of returning the items in the lockers to the warehouse should be setup to be dependent on your inventory levels at the time.
So when a new customer is signed up to use this solution, you ask them about their lead time, the inventory levels they maintain, stock turnover rate and how important it is to them to have return items restocked immediately.
The companies with the largest inventory and low stock turnover rate might be happy to wait 2 weeks for returns to arrive back at the warehouse.
By allowing them to sit for 2 weeks, you’re giving the best opportunity possible for a ‘convenient’ route which you can piggy back off, and thereby offer a cheap solution. For example:
“Uber Driver, Dan, is finishing up for the day. He has signed up to your platform, because he knows it allows him to make extra cash on his ‘dead’ trips. An hour before Dan is set to clock off, he presses a button in your app which says he’s clocking off in an hour. In that time, your app monitors his position, and then scans all the lockers in the area for returns that match his route from his current position back to the warehouse. If there’s a match, he gets an option saying something along the lines of: There are 5 packages at Cnr. of Example and Street that need to be picked up and dropped off at Warehouse X. Pick up is 2km from your current location, and drop off is a 1km deviation from your route back home. Revenue earned for this trip will be $12.99.”
The same would apply for 3rd party logistics companies.
Another costly part of the returns process is return warehousing. Most full-solution 3rd party logistics companies charge fee’s for returns.
Part of your solution may be a specific warehouse specifically for returns. This would link into the customer’s backend (Shopify, Magento, Woocommerce etc.) and act as another fulfillment center. So instead of the item having to go back to the original warehouse, it goes back to your warehouse, which is solely geared for returns, and you fulfill any new orders which contain the returned items you’re holding on site, directly from your warehouse.
Returns are a contentious topic. It’s clear that consumers value having a super-easy and free return policy.
One way to alleviate any disapointment is to clearly communicate why you’re doing certain things. When customers are just told This is the way things are, they are much less understanding than if you give them the rationale.
On your checkout page, make it clear what your return shipping policy is:
“In an effort to make our products as affordable as possible, we don’t work a cost of return-shipping in to the margin we make on products. We don’t think it’s fair for everyone to subsidize the cost of returns of a few customers.
We’ve made the return process as simple as possible. Read more here.”
Additionally, there will be software which checks the contents of customers’ carts. If it notices there are more than one size of the same product, there should be a popup which says something similar:
“We’ve noticed that you have more than one size in your cart. Please remember to check out our returns policy. We’re more than happy to exchange sizes for you, but don’t work the cost of returns into our mark up on these items. If you’re unsure about your size, go through our size-finder process or speak to a human.”
🛠️ Skill Builder
// A skill to add to your founder’s toolbox
🦜 5 Steps to Remembering Everyone You Meet’s Names
One of the most important things you can do to make a good impression when you first meet someone (especially when you’re trying to sell/pitch to them) is remember - and use - their name.
1: Lose the ego
The number one reason people forget what other people’s names are is because they’re so focused on themselves.
2: Trigger finger
Bad memory is often mistaken for not paying attention. If you can remember experiences and stories from your childhood, there’s nothing wrong with your memory. You’ve just got an attention problem.
The intention here is to develop a cue so that you snap yourself out of whatever hole your mind is in, and focus your attention on the task at hand: Names.
3: Repeat after me
The first actual action you have to take is to use that person’s name immediately. This is usually in the form of “Hi Alex, it’s great to meet you”. Don’t be scared to keep using it, too: “Alex, I wanted to ask you a question”, “What do you think about that, Alex?”
The more the merrier, for the both of you. People love hearing their own name.
4: Bring them to life
As soon as you hear a person’s name, you’ll associate it with something. There will be something unique about that person’s name that immediately springs to mind. If, on the extremely rare occasion, that doesn’t happen — then assign them something memorable.
5: Build a story
f you’re in a room full of people — like a board room — it’s helpful to build a story using the characters you’ve created in the step above. That way, if by chance you forget one person’s character (name) you can just look for the gap in the story you created, and just like that, the name flashes back into your memory.
// The tweet of the week, from someone I follow over at @simon_blogs
So applicable, in today’s crazy world.
// Valuable tidbits from around the interweb
💡 The best thing I’ve seen this week: Steve Jobs on what it means to be intelligent.
📞 4 Ways you can improve your cold-calling technique, or write a better script for your call center.
🚵♀️ Something completely random: The Tour de France finishes in Paris this Sunday. Every year, I’m obsessed with it for 21 days. I love cycling. Until now, I’ve never fully understood the economics of the sport. Here’s The Hustle’s breakdown on the economics of the Tour de France.
👋 The End Notes
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