Thursday, January 23, 2025

AI Can Reduce Product Return Rates and Therefore Boost Profitability

One use case for artificial intelligence that can have significant operating cost advantages for retailers is its use in e-commerce apparel sales to reduce the rate of customer returns (wrong size, don’t like the color or fit, ordered the same item in several sizes expecting only one will fit best). 


Product returns in the retail industry are an ever-present cost of doing business. By some estimates, retail merchandise returns represent as much as 11 percent of all original sales, and might, in some areas as apparel, be as high as 20 percent to 25 percent. 


Aside from the costs of logistics to handle such returns, it often is the case that the returned items cannot be resold. In the case of apparel, such losses are said to reach half to 60 percent of returned goods. In a business with notoriously slim profit margins, that is a major cost of doing business.


The point is that product returns are an important performance indicator among many. That is a key reason why Amazon now charges its retail partners restocking fees when items are returned. 


source: Market Gap 


One study suggests that for an average company, a five percent improvement in the rate of returns has the potential to deliver improvements of about 200 basis points in net margin, or about two percent. 


And though it is hard to quantify the impact of returns on firm profitability, some retailers believe “an individual consumer with a long-term pattern of return rates greater than 20 to 30 percent negatively affects operating profit.”


source: Market Gap 


Study Title

Date

| Publisher

Estimate

The Cost of Product Returns in Online Retail

2023

Journal of Retailing

  • average return rate: 20.8% of online purchases

  • Processing cost per return: $10-20

  •  Return fraud accounts for 10.1% of return costs

  • Net profit impact: -2.1% average reduction

Reverse Logistics in E-commerce: A Comprehensive Study

2020

Harvard Business Review

  • Returns reduce gross margins by 4.4-6.8%

Product Returns in Fashion

2019

Journal of Fashion Marketing and Management

  • Return processing costs: $3-6 per item

  • Apparel return rates: 28-35%

  • Size/fit issues account for 62% of returns

The Economics of E-commerce Returns

2019

MIT Sloan Management Review

  • Total return costs: 8-10% of revenue

  • Fraudulent returns cost retailers $5.8B annually


So AI use to reduce returns caused by “wrong size; wrong fit; wrong color” should materially affect profitability rates.


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