E-commerce returns can make or break profitability. Ben Franzi, Strategic Advisor at TMX Transform explores how both retailers and postal networks must shift from transaction-level thinking to lifetime value calculations, and why data-driven returns strategies are becoming essential as parcel volumes surge.
Global e-commerce sales are projected to reach USD$7.4 trillion in 2025, up from USD$6 trillion in 2024, according to Statista. The resulting rise in parcel volumes is being felt around the world, with Royal Mail challenging six-day service mandates, and PostNord aiming to stop delivering letters altogether by the end of this year.
The dominance of online shopping brings an inevitable increase in returns, putting added pressure on already strained supply chains and retailer margins.
Returns function simultaneously as a powerful marketing tool and a significant operational burden. In fashion, where return rates often exceed 30 per cent, merchants face substantial challenges – inspecting returned goods, reselling within the same season, and managing the entire restocking process.
Despite this burden, return policies remain an essential part of most business models. Both retailers and the postal networks that serve them face a balancing act: meeting customer expectations while maintaining operational efficiency and protecting profit margins.
Consider an average Australian e-commerce transaction with a $100 basket size and a $30 gross margin. If you're spending $7 to send it out and $7 to get it back returned, that's half your gross margin just gone in shipping costs.
With these economics, individual transactions with returns become barely profitable. The real value emerges when looking beyond single purchases to customer lifetime value. Retailers make little or no money on initial transactions with returns, but if those shoppers become repeat customers, the profitability equation changes dramatically.
"You'll make profitability back on subsequent transactions because customers learn about sizing and no longer need as many returns, plus you don't have to spend acquisition costs to bring them back," Franzi explains.
Retailers: How to handle returns
Retailers facing the returns challenge need to understand:
- Design for your specific business model. For instance, fashion businesses with 30%+ return rates need consolidated returns processing to efficiently inspect, rewrap, and restock items before they're out of season.
- Consider consolidation vs. immediate processing. Some retailers benefit from handling returns in batches (consolidated) while others need immediate processing. Avoid dealing with returns in dribs and drabs if your operation requires efficient bulk processing.
- Evaluate whether items should return at all. For low-value items, the economics might favor recycling or disposal rather than return shipping and processing. Consider whether the cost of return logistics makes sense for each product category.
- Integrate tracking technology with inventory systems. When retailers can predict exactly when returned items will arrive, they can speed up processing and get merchandise back on sale faster.
- For international sellers, explore local returns specialists. Returning products between regions is prohibitively costly. Local returns providers can assess, repackage, and even resell returned merchandise in the destination market, eliminating international return shipping.
- Remember the marketing value of returns. Without return options, many customers won't make that first purchase due to uncertainties about size, color, or appearance. Returns policies directly impact conversion rates, especially in categories where fit and appearance matter.
Combining deliveries and returns: It depends on density
Many organizations are exploring whether delivery vehicles should also handle returns pickups during the same routes. According to Franzi, there's no universal answer to this question - success depends largely on transaction density.
Transaction density refers to how many deliveries and pickups can be completed within a concentrated geographic area. The higher the density, the more efficient the operation.
The major costs in any pickup and delivery operation come from key factors:
- Time spent sorting packages and loading vehicles
- Drive time to the first stop
- Time spent at each door
- Drive time between stops
Retail and postal organizations with high delivery volume and density often operate separate pickup and delivery fleets. In contrast, carriers handling premium, time-sensitive deliveries with lower density typically run combined pickup and delivery models.
The core element is how many parcels can you deliver or pick up in the same street. That dramatically shortens drive times between stops, which is one of your biggest costs.
With delivery costing , maximizing utilization is essential regardless of whether you choose separate or combined delivery and returns operations.
“It is vital to run the data first. Don't have a design outcome already in mind. Let the data tell you what you should do through modeling and simulations," Franzi says.
Data-driven fleet planning is particularly important given projected growth in e-commerce.
"We're likely to see e-commerce rise significantly over the next five years, which means parcel volumes will rise with that. If you lock in a returns strategy now without proper modeling, in three years' time that might be the wrong approach."
Regardless of the returns model, creating an easy consumer experience remains paramount. Return lockers, convenient drop-off points, and label-less returns have been shown to significantly impact customer satisfaction and merchant loyalty.
The rise of specialized returns services
Specialized returns providers are emerging and expanding globally, offering services that go well beyond basic transportation. These companies handle the complete returns cycle: receiving items, assessing conditions, repackaging when needed, and even reselling merchandise directly from their facilities.
"There are now specialist returns providers emerging in the market, and they're likely to continue expanding, particularly for international e-commerce," Franzi notes.
By enabling local processing and potential resale in the destination market, these services can improve both economic and sustainability while providing merchants with more visibility throughout the supply chain.
If you've got stock moving between countries, returning it all the way back to the origin is costly. But with a local return specialist, merchants can actually sell that stock back into the destination market.
For traditional carriers, this trend represents both threat and opportunity. Organizations focused solely on transportation risk commoditization, while developing higher-value returns capabilities can strengthen merchant relationships and capture additional revenue.
Any new service implementation must be reliable and consistent, however, as failed promises typically generate costly customer service calls and reduce repeat purchase likelihood – negatively impacting both carriers and merchants.
Building returns as a competitive advantage
As e-commerce volumes continue to surge, effective returns management will increasingly separate market leaders from the competition.
For retailers, returns represent more than a necessary cost – they're a strategic investment in customer acquisition and retention. For postal organizations, returns capabilities offer an opportunity to move beyond commodity shipping into higher-value services that strengthen merchant relationships.
The organizations that approach returns strategically – making data-driven decisions while focusing on the complete customer journey – will transform this challenging aspect of e-commerce into a powerful driver of loyalty and success.
