The most successful retailer isn’t necessarily the company with the best product or the most effective marketing. Instead, success hinges on striking the right balance between costs and revenue.
As retail evolves, ecommerce companies have an opportunity to deliver a better customer experience and cut costs by leaning into premium automated systems. In this article, you’ll learn what to consider when identifying areas where you can reduce expenses, and how you can leverage technology to increase customer satisfaction, create loyalty, and generate revenue while eliminating overhead.
The main categories of overhead expenses in ecommerce are:
The three ways to lower these costs are negotiation, elimination, and substitution.
For certain services or products, retailers may be able to negotiate a better deal—e.g., work out a discount with your courier or credit card processor, or reach an agreement with your packaging provider to order higher volume at a lower price point. In other situations, retailers may discover that an investment isn’t yielding a return. For example, the budget dedicated to a particular marketing channel may not be generating sufficient revenue, so the company may decide to eliminate that line item from the marketing budget.
In substitution, companies are swapping a service or product for an alternative that better suits their needs.
Even for a profitable business, cutting costs can help you save for future capital investment or create a buffer for an economic downturn. But saving money is irrelevant if you’re disappointing customers; The key is to find ways to eliminate unnecessary expenditures without compromising on quality or customer experience.
When identifying areas of your business that are ripe for savings, the question is rarely what should you go without. (You’re not going to give up cybersecurity protection—even if you seemingly don’t use it—because a ransomware attack could cost more than the upfront expense of protecting your systems.) Instead, consider ways you can cut costs while addressing your customers’ needs more effectively than your current systems do.
The four areas where most retailers can make value-adding improvements are:
Post-purchase experience and returns—whether it’s minimizing the need for them or making them more pleasant—are common threads through many of these cost-saving measures.
The ecommerce return rate average in 2022 was 16.4%, and return rates are expected to grow another 2.2% in 2023. Improper fit, poor product descriptions, and unsatisfactory quality are three of the six most common reasons for retail returns—all of which can be mitigated by setting reasonable customer expectations.
Product pages are a retailer’s first line of defense against returns, and should capture every detail a shopper needs to make an informed purchase decision. That includes:
Apparel accounts for 10.01% of all ecommerce returns—the highest amount of any product category—and 93% of shoppers consider product photos to be “important” or “very important.” Product photography featuring models of different sizes and body shapes can help shoppers visualize how an item will look on their own bodies (and minimize bracketing in the process).
Instead of photographing only one model per item, shoot apparel on two to three models of different sizes for each item. Include each model’s height and measurements (chest/bust, waist, and hips), as well as the size they’re wearing in the photo.
For retailers offering extended sizing variations within an apparel sku—e.g., tall, plus, or petite— indicate the parameters for each sizing category on the product page to minimize bracketing. Madewell, for example, includes information on its product pages defining Petite as “Your height: 5’3” and shorter. Your inseam (top of inner thigh to floor): 29” and under,” and Tall as “Your height: 5’9” to 5’11”. Your inseam (top of inner thigh to floor): 33” and up.”
Shoppers want to read reviews before making a purchase: 86% will not buy an item without reading at least one review, while 72% want to see real customers’ images. Retailers should be soliciting reviews as part of their post-purchase communication strategy.
Offering past customers a future discount in exchange for reviews—especially with photos—of their recent purchases drives repeat sales and increases first-time conversions. Product description copy, like product photography, can create unrealistic expectations, but customer reviews offer a more accurate perspective, including real-world experience with product performance, which lowers ecommerce return rates.
In the development phase, most consumer products are tested under ideal conditions. Once a product goes to market, they are subject to real-world wear, tear, and scrutiny. Instead of burying the complaints or negative feedback, retailers can head off future returns by incorporating customers’ post-purchase feedback into the product page.
This is one area where returns data is particularly useful: Retailers may not be able to collect feedback or reviews from their satisfied customers, but they can require a “reason for return” to complete the return transaction.
The most common way this information is used is in sizing. Apparel and footwear retailers frequently use a sliding scale to track customer feedback and indicate if customers believe an item runs small, large, or true-to-size. Zappos takes this concept a step further, and uses its robust post-purchase data to recommend a particular size item based on an analysis of customer’s past purchases and the aggregated feedback on the specific product.
Customer service calls can cost as much as $6 per call, and WISMO and WISMR questions account for 18% of those calls. Retailers need capable customer service agents to solve problems when they arise, but many inbound queries—particularly WISMO and WISMR—can be handled more efficiently and affordably through automated processes.
After clicking the "buy" button, customers should receive confirmation and tracking messages with the following:
Retailers can deliver greater visibility into the entire post-purchase process with branded tracking pages. Branded tracking pages give retailers control over the post-purchase experience. Instead of sending customers to the carrier for WISMO tracking information, retailers can keep customers on their own site and continue to expose them to new products.
By switching to automated order updates and branded tracking pages, retailers not only reduce their call center expenses, they increase revenue. Companies like Paper Mart say that many of their customers are making additional purchases through their post-purchase emails and tracking pages.
Products that require set-up generate more customer support questions—whether they relate to missing parts for assembly, or technical issues connecting gadgets. By analyzing customer support calls for patterns and creating content to proactively answer those questions, retailers can lower call center costs and improve customer satisfaction.
Premium audio retailer Sonos, for example, uses its Narvar branded tracking pages to educate their customers about the products they’ve purchased while they wait. “We talk about things like creating an account, downloading the app, and custom tuning with Trueplay so that we can get the user excited about the product that they’re about to receive and get them in a place where they can have a positive experience, quickly,” Sonos’s Senior Ecommerce Manager explained.
As a result of this change in approach with the tracking page, Sonos saw a further 3% drop in WISMO calls, and a 24% increase in click-through rate (CTR) from the tracking page.
There are two major ways that retailers can reduce expenses through their returns policies. First, there are direct savings through measures like digital returns, consolidated returns, and improved reverse logistics. Second, there’s recaptured revenue through strategies that get a returned item back on the shelf faster so it’s more likely to be sold at or close to full-price.
Retailers save as much as $0.10 to $0.15 cents per package just on printing costs by making the switch from enclosed shipping labels and instructions in packages to digital returns.
Digital returns let customers decide how they want to manage the return (i.e., third-party shipping, digital-to-physical returns, home pickup, BORIS) and give the retailer insight into the customer’s behavior and preferences.
The common elements in digital returns are:
Similar to shipping notifications on outbound orders, the customer can be alerted through their preferred communication channel, (email, text, or push notification) of both their return and refund status (“in-transit”, “scanned at warehouse”, “refund issued”, etc.) eliminating the need for costly WISMR inquiries.
Additionally, detailed reasons in the digital RMA process help retailers adjust their product pages (for items that are currently being sold through the website), reevaluate manufacturing relationships, and make better product recommendations to their customers.
Retailers lose one-third of their revenue to return shipping and processing. Returns, alone, create 5 billion pounds of landfill waste and 15 million tonnes of carbon emissions annually just in the United States. Returns consolidation aggregates smaller shipments as one combined shipment to reduce logistics costs and environmental waste. Benefits include:
By minimizing wasted space on a truckload, returns consolidation reduces the number of trucks needed to transport return shipments. When a load is full, the fixed costs associated with the load—e.g., driver wages and fuel surcharges—are distributed to a greater number of products, lowering the return cost per item.
Returns consolidation also ensures that each item is properly packed for return transportation, minimizing the risk of damage as items make their way back to distribution centers.
Reverse logistics is the side of the supply chain that transports goods from the customer to the vendor. Implementing intelligent dispositioning strategies within reverse logistics can help retailers mitigate return costs.
Intelligent dispositioning uses dynamic rules and customer feedback to determine how and where a return is processed. Knowing why and when a customer is making a return can inform dispositioning rules and increase a retailer’s profits.
Beyond directing categories of products to specific locations, intelligent dispositioning rules allow retailers to localize returns to closer 3PL warehouses, reducing the time and cost of shipping, speeding up refunds, and returning inventory to the shelves faster.
Acquiring a new customer costs 5X more than retaining an existing one. When retailers retain customers, they can hit revenue targets without spending as much on customer acquisition costs (CAC). The likelihood of selling to a return customer is 40% greater than converting a new customer. Increasing customer retention by as little as 5% can increase profits by more than 25%.
A retailer’s goal is to increase the lifetime value (LTV) of a customer to offset the CAC. A healthy LTV:CAC ratio is at least 3:1. Since the average CAC in retail is $10, the average retailer needs to make a net profit of $30 per customer to have a sustainable business model. By proactively addressing common pain points in transactions, retailers increase retention. Remember:
Investing in post-purchase experience is one of the most effective ways to reduce expenses in ecommerce and increase revenue. Gathering product reviews and photos from past shoppers can help convert future customers. Proactively updating shoppers on the status of orders and returns decreases call center volume and costs, while boosting loyalty. Enabling easy, efficient digital returns minimizes shipping and printing costs, while driving repeat business.
Together, these actions work to not only reduce ecommerce expenses, but increase customer satisfaction and retention.