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Hidden costs of e-commerce quickly adding up, fueling profit erosion

Tuesday, Dec 1, 2020

The price of successfully operating an e-commerce retail business carries more significant, hidden costs than the average consumer may understand – from acquisition, to inventory, returns and more.

At the height of the pandemic, online sales showed an evident increase in demand. So much that many retailers immediately saw the frictions of e-commerce come to life. With the extra business, came the additional costs to deliver, fulfill and manage returned orders.

A recent article from Business of Fashion shares a few ways retailers can keep e-commerce costs down, such as:

  • Keeping inventory down
  • Predicting demand ahead of time
  • Spreading out inventory
  • Simplifying the supply chain
  • Bundling products
  • Personalizing product offerings
  • Reducing returns

Each of these factors play a key role in e-commerce costs, however some of them are impossible to fully control. The cost of returns, for instance, are constantly rising each year, and are predicted to cost companies $5 billion this year alone. This is 75% more than four years prior.

As the holiday shopping season quickly approaches, returns become even more prevalent. Historically, online returns jump to 30% and can be as high as 50% for more expensive items – that number is predicted to severely increase this holiday season compared to previous years. Consumers typically only make returns in brick-and-mortar stores 8-10% of the time, but for e-commerce that number is nearly doubled.

Returns can also significantly impact margin costs for e-tailers. “The average return represents 30 percent of the purchase price. The average margin for an online order is 10 percent, and the average cost of one return is $15.00,” according to an article from CNBC.

So, what does this mean?

E-tailers could potentially have a net loss for each return made, depending on its cost. To make up the margins, e-tailers feel the pressure and see the need to sell more product. Because returns happen so often, e-tailers are constantly looking to make up the lost sales. This is likely why they may have to keep costs down in other sectors, such as inventory and product offerings as BOF mentions in their article.

The apparent costs of purchasing and returning products online are not obvious. Returns are just one of the evident shortcomings of e-commerce. With the increase in online shopping, it is going to be up to retailers to keep costs down to meet consumer demands and stay afloat.

This holiday shopping season will undoubtedly bring success to retailers operating, or for the first time experimenting in the e-commerce space. However, if historical data and performance indicators are correct – the spike in success may soon dwindle under the sobering realization of the hidden costs from selling products online.

Source: 7 Ways to Make E-Commerce More Profitable – BOF, Complicated Customer Returns – Blue Acorn, Costly Business of Retail Returns – CNBC, Online Returns – Fast Company
Photo Credit: Unsplash

 

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