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December 5, 2006 The Hidden Costs of Returns Back in
Issue 88, we broke down how to calculate how much a return will cost you
to process per line item. In the example that we put forth we said that it
will cost $4.42 per line item to receive, restock, and issue a credit for a
returned item. Although there are some other costs that freight costs and
research of why the product was returned these costs are all minimal in
comparison to the amount of money lost from not selling the product. In the
food world, where perishable products are part of the business, a retuned
product usually means an unsold and unusable product. Let’s take a look at
how much money you are losing on just one type of return. Let’s say that the above grand total recap is for the month of November for one of our customers. From the recap you can see that you had 30 returned products that you sold for a total of $25,225.90. Let’s say that the average percentage is 17%. $25,225.90 x 17%(Gross Profit Percentage) = $4288.40 of profit that was not received. The good news is that with a food software solution that handles returns with reasons you may be able to make some of that money back. You can notice that many of returned products were due to human error NOT bad product for example 6 returns were because the wrong product was sent, 6 returns of product that the customer didn’t order, and 4 returns because of a duplicate order. If handled in a timely manner these products can be put back in inventory and possibly resold at a lower gross profit percentage to a customer that does not mind the short codes. The kind of return that will kill you is the out of codes. Not only do you have to throw out the product and have no way of making that money back but in our example this was the reason that cost us the most gross profit: $19,941.20 x 17%(Gross Profit Percentage) = $3,390 of profit LOST!!! That is a lot more $$$ than the $4.42 that it takes to process the return. Now that you know that a return will cost you a lot more than $4.42 per line item, the next logical question would have to be “How can I make some of this money back?” This question has to deal a lot with the reason of the return. As we said earlier if a product is returned that has absolutely nothing wrong with it and the return is handled in a timely and correct fashion, there is the possibility of trying to resell that item to other customers. With other returns such as damaged or out of coded products your chances of making back any of that gross profit is slim to none. Although you seem to be losing a lot money on returns there is a way to make some of it back. In one of John Schreibfeder’s articles he says that a great way to recover some of your costs of returns is to put a handling charge on the credit memo. Let’s take a look at an example of one way it could be calculated: Line Items
Returned = 6 6 Line Items Returned x $4.42 Per Item = 26.52(Total cost of processing a return) As you can see from our example you should charge the customer at least $26.52 to cover your expense of processing the return. Knowing how much a return actually cost you is very important in effective return management. In an attempt to save money you should be looking at the returns that cost you the most amount of money and focusing on how to improve that. Saving Money Starts By Knowing Your Costs!! Finding Ways To Recover Return Costs Will Make Processing Returns Less Painful & Reduce Costs To Unsubscribe
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