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A dropshipper selects products in much the same way as any e-commerce entrepreneur: by looking at demand, trends, competition, cost price and potential profit margin.
However, experts at Stelvel Ltd point out that one variable is often missing from this calculation – the product return rate, i.e. the proportion of goods returned after purchase. In traditional e-commerce, returns are a problem for the warehouse. In the dropshipping business, however, it is a problem affecting the entire chain between the seller, the supplier and the customer.
Returns are part and parcel of the online sales process. When choosing a niche, a dropshipper is effectively choosing their future return rate. And a high product return rate can wipe out profits, even as sales grow.
Clothing is returned in 20–40 per cent of cases, footwear in 17–30 per cent, electronics in 8–15 per cent, cosmetics in 4–12 per cent, and food in 1–3 per cent. Stelvel Bulgaria has already written about products with a high risk of returns. In this article, we’ll look at how to use the product return rate to assess a product’s actual profitability before sales begin.
A return costs more than a lost sale
A return is not simply ‘one sale lost’. The seller must refund the buyer. And, depending on the terms and conditions, they may have to pay for return logistics or write off the cost of the goods. The higher the product return rate, the more such orders there are per hundred sales, and the faster the initial margin disappears. For a dropshipper who earns $15–25 per order, even a single return can wipe out the profit from several successful sales.
A dropshipper is entirely dependent on the supplier and their integrity. They have no physical control over the goods the customer receives. In essence, at this point, one of the main advantages of dropshipping (no warehouse, no costs for purchasing stock) becomes its weak point. If the actual product differs from what the buyer expected, the result is a return.
Therefore, a high return rate is often linked to the specific characteristics of certain product categories. This is a key factor that drop shippers should take into account when selecting the products they intend to sell, according to experts at Stelvel.
What constitutes a good product for a dropshipping business?
Two products may have the same price, cost price and demand. However, if one has a product return rate of 5 per cent and the other 30 per cent, the profit the business makes will differ significantly. In the first case, the company only needs to maintain a small reserve to cover the costs of returned orders. In the second case, returns become a constant and substantial expense that will have to be covered by the profit from remaining sales.
Therefore, the product return rate must be taken into account even before sales begin, when selecting products and putting together the shop’s range. It is not essential to know the exact figure for a specific product – it is sufficient to understand the range for the category and the reasons for returns on similar products. If a product remains profitable even at this level of returns, it is worth testing.
If profits disappear even at the category average product return rate, then such a product is not viable for dropshipping, even if demand is high.
When a customer plans a return in advance
Experts at Stelvel Ltd note that a high product return rate is sometimes the result of how a customer makes a purchasing decision.
63 per cent of online shoppers order several sizes of the same item, knowing in advance that they will return some of them. This is known as ‘bracketing’. The market itself encourages shoppers to behave in this way – through free delivery, free returns and ‘risk-free’ purchasing policies.
For the customer, this is entirely rational: they take the fitting process from the shop to their home, place an order, and then return part of what they’ve ordered. The retailer, however, loses out on paid orders and incurs additional costs to cover the returns.
How to find and analyse data on product return rates
Step one: analyse the trends for the product category in question or a similar one. It is not essential to find the exact product return rate; it is sufficient to determine an approximate range. A low rate – 3–5 per cent – usually has little impact on profit. A high rate – 25–40 per cent – means that every third or fourth order results in a loss.
Step two: Check reviews on competitors’ pages and websites. Go to Amazon or another marketplace, filter out 1–2-star reviews for a similar product, and analyse a sample of 50–100 reviews. If complaints such as ‘doesn’t match the description’, ‘the size wasn’t right’ or ‘it looks different in the photo’ are common, this indicates a niche and category with frequent returns.
Step three. Plug the figures into the calculation. Take the average product return rate for your category, multiply it by the expected number of orders, and add the cost of each return (taking into account advertising costs, return postage and refunds to the customer). Subtract all of this from your expected profit. If the result is zero or negative, this product is not suitable for dropshipping, according to the experts at Stelvel Bulgaria. No matter how attractive the trend and demand may seem.
Product return rate as a filter
Dropshipping is generally regarded as a business where the key is finding the right product: high demand, low cost price, and a good margin. A dropshipper may visualise the entire pre-sale process and the sale itself, but fail to take into account what happens afterwards – or only consider it partially.
A customer may place an order, the shop may receive the proceeds, but a few days later the money will have to be refunded. At that point, that attractive profit margin starts to look very different indeed. Therefore, the question a dropshipper usually asks – ‘How much can we earn from selling this product?’ – is far too narrow. The right question is: ‘How much will we actually earn if some customers return the goods?’
This is precisely where the attractive economics on paper end and the real economics of dropshipping begin.
Which channels actually generate profit? Where is your business losing customers, and what is preventing you from scaling up sales? The experts at Stelvel will analyse key loss points, assess the economics of your sales channels and review your positioning.
If you’re tired of constantly searching for high-quality products, reliable suppliers and profitable niches, then you’ll find exactly what you need on the Stelvel EOOD dropshipping platform!