How to Identify Products That Might Be Losing You Money
November 23, 2023
by Rebecca Fox

Your actual profit margins may be different from what you think they are due to the impact of returns, which means you might actually be losing money on some of your products. 

ReturnGO can help you identify edge products with warning signs like low sales, small profit margins, and high return rates, so you can make informed decisions that will maximize your profitability.

Differentiating Profitable from Unprofitable Products

How do you know which products are truly contributing to your bottom line and which ones are silently draining your profits? 

Returns are often underestimated in their impact and can greatly inflate actual costs and reduce profit margins. Understanding the true cost of your products is crucial for staying profitable.

The key lies in identifying products that have a combination of low sales, small profit margins, and high return rates. These products, your “edge products”, should be further examined and optimized as necessary.

Here are some specific characteristics to look for when identifying edge products:

  • Small Profit Margins: You may have smaller profit margins than you think, the trick is to calculate them correctly while taking into account returns.
  • High Return Rates: Products with particularly high return rates might mean that you’re spending more on various hidden costs, affecting your margins. 
  • Low Sales Volume: Products that consistently rank among the bottom 10% in terms of sales volume might be quietly draining your profits.

If a product has a mixture of these characteristics, it might not be very profitable, and could even be losing you money. ReturnGO can help you pinpoint these underperformers so you can optimize your products and boost your bottom line.

Characteristics of Unprofitable Products

When it comes to identifying unprofitable products, it’s essential to recognize the telltale signs that could be eating away at your bottom line.

1. Products with Small Profit Margins

When reviewing your products, you’ll want to take a close look at items with small profit margins. Even if these products seem nominally profitable at first glance, small profit margins don’t leave much room for error before swinging into the red. 

The Hidden Impact of Returns on eCommerce Profit Margins

Given that returns can significantly inflate actual costs and reduce profit margins, maintaining profitability requires understanding the true cost of items. 

With an average return rate of 18.5%, nearly one in five items sold online may be returned, leading to additional expenses associated with shipping, restocking, and refunds or exchanges.

Accurately calculating the actual cost, and thereby profit margin, of an item requires factoring in these hidden return expenses.

How to Calculate Your Actual Item Costs

To accurately calculate your actual cost per item, taking into account expenses related to returns: 

Multiply the item cost as it is recorded in your online store (usually based on the original purchase price) by the number of items sold of that product, then add return expenses such as processing fees, labor costs, warehouse costs, etc. Divide that by the number of items sold to get the actual item cost.

This is the formula:

Actual Item Cost = (Recorded Item Cost x Sold Items + Return Expenses) / Sold Items

For instance, let’s say you sell a product with an initial purchase price of $10. You’ve sold 200 units of this product, but you’ve also encountered a 23% return rate, which means that 46 units have been returned. Assuming an average return cost of $5 per return, the actual item cost would be $11.15.

Actual Item Cost = ($10 x 200 + (46 returns x $5 return cost)) / 200 = $11.15

Using this formula, you’ll find that the actual cost per item is $11.15, which is 11.5% more than what you originally had marked as the item cost, highlighting the significant impact of returns on the true cost of an item.

By understanding and accurately calculating your actual item cost, you can calculate your profit margins, and see if they are as high as you think or if they might be actually losing you money.

2. Products with High Return Rates

When a product has a high return rate, you should take a closer look at its profitability. When products have a consistently high rate of returns, it’s often an indicator that they might not be performing as expected. 

As discussed above, returns reduce the margin, so this becomes even more concerning when they have high return rates combined with low profit margins, as they’re more likely to break even or lose money. 

Therefore, make sure to look into products with particularly high return rates, as they have a higher chance of not being profitable, and in the worst-case scenario, actually losing you money.

With ReturnGO’s return analytics dashboard, you can see which products have particularly high return rates, enabling you to make informed decisions about whether to retain, adjust, or discontinue such edge products, ensuring that your eCommerce store remains profitable.

3. Products That Don’t Sell Well

It’s common to focus on the top sellers since losing money there is more significant, but even low-selling products may be slowly draining your profits. When combined with small profit margins and high return rates, you could be losing money without noticing. 

Start by analyzing your sales data to identify your consistently lowest-selling items. Flag any products that regularly rank in the bottom 10-20% of sales. Cross-reference these with profit margins and return rates, to see if they’re profitable despite the low sales.

See if production costs can be reduced or prices can be raised to increase the profit margins, and try to improve sales through marketing, messaging, and placement.

If these tweaks don’t improve your sales or margins, you may want to discontinue less popular items to free up resources for better-performing products.

How to Optimize Your Profitability

Once you’ve pinpointed your unprofitable products, there are several strategies you can use to boost your overall profitability.

Streamline Operations

Take a critical look at every business process, and streamline them to eliminate unnecessary steps that inflate costs without improving quality or customer experience.

Invest in automation tools like ReturnGO to streamline your post-purchase workflows. ReturnGO powers efficient order tracking, return processing, reverse logistics, and more to increase operational efficiency throughout the whole eCommerce workflow.

By using ReturnGO, you can identify return reasons, reduce errors, and automate your return workflows in order to streamline your processes. 

Find alternate suppliers or manufacturers that can provide high-quality products at a lower cost, or consolidate purchases into larger orders to negotiate better bulk rates from vendors. Even small per-unit cost reductions can quickly add up to big savings at a high volume.

By optimizing your business processes, reducing waste, and leveraging automation, you can drive down costs and improve efficiency. More efficient operations means lower overhead expenses, increasing bottom-line profits.

Chat with our experts to boost your customer return experience and LTV today.

Leverage Analytics

Track your returns and orders data, and analyze things like your actual item costs, return rates, and return reasons.

ReturnGO provides advanced analytics to help you see all your returns data in one place, and track return rates and associated expenses like refunds, shipping, and restocking.

By connecting ReturnGO’s returns data with your store’s item cost information, you can dynamically calculate actual item costs, revealing the real margin after returns. 

Used across your business, ReturnGO analytics empower you to make data-backed decisions to optimize profitability.

Review Pricing Regularly

When you’ve found a product with a lower profit margin than you thought, you can raise the price to ensure that it’s profitable. 

Experiment with small price adjustments to see what works best, and factor in rising costs with gradual increases to avoid surprising customers. 

The goal is to find the perfect pricing that brings in the most profit for each sale. Remember, effective pricing isn’t a static process; it’s an ongoing effort that requires continuous monitoring, evaluation, and adjustment. 

By regularly reviewing your pricing strategy, taking into account shifting costs and return expenses, and using data to guide your decisions, you can ensure that your products are priced right for success, contributing to the sustainable growth and profitability of your eCommerce business.

Reduce Return Rates 

For products with high return rates, use the ReturnGO return analytics dashboard to analyze why customers are sending items back – poor fit, misleading photos, defects? Then figure out a fix that addresses the root problem. 

Improve your product descriptions, imagery, and sizing information to set clearer customer expectations to reduce returns. Also, implement quality control procedures to reduce the number of defects and therefore return requests.

Fewer returns directly translates to lower shipping, handling, and restocking labor costs. Without a lot of returns dragging down profitability, margins on those products will improve thanks to a higher effective sales volume. 

Additionally, improve the outcomes of the returns you do get – offer exchanges and store credit to reduce overhead costs and encourage customers to shop within your store. By offering these options, you can minimize the need for full refunds and keep the revenue in your store.

Implement Return-Related Fees

To boost profits and manage costs effectively, consider implementing return-related fees such as restocking fees, return shipping fees, or returns processing fees as a financial buffer against the impact of returns. 

Strategically placing these fees can enhance the overall profitability of each transaction while also encouraging customers to make more intentional purchase decisions, knowing they’ll need to pay for returns. 

By implementing return-related fees, you can cover a portion of the expenses associated with processing returns. When calculating your profit margins, remember to subtract the return-related fees paid by customers from your return expenses.

This financial buffer mitigates the negative impact of returns on eCommerce profit margins, so you get more out of each sale.

Keep Your Business Profitable

The ever-evolving world of eCommerce is about more than just making sales; it’s about making smart and profitable sales. Paying attention to warning signs like low profits, high returns, and slow sales is key to keeping your business profitable and successful. 

Use ReturnGO analytics to identify unprofitable products so you can make informed decisions to improve your product offerings, boosting your profit margins while setting the stage for long-term growth.

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