Revealed: The Impact of Customer Returns on Small Businesses

Entrepreneur Woman Unpacking Items From Box

In a world dominated by next-day deliveries and one-click checkouts, UK retailers are losing around £5.2 billion per year due to online returns alone.

When it comes to small businesses, nearly one in five (18%) orders placed end up being returned according to our latest survey. From squeezing resources to hurting the bottom line, returns are having a huge impact on the operations and profits of small businesses. But what is the true cost of customer returns?

To gain a better understanding of how small businesses have been impacted by returns, the team here at Capital on Tap spoke to over 250 small business owners from a variety of sectors across the UK. The research has looked into which industries have been hit the hardest, the areas in the UK that are feeling the biggest squeeze, and what the most common issues caused by returns are for SMEs. 

The biggest issues faced by businesses due to customer returns 

Our research revealed some of the main issues that are affecting small businesses when it comes to customer returns. Hugh Acland, Commercial Director at Capital on Tap, has also provided some top tips for overcoming these issues. 

1. Increased time spent on returns management 

The most common issue in regard to returns is the increased time that companies have to spend on managing them. Of those surveyed, over a quarter (27.3%) of small businesses say this has been a big challenge for them over the last year. 44% of respondents from the food retail sector cited this as the biggest challenge that returns cause for them.

Hugh says, “Manually sorting and managing returns can eat up a huge amount of time, and this can have a big impact on the efficiency and operations of a business, particularly for those with only a small number of employees. 

“Automating some of your returns processes can reduce the time spent though. Investing in technology such as an inventory management system can support your team in receiving, restocking, and reselling returned items, and should free up some of their time to get back to the more important tasks at hand.”

2. Financial impact due to refunded products 

As we’ve already explored, there is a significant financial impact when it comes to customer returns, and 26.9% of small businesses across the UK say this has been an issue for them this year.

Of those surveyed, businesses within the restaurant & food industry are feeling the pinch the most, with 40% citing refunds as their biggest challenge when it comes to customer returns. This may be particularly prevalent in this industry due to food not being cooked to the standard the customer expected, incorrect dishes coming out or delays from ordering. 

Hugh says, “Refunding customers can take a big financial toll on your business, especially if you aren’t able to resell the product or service straight away. 

“Using a business credit card can help to give you a bit more flexibility over your finances. They can be a useful tool for bridging any cash flow gaps as you process refunds, and they can also give you greater visibility over the spending and returns across your whole business.”

3. Product returns have been faulty or unsellable 

The third and fourth most common issues with returns are because products have been sent back either faulty (26.5%) or in an unsellable state (25.7%). 

According to those surveyed, a huge 80% of businesses that sell container and glass products said that faulty returns are one of their biggest challenges, which is perhaps unsurprising given the fragile nature of their products. 

Hugh says, “It’s essential that any business has a clear returns policy. You need to communicate this with customers and confirm the quality and condition you expect returned items to be in. For instance, if an item has been clearly used or worn, will you allow a customer to return these? 

“Also, make sure you’re prioritising packaging so that your products aren’t being damaged on the way to the customer.”

4. Restocking has become an issue because of unknown returns

A quarter of businesses (25.3%) also say that they are struggling to restock properly because they don’t know how many returns they will be receiving. 

This is a particular problem for retailers, with 42% saying this is their main issue when it comes to customer returns.

Hugh says, “Investing in technology, such as management softwares, will not only free up time and resources when it comes to returns, but it will also give you a clearer view over your current stock. Keeping track of returns via software or even a spreadsheet will also help you to better understand what needs to be improved across your business. 

“Setting a time-limit for refunds is also really important, so you don’t get hit by an unexpected return several months down the line. The right timeframe will differ by company and product, but have a think about what will work for you. Maybe you think customers only need a short two-week time-limit, or maybe 60 days will work better for your business.”

5. Lack of capacity to work on returns

The amount of time taken to manage returns might be the number one issue, but there is also the problem of teams having a lack of capacity to actually work on returns. 24.9% of small businesses surveyed say this has been a big challenge for them over the last year.

80% of home furnishings companies said this is the main issue they had to face when it came to customer returns. Hugh says, “Sorting returns is a laborious process, and smaller companies often won’t have enough resources to manage them without it impacting other areas of the business. 

“It could be worth considering outsourcing your returns handling, so you and your employees can focus your efforts elsewhere across the business. There are dedicated logistics companies that can help manage these processes, although there will of course be costs involved here, so you’ll need to decide whether freeing up your time is worth these fees.”

Where in the UK is being hit the hardest by returns?

In the UK alone, one in four small businesses see between 16–20% of their orders being returned. As we’ve already explored, the type of industry clearly has an impact on this number, but our research has also revealed that the volume of returns actually differs significantly depending on where businesses are based across the UK. 

According to the survey, with nearly a quarter (23%) of all customer orders being sent back, small businesses in Plymouth see the highest number of returns. 

While the financial impact of returns is a big issue, this actually isn’t always the largest drain on businesses, with the time spent on things like managing returns and sorting refunds also affecting operations and efficiencies. In fact, of those surveyed, nearly two-thirds (60%) of businesses in Plymouth say that a lack of capacity is the biggest problem for them when it comes to customer returns. 

SMEs in Liverpool see the second highest number of returns, with those surveyed saying around 21% of all orders end up being sent back. Following in joint third place are Cardiff and Southampton, with businesses based in both cities admitting around two-fifths (20%) of all orders are returned to them. 

Despite seeing the biggest financial impact, with returns costing businesses around £1,090 each year, Sheffield-based businesses actually see the lowest number of returns, at just 7%, according to those surveyed.  

Sources & Methodology

Survey was conducted on 250 UK small business owners over the age of 18, in September 2023. 

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