Have you ever wondered why clothes are so expensive while they’re so cheap to make? Read on to learn how a t-shirt that costs $3.00 to produce winds up costing $25.00 on Amazon.
We’ve all seen it: a pair of jeans on sale for $15 with an MSRP of $300. It can be maddening to think how little it must cost to produce the jeans if they can be sold for so little. What’s up with that?
Returns and shipping costs inflate the price of clothing. In a typical situation that pair of jeans has been shipped across the ocean, been through the mail 5 or 6 times, and returned at least twice. These costs add up quickly, especially for clothing sold online.
It’s really the same for most things, whether we’re talking about laptops or pots and pans. Online returns are increasingly a problem for ecommerce businesses who must pass the cost on to the consumer.
Returns and shipping make clothes expensive.
Just imagine this scenario. You’ve decided to sell your own brand of t-shirts, and you’ve found a factory in Pakistan to work with. Maybe the factory can produce your shirts for $3 each. You buy 100 for $300, and ship them air freight to the US. So now you’ve spent another $100 in shipping and DHL drops them off at your house. That’s not too bad, your cost per shirt is still only $4, and your garage is full of t-shirts.
Now, let’s say you sell all 100 shirts from your website. If you ship your shirts USPS Priority Mail, that’s another $5 per shirt. So, now your cost per shirt is more like $9. It’s pretty standard 10-30% of sales will be returned, so let’s assume 10 shirts get sent back, and you refund your customers. You’re also paying the return shipping. That’s another $50 in costs.
Your shirts get returned, and you look through them to make sure they can be sold again. Odds are someone returned the wrong shirt, or wore it to a concert and puked on it. These things happen, and it tends to be about 10-15% of all returns can’t be resold as-is.
You resell your remaining 9 shirts and ship them again (another $45 in shipping). Odds are, one of them will get sent back, so make that $50.
All said and done, your $3 shirts have cost you:
| $300 | Production costs |
| $100 | Import via international air freight |
| $500 | Shipping orders to customers |
| $50 | Shipping returned t-shirts back |
| $45 | Shipping orders to customers a second time |
| $5 | One more returned t-shirt |
| $1300 | Total cost, of $13.00 per shirt. |
If you want to make a healthy profit, you’d have to sell your shirts for $25 each, and that’s how we end up with what can seem like artificially inflated prices for clothing.
It’s even more expensive at scale
The story above is typical for someone just starting off in ecommerce, but what happens when the business grows? Sure, you could keep receiving t-shirts and shipping from your garage, but who really wants to do that when Amazon FBA has the allure of 100% hands-off inventory? What about sellers living outside North America or traveling abroad? Who receives, packs, and ships all of those t-shirts?
It’s impractical for a growing ecommerce business to open a warehouse and maintain the staff necessary to operate it. The costs are staggering. Instead, it makes more sense to outsource.
Growing sellers often partner with 3rd party logistics companies, who receive inventory, pack and ship orders, and inspect returns on behalf of the seller. While much more practical than opening a warehouse, this type of arrangement can add significant costs and overhead. It’s very important for growing ecommerce businesses to choose a 3rd party logistics partner carefully.
The costs of partnering with a 3PL could potentially increase the cost of each t-shirt by $5 or even $10, depending on a number of factors. Sellers are forced to pass these costs on to the consumer, and before you know it the $25 t-shirt is $40.
Most 3PLs have a set of guidelines in place their customers must follow, and can charge exorbitant fees for deviations from their policies. For example, many require all products received to be barcoded for easy identification, and charge extra for inventory without barcodes.
For this reason, partnering with a 3PL can be a lengthy and frustrating process for sellers, who often find the extra requirements and rules expensive and confusing to navigate. When handled badly, it can transform delighted customers into an angry mob.