A return costs you twice, once in the money you spend handling it and again in the profit on the sale that went away. Put your own figures in below. The numbers already there are an example we made up, so please don't take them as a benchmark.
How the sum works
Take the example above: 10,000 orders a month at £80, a 35% margin, a quarter of orders returned and £15 to handle each one.
- That's 2,500 orders coming back every month. At £15 each you're spending £37,500 a month on handling, or £450,000 a year.
- Each refunded order also gives up £28 of gross profit (35% of £80), which comes to £70,000 a month, or £840,000 a year.
- If you bring the return rate down by one point, 100 more orders a month are kept. Each of those saves £15 and keeps £28, so that's £43 an order, £4,300 a month and £51,600 a year.
We should be straight about that last figure, as it flatters the idea. It assumes the customer who no longer returns is the same one who would have bought anyway, and that won't always be so. A policy that puts people off buying can lower your return rate and your profit at the same time, and you won't see it unless you've kept a control group.
What goes in the handling cost
ZigZag estimates £10 to £20 per return, including logistics, repackaging and lost sales. It's a rough range from a returns company, and it includes lost sales (which the calculator counts separately), so your own figure will be better. From your books, add up:
- The return label, if you pay for it
- Warehouse time to open, inspect, steam or repack and put away
- Customer service contacts per return
- Payment fees you don't get back on the refund
- Stock that can't go back on sale at full price
- Outbound delivery on the original order
Most finance teams know the first of these and guess the rest. An hour with whoever runs your warehouse will get you closer than any report, including this one.
What to do with the number
Put it next to your marketing budget, because we suspect few brands have ever seen the two side by side, and it can be an uncomfortable moment. Then break it down, since a few styles and a few customers will probably account for far more than their share. Measure the rate properly, find out why the items came back, and only then decide whether to charge.