How do I account for returns when I calculate my margin?
Add up what returns cost you over a batch of orders, divide it by the number of sales that were kept, and add the result to the product cost in the calculator. There is no returns field, but this way each successful sale carries its share of the sales that came back.
What a returned order costs you
When a customer sends something back and you refund them, the sale disappears, but the costs do not:
- The outbound shipping you paid, and the return shipping if you cover it.
- Time to inspect and repack, and perhaps a new bag or box.
- The product itself, if it comes back damaged or worn and cannot be sold again.
Take these figures from your courier invoices and your returns log, not from guesswork.
Why divide by the sales you kept?
Say 10 of every 100 orders come back. Returned orders bring in no money, so all the profit comes from the other 90, and they have to cover the cost of the ten. That is why you divide by 90, not 100.
A fashion item costing 60 and selling for 100: profit 40 and margin 40% before returns.
10 returns out of 100 orders, each costing 25 in shipping and handling, and the item comes back sellable. Total 250.
250 ÷ 90 = about 2.78 on each kept sale. The cost becomes 62.78.
In the Profit margin calculator: profit 37.22 and margin 37.22%.
When the rate rises or the item is ruined
The effect grows fast in two situations. First, the return rate doubles: 20 returns out of 100 means 500 spread over 80 sales, or 6.25 per sale. Cost 66.25, margin 33.75%.
Second, the item comes back unsellable, such as clothes that were worn and marked or a product with a broken seal. Now each return costs 25 in shipping and handling plus 60 for the product, 85 in total. With 10 returns per 100: 850 ÷ 90 = about 9.44 per sale. Cost 69.44, margin 30.56%. Nearly ten points of margin gone to returns.
What to do with the number
- Work it out per product category. Returns on clothing and shoes often differ a lot from accessories.
- If the margin after returns is weak, the fix may be on the product page: a clearer size chart and more accurate photos cut returns before any price change.
- Log return costs each month in the Expense summary generator to see the total, then redo the calculation monthly with fresh figures.
- Review your returns policy: who pays for the return leg? Changing that one term changes the cost figure.
Common questions
Does an exchange for another size count as a return?
The sale stands, but you paid extra shipping. Add that shipping to your total return costs without reducing the number of kept sales.
How many orders do I need for a reliable rate?
The more orders, the closer the average is to reality. A full month of orders is a sensible start for most small stores.