Returns might seem like a simple refund, but they carry hidden costs that can cut into your profits. This guide helps you understand typical return costs and recognize when they signal a bigger problem.
Key Takeaways
- When customers send items back, you pay for shipping, processing, and often lose the chance to resell the product at full price.
- It’s normal for online stores to have around a 20-30% return rate, which is much higher than physical stores at ~5-10%.
- If your cost of returns is way above industry norms or keep climbing, your store may have problems with poor product quality, misleading descriptions, or even fraud.
As an online retailer, you know that returns are part of the business. Customers can’t try things on or see them in person beforehand, so a certain number of products will come back to you. Offering easy returns keeps customers happy and buying from you again. However, those returns come at a cost to your business. Learn what the cost of returns includes and get a sense of what’s normal in online retail.
What Does ‘Cost of Returns’ Mean?
“Cost of returns” refers to all the expenses your store incurs when a product is returned. That includes things like the money spent on processing the return, restocking or repackaging the item, shipping it back, and the potential loss of revenue if the item can’t be sold again for full price. In short, it’s the total cost of undoing a sale.
Understanding how to reduce returns and their costs is essential to run an online retail store because they directly affect your profitability. You expect to make money on a sale, but a return is money out of your pocket.
How Much Do Returns Cost Retailers?
Returns can cost retailers a lot more than you might expect. One 2024 report by Radial found that for every $100 in online sales, about $27 worth ends up being the cost of returns. That means more than a quarter of the sale’s value is lost just to processing the return and handling the item again.
What Makes Up the Total Cost of a Return?
A single return sets off a chain of costs for you. Here are the main components that make up the total cost of a return.
Shipping Costs
If you offer free returns, you pay for the package to come back. Even if you don’t, the original outbound shipping cost is usually lost when the item comes back (you’re not getting that shipping fee back). Paying for return labels and losing the initial shipping expense directly cuts into your profits.
Processing and Labor
Every return uses up someone’s time. Your team has to receive the item, open it, inspect its condition, and process the refund or exchange. This labor, whether it’s 5 minutes or 30 minutes per item, costs money in wages.
In fact, handling one return can take almost 40 minutes of work (unboxing, checking, updating inventory), which might be about $13 in labor cost on average.
Restocking and Storage
After inspection, the item might need repackaging or cleaning before it’s resalable. Then it goes back on a shelf or into storage. This uses up warehouse space and materials.
If the item is seasonal or has a shelf life, a delayed return might mean it misses its prime selling window. The cost of return is the effort to get the item ready for resale and the opportunity cost of that item sitting in inventory.
Product Value Loss
Often, a returned product can’t be sold as new again. Maybe the packaging is opened, or the item shows slight wear. To sell it, you might have to mark it down or liquidate the item.
In some cases (like cosmetics, perishables, or personal items), you have to toss the returned item entirely. This loss of value is one of the main reasons typical return rates are so high. It’s essentially lost revenue.
Payment and Processing Fees
Remember that when you made the sale, you paid a payment processing fee to the credit card processor or platform. When you refund the customer, you don’t always get those fees back.
Additionally, handling the return might involve restocking fees or other administrative costs charged to you by warehouses, fulfillment partners, or third-party logistics providers for receiving, inspecting, and restocking returned items. These costs are usually smaller per item, but they add up across many returns.
When Do Return Costs Indicate a Deeper Issue?
Because some returns are normal, how will you know when the costs of returns are pointing to a bigger problem in your business? Here are some warning signs that your return costs may indicate a deeper issue beyond routine customer returns.
Your Return Rate Is Much Higher Than Average
If most online retailers in your sector have ~20% returns and you’re seeing 40% or more, it’s a clear red flag. An unusually high return rate often signals that something is off with your products or shopping experience. For example, misleading product descriptions or photos can set inaccurate expectations, leading to customer disappointment and higher returns.
The Same Product Gets Returned Repeatedly
When one specific item has a consistently high return frequency, it usually points to a problem with that product. The sizing may run small, the color might not match what’s advertised, or there could be a defect.
Repeated returns of the same item are a strong signal that you need to investigate and fix the product itself or improve how it’s described online.
Customers Cite Similar Issues in Returns
There are so many different reasons for returns, so pay attention to what your customers say. If many returns include notes like “not as described,” “didn’t fit,” or “item defective,” you may be dealing with deeper quality control or information issues.
For instance, frequent “didn’t fit” complaints could mean your size chart needs improvement, while “not as described” suggests your listings need clearer or more accurate details.
Return Costs Are Significantly Hurting Your Profits
Online retail profits are usually thin. If returns cost more than a small percentage of each sale, they can erase your profits entirely. In some cases, you may need multiple successful orders to make up for one returned item.
Signs of Return Fraud or Policy Abuse
Patterns like customers repeatedly returning heavily used items or engaging in “wardrobing” (buying items to use once and then return) can drive up return costs unnecessarily. This type of abuse suggests you need to tighten your returns management processes and policies. While customer-friendly policies are important, excessive losses from abuse often mean it’s time to adjust the rules.
Kiwi Sizing Helps Reduce the Cost of Returns
The cost of returns to online retailers adds up fast. And when a large share of those returns comes down to poor fit or sizing confusion, that’s a problem you can fix with Kiwi Sizing.
By giving shoppers clearer size charts and personalized size recommendations directly on your Shopify store, Kiwi helps customers choose the right size the first time. Fewer wrong-size orders mean fewer refunds, less reverse logistics, and more inventory staying sellable at full price.
Reduce returns on Shopify by installing Kiwi Sizing. You’ll be able to give your customers the sizing clarity they need, while improving their overall shopping experience.
