The real cost of a return for an Australian online store

A return costs you far more than the return label. By the time a parcel comes back, you've already paid for postage, packaging and packing on the way out, you may pay postage again on the way back, and someone has to inspect, restock and refund it. On an ordinary order, one change-of-mind return can cost about as much as the profit the sale would have made.

This guide breaks a return into its cost lines, works through three common scenarios in AUD, and shows how to turn the result into a per-order allowance and a decision on free returns.

Why the return label is only part of the cost

Most stores think of a return as "the cost of the label". That's the one line that shows up as a fresh charge. The bigger costs are the ones you've already paid or that hide in staff time:

• Outbound postage you can't get back. You paid Australia Post to send the parcel. Refunding the customer doesn't refund you.
• Outbound packaging and packing time. Same story: spent and gone.
• Return postage, if you pay for the customer's label.
• Processing time: opening the parcel, checking the item, restocking or writing it off, and issuing the refund.
• Payment fees. At the time of writing, Shopify's refund help page says credit card fees aren't refunded when you refund an order paid through Shopify Payments.
• Stock you can't resell: damaged, worn, opened or out-of-season items.
• The original shipping charge. If you refund it, you lose the money that was meant to cover postage. If you keep it, it offsets part of the cost.

If you've already worked out your true shipping cost per order, the first three lines will look familiar. A return makes you pay them without the sale to cover them.

The cost of a return, as a formula

Keep it simple and put every line in dollars per return:

Cost of a return =
    outbound postage + outbound packaging + outbound packing time
  + payment fee not refunded
  + return postage (if you pay it)
  + processing time
  + stock written off (if it can't be resold)
  − anything you keep (shipping charge not refunded, restocking fee)

The last line matters. If your policy keeps the original shipping charge or deducts a restocking fee, that money offsets the cost. Shopify's refund page notes you can choose how much shipping to refund, and can edit the refund amount to deduct a restocking fee.

Worked example: one order, three ways it comes back

These figures are illustrative, not current Australia Post prices. Check your own rates before you rely on any number. To keep the maths readable they ignore GST; ask your accountant how GST applies to refunds in your business.

Say a customer buys one item for $60 and pays $10 shipping, so the order total is $70. Your costs on the way out:

Cost line	Amount
Outbound postage (say)	$11.20
Packaging	$1.20
Packing time (5 minutes at $36/hour)	$3.00
Payment fee (say 1.75% of $70)	$1.23
Outbound costs already spent	$16.63

The item costs you $24, so if the customer keeps it, the product margin is $60 − $24 = $36 (before shipping, which here loses $16.63 − $10 = $6.63).

On the way back, assume a return label costs you $10.90 (illustrative) and processing takes 10 minutes at $36/hour = $6.00.

Scenario A: free change-of-mind return, item resold

You pay for the return label and refund the full $70, including shipping.

Outbound costs already spent     $16.63
+ Return label                   $10.90
+ Processing                      $6.00
− Anything you keep               $0.00
= Cost of the return             $33.53

The $70 refund cancels the $70 you took, so you keep nothing and what's left is the cost: $33.53. That's nearly the whole $36 margin a kept sale would have earned. Put another way, one free return of this kind wipes out roughly one sale's profit.

Scenario B: customer pays return postage, you keep the shipping charge

You refund the $60 item only, and the customer sends it back at their own cost.

Outbound costs already spent     $16.63
− Shipping charge kept           $10.00
+ Processing                      $6.00
= Cost of the return             $12.63

Same item, same customer, and the return costs $20.90 less than scenario A. Your returns policy is a pricing decision.

Scenario C: free return, item can't be resold

As scenario A, but the item comes back damaged or opened and has to be written off.

Scenario A                       $33.53
+ Stock written off              $24.00
= Cost of the return             $57.53

Now one return costs more than one and a half sales' worth of margin.

Turn it into a returns allowance per order

You don't know which orders will come back, so spread the cost across all of them:

Returns allowance per order = return rate × average cost per return

Using the example, say 8% of orders come back (illustrative; use your own figure from your order history), and 1 in 4 returns can't be resold:

Average cost per return = (0.75 × $33.53) + (0.25 × $57.53)
                        = $25.15 + $14.38
                        = $39.53

Allowance per order     = 0.08 × $39.53
                        = $3.16

That $3.16 belongs in your true shipping cost on every order, next to postage, packaging and handling. If you set a shipping markup to cover your costs, this is one of the costs it has to cover. Leave it out and every order looks about $3 more profitable than it is.

Work out the rate from your own orders, by product type if you can. A store selling clothing in several sizes will see very different returns from one selling consumables, and a single blended rate can hide one product line that returns far more than the rest.

Should you offer free returns?

Free returns can lift conversion, but they're not free to you. Here's a simple test using the example numbers.

Say you ship 1,000 orders a month and 8% come back: 80 returns. The difference between a free return (scenario A) and a customer-paid one (scenario B) is $20.90 per return.

Extra cost of free returns = 80 × $20.90 = $1,672 a month

Now divide by the profit on one extra order. If an extra order earns you $25 after product, shipping and fees (illustrative):

Extra orders needed = $1,672 ÷ $25 = 66.9, so about 67 a month

Free returns would need to lift orders by about 6.7% just to break even, and that assumes your return rate doesn't rise once returns are free. If you can't reasonably expect that lift, keep paid returns for change of mind and put the money elsewhere.

A middle path many stores use:

• Free returns or exchanges on faulty or wrongly sent items (you were going to pay anyway).
• Customer-paid change-of-mind returns.
• Free exchanges, but not free refunds.

Your obligations for faulty items under Australian Consumer Law are different from change-of-mind returns, which is a policy choice. This post is about the cost, not the legal rules, so check the ACCC's guidance for businesses or get advice before you write your policy.

Refund or exchange?

An exchange costs another outbound parcel, but you keep the sale. Using the example:

Exchange = return label + processing + new outbound parcel
         = $10.90 + $6.00 + ($11.20 + $1.20 + $3.00)
         = $32.30

That looks similar to scenario A's $33.53, but the difference is what you keep: after an exchange, you still have the $36 product margin. After a refund, you don't. Offering an exchange first, by making it the easy option on your returns page, is one of the cheapest ways to cut the cost of returns.

Ways to cut the cost of returns

• Fix the reason, not the refund. Read your return reasons monthly. "Too small", "not as pictured" and "arrived damaged" each point to a fix: size guides, better photos, better packaging.
• Pack to protect. A damaged return costs you the stock as well as both legs of postage. A little more protective packaging is usually cheaper than scenario C.
• Make returns easy to process. A set place, a checklist and a 10-minute target keep processing time from creeping up.
• Pick a return method that suits your volume. Australia Post's parcel returns page describes options for businesses, including creating return labels in MyPost Business and printer-free labels at selected Post Offices. Check how and when each one is charged before you choose.
• Price the allowance in. Once you know your returns allowance per order, include it in your shipping price or your free-shipping maths so it isn't a surprise.

Where TrkShp fits

TrkShp doesn't handle returns: it quotes live domestic Australia Post rates at Shopify checkout. What it can do is make the outbound side of this maths accurate. Its reports show quoted postage and margin, which gives you a real figure for the first line of every return instead of a guess.

Key takeaways

• A return costs the outbound postage, packaging and packing you've already spent, plus return postage, processing and any fees you don't get back.
• In the example, a free change-of-mind return cost $33.53, almost the full $36 margin on the sale; a customer-paid return cost $12.63.
• Turn returns into a per-order allowance (return rate × average cost per return) and include it in your true shipping cost.
• Before offering free returns, work out how many extra orders you'd need to pay for them.
• Exchanges keep the sale and its margin, so make them the easy option.

For the full picture of what shipping makes or loses you, read our guide to shipping margins, and see the setup docs for how to preview the rates your store will quote.