A returns allowance in your margin per product
Some of what you sell comes back, and each return costs postage, handling and sometimes the item itself. Spread that expected cost across every unit sold so the margin you see already allows for it.
Updated
What a return costs
- return postage, if you pay it;
- handling: inspection, repacking, restocking;
- the item, when it cannot be resold at full price;
- the original outbound shipping and payment fee, which are not recovered.
Working out an allowance
A product has a 12% return rate. A return costs $6.50 in postage and handling, and one return in four cannot be resold, losing the $21.40 unit cost.
cost per return = $6.50 + 0.25 × $21.40 = $11.85
allowance per unit sold = 0.12 × $11.85 = $1.42
On a $68.00 price that is 2.1%.
Rates differ by product
Apparel with size options returns far more often than homeware. A shop-wide average hides the products where returns remove most of the margin, so set the allowance where the rates differ most.
Does it belong in cost per item
No. It is an estimate of a selling cost, not a cost of the goods.
Recording it in Cogsy
Add a “Returns allowance” cost kind, as a percent of price or per unit, with a shop default and specific values on high-return products. Keep it out of the cost written to Shopify.
Questions
- Is a returns allowance a real cost?
- It is an estimate of a real cost, spread across all sales. No single order incurs it; over a quarter the total should come close to what returns actually cost you.
- Should it be a percentage or an amount?
- A percentage of price suits products where the main loss is refunded value or written-off stock. An amount per unit suits products where the main cost is return postage and handling, which do not depend on price.
- Does a refund not already reduce my sales?
- Yes, the refund reduces net sales. The allowance covers what the refund does not, namely the postage, the handling and the stock you cannot resell.
Related
Glossary
Contribution marginContribution margin is the price minus every cost that varies with a sale, including fulfilment and payment fees. The formula and a worked ecommerce example.
Feature
Costs on top of the unit costPackaging, fulfilment or duties per unit, or fees as a percentage of the price, for a variant, a product or the whole shop.
Cost type
Outbound shippingWhen you offer free or subsidised shipping, the postage is a cost of the sale. How to estimate it per unit and keep it out of the cost of goods.