Ecommerce & Digital
Customer Returns: The Hidden Cost Ecommerce Businesses Do Not Model
1 July 2025
Returns rates in ecommerce are higher than in physical retail, category-dependent, and frequently underestimated in financial models. A business that plans for 3% returns and experiences 12% has a materially different P&L than the one the board approved.
Returns are also one of the clearest signals about product-market fit, customer expectations, and operational quality. They are among the metrics that mislead when not broken down properly. Businesses that treat them only as a cost centre miss the diagnostic value.
The full cost of a return
The visible cost of a return is the refund. The actual cost is considerably higher and includes some elements that most ecommerce businesses do not track at the SKU level.
Outbound shipping was a cost on the original order. If the customer received free shipping, that cost was absorbed. It is not recovered on a return.
Return shipping is either borne by the customer or the business. Where the business bears it, this is a direct cost per return. Where the customer bears it, there is a conversion cost: returns friction reduces repeat purchase likelihood and affects brand perception.
Processing cost covers the time and resource involved in receiving the return, inspecting it, deciding its disposition, and updating the system. This is real labour cost that rarely appears in the returns P&L.
Stock disposition is where significant hidden cost sits. A returned item in perfect condition can be resold. A returned item that is damaged, missing components, or has been used cannot be sold at full price. The markdown, the repackaging cost, or the write-off belongs in the cost of that return.
Lost future margin from a customer who returns and does not repurchase is harder to quantify but real.
What a good returns rate looks like
Returns rates vary significantly by category. Apparel and footwear run high, often 20 to 30%, partly because of fit uncertainty. Consumer goods and household products run lower, often 3 to 8%. Electronics vary by product type.
Knowing your category benchmark matters because returns rates are only meaningful relative to what is normal. A 10% return rate in apparel is excellent. In a product category where 3% is standard, it indicates a problem.
The more useful question than absolute rate is trend. A returns rate that is increasing over time is telling you something: about product quality, about listing accuracy, about changes in the customer base, or about fulfilment errors. The returns data has the answer if you ask it.
The reasons customers return
Amazon and most ecommerce platforms capture return reasons. Reviewing Amazon return rate data alongside other platform analytics is underused but valuable.
“Not as described” points to listing accuracy problems. Fix the listing before fixing anything else.
“Defective or doesn’t work” points to product quality or manufacturing consistency issues. Investigate at the supplier level.
“Changed mind” is the most ambiguous reason and often masks other issues. A high proportion of changed-mind returns in a category where change-of-mind is unusual warrants closer examination.
“Wrong item sent” is an operational error. Track it by fulfilment team or fulfilment partner.
Each return reason has a different fix and a different cost profile. Aggregating them into a single return rate loses the actionable information.
Modelling returns correctly
Modelling returns in the ecommerce P&L should happen from the start, not as a single percentage applied to revenue but as a structured cost with its constituent parts separately estimated.
The model should distinguish between categories with different returns profiles, between channels with different returns rates, and between return reasons with different cost implications. It should be updated with actuals as they develop, and the variance between plan and actual should be understood and explained.
Maebh Collins is a Chartered Accountant (FCA, ICAEW) with twenty years of operational experience as a founder and senior finance leader, including ecommerce P&L management across multiple product categories and markets.
Maebh Collins is a Chartered Accountant (FCA, ICAEW), Big 4 trained, with twenty years of experience building and running international businesses. She specialises in finance transformation, ecommerce operations, and digital strategy.