How to calculate product return costs and a return allowance
A refund, recovered stock and fee credits all affect a returned order. Compare that outcome with a sale the buyer keeps before applying a return rate.
Open the Product Profit Calculator →Compare the returned outcome with the ordinary sale
First calculate the contribution from an order the buyer keeps. Then calculate the returned outcome using the actual refund, extra return postage, recovery of stock, refunded fees and any other adjustments. The difference is the additional contribution loss caused by the return.
If a kept order contributes £8 and a returned order leaves a £4 loss, the return is £12 worse than the kept sale. Use £12 as the additional loss input, rather than only the £4 loss. That captures the £8 contribution that no longer remains as well as the extra £4 loss.
Record what is recovered and what is lost
A saleable returned product, damaged stock and an item you do not receive back have different outcomes. Record the stock recovery on a consistent cost basis. Separately check which fees were refunded and which delivery costs were paid or recovered.
Avoid counting the original product and postage costs twice: they are already in the ordinary sale calculation. The return input is the difference from that baseline. Marketplace refund policies vary, so use current official rules and statements instead of assuming that every fee disappears when a buyer is refunded.
Convert the difference into a planning allowance
Multiply the additional loss per returned order by the expected return rate. With a £12 additional loss and a 5% rate, the allowance is £0.60 per order. Applied to an £8 ordinary contribution, the estimated average becomes £7.40 across the mix of kept and returned orders.
This is an expected allowance, not a prediction that exactly five of every hundred orders will be returned. Use the rate from a suitable period or label a new-product assumption clearly. Check different products separately when their return causes and recovery values differ.
| Illustrative assumption | Amount |
|---|---|
| Kept-order contribution | £8 |
| Returned-order outcome | −£4 |
| Additional loss per return | £12 |
| Expected return rate | 5% |
| Allowance per order | £0.60 |
| Expected contribution | £7.40 |
A worked example
If a returned order loses £15 net compared with a kept order and one in ten orders returns, the expected allowance is £1.50 per order.
Before you use the result
- Calculate both the kept and returned order outcomes.
- Include actual fee refunds and stock recoveries.
- Enter the additional difference from the kept-sale baseline.
- Use a documented rate for the relevant product.
- Review the assumption when return reasons or recovery change.
Common questions
Is every returned item a complete write-off?
No. An item may return in saleable condition, need rework or have no recovery value. Model that actual outcome along with refund and postage adjustments rather than treating all returns identically.
Does this decide whether a customer is entitled to a refund?
It models entered costs. Consumer rights, marketplace policy and the business's obligations need separate review. Do not use a cost estimate to replace those requirements.
Put the numbers into practice
Product Profit Calculator →How to include wastage in cost per saleable unit →How much can you spend to acquire a product order? →Etsy fees explained: UK and US seller profit inputs →A practical calculation guide, not professional accounting, legal or tax advice. Examples are illustrative unless identified as official. Calculation methodology and limitations.