Most brands know their return rate. Few know what one return costs, or what it’s worth to turn a refund into an exchange. That second number decides how much bonus credit you can afford.

What a return costs

Every return carries the same basic costs, whatever the outcome: the label, receiving and inspection, repackaging, and a write-off on the share that can’t be sold again at full price. The Wall Street Journal reported in 2021 that processing an online return can cost $10 to $20, excluding freight Reported. Ask your 3PL for your own number, and finance for the share written off.

Three outcomes, three ledgers

Store credit needs care. Unspent credit is a liability, not income, and state rules on unused credit vary. Don’t plan on breakage (credit never spent) as profit, and have counsel and your accountant set how credit is recorded and whether it expires.

A worked example

Say a brand ships 10,000 orders a month at an $80 average item price, with a 65% product margin, so each item costs $28. Fifteen percent of orders come back: 1,500 returns a month. Bringing one back and processing it costs $12, and 20% of returned items can’t be sold again at full price.

• A refund costs $12 plus 20% of $28 in write-offs: $17.60 per return, on top of the lost sale. At 1,500 a month, that’s $26,400 Derived.
• An exchange keeps the $80 sale. The replacement costs $28 in goods and $9 to ship, and 15% of exchanges come back again. Against a refund, each exchange is worth about $32.56 Derived.
• A $10 bonus for exchanging (customers can pick $90 of goods) costs $3.50 at product cost, which cuts the value of each exchange to about $29.48 Derived.

If 20% of returns end in exchange today and the bonus lifts that to 30%, the brand gains about $3,500 a month, after paying the bonus to everyone who would have exchanged anyway Derived. The bonus pays for itself if it lifts the exchange share to about 22%. That’s the tool’s default below.

With the defaults, a refund costs $17.60 beyond the lost sale, an exchange is worth $32.56 more than a refund, and a $10 bonus pays if it lifts the exchange share from 20% to about 22.1%. At 30%, it gains about $2,330 per 1,000 returns. Raise the second-return rate and watch the value erode: an exchange should be for the right size, not a random swap.

Do this

• Get one cost-per-return number from finance this week, with the share of returns that go back on sale at full price. Put it and your current exchange share into the tool. The number in the second box is the most you should ever spend, per converted return, on the exchange flow in chapter 7.