What returns really cost: a worked example

Returns are a big number nationally. Retail Economics' benchmark for ZigZag forecast UK non-food returns worth £25.1bn in 2025, with an overall returns rate of around 19.5%. In the US, the National Retail Federation and Happy Returns estimated in October 2025 that 15.8% of annual retail sales would be returned, rising to 19.3% for online sales.

National figures don't tell you what returns cost your business. Most owners know the return postage figure because it shows up on a carrier invoice. Few have added up the rest. This piece walks through one return, then scales it up.

One return, step by step

Every number in this example is illustrative. It describes an imaginary online clothing retailer, not a real business, and your figures will differ.

The item is a jacket that sells for £60 excluding VAT. It cost £24 to buy in, so the gross margin on a sale that sticks is £36. The customer ordered with free delivery and sends it back.

Here is what that return costs before we even ask what happens to the jacket.

The labour line is worth a second look. With the National Living Wage at £12.71 an hour since April 2026 and employer National Insurance at 15% since April 2025 (and the National Living Wage rises again each April), a fully loaded hourly rate in the mid-teens is a reasonable working assumption for warehouse staff. If inspection takes ten minutes rather than six, that line goes up by two thirds.

Now the jacket itself. Not every return goes straight back on the shelf. Suppose, for illustration, that out of every ten returned jackets:

• seven are in perfect condition and are resold at full price;
• two are marked or missing tags and are sold through an outlet at half price, losing £30 of revenue each;
• one is damaged or worn and is written off, losing the £24 it cost.

Averaged across the ten, the product loss per return is (2 x £30 + 1 x £24) divided by 10, which is £8.40.

Add the two together and each return costs about £20. That is a third of the selling price, and more than half of the £36 margin a completed sale would have earned. The sale itself is gone too, because the customer has been refunded.

Scaling it up

Keep the same illustrative business and give it 100,000 online orders a year at an average of £60, so £6m of sales. At a 20% return rate, broadly in line with the UK benchmark above, that is 20,000 returns.

At £20 each, returns cost about £400,000 a year, on top of the margin lost on the refunded sales. Against a gross margin of £3.6m on all orders, that is roughly 11%. For a retailer with a net margin of a few per cent, that is often the difference between a good year and a poor one.

Two sensitivities are worth running on your own numbers. First, the return rate: cutting it from 20% to 17% removes 3,000 returns and about £60,000 of cost. Second, the recovery rate: if better grading and a refurbishment step meant eight in ten went back at full price instead of seven, the product loss per return would fall from £8.40 to £5.40.

Carrier costs move too. Royal Mail raised its business parcel prices in October 2025 and introduced a peak surcharge for business accounts over the 2025 Christmas period. Recheck your return label cost each time your carrier changes its tariff.

Which levers to pull first

Start with the reasons. Most returns processes capture a reason code of some kind, and it is often left unread. If a large share of returns in one product line say "too small", that is a sizing problem to fix with the supplier or in the size guide, not a logistics problem.

Then look at recovery. Faster grading means stock gets back on sale before it goes out of season. A proper outlet or refurbishment route recovers more than a write-off. Second Tide works in exactly this area.

Charging for returns is a commercial decision with real trade-offs. The ZigZag benchmark found 42% of UK retailers charge for returns, excluding delivery fees, rising to 80% in young fashion. The NRF research found 82% of US consumers call free returns a major consideration when buying. Charging cuts cost per return but can cost you conversion. Test it on one category before rolling it out.

Finally, watch for abuse. The NRF estimates that 9% of US returns are fraudulent. UK figures will differ, but a few simple checks on high-value items at receipt are usually cheap to add.

The free True Cost of Returns calculator lets you run this model on your own figures, and Convoy and Second Tide handle returns logistics and recovery when you're ready to act.