A returns budget should include lost contribution, delivery costs, unrecovered fees, and the condition of the returned inventory. Setting aside the full retail price for every expected return can overstate some costs while overlooking others. Model the cash refund and the economic loss separately.
The example below is an original planning exercise for a new physical-product store. Its return rate and costs are assumptions, not Shopify benchmarks or a forecast for your business.
Define the original order
Assume a product sells for $50 with free customer shipping. Product cost is $20, outbound shipping is $6, packaging and handling are $2, and the illustrative processing fee is 3% plus $0.30, or $1.80.
Contribution on a kept order is $50 − $20 − $6 − $2 − $1.80 = $20.20, before marketing, fixed overhead, tax, and owner pay. Start with this baseline so you can see what changes when an order is refunded.
Model a returned item that can be resold
Suppose the customer receives a full $50 refund. The merchant pays a $6 return label and $3 for inspection/repacking. The item comes back in fully sellable condition, preserving its $20 inventory cost value for a future sale. Do not also record that recovered item as permanently lost stock.
| Cost left on the refunded order | Amount |
|---|---|
| Original outbound shipping | $6.00 |
| Original packaging and handling | $2.00 |
| Unrecovered processing fee | $1.80 |
| Return label | $6.00 |
| Inspection and repacking | $3.00 |
| Net loss on this returned order | $18.80 |
Relative to the $20.20 contribution expected if the customer kept it, this return creates a $39 shortfall. The bank also needs enough cash to issue the $50 refund before the returned unit generates another sale.
Shopify's Shopify Payments refund documentation states that the original credit-card processing fee is not reimbursed. Confirm the rules for other payment methods separately. Shopify's returns and exchanges guide covers the platform workflow; the calculations here are a planning model.
Apply the model to the first 100 orders
Assume 95 customers keep their orders and five receive the returns treatment above. Kept orders contribute 95 × $20.20 = $1,919. Returned orders lose 5 × $18.80 = $94. Total contribution is $1,825, compared with $2,020 if all 100 orders were kept.
The returns allowance is therefore $195 ÷ 100 = $1.95 per original order in this scenario. That allowance captures the difference from the no-return baseline. Deduct it once; do not also subtract the same expected losses elsewhere in the model.
What if the returned item cannot be resold?
If the $20 product cost is lost completely, each returned order loses $38.80 instead of $18.80. Five such returns reduce total contribution to $1,725, a $295 shortfall from the all-kept baseline, or $2.95 per original order.
Test a mix of resellable, discounted, and unsellable returns. A clothing size exchange, an opened consumable, and a damaged ceramic item do not have the same recovery value. Include additional replacement shipping when modeling exchanges; retaining revenue does not make the replacement process free.
Use a pilot ledger to replace assumptions
Record the original order value, refund amount, payment fee recovery, outbound and reverse delivery, handling time, and final inventory condition. Keep reason codes concrete: wrong size, damaged in transit, inaccurate description, or changed mind.
Compare the allowance with actual results after enough orders to reveal recurring patterns. Do not generalize from one unusually expensive return. Use the findings to improve product information and packing, as well as the budget.
Put the allowance into the startup cost calculator, and check the payout cash calendar for refund timing. Customer return rights and permissible charges vary; confirm applicable requirements before writing a policy. The financial model does not determine what a customer is entitled to receive.