Hidden Costs of Refunds for Your eCommerce Store and How to Reduce Them
August 23, 2022
by Rebecca Fox

Refunds may be costing your eCommerce store a lot more than you think. Understanding what those hidden costs are and how to reduce them helps you increase your bottom line and keep your customers happy.

You won’t have a complete understanding of how much refunds cost your business without taking into account these hidden costs.

It’s important to remember that while returns may be difficult to avoid altogether, they don’t necessarily have to come in the form of refunds. 

What’s the Difference Between a Return and a Refund?

Before we dive into the associated costs of a refund, it’s important to understand that a return doesn’t always have to mean giving a refund and there are a few different types of returns you can offer, such as exchanges and store credit.

When a customer asks specifically for a refund, they’re signaling that they weren’t satisfied with the purchasing experience and are likely to take their money elsewhere.

Every time you give a refund, you lose a sale and often a customer, and you can’t reverse the time, effort, and money that you invested in that customer.

The Hidden Costs of an Online Refund

Refunds result in hidden costs (that are often difficult to track) that can have a significant impact on your company’s bottom line. 

Customer Acquisition Costs

When a customer refunds an order, you lose the money you spent on acquiring that customer.

With every refund, you’re losing out on the money you spent to acquire that customer, and then you have to invest the same amount again to replace them with a new customer. Acquiring a new customer can cost up to 7 times more than retaining a customer. 

Focus on keeping the customers you have, and avoid losing customers through refunds.

Shipping Costs

Many eCommerce stores offer free return shipping. This means that, with every refund, you’re absorbing the shipping costs, and you’re not retaining any revenue or preserving your relationship with your customers.

Labor Costs

There are a lot of labor costs associated with refunds, especially when handling your returns manually.

When calculating how much a refund really costs, you need to take into account administration, warehouse, and transportation labor costs.

  • Customer service – handling customer requests, manually approving returns, and solving issues with payments and orders.

Reduce customer service costs by offering self-service returns through a return portal. This takes the pressure off your support team and enables you to encourage exchanges over refunds.

  • Transportation – shipping carriers, damage incurred in transit, coordinating shipments with the warehouse, and tracking returned items.

Shipping costs can be reduced by doing your research on shipping carriers, comparing shipping 

costs, and constantly looking for the best price.

  • Warehousing – you need to pay for the upkeep of your warehouse(s), and depending on the condition of the returned items, your team needs to return items to inventory, repair or repackage items, or dispose of them. 

You can streamline your reverse logistics by outsourcing shipping and warehousing to a 3rd Party Logistics (3PL) company that can handle your return shipping, process returned items, and track returns.

Opportunity Costs

A refund can sometimes lead to the end of a customer relationship, making you lose out on the future revenue that you could have made from those customers. 96% of customers will leave you because of bad customer service, and you don’t want your return process to be a part of that experience.

While the exact opportunity cost depends on your average customer lifetime value, there is no doubt that keeping your customers coming back and buying from your store again can lead to a huge increase in profitability.

Environmental Costs

While there are clearly huge financial costs to refunds, there is another kind of cost you’re paying: returns produce 16 million tons of carbon emissions a year. 

Many returned items are thrown out, leading to 5.8 billion pounds of landfill waste a year. Getting your products into your customers’ hands has a huge impact on the environment, and bringing them back doubles that impact.

Reducing your return rates will help reduce the amount of waste and emissions caused by returns. 

What’s the Solution to Refund Costs?

The solution to the cost of refunds is to encourage exchanges instead.

With exchanges, you have many of the same shipping and labor costs as refunds, but you don’t lose your acquisition costs, and your customers remain engaged with your store and are likely to come back and buy from you again.

Offering a replacement instead of a full refund can help you keep a positive cash flow, minimizing these hidden costs and retaining your customers. 

Fewer Refunds, More Exchanges

You may think that refunds aren’t such a big deal, when in fact, they cost you a great deal of money and energy.

It’s important to be aware of all your costs and expenses so that you can take steps to reduce them. 

Shift your focus from refunds to exchanges and store credit, which are more cost-effective than refunds, and will ultimately save you lots of time and money.

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Streamline your return process and ensure a great post-purchase experience for your customers.