Promotions and merchandising

Returns, Refunds, and Discounts

A discount reduces revenue on every promoted order. A return can reverse revenue, add logistics cost, and recover some inventory. Combining them hides the action available.

60-second answer

Model expected economic loss, not return rate alone.

Return rate is the share of orders or units returned. Refund rate is the share of sales value refunded. Expected return loss is the net economic cost after refunded revenue, reverse logistics, unrecovered product cost, fees that remain, restocking charges, and inventory recovered for resale.

Expected return loss = refunded margin + reverse-logistics cost + unrecovered inventory + retained fees - restocking revenue

A 10% return rate does not automatically mean a 10% loss allowance. Product recovery and operational costs determine the loss.

Keep mechanisms separate

Each loss points to a different operating move.

Mechanism	What changes	Possible action
Discount	Revenue on every promoted order	Test the volume or conversion lift required.
Refund without return	Revenue and possibly fees	Investigate service, fraud, or product quality.
Restockable return	Revenue plus reverse handling	Reduce handling cost or return incidence.
Unsellable return	Revenue, handling, and inventory value	Improve product fit, packaging, or recovery.
Cancellation	Reported sales before fulfillment	Use mature net sales and reconcile timing.

Worked return

A returned $100 order does not always lose $100.

Assume a $100 order has $35 product cost. It is fully refunded, reverse shipping and inspection cost $9, $3 in payment fees are not recovered, and the product can be resold for its full $35 inventory value.

Return effect	Amount
Original contribution before fulfillment and ads	$62
Lost contribution from refunded sale	-$62
Payment fee retained by the processor	-$3
Reverse shipping and inspection	-$9
Inventory value recovered	$35 already preserved
Net loss versus keeping the sale	-$74

The restockable loss is $62 of lost contribution + $3 retained fee + $9 reverse logistics = $74. If the product were unsellable, the additional $35 inventory loss would bring the total impact to $109. This is why a single return-rate percentage can be misleading.

Percentage check: A rise from 8% to 10% return rate is 2 percentage points, or a 25% relative increase. Use percentage points when changing a calculator allowance.

Allowable CPA case

A lower return allowance restores acquisition room dollar for dollar.

Use the allowance only after translating return and refund behavior into expected net economic loss. In this illustrative, non-benchmark scenario, a $100 net order has $40 product cost, $8 fulfillment, $4 other variable cost, 3% payment fees, and a $10 retained-profit goal.

Allowable CPA = net order revenue - variable costs - expected return loss - retained profit

Target ROAS = net order revenue / allowable CPA

Expected return-loss allowance	Contribution before ads	Allowable CPA	Target ROAS
10% ($10)	$35	$25	4.00x
8% ($8)	$37	$27	3.70x

Reducing expected net loss by 2 percentage points adds $2 of allowable CPA per $100 order while the other inputs stay fixed. At the entered 3.00x current ROAS, contribution after ads also rises from $1.67 to $3.67 per order. This is a sensitivity test, not a forecast that return reduction or extra spend will occur.

Open the 10% to 8% return-allowance scenario

Promotion workflow

Calculate the lift a discount must replace.

A discount happens before fulfillment and may change product mix, conversion, average order value, and return behavior. Start with the promoted order value, keep fixed campaign cost explicit, and calculate the order or conversion lift required to restore baseline total contribution.

Use the Promotion Profit Calculator for that separate decision. Do not use the return allowance to hide a planned discount or deduct refunded revenue twice.

Shopify sales reportsDiscounts, returns, and sales adjustments. Checked August 20, 2026.
Google Analytics ecommercePurchase and refund fields. Checked August 20, 2026.