Returns math for a sub-$50 DTC product
The unit-economics walkthrough every DTC founder eventually wishes they'd done: how returns at 5-25% reshape gross margin, and the SKU-level decision they trigger.
Most first-time DTC founders model their gross margin without modelling returns. Then their first quarter ships and 20% of orders come back — and the unit economics they thought were healthy turn out to be break-even at best. This walkthrough is how to do the math properly, before that quarter happens.
The base model (no returns)
Price: $40 COGS: $10 Shipping out: $6 Payment processing (2.9% + $0.30): $1.46 Per-order contribution before returns: $22.54
Looks healthy. ~56% contribution margin. Then returns hit.
The same model with 20% returns
For every 100 orders sold:
- 80 stay sold → 80 × $22.54 = +$1,803
- 20 returned. For each return, you incur:
- Outbound shipping already spent: -$6 × 20 = -$120
- Return shipping (you typically eat it for sub-$50 products): -$6 × 20 = -$120
- Restocking labour ($2/return): -$40
- Refund processing fees (the payment processor doesn't refund their cut): -$1.46 × 20 = -$29.20
- Inventory damage / unsellable: assume 25% of returns are unsellable, COGS write-off: -$10 × 5 = -$50
- Subtotal cost-of-returns: -$359
Net contribution per 100 orders: $1,803 - $359 = $1,444 → $14.44 per gross order
Your contribution margin just collapsed from 56% to 36%. Same product, same price, real-world returns.
At 5%, 10%, 20%, 30% — the curve
| Return rate | Net contribution per gross order | Effective gross margin |
|---|---|---|
| 0% | $22.54 | 56% |
| 5% | $19.65 | 49% |
| 10% | $17.50 | 44% |
| 20% | $14.44 | 36% |
| 30% | $11.50 | 29% |
| 40% | $8.50 | 21% |
Apparel runs 20-30%. Beauty runs 5-10%. Home goods run 5-15%. Consumables run under 5%. Pick a return-rate band based on your category, not an optimistic guess.
The SKU-level decision
The above is a single-SKU model. Real DTC catalogues have ranges. The math at SKU level surfaces something founders rarely see:
A SKU at 30%+ return rate is almost always destroying margin even if it's a top seller.
Example: a top-selling apparel SKU at 100 units/month and 35% return rate produces ~$1,000 of net contribution. A second-tier SKU at 40 units/month and 8% return rate produces ~$700. The "best seller" looks 2.5x bigger in revenue terms but is only 1.4x in actual contribution. Once you factor in customer-support time on returns (which scales linearly with returns volume), the second-tier SKU is often more profitable per dollar of working capital tied up in inventory.
The decision this triggers:
- Drop the SKU if the return rate is structural (size-fit problem, expectation mismatch, photography issue) and you can't fix it quickly.
- Fix and re-test if the return rate is signal (one batch had a defect, sizing chart needs an update, hero shot was misleading).
- Reprice up if returns are concentrated in price-sensitive buyers — sometimes a 10% price increase weeds out the wrong customers and cuts returns disproportionately.
What to model from day one
- A returns line in your unit-economics spreadsheet, with a band, not a point estimate.
- Customer-support hours per 100 orders × your effective hourly cost.
- Restocking labour even if you do it yourself (your time has a value).
- A 25-40% "unsellable" rate on returned inventory.
The math is depressing the first time you see it. It's much less depressing than blowing through six months of cash because you assumed returns wouldn't apply to you.
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