What is a Refund Rate?

Additionally, e-commerce returns in the U.S. during 2022 totaled $817 billion, making it a major concern for business owners. Even if your business isn’t in the retail space, it’s estimated that around 9% of all gross sales from in-store purchases are returned. Refund rate helps you track your refunds, generate accurate sales projections and develop a normal range of returns.

How Does a Refund Rate Work?

Refund rate gives business owners insights into what percentage of their total sales are returned or refunded. It is one way to track your net sales and understand profitability trends. For example, if your business is constantly refunding customers due to faulty products, you are still out the money spent on raw materials and direct labor used to produce that product. This can harm your profitability and indicate changes are needed.

Refund rate is commonly calculated in conjunction with chargeback rate, payment conversion rate, and checkout abandonment rates to give you a robust picture of sales and returns. Every company will take a different approach to refund rate. However, it is beneficial to calculate on a regular basis to catch changes in your operations and potential fraud.

The Importance of Refund Rate

Refund rate is important to track profitability and growth. In addition, your refund requests give you insight into customer sentiment. If refunded transactions occur because customers aren’t happy with the product, you may need to invest in product development or rework your customer service. Your customers keep you in business. Constantly losing revenue due to product returns indicates an uncertain future.

Next, refund rate is important to catch payment fraud. Without the proper refund policies or oversight in your refunds, customers might be submitting fraudulent chargeback requests. If your business isn’t paying attention to increases in refunded transactions, you could lose revenue rightfully owed to your business.

How to Calculate Refund Rate

The calculation for refund rate is straightforward and only involves two numbers. Here’s the formula for refund rate:

Refund Rate = (Number of Product Returns / Total Number of Products Sold) * 100

Let’s say that your business sold 100,000 units last month. Looking at the refunds issued, you find that 5,000 of these units were returned. Using the above formula, we find that our refund rate is 5%.

Refund rate can also be calculated using dollar amounts. This is done by finding the actual dollar amount of returned units and dividing it by your gross sales. Let’s say that your refunded transactions total $3,000. Your gross sales for the same time period were $75,000. Dividing $3,000 by $75,000 generates a refund rate of 4%.

How to Interpret Return Rate

Generally, a high refund rate indicates unhappy customers or product quality issues. High refund rates can also occur due to poor refund policies, which customers are taking advantage of. Low refund rates are preferred because it means more customers are keeping your products, hinting at strong product quality and customer satisfaction.

Looking back to the above example, let’s say you want more insights into why products are being returned. You discover that 3,000 of the units were due to product issues and another 2,000 were sent back because the customer didn’t enjoy the product. This means your refund rate for faulty products was 3% and the refund rate for unhappy customers was 2%.

When the next month rolls around, you also sell 100,000 units, but now you have 7,000 returned products, of which 5,000 are attributed to faulty products. Your refund rate for faulty products is now 5%. This could indicate that there are problems with your product development. Maybe you received a bad batch of raw materials, or your manufacturer is slacking. Whatever the case, knowing this information helps you maximize sales, operational efficiency, and customer satisfaction.

Ways to Improve Return Rates

If you have a high refund rate, there are strategies you can deploy to lower your refund requests. Let’s explore a few of these strategies.

Understand the Root Cause

First, you need to understand the root cause of high refund rates. Are you receiving refund requests because of a faulty product? Are customers committing chargeback fraud? Finding why your return rate is high is important to develop an action plan. Remember, the root cause of your refund rate can change each month. Breaking down how many products are being returned due to damage versus normal returns gives you insights into how your refund rate is changing between periods.

Review Refund Policy

Your refund policy outlines when a customer can return a product. If you aren’t clear about your refund policies, customers can take advantage of your system. For example, if your refund policy states that a customer can return a product within 60 days, but doesn’t outline valid return reasons, you might have a customer using the product and returning it within the time period. Tightening your refund policies can lower your return rates and combat refund fraud.

Track Seasonality

If your sales are higher during the holidays, a higher refund rate isn’t necessarily bad. This is why it’s important to understand seasonality. For example, a customer might purchase your product in November or December. However, the refund payment processing doesn’t hit until January. The timing difference could cause your refund rate to be higher in January and lower in November or December.

Summary

• Refund rate measures the number or amount of product sold and then returned.
• Factors that influence refund rates include chargeback fraud, faulty products, and dissatisfied customers.
• The lower the refund rate, the better.
• Understanding the root cause, reviewing your refund policy, and tracking seasonality are three ways to lower your refund rate.