Returns and refunds are two terms often used interchangeably, but they represent different aspects of the post-purchase experience. Let's clarify the difference between the two and explain how each impacts your business metrics.
Returns vs. Refunds
A return occurs when a customer sends a product they purchased back to you. There can be several reasons for a return, including not liking the style, incorrect sizing, damages, or late deliveries. The key point here is that the product physically returns to the store or warehouse.
A refund is the process of reimbursing the customer for the product they purchased. Refunds typically happen after a return, but that's not always the case. Refunds can either be a full refund where the entire amount paid by the customer is returned or a partial refund where just a portion of the original payment is refunded, often due to issues like product defects.
Why Is It Important?Handling returns and refunds are two independent processes in your shop system. While both can be connected, they don't necessarily happen at the same time—especially when refunds are processed at the order level. |
Because of this, returns and refunds impact your reporting differently. Here’s a high-level breakdown:
- Refunds affect net revenue and cash flow management.
- Returns impact product performance and inventory management.
In RetentionX, returns and refunds are attributed back to the original purchase date. This means that if a product is returned a month after the initial purchase, the net revenue from that sale will be adjusted based on the original purchase date.
Examples
Let’s look at some real-world examples. These will help you see how returns and refunds affect your numbers. To make our calculations easier to follow, let's imagine a world without taxes, discounts, and shipping - though of course, they would be factored in based on your revenue definition!
Imagine Jane shops at your store for the first time and buys a pair of black boots for $489 and a pair of wide-leg jeans for $250.
Scenario #1: Return & Refund
Jane immediately fell for the jeans and, of course, keeps them. However, after trying on the boots, she decides they aren't her style and returns them for a full refund.
Order Revenues in RetentionX
- Gross Revenue (before refunds): $739
- Net Revenue (after refunds): $739 - $489 = $250
Product Revenues in RetentionX
Jeans
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Boots
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Scenario #2: Return & Partial Refund
This time, Jane returns both the boots and jeans, but apparently, they’ve already been worn—likely after a fun party night in her new outfit! Given the condition, you agree to offer a partial refund of $600.
Order Revenues in RetentionX
- Gross Revenue (before refunds): $739
- Net Revenue (after refunds): $739 - $600 = $139
Product Revenues in RetentionX
This example makes it pretty clear that the refund amount cannot always be attributed to individual products within the order. We don’t know whether the refund should be partially distributed, or if the jeans were fully refunded while only the boots received a partial refund.
That’s why, at the product level, the net revenue generated by each product works with returns and uses GMV for the calculation:
Jeans
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Boots
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Scenario #3: No Return & Partial Refund
Jane loves both the boots and jeans and decides to keep them. Unfortunately, she notices a small defect in the stitching of the jeans. Instead of returning the product, she requests a partial refund to accommodate the defect, and you agree to offer her a partial refund of $100.
Order Revenues in RetentionX
- Gross Revenue (before refunds): $739
- Net Revenue (after refunds): $739 - $100 = $639
Product Revenues in RetentionX
Jeans
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Boots
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Scenario #4: Exchange
Jane loves both the boots and jeans but unfortunately finds the jeans are running too big for her. She decides to return the jeans and asks for an exchange instead of a refund. Since she's receiving a different pair of jeans, no refund is issued.
Order Revenues in RetentionX
- Gross Revenue (before refunds): $739
- Net Revenue (after refunds): $739 - $0 = $739
Product Revenues in RetentionX
Jeans
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Boots
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As soon as a new order is placed for Jane with the correct size jeans, the net revenue will increase again by $250, and the return rate will drop to 50%.
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