Measuring returns by product contribution margin

Compare the contribution from a sale the customer keeps with the contribution of its actual return outcome. This shows how much a product's returns change its economics. A return rate alone cannot answer that question, and a returned unit should not automatically be valued at zero or at its original cost.

Define contribution for a kept sale

For an internal comparison, take revenue retained from one supplied unit and subtract its item cost and the variable selling costs included in the model. These may include outbound fulfilment and payment charges. State whether amounts include or exclude GST, and use one basis throughout. Finance should reconcile the method with the retailer's accounts; this is a decision model, not a prescribed financial-statement margin.

Suppose a hypothetical product has A$100 in revenue on a consistent basis, A$40 item cost, A$10 outbound fulfilment and a A$3 payment charge. Kept-sale contribution is A$100 − A$40 − A$10 − A$3 = A$47.

Calculate the returned outcome

Suppose that sale is fully refunded. The retailer also incurs A$12 return freight and A$6 receiving and assessment cost.

If inspection supports A$40 of recoverable item value in this model, the outcome is as follows. A$0 retained revenue − A$40 item cost − A$10 outbound fulfilment − A$3 payment charge − A$12 return freight − A$6 handling + A$40 item recovery = −A$31. That is A$78 below the A$47 kept-sale outcome.

The A$40 recovery is item value, not another customer payment. On a later sale, record that sale and release the corresponding item value under the same model. Otherwise the analysis counts recovery twice.

If the assessed recovery is only A$10, the returned outcome is −A$61, or A$108 below the kept-sale outcome. All figures are invented to show the arithmetic.

Actual recovery needs evidence. AASB 102's inventory measurement section specifies the lower of cost and net realisable value; its definition of net realisable value deducts estimated completion and selling costs from estimated selling price. Inventory accounting for a particular retailer requires its own assessment. The example's recovery value is an internal modelling input, not an automatic book value.

A repair, exchange, partial refund or supplier recovery needs its own outcome model. Keep any possible manufacturer recovery separate until its basis and amount are established.

Compare products on the same basis

For each product or stable variant, combine contribution from kept sales and completed return outcomes, then divide by units supplied for a contribution-per-supplied-unit view. Show total contribution too. Use sales groups with a comparable opportunity to generate returns, and identify unresolved cases whose outcome or stock value could change.

A thin-margin item can be sensitive to a few costly returns, while a higher-margin item may still warrant action if a recurring problem drives large total losses. Inspect counts and cases before changing price or range. Contribution does not decide a customer's remedy: Australian consumer-guarantee rights and any offered change-of-mind terms must be handled on their own facts.