Understanding Return to Origin (RTO) Charges in E-commerce

With over 12.5 crore Indians shopping online, the e-commerce sector faces a pressing cost challenge—Return to Origin (RTO). 

For brands, each return means repeated shipping costs to locked inventory.

Raising immediate requirements for founders like you to learn about what is to charge so you can grow your brand without getting strangled into failed deliveries.

In the following sections, you will learn about RTO charges, their effects on your business, and the necessary measures you must take to control returns.

What is Return to Origin (RTO)?

Return to Origin (RTO) in e-commerce happens when a delivery package can't reach the customer and returns to the seller's address. 

For e-commerce businesses, RTO means paying twice for shipping—once for sending it to the customer and again when it returns to your warehouse. 

According to findings, Indian e-commerce companies face RTO rates between 20-25%, with some sectors seeing up to 40% returns.

Here is what typically happens during an RTO

For example, when a Cash on Delivery (COD) order faces RTO, you might lose

• Forward shipping cost
• Return shipping cost
• Packaging material
• Staff time spent processing returns
• Product value due to damage during transit

Data from Unicommerce's India Ecommerce Index Report 2023 found that return orders increased from 9.8% in FY22 to 10.4% in FY23. 

The problem affects small D2C brands significantly because they often work with limited resources and margins.

Why RTO Matters for Your Online Business

Understanding RTO matters because it affects your

Money Flow

Higher RTO impacts unit economics through

• Lost revenue from the order
• Money spent on customer acquisition
• Money spent on logistics

Daily Operations Such as

• Inventory discrepancies with brand partners
• Stock-level maintenance challenges
• Planning difficulties for future product needs
• Additional costs for repackaging returned goods

Main Reasons Behind RTO Orders

Here are the common causes e-commerce brands face regarding RTO 

Different product categories show varying RTO rates. 

For example, clothing has emerged as the most returned category, with return rates between 25-40%.

The impact also depends on

• Location (metro vs non-metro)
• Payment method (COD sees 15-20% RTO vs 5% for prepaid)
• Product category
• Delivery distance

Components of RTO Charges

When an order returns undelivered, you deal with multiple costs that add up quickly. 

The main charges are

Forward Logistics Costs

The first cost hit comes from the initial attempt to ship packages to a customer. 

It accounts for the following expenses.

• Package pickup from the warehouse
• First-mile transportation
• Last-mile delivery attempts
• Fuel surcharges
• Handling fees

Brands often lose these costs entirely in RTO cases. For example, if you're shipping a ₹1,000 product and paying ₹100 for delivery, that ₹100 becomes an immediate loss when the package returns.

Reverse Logistics Costs

When delivery fails, the return journey of the order back to the warehouse to be sold again begins. 

It creates a second set of shipping costs involving 

• Pickup from the delivery location
• Transportation back to the warehouse
• Additional handling requirements
• Documentation processes

The charges often match or exceed forward shipping because returned packages require more careful handling. 

As they might arrive in opened packaging or need extra protection for the return journey.

Handling and Processing Fees

Once returned packages reach your warehouse, they need processing.

Berrylush, for example, dedicates 3,000 square feet just for processing returns, including expenses. 

• Package inspection
• Quality checks
• Repackaging if needed
• Documentation
• Inventory updates

The time and effort spent on each return directly affect your operational costs. 

Small D2C brands feel this impact especially more because they often work with limited staff handling multiple responsibilities.

Inventory Management Costs

RTOs complicate inventory management extensively.

As we learn from Dhartii's experience, brands face additional expenses like

• Extra warehouse space for returns
• Holding costs until reprocessing
• System updates and tracking
• Stock planning adjustments

The real cost shows up in

1. Stuck capital that could serve better purposes

2. Storage space that could hold fresh stock

3. Staff time spent managing return stock

4. Delayed restocking of popular items

Depreciation or Damage Costs

Products also lose value during the RTO process, which happens through

Physical changes

• Packaging damage
• Product wear during transit
• Environmental exposure
• Handling marks

And if you run a FMCG brand, the challenge grows bigger. 

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As seen in Khanal Foods reports, returned perishable goods face

• Quality degradation
• Freshness loss
• Reduced resale value
• Complete write-offs in some cases

Sometimes, goods become unsellable, leading to total value loss. 

Even when you can resell items, you might need to offer discounts, further eating into your margins.

Financial Impact of RTO on E-commerce Businesses

RTO hugely affects both established retailers and growing D2C brands, though the scale and intensity of impact vary based on business size, category, and operational model. 

Some of the common financial disadvantages include 

Transport and Processing Money Loss

Every return eats into your profits through

• Delivery fees you paid to send it to the customer
• Shipping costs to get it back to your warehouse
• Extra boxes and packaging to ship it safely
• Staff time spent checking and processing returns
• Wages for quality inspection teams
• Rent for storing returned items

Say you're running an online fashion brand in Mumbai.
When a ₹1500 dress comes back

• You lose ₹120 on the first delivery
• Another ₹150 goes in return shipping
• Staff costs about ₹80 to process it
• New packaging costs ₹40
• Storage costs ₹30 per week until it sells again

These costs add up fast. Delhivery's research shows that brands often spend 1.5x the original shipping cost just handling returns.

Additional administrative and support expenses like

The fashion industry, in particular, presents a clear picture of these costs - online purchases see a 24.4% return rate compared to the global average of 16.5%. 

It means for every 100 orders shipped

• 24 orders come back
• Each requires double logistics handling
• Fresh quality checks
• Inventory updates
• Customer communication

Compromised Cash Flow 

Returns slow down your cash movement in several ways

• Products sitting on shelves that you can't sell yet
• Money locked in refunds that take time to process
• Time spent matching orders, returns, and payments
• Less money is available to buy new stock or run ads

Suppose when a customer returns an item worth ₹2000, you lose more than just the sale. 

Your money stays stuck in that product; you spend on shipping both ways, and you might need to sell it at a lower price later.

And for COD orders, the situation becomes more complex

• Delayed payment collection
• Additional banking charges
• Higher processing costs

Long-term Financial Effects

Managing Stock Gets Messy

RTO causes multiple inventory management problems.

Your warehouse team might face daily confusion about

• How much stock to keep when returns are unpredictable
• Where to store extra items as a buffer against returns
• Which products have longer shelf lives, and how do prioritise them

Product quality issues pile up, and your team needs to check every return for

• Whether items can go back on sale and at what price
• If products need new packaging
• Documenting any damage properly with photos
• How much value you lose on each returned item

Impact on Profit Margins

The combined effect of RTO on profit margins can be observed through various metrics like

Lost money on every return:n when customers send items back, you lose

• The sale amount immediately
• Marketing spending that brought the sale goes to waste
• Money spent getting that customer is gone
• Future purchases from that customer drop

Extra running costs returns need

• More staff to process items
• Time to train workers
• Software to track everything
• Space and equipment in warehouses

Let's say you spend ₹500 to get a customer who buys a ₹2000 shirt. If they return it, you lose

• The ₹2000 sale
• ₹500 in marketing costs
• ₹200-300 in return handling
• Plus, they might not buy from you again

Brand Health Decline

Returns silently affect how customers view and interact with your brand

• Lower satisfaction scores show up in reviews and social media 
• Shoppers who return items buy less in their next purchase or never buy again from you
• Your brand image takes a hit compared to competitors who handle returns better

Environmental Impact 

Each return adds to your company's environmental footprint through

• More vehicles on the road moving packages back and forth
• Extra packaging materials are  needed for reshipping
• Higher energy use in warehouses processing returns
• More raw materials are consumed in the whole process

A report by CleanHub puts this in perspective. The carbon emissions from fashion returns alone match what 3 million cars produce in the US each year. 

Strategies to Mitigate RTO and Associated Charges

To cut down your RTO rates, practise the methods discussed below.

Address Verification Systems

Wrong address is a major reason behind RTOs, making address verification a key focus area. 
The right systems such as Pragma’s pre-delivery address check,helpsp you prevent delivery failures before they happen by

• Confirming pin code accuracy
• Checking if the area is serviceable
• Mapping precise delivery locations
• Validating complete address details

It allows you to find wrong pin codes or missing details, preventing 40-50% fewer returns just by catching these issues early.

Use Smart Customer Updates Through WhatsApp

When customers know what's happening with their orders, they're more prepared for delivery.

Pragma helps you keep your buyers ready and informed for delivery by

• Sending automatic order status messages
• Sharing live tracking details
• Letting them update delivery times
• Notifying about delivery attempts

A leading beauty brand slashed its RTO by 35% using Pragma's WhatsApp alerts by enabling customers to easily.

• Change delivery timing if not home
• Share correct addresses quickly
• Fix any delivery issues early

Pro Tip: Write simple messages about order status, delivery timing, and any changes to help customers plan better.

Flexible Delivery Options

One size doesn't fit all in delivery. In the Woodland case, offering multiple delivery choices helped them understand different customer needs. 

Some prefer home delivery, while others might want to pick up from a nearby store.

The company runs its delivery network combining to avoid failed deliveries, though

• Local delivery partners
• National courier services
• Store pickup options
• Alternative delivery locations

Incentivising Prepaid Orders

A leading beauty brand provides customers with multiple payment choices, which brought down their return rates from 40-45% to 20%.

It helped them 

• Make prepaid orders more attractive with small benefits to consumers
• Add nominal charges for COD orders
• And create a clear difference in the total cost between prepaid and COD 

The strategy works by giving customers a choice while gently pushing them toward prepaid options.

Efficient Reverse Logistics

Even with prevention measures, some returns will happen. 

For example, through organised reverse logistics, Better Shop keeps RTO rates under 20%. 

Their process includes

• Regular pattern analysis of returns
• Customer trust building
• Service quality checks
• Market-focused approach

The company focuses on understanding why returns happen in specific areas. 

It helps them adjust their approach based on local needs and use this information to improve product listings and delivery processes.

To Wrap It Up 

Every unmanaged RTO slashes your profits twice—once in shipping costs and again in blocked inventory. 

While the average Indian e-commerce company loses 20-25% of orders to RTO, top performers keep it under 10% through smart address verification, WhatsApp updates, and flexible delivery options.

Don't let RTOs drain your working capital—understanding these charges and implementing the right prevention measures could be the difference between scaling your brand and struggling with cash flow.

FAQs (Frequently Asked Questions on Return To Origin Charges)

What is the Return To Origin process?

RTO happens when a delivery fails to reach the customer and returns to the seller's warehouse, resulting in double shipping costs and potential inventory damage.

What are RTO charges in dropshipping?

For drop shippers, RTO charges include both forward and return shipping fees, plus any product value loss during transit. These costs affect both the supplier and the drop shipper.

What is the difference between RTO and customer return?

RTOs occur when packages can't be delivered and return unopened. Customer returns happen after successful delivery when buyers choose to send items back, often requiring different handling processes.