Returns and credit notes: the cost-to-serve outside your price list

1. The cost that sits outside the price list

Most owners know their gross margin by customer. Fewer know what each customer sends back. A credit note, a short-shipped line, a second van to redeliver: each one is paid for by someone, and it is rarely the customer who caused it.

For illustration only, take five customers of a made-up manufacturer, with £1.3m of annual sales between them. Each is quoted at roughly 30% gross margin. Customer D looks best at 32%. Now add what returns actually cost: £45 to process each credit note, £160 for each redelivery, and the value of returned stock written off. D raised 22 credit notes and needed 10 redeliveries, so its margin falls to 28.2%. Customer B, with 30 credit notes and 14 redeliveries, drops from 30.0% to 25.8%. A and E barely move, at 29.3%.

The business average only slips from 29.9% to 27.9%. The average hides the story: D and B carry most of the cost, and the ranking changes.

2. Why this matters in the 2027 price round

Costs are rising unevenly. The Office for National Statistics (ONS) reported that input prices paid by UK manufacturers were up 8.3% on the year in September 2026, while output prices rose 4.6%. Transportation and storage services rose 10.7% in the year to Q3 2026. With those cost trends, redeliveries are unlikely to be getting cheaper.

The Bank of England's October 2026 Agents' summary says profit margins remain compressed, and that "weak demand and customer resistance are causing others to absorb costs in margins". Absorbing costs is a decision, but with returns it is usually made by default, not by choice.

3. A one-hour method

You need three lists and one table.

1. Export the last 90 days of credit notes. Add the reason code, if you keep one.
2. Count redeliveries from dispatch or your driver sheets.
3. Pull gross margin by customer for the same period.

Build one row for each of your five largest customers: net sales, gross margin, number of credit notes, number of redeliveries, stock written off. Multiply credit notes and redeliveries by a unit cost from a short time-and-vehicle estimate, which can be rough. Subtract the total from gross margin.

This is direction, not measurement. Allocating shared costs involves judgement, and a quarter is a short window. The ranking still tells you where to look.

4. Why the principle holds

The method is ordinary cost-to-serve analysis. Consultancy West Monroe describes it as revealing "the true cost of servicing individual customers", and in one client case found the largest customer carrying too much freight cost while smaller ones were subsidised. That is a single published case, not a general rate, but the logic is the same as the table above: segment by profit, not by revenue.

Tips and tricks for this week

• Add a reason code to every credit note from Monday. Without it, you cannot tell packing errors from customer changes.
• Treat a redelivery as a cost line, not an apology. Record the vehicle, the driver time and the fuel.
• Start with the customer whose gross margin is highest but whose credit notes are most frequent.
• Pick one lever per customer: a minimum order value, a redelivery charge, or clearer delivery terms.
• Put the new terms in the 2027 price list, with a review date.

If you want the same view across your whole product range, the Business Health Check is the place to start.

One change, one date.