TheReturnsDeathSpiral:WhyYour4.0ROASIsActuallya1.2Loss
Fashion ecommerce operates on a dangerous fiction. The dashboard shows ROAS. The warehouse shows a different story. Returns are eating your margin, and Google Ads does not care.
If you are running a fashion brand with a 25% to 40% return rate (common for apparel), your platform-reported ROAS is fundamentally misleading. That 4.0 ROAS everyone celebrates? After returns, shipping costs, and restocking, it might be a 1.2 loss.
The Maths That Agencies Ignore
Let us walk through a realistic fashion scenario:
Example: Reported 4.0 ROAS
Ad Spend: £10,000
Reported Revenue: £40,000
Reported ROAS: 4.0
Now apply the reality filter:
Reality: After Returns
Return Rate: 30%
Returned Revenue: £12,000
Net Revenue: £28,000
Return Shipping Costs: £1,800 (£15 per return)
Restocking/Processing: £1,200
Actual Revenue After Returns: £25,000
True ROAS: 2.5 (not 4.0)
That 2.5 ROAS is before contribution margin. If your margin is 50%, you need a 2.0 ROAS just to break even. At 2.5 true ROAS with 50% margin, you are making 25p profit per £1 of ad spend. Not the £1.50 the dashboard suggested.
Why This Creates a Death Spiral
The problem compounds because of how optimisation works:
High-Return Products Win
Smart Bidding sees high conversion rates on products that convert because customers order multiple sizes. It bids more on them. Returns go up.
Revenue Looks Good
Gross revenue climbs. Reports celebrate. Nobody looks at net revenue until the finance team raises the alarm three months later.
Margin Collapses
Return costs accumulate. Restocking labour increases. Damaged inventory writes off. Contribution margin goes negative on high-return SKUs.
Cash Flow Breaks
You paid for ads. You paid for inventory. You paid for shipping. Then you paid for return shipping. The customer kept nothing. You kept the bill.
How to Adjust ROAS Targets for Returns
The solution is not to stop advertising fashion. It is to set realistic targets that account for your actual return economics.
The Return-Adjusted Target Formula
Required Platform ROAS = Breakeven ROAS ÷ (1 - Return Rate)
Example: If your breakeven ROAS is 2.0 and your return rate is 30%, you need a platform ROAS of 2.86 just to break even. (2.0 ÷ 0.70 = 2.86)
This means your target ROAS needs to be significantly higher than you think. A 4.0 platform ROAS with 30% returns is equivalent to a 2.8 actual ROAS. Only just above breakeven for most fashion brands.
Category-Level Return Segmentation
Not all products return at the same rate. This is critical for campaign structure:
- • Fitted clothing: 35 to 45% return rate
- • Loose/oversized styles: 20 to 30% return rate
- • Accessories: 10 to 15% return rate
- • Basics/replenishment: 5 to 10% return rate
Setting one ROAS target across all categories is guaranteed to lose money on some and under-invest in others.
Feed-Level Return Data
The most sophisticated approach uses custom labels to segment products by historical return rate:
Custom Label Structure
- custom_label_4 = "return_tier_low" (under 15%)
- custom_label_4 = "return_tier_medium" (15 to 30%)
- custom_label_4 = "return_tier_high" (over 30%)
Then build campaigns that bid differently based on return tier. Or exclude high-return products from prospecting entirely and use them only for remarketing where intent is higher.
Breaking the Spiral
Three interventions that work:
1. Feed-Level Exclusions
Identify SKUs with return rates above 40%. Exclude them from Shopping and Performance Max. The revenue loss is smaller than the margin destruction they cause.
2. Return-Adjusted Bidding
Set different ROAS targets by product category based on return rates. Accessories can run at 3.0 target. Fitted dresses need 5.0 or higher.
3. New vs. Returning Customer Segmentation
Returning customers typically have lower return rates because they know their size. Bid more aggressively for returning customers. Be more conservative on new customer acquisition until they prove they keep products.
"Every fashion brand knows their return rate. Almost none of them use it in their ROAS targets. This is how profitable-looking accounts quietly bleed cash."
What Your Agency Should Be Doing
If your agency is not asking for return rate data by category, they are optimising blind. If their reports show platform ROAS without return adjustment, the numbers are fiction.
The questions they should be asking:
- • What is your return rate by product category?
- • What are your return processing costs per unit?
- • Can we get return data into custom labels?
- • How does return rate differ between new and returning customers?
Running fashion ads without return-adjusted targets? We can show you the gap between your reported ROAS and actual profitability.
Book a Discovery CallGet our insights in your inbox
Plain-English thinking about Google Ads. No spam, unsubscribe anytime.