Short answer
RTO means return to origin: an order is shipped but not delivered, and comes back to you. You pay shipping both ways, packaging and often damaged stock, and the ad spend that won the order is wasted. It is far more common on cash on delivery than on prepaid orders, so COD can cost more than it looks even though it carries no gateway fee.
What RTO means
RTO stands for return to origin. The courier tries to deliver, the buyer refuses, cannot be reached or is not at the address, and the parcel travels back to you. It is also called a failed delivery or an undelivered order.
Returns are a different thing: the customer receives the order and sends it back. Both cost you money, but RTO is the one that hits cash on delivery hardest, because the customer has paid nothing and can simply say no at the door.
What a failed order costs
Shipping out and shipping back, which you usually pay in full. The packaging. Any stock that returns damaged or cannot be resold. The time to inspect and restock it. And the ad spend that brought the order in, which bought you nothing.
Add those up for your own store and put the total in as the cost of one failed order. It is almost always larger than owners expect.
Try it now: Shopify Profit Margin and Fees Calculator →
What COD saves you
A cash on delivery order goes through no payment gateway, so it pays no gateway fee. Shopify treats it as a manual payment method, and its per-order fee for outside gateways does not apply to it, which is worth confirming on your own invoice.
Those two savings are real. On a 1,499 order in the example below they are about 70.
What COD costs you
Most COD setups add a handling fee per order from the courier or the COD partner. And COD orders fail far more often than prepaid ones, so the failed-order cost lands on a bigger share of them.
A worked example
This uses made up numbers, not anyone's real rates. An order sells for 1,499 including 18 percent GST, on the Basic plan, with ad spend of 250. UPI orders pay a 1 percent gateway fee and 4 percent of them fail. COD orders pay no gateway fee, carry a 35 handling fee and 20 percent of them fail. A failed order costs 150.
A UPI order earns about 410. A COD order earns about 404. They are almost level: COD saves about 70 in fees and gives most of it back in handling and extra failures.
Now say a failed order really costs 300, because the stock comes back damaged. The UPI order drops by about 6 and the COD order by about 30, so COD falls roughly 30 behind. The point is not these numbers. It is that the answer depends on your failure rate and what a failure costs you.
How to find your own numbers
Your payment mix is in Shopify admin under Analytics, by payment gateway. Your failed-delivery rate is in your courier's dashboard. Your gateway rates are on its pricing page or statements, and your COD handling fee is on your courier's rate card.
Put them into the calculator's payment method split and it shows the profit of each method side by side.
Ways to bring failures down
Confirm COD orders by phone or WhatsApp before shipping. Offer a small discount for paying online, or a fee for choosing COD. Block cash on delivery for pin codes where deliveries often fail. Check addresses at checkout.
Even a few points off the failure rate can be worth more than negotiating a lower gateway fee.