Once a new ecommerce trend emerges, there’s huge pressure for merchants to get with the program – or risk becoming irrelevant. We’ve seen this happen with two-day shipping, thanks to Amazon’s outsized influence on consumer expectations.
Due to the COVID-19 pandemic and our newfound reliance on online shopping, ecommerce returns have become the latest battleground. Consumers are wanting a no-strings-attached approach to returns, which is proving to be very costly for retailers.
According to the National Retail Federation, U.S. consumers returned an estimated $428 billion in merchandise in 2020, approximately 10.6% of total retail sales.
It’s impossible for your brand to stop customers from making ecommerce returns altogether; it’s simply a part of how many consumers navigate shopping online. But you can minimize lost revenue by making exchanges a much more attractive alternative to full refunds.
It’s not rocket science why retailers prefer exchanges to full refunds. The total cost of returns includes processing, remerchandising, and restocking fees, labor costs, and may also include return shipping. If lost sales are added into the mix, this can have a serious impact on your bottom line.
Despite this, many retailers do little to shape customer behavior and make exchanges a more appealing option. The majority of returns management strategies treat exchanges as another type of return, rather than a revenue-saving tactic that increases conversion rates and customer lifetime value.
This is because returns are rarely broken down into different types of return behavior – despite having wildly different effects on your business.
Merchants are used to hearing about the importance of tracking their ecommerce return rate i.e. the frequency that customers are returning items at your online store. But your return rate alone tells you little about returns behavior at your business.
Why? Because your ecommerce return rate doesn’t tell you how many returns are being converted into further sales opportunities.
Your return rate is a high-level overview that doesn’t differentiate between refunded orders (lost revenue) and exchanges that increase customer retention.
This is why merchants should be breaking this down into two different metrics: your refund rate and your exchange rate.
Refund rate = The total number of refunded orders versus the total number of returns.
Refunded orders / total orders = percentage of refunds
Exchange rate = The total number of orders featuring exchanges versus the total number of returns.
Exchanged orders / total orders = percentage of exchanges
Taking into account these metrics can throw a very different light on your return rate.
For example, if you have a high ecommerce return rate (above 30%) but an exchange rate of 70%, this means that only 30% of orders involve a refund.
A high exchange rate is a very positive indicator for merchants. It demonstrates that customers want to keep supporting your brand, as opposed to shopping with a competitor. It also shows that your business has an effective returns workflow that encourages online shoppers not to pursue refunds right off the bat.
But if you’re struggling with a persistently high refund rate, this is a sign you need to revisit your returns experience to see what’s causing customers to end their relationship with your brand.
While there is no magic number, your exchange rate should always be higher than your refund rate. This is because if the reverse is true, your ecommerce store is likely missing out on numerous opportunities to rescue sales.
Product categories such as clothing and apparel boast some of the highest return rates in ecommerce at 30%. This is due to the large number of product variations. When consumers have to choose the size and color of a garment they haven’t had the opportunity to try, there’s a much higher risk of incorrect purchasing.
But these product returns are where ecommerce businesses can exert the most influence on customer loyalty. If it’s simply a case of swapping out the wrong size for the right one, your exchange policy should make this process seamless and hassle-free.
So, what can ecommerce retailers do to lower their refund rate and make exchanges more attractive to customers?
If you want more customers to commit to exchanges rather than refunds, the solution is simple; to remove as much friction from the returns process as possible.
When consumers are having a positive customer experience with a retailer, they’ve much more likely to want to extend that relationship. Naturally, this includes the returns experience; 92% of consumers say they will support a retailer again if the product return process is easy to navigate.
With the following strategies, online retailers can become more successful at turning refunds into exchanges:
It’s common for retailers to use a shared policy that governs both returns and exchanges. However, this isn’t necessarily to your advantage.
Exchanges are a desirable behavior where refunds are not. So, it makes little sense for you to give them equal treatment in your returns policy.
Instead, your policy should give customers a clear incentive to choose an exchange over a refund. Why? Because this means consumers are more likely to request a full refund only when there’s a good reason i.e., a product is defective.
So, what does an exchange-friendly return policy look like in online shopping?
Not charging customers for return shipping when they make exchanges.
Free return shipping is a big drain on a retailer’s profit margins. Yet many brands feel pressured to offer return shipping due to expectations shaped by the likes of Amazon. A common approach is to incorporate the cost of returns into product pricing, which risks pushing customers towards cheaper competitors.
Instead, use your return policy as an opportunity to encourage desirable return behavior i.e. making an exchange. As we said earlier, it makes very little sense to penalize customers who want to exchange an item by charging them for the privilege. This gives them the message that you’re not interested in continuing the customer relationship – not exactly a great way to build trust.
Charging return shipping at checkout on refunded products makes customers think more carefully about the merits of asking for their money back. By making exchanges the easier (and cheaper) option, your refund rate is likely to drop considerably.
Offer bonus credit/loyalty points for exchanges.
You can also offer your customers much more direct benefits to encourage exchanges. Low-hanging fruit such as offering discounts off their next purchase, bonus credit, or extra loyalty points make it worth your customer’s while to find an alternative item. It’s important to weigh up the cost of a lost sale against the benefits you’re offering to find that sweet spot that incentivizes exchanges without breaking the bank.
Use longer return windows for exchanges.
Generous return windows have become a widespread expectation for online purchases, especially during the holiday season when parcel networks are overstretched. In the case of exchanges, it’s worth extending your generosity even further by giving customers longer timeframes. This shows that you value your customer’s decision-making and want to give them as much time as possible to choose the right item.
Clothing brand Lulu’s offers a great return policy example. They use an alternative version of this template to ensure that items are returned quickly enough to be resold in a fast fashion market. They offer free returns so long as items are returned within a ten-day window, charging $7 thereafter. They also heavily promote this policy on social media to attract shoppers wanting hassle-free returns.
All online shoppers experience the same problem: How do I know if the product I’m purchasing is right for my needs?
This was a particular issue during the pandemic when restrictions forced consumers to shop online for products they would rather buy in person. So, it’s hardly surprising that 2020 saw a massive increase in customers choosing to bracket their purchases.
“Bracketing” is when a customer buys multiple versions of the same item to try at home, with the intention of returning those that aren’t suitable. In addition to throwing inventory counts out of whack, bracketing also increases a merchant’s fulfillment costs and puts strain on their return processing capabilities.
So, why do customers bracket? Because the process of exchanging an item is too time-consuming. For example, if customers have to return a garment before they receive the correct size, this adds a huge amount of friction to the customer experience. It’s far easier for consumers to buy multiple sizes, then simply return what they don’t need.
What is the best way to prevent bracketing? By embracing it as an official sales strategy.
Eyewear brand Warby Parker launched a home try-on program in addition to its AR app. Customers can have five different frames sent to them for free for a five-day trial period, along with a pre-paid shipping label. After selecting their favorites, Warby Parker will send them fresh unworn pairs for the actual purchase.
In sum, ‘try before you buy’ policies give consumers the opportunity to properly test a product and reduce the odds of them needing to exchange or return, which takes pressure off your returns workflow.
Return rates at brick and mortar stores are traditionally much lower than online returns, sitting at roughly 10% of total sales. This is partly down to the consumer’s ability to inspect products in advance of purchasing. But it’s not the only reason. When customers are able to make returns in person, you have a unique opportunity to suggest alternatives that could save a sale.
Offering BORIS (Buy Online, Return In-Store) eliminates a huge number of pain points from the returns process. In-store returns are far more convenient for customers because returned products and refunds can be processed in the same session. They also don’t have to navigate the complexities of the packing and shipping process.
Best of all, BORIS is a great strategy to upsell customers and give them additional support that strengthens their relationship with your brand. Store associates can seamlessly retrieve the correct size, or recommend alternative products that fit the customer’s needs.
In-store returns also help to kickstart a whole new buying cycle; with 75% of shoppers using click and collect services buying extra items, this is fertile ground for customers to begin looking for their next purchase.
If you’re a digitally native brand, Happy Returns can provide Return Bars within convenient store locations to facilitate in-person exchanges and returns.
One of the biggest issues that online businesses face with processing exchanges is that their systems are not set up to do this in one session. Exchanges involve processing a returned item and sending out a replacement under the same order, which can play havoc with inventory levels if your online store isn’t properly synced with your OMS.
Investing in a third-party returns management tool is one of the best ways to coordinate a returns process that makes exchanges the first port of call for customers. For example, Whiplash partner Loop Returns uses advanced automation to suggest appropriate exchanges to your customer – and facilitate them with just one click. With Loop, you can also opt to offer customers store credit before a refund, helping you to keep them in your sales funnel for longer and stimulate further sales activity.
Ideally, your business should aim to limit returns activity as much as possible. The more customers who get their purchase right the first time around, the higher customer satisfaction is likely to be.
But even with the best product descriptions and imagery, customers are still liable to change their minds. That’s why it’s important which returns are preventable versus those that aren’t.
There’s only one way to understand how many refunds could become exchanges with the right returns management strategy; by asking customers why they’re making a return in the first place.
For example, if a large percentage of your returns are listed as ‘different color than I expected’ or ‘wrong size’ this is an indicator that your business isn’t making exchanges easy enough. But if the majority of full refunds are due to compelling reasons such as product defects, you’re unlikely to be able to reduce refunds much further unless you start investigating possible issues with suppliers.
If you’re wanting to reduce the number of full refunds that you’re handing out, it might be tempting to stipulate in your returns policy that you won’t offer refunds for change of mind. Forcing customers to choose either an exchange or store credit will certainly lower your refund rate – but at a price.
In the past, these kinds of return policies were commonplace as a way to combat returns fraud. But in 2021, customer-centered retail has become the norm.
With more retailers than ever using no-questions-asked returns as a key selling point, it’s just too easy for customers to find a competitor who offers more flexibility. This has caused consumer attitudes towards returns to harden; over half of US consumers won’t shop with an online seller that doesn’t offer free returns, with 49% checking a brand’s returns policy before committing to a purchase. With the number of sales you’ll be losing, this approach is going to cost you far more than it saves.
In sum, hard-line return policies aren’t going to foster customer loyalty; they’re only going to erode trust and increase churn because customers don’t feel valued by your brand.