We say it all the time: a return doesn’t equal a refund. Understanding this concept on a deeper level and putting it into action by influencing the return behavior of your customers will change your business for the better.
Understanding the value of exchanges over refunds
There are three types of returns that a customer can request, which make up what we call the return composition:
Of these three, exchanges are by far the best option. There are a few reasons why this is the case. Exchanges help you retain revenue since the customer isn't requesting money back. By continuing the customer relationship, you’re also likely to see a higher AOV. Plus, if your customer recommends your brand to friends and family, that’s additional revenue you can attribute to exchanges.
But how do you get customers to choose the “right” behaviors?
OK, so now you understand why exchanges are more valuable than refunds. But is it really in your control to have customers choose one or the other?
By leaning into what we call return behavior modifiers, you have a great chance of convincing someone to opt for more exchanges and request fewer refunds. Here’s how.
1. Offer a bonus credit for exchanges
You want to incentivize customers to choose an exchange over a refund. One of our favorite tactics at Loop is to offer a bonus credit on exchanges. This is essentially a small monetary incentive that gives shoppers additional purchasing power above the value of what they’re returning.
For instance, let’s say a customer purchased a $30 top but doesn’t love the fit. If the customer decides to exchange it for another size, they receive an extra $10 to shop with. With the bonus credit, your customer can upgrade to an even nicer shirt or get a whole new item from your store.
This is great for the customer since they’re essentially being rewarded for choosing an exchange. But it’s also great for your business because it creates an opportunity for upsells, in addition to all the other benefits of exchanges we mentioned before.
These benefits aren’t just hypothetical. One of our long-time customers, Baseballism, has been offering a $5 bonus credit on exchanges for years now. Not only has this tactic resulted in fewer refunds, but it’s also generated a significant amount of additional revenue for the brand.
In fact, upsells now comprise 14% of Baseballism’s total returns and have generated an additional $10k in the last year. By pushing customers towards exchanges, Baseballism also sees an incredibly low refund rate now at 47%, which means that they’re refunding less than half of their total returns. Compare this to the average ecommerce return rate, which is around 80%.
2. Charge for return shipping on refunds
In addition to encouraging more exchanges, you also want to actively discourage refunds. One of the best ways to do this? Charge a small shipping fee for refunds.
There’s a reason why this is such a powerful return strategy. Free return shipping is a big deal to customers. 90% of consumers highly value free returns when making online purchases, and 62% of consumers would buy again from a brand offering free returns.
Knowing this, it’s clear why a shipping fee will make customers think twice before opting for a refund. If they still decide to eat the cost, that’s ok! Since a customer who wants a refund is already ending the relationship with the brand, there’s no harm done with the small shipping fee.
This small change can lead to significant outcomes. A footwear brand that we work with used this tactic for two months. Take a look at the results below.
Over a period of eight weeks, exchange rates climbed 25.4% and refund rates decreased by 28%.
Even as standalone tactics, the bonus credit and shipping fee can have a huge impact on your return rates. When paired together, they’re even more powerful. Why? Because it means that if a customer wants a refund, they have to turn down free money and incur an additional cost.
What about charging return shipping on all returns?
You might be asking yourself, wouln't charging return shipping on all returns be a good idea? That would deter customers from returning and create the behavior you want... less returns.
I will challenge that and say, you don't want fewer returns. You want fewer refunds. Charging for all types of returns makes your brand riskier in the eyes of your customer. That added risk to them will lower your conversion rate. If the product doesn't work out for them they are left paying for it.
By making exchanges free and refunds have a cost you are allowing customers who want to continue the relationship a way to make a new purchase. If they were to refund and you had to acquire a new customer that would cost you way more than the shipping cost of the exchange. Free exchanges end up being the lowest CAC in ecommerce.
Free exchanges end up being the lowest CAC in ecommerce.
A combination of these tactics will change your return composition forever. But you don’t have to take our word for it. Try it for yourself. If you need help getting starting, we’d love to help. Get in touch with our team.