Commerce excellence is now built post purchase, and one of the most important post purchase interactions is your return process. But how do you know if you are providing a great returns experience?
The metrics to track are not as common as the conversion metrics of the past, but customer obsessed brands are becoming more aware of how they can use it to properly evaluate returns.
Return rate gives you a high level view
A return does not equal a refund. There are many reasons that a customer may want to return where they are not expecting the money to be refunded. It is important not to confuse your return rate with your refund rate (explained later).
Your return rate is the highest level metric you can use when evaluating your return policy and process. It shows you what percentage of your orders are being sent back as a percentage of all of your orders.
Return rate is calculated like this
Returned orders in a time period / Total orders in the same time period
Return rate can be used to get a better understanding of how your acquisition and conversion models are impacted by customer retention. If you do not include the percentage of orders that are being returned you are ignoring half of your revenue equation.
We prefer to use return rate as a high level check and then dig into the specific types of returns that are happening. When you look at your returns this way it allows you to better evaluate whether you have an effective return policy or not.
Zooming in on your return rate
A return is anything that is being sent back to the brand. Those returns can be further segmented into the type of return such as refund, exchange, store credit, or any other options you provide. This level of segmentation will allow you to get much more granular and spot areas to improve that are not obvious when looking from 10,000 feet.
Here are a few return metrics you can use to drill down further and gain more insight into your return policy and process.
Refund rate lets you see issues with product quality
When a customer is requesting a refund it is usually due to one of two reasons. The product did not meet their quality expectations, or your brand did not deliver on what was communicated through marketing. Either way, there is a ton to learn from looking specifically at your refund rate.
Here is how to calculate it
Refunded orders in a time period / Total returns in the same time period
Refund rate is often used as a quality assurance metric and is even used as a way to police marketplaces and remove products and brands that are not meeting the standard. A rising refund rate can signal many things including:
Manufacturing process is not keeping pace with demand
Manufacturer (facilities) are below par
Product is not delivering on what marketing is promising
Materials are not meeting customer standards
While this metric is the most common way to dive deeper on your return rate, it only tells you a fraction of what is going on. To truly understand your returns, there are two additional metrics you should calculate.
Exchange rate will tell you whether the RIGHT product is getting to your customer
A well structured return policy will encourage customers to exchange for the right product before asking for a refund. That is why you should break your return rate into the different types of returns you offer like refund rate (mentioned previously), exchange rate, and any other options you offer such as store credit.
When you evaluate your exchange rate separate from returns, you are able to see what percentage of total returns are being returned because the customer got the wrong product. It could be the wrong size, color, or not what they were expecting. Regardless of the reason, they still want something from your brand, just not what they have right now.
Here is how to calculate it
Exchanged orders in a time period / Total returned orders in same period
This is a different measure of success than refund rate, which shows you product quality. This rate will show you the percentage of returns where you are still keeping a customer. The higher your exchange rate is (as a percentage of total returns) the healthier your business will be. Exchanges keep a customer relationship alive, while a refund is more often than not the end of the relationship.
You can use exchange rate as a health check metric and combine it with return reasons to discover where you can improve your customer experience.
Retention rate shows how effective your return process is at keeping a customer
Your return process should be encouraging customers to remain a customer. Your retention rate shows you what percentage of your returns result in keeping a customer. Exchanges are an obvious example of a return event where revenue is retained, but there are others. Returns where you issue store credit instead of the original payment method would also retain revenue.
Loop allows you to set up exchanges where a customer can exchange for a completely different item in your catalog. Even if the item is more expensive, the shopper can pay the difference without leaving the exchange process. This type of exchange would also be included in your retention rate.
With customer acquisition more expensive than ever, it is important to bolster customer retention efforts wherever possible.
Time per return measures your operational efficiency
Your support teams should be focused on providing the best customer experience possible, not issuing refunds and facilitating exchanges all day. The amount of people hours you spend handling returns is important to know because it is hours that they are not able to work on higher impact projects.
This metric is a bit harder to get exact, but here is a great way to estimate it.
(Estimated time spent per day by a rep x number of reps) / total returns
This metric is particularly important for rapidly scaling DTC brands. While it is easy to handle returns via email requests or including labels in each order, the time commitment of your team grows quickly. If you track the amount of time required to facilitate returns you will know when it is time to look at a tool to help you automate such as Loop.
It is also equally important to have an understanding of how long a return is taking from the customers perspective. Customers feel extremely vulnerable when they need to return, the longer it takes, the more likely vulnerability will turn to anger and negative reviews.
Look at how long it takes to request the return, as well as how long it takes to get them the product they requested to exchange for.
Returns are a part of building customer lifetime value
Customer lifetime value is one of the hardest metrics to calculate and has a ton of variables. Everyone calculates it differently with varying degrees of complexity. No matter how you measure lifetime value or customer loyalty, be sure to include your return process in the strategy to achieve it.
Post purchase is where lasting relationships are made! Be sure to provide the same level of attention to it as you do to acquisition and conversion, because turning the returns process into an experience does wonders for relationship building.
The return process is also not a place to try and cut costs. When you view the returns process as a cost center you will always be in the mindset of how do I cut costs rather than maximize value. It’s a mindset that gets a ton of brands stepping over a dollar to save a dime.
Your return process mindset should be about maximizing value rather than cutting costs.
Commerce excellence is now built post purchase. Invest in creating connections with your customers and you will drive your customer lifetime value up. Your return process is a great place to start building that post purchase experience. Grab some time with a member of our team to discuss how your Shopify brand can improve its return experience.