Retail returns will cost ecommerce companies over $620 billion in 2023, so encouraging exchanges as a means to minimize the impact of returns is something all e-merchants ought to do.
Today, we’ll go over what an ecommerce exchange policy is, the relationship between returns, exchanges, and refunds, what an ideal exchange rate is, and tons of best practices to turn refunds into exchanges.
So if you’re ready to discover how to promote exchanges and reduce refunds, find yourself a comfy seat and keep reading!
What is an ecommerce exchange policy?
First of all, an ecommerce exchange occurs when a customer returns a purchase for another item from your online store.
Therefore, your ecommerce exchange policy is a set of conditions your company creates to
(A) clarify when a customer qualifies for an exchange and
(B) The process by which the exchange will be executed.
How much revenue lost after an exchange depends on the replacement product’s value.
When it costs more than the original item, your customers pay the additional amount, and when it costs less you refund your customers the price difference.
Whichever way, the impact of the loss is reduced, and more money is kept within your business.
Do you need a comprehensive exchange policy
Most sellers bundle their exchange policy with their return policy, another set of conditions that clarifies;
- Items that are, and not eligible for returns
- The time window to request a return
- The timeline for processing returns and exchanges
- And the costs associated with shipping the return or refund
However, since exchanges are desirable customer behavior and refunds are not, it doesn’t make sense to give both options equal treatment under your return policy.
Rather, structure your return policy in a way that information about exchanges is put front and center. Basically, you want to attract more customers to the idea of exchanges and to do so with a lucrative offer (which we’ll discuss soon).
Why? Because consumers are more likely to choose replacements when the product isn’t damaged or defective. And by having a well designed ecommerce exchange policy, you not only incentivize exchanges and reduce refunds, but also create a clear and easy to find guide for shoppers interested in an exchange.
As we are going to talk a lot about exchanges, it’s important you also understand these terms and how they relate;
Returns Policy; The set of conditions that explain your company’s rules and processes for accepting returns and facilitating refunds or exchanges.
Returns rate; The percentage of purchases your customers return.
Refunds rate; The percentage of processed returns that ended in a refund.
Exchange rate; The percentage of processed returns that ended in an exchange.
The relationship between returns, exchanges, and refunds
When your store accepts a customer’s return, there are two resolutions;
(A) An exchange for another product
(B) A partial or full refund of their money
(C) Or store credit that can only be spent in your store
Here we’ll see each resolution affect your business
Revenue and Profitability
When you issue a refund, you lose a sale and the revenue it generated.
If the product is defective, damaged or not worth the return cost, you can simply let the customer keep or discard it. But if for any reason you want to collect it, you also incur additional costs, such as return shipping, quality checks, refurbishment, and restocking.
On the other hand, when you issue an exchange, you don’t lose out on the sale completely.
When the replacement item costs more than the original item, your customer pay the additional amount, and when it costs less you refund your customers the price difference. Thus, the impact of the loss is reduced, and more money is kept within your business.
As for store credit, when customers redeem it, they usually add more money, on average $20 more. So offering store credit helps increase your customer lifetime value and, as a result, your overall profits.
Customer Experience and Loyalty
When a customer insists on a refund, it means that they no longer need the item or their experience was bad enough that they no longer want to shop with you.
In contrast, if a customer agrees to an exchange, it shows that while they weren’t satisfied with the original product, they’re willing to preserve their relationship with your business.
Meanwhile, since your customers can only use store credit with your store, it fulfills the aim of keeping them loyal to your store.Plus, 68% of customers who receive store credit buy again so while this option isn’t as attractive as an exchange (for you the seller), it’s better than a refund.
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Now that we know what ecommerce exchanges are, let’s uncover how to calculate your ecommerce exchange rate.
How to calculate your ecommerce exchange rate？
To calculate your ecommerce exchange rate, you need to divide the total number of items exchanged by the total number of items returned. For easy reference later, save this formula:
Ecommerce exchange rate = (No. of exchanged orders ÷ No. of returned orders)
To illustrate this with an example, let’s say your company has a 15% return rate. Out of those returns, imagine your exchange rate is 35%. What does that mean? That 35% or less than half of your customer returns ended in an exchange (or revenue saved). Or, that 65% or more than half of all returned orders resulted in refunds or (zero revenue saved.)
So is a 35% exchange rate a good number to aim for or does the store in our example need to improve? Let’s find out now.
What is a good ecommerce exchange rate to aim for?
Generally speaking, all merchants should aim for an exchange rate that’s higher than their refund rate. So, anything from 50% and above is commendable.
Such a high rate indicates your company is doing an excellent job retaining sales and minimizing losses. And it shows that customers want to preserve their relationship with your brand, so customer loyalty wise, you’re doing great.
Still, you must understand that customers return items for a number of reasons, and depending on the circumstances, there’s little to nothing you can do to encourage an exchange.
For example, shoppers occasionally experience buyer’s remorse, so they send products back for no good reason. In this case, an exchange is usually out of the discussion. Other times, scammers pay for an item with a stolen card and then refund it in good condition for cash or sometimes the shopper simply finds a better price elsewhere.
Moving on, let’s dive into several proven and research backed strategies for turning as many returns into exchanges as you can.
6 tips to turn refunds into exchanges
1. Offer free shipping on exchanges
Just as merchants use paid shipping to discourage returns, you can, in reverse, offer free shipping only on exchanges to reduce refunds and encourage exchanges.
Charging on return shipping on refunded products forces shoppers to carefully evaluate the costs and drawbacks of asking for their money back, so by making exchanges cheaper and less complicated, you can significantly improve your exchange rate.
According to Loop Returns, after consulting with a footwear retailer (although unnamed) to charge a tiny fee on refunded items, they were able to propel their exchange rate by 25% and reduce refund rates by 28%.
2. Offer bonuses for exchanges
Besides store credit for facilitating the exchange, you can offer direct perks such as cashbacks, coupons, gift cards, loyalty points, and more that can be used towards future purchases in order to encourage exchanges.
These offers guarantee the customer additional purchasing power outside of the exchange, so there’s an inherent incentive for them to take it.
However, remember to assess the costs whenever you choose to offer financial incentives. As a general rule of thumb, It should never cost your business more to secure an exchange than to lose money on the refunded product.
Instead, you want to find the sweet spot that maintains the overarching goal of profitability whilst still being lucrative enough to retain the customer.
3. Incentivize exchanges with a longer exchange window
This is another example of tweaking your policies to influence customer behavior.
According to Loop, over 80% of returns are requested in 14 days. However, most e-merchants overstretch their returns window to 30-days.
To drive more exchanges, Loop advises that instead, you can take a different approach by offering different time windows for different types of returns. For example, a shorter window for refunds i.e 14 days and a longer window for exchanges, maybe 30, 45 or even 60 days.
This way, when the refuns window expires, customers will have no option but to exchange. Moreover, when shoppers see your generous exchange window, they’ll understand that you value your relationship because you’re giving them so much time to find a replacement.
4. Integrate self-service returns portals
60% of returns on Shopify stores are caused by the wrong size or fit. So it’s safe to assume that up to 50% of returns have the potential to be converted into exchanges.
However, not if your return process is complicated and strenuous. When that’s the case, most of your customers will prefer to cut their losses and choose a refund instead.
As a remedy, look to self-service return portals like Loop Returns. What this kind of software does is it enables customers to initiate an exchange by simply browsing through the portal for something they want.
Compared to having customers send back-and-forth emails with your service team, this results in a more streamlined and hassle-free process for both your customer and your company.
Moreover, simplifying your returns process can have tremendous benefits for your revenue, as 92% of shoppers say they’ll shop at a store again if the last return is hassle-free.
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5. Monitor the causes of returns
Sadly, your return rate doesn’t give insight into why those returns happen in the first place. To discover that, you need to consciously investigate and ask customers why they’re seeking returns.
Perhaps it could be that your store’s sizing options aren’t comprehensive enough. It could be that inefficiencies in your fulfillment process cause the wrong product to be sent out. Or it could be that your supplier keeps sending defective merchandise so it causes so many returns.
Whichever reason out of the dozens of causes of returns it is, it’s your job to find them out and develop a game plan to address them.
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6. Don’t force exchanges and store credit on customers
It may be tempting to solve the problem of refunds by only allowing refunds for damaged or defective goods. Or not allowing refunds for a change of mind on the customer’s part i.e., size, style, etc.
While this will certainly reduce the rate of refunds, understand that it comes at the price of customer loyalty. You simply can’t force customers into taking exchange or store credit because it erodes customer trust in your business and it makes customers feel undervalued. And the more customers develop negative associations with your brand, the less they are likely to patronize you.
Summary and Final Thoughts
To sum up, an ecommerce exchange rate is the number of returns you convert into exchanges.
If you’ve been following closely, you’ll remember that exchanges minimize the cost of returns, retain customers, and keep more money flowing within your business so a part of your business you want to focus on.
Now, go ahead to calculate your returns rate, and then both your refunds and exchanges rate. This enables you to develop a clear picture of your business’s state of returns.
With your “returns health” in mind, follow the strategies we discussed today, and keep striving until you can hit a percentage of 50% and above.
If you found this guide helpful, be sure to check out the Globallyfulfill blog where we post new tips, tricks and guides every week.
