Best practices for a streamlined e-commerce exchange policy

[Updated post from August 11th, 2021]

Once a new e-commerce trend emerges, there's huge pressure for merchants to get with the program – or risk becoming irrelevant. We've already seen this happen with two-day shipping, thanks to Amazon's outsized influence on customer expectations. 

Following the COVID-19 pandemic and the increased uptake of online shopping, ecommerce returns have become the latest battleground for brands.

According to the National Retail Federation, consumers returned an estimated $816 billion worth of retail merchandise that was purchased online in 2022. Consumers want an easy, no-questions-asked approach to returns, which is proving to be very costly for retailers.

We'll start by saying that your brand can't stop ecommerce returns altogether; it's simply a part of how many consumers navigate online shopping. But you can minimize lost revenue by making exchanges the more attractive option.

How? By creating a stellar e-commerce exchange policy.

What is an e-commerce exchange policy?

An e-commerce exchange policy refers to the rules enforced by an online store when it comes to customers exchanging merchandise. Often, an exchange policy will be bundled with an e-commerce return policy that outlines requirements such as:

• Windows to return/exchange items.
• Items being returned in their original packaging.
• Timetime for processing returns/exchanges.
• Items that aren't eligible for returns/exchanges e.g. final sale or prohibited items.
• Costs associated with the return/exchange e.g. restocking or shipping costs.

In e-commerce, returns and exchanges are often talked about interchangeably. However, there's one key difference: A return represents lost revenue, while an exchange equals revenue saved - and if coordinated efficiently, a customer is retained.

Exchanges: An untapped opportunity to retain revenue

It's no surprise why online retailers prefer an exchange to a return request. In addition to lost revenue, the reverse logistics process involves a variety of costs, including:

• Return processing
• Remerchandising
• Restocking fees
• Labor costs
• Return shipping costs

In fact, studies show that returns will cost brands an average of 21% of the total order value -and this figure is quickly rising with inflation and transportation costs.

While the exchange process involves some reverse logistics costs, it helps to prevent revenue from disappearing out the door by replacing a returned item with something else. With the right cross-selling and upselling tactics, exchanges can even result in merchants capturing more revenue from their customers.

Despite this, many online retailers do little to make customers decide that an exchange is a more appealing option than returning. This is because most return policies treat exchanges as another type of return, rather than as a revenue-saving strategy that increases customer lifetime value.

How to calculate your e-commerce exchange rate

Merchants are used to hearing about the importance of tracking their e-commerce return rate. But this metric tells you little about revenue earned versus revenue lost.

Why? Because your average ecommerce return rate doesn't differentiate between refunded orders (i.e. lost revenue) and exchanges that retain revenue and increase customer loyalty. 

To understand how many returns have been converted into further sales opportunities, you need to understand your average e-commerce exchange rate.

Your exchange rate refers to the total number of orders that were exchanged versus the total number of returns:

No. of exchanged orders / no. of total orders = exchange rate

Understanding your exchange rate can throw a very different light on your return rate. For example, if you have an e-commerce return rate of 30% but 30% of these returns are exchanges, this means that 70% of returned orders involved some type of refund. 

A high exchange rate is a very positive indicator for merchants. As well as your keeping your business profitable, it demonstrates that customers want to maintain a relationship with your brand. It also shows that your business has an effective returns workflow that encourages online shoppers not to pursue refunds right off the bat.

What is a good e-commerce exchange rate to aim for?

Online stores should always aim for their exchange rate to be higher than their refund rate. This is a sign that your ecommerce return policy is going a good job of retaining sales.

Some product categories, such as clothing and apparel, boast return rates as high as 30% in e-commerce. This is due to variations in size and color, which increases the odds of products being unsuitable.

Yet these are the types of returns that a well-thought-out e-commerce exchange policy can fix. If it's simply a case of swapping out the wrong size garment for the right one, your exchange policy should make this process seamless and hassle-free. 

Why do you need an exchange policy that's separate from your return policy?

Most brands will create an e-commerce return policy that covers both returns and exchanges.  Exchanges represent desirable customer behavior, while refunds do not. So, why does it make sense to give returns and exchange them equal treatment under your return and refund policy?

Your return policy should always give online customers a clear incentive to choose an exchange over a refund. Why? Because consumers are more likely to request a full refund only when there's a genuine reason i.e., a product is defective or damaged in transit.

If a customer wants to return due to incorrect sizing or a simple change of mind, a well-designed e-commerce exchange policy will not only manage returns seamlessly but also create a customer-centric process for choosing replacement items.

So, what does an exchange-friendly exchange and return policy look like for online shopping?

6 tips to turn refunds into exchanges

If you want more online shoppers to choose exchanges rather than refunds, the solution is simple; to remove as much friction from the exchange 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; research shows that 96% of shoppers would return to a business whose exchange or return process is easy to navigate.

With the following strategies, online retailers can design an exchange policy that turns refunds into exchanges:

​​1. Offer free return shipping costs when customers make exchanges

Free return shipping is a big drain on a retailer's profit margins. Yet many brands feel pressured to cover the cost of return shipping to meet customer expectations for free and easy returns.

Instead, you can use your return policy to encourage desirable return behavior. It makes little sense to penalize customers who want to exchange items by charging them for the privilege. Charging return shipping on exchanges gives online shoppers gives the message that you're not interested in continuing the relationship – not exactly a great way to build trust.

In the reverse, 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.

Retailer Anthropologie deducts a $5.95 fee from refunded items to cover the cost of the return shipping label, while exchanges are eligible for free shipping.

2. Offer a longer return window for exchanges

Generous return windows have become a widespread expectation for online purchases, especially for holiday returns when parcel networks are overstretched. In the case of exchanges, it's worth extending your generosity by giving customers an even longer return window. This shows that you value your customer's decision-making and want to give them as much time as possible to choose the right replacement.

Sephora's return policy gives customers a 60-day return window if they accept store credit, while customers wanting refunds only have a 30-day window.

3. Offer bonus credit/loyalty points for exchanges

An ecommerce business can also offer customers more direct perks to encourage exchanges. Low-hanging fruit, such as discounts off their next purchase, bonus store credit, or extra loyalty points, make it worth your customer's while to find an alternative item.

If you're going to offer financial incentives, it's important to weigh up the costs of a lost sale against the benefits you're offering to find that sweet spot that encourages exchanges. It shouldn't cost you more to secure an exchange than it does to lose revenue from a refunded sale.

4. Offering BORIS (Buy Online, Return In-Store)

Customer returns at brick and mortar stores are traditionally much lower than for online purchases, sitting at roughly 10% of total retail sales. This is in part due to the ability to inspect products in advance of purchasing. But there's another key reason: When customers make returns in person, brands have a unique opportunity to suggest alternative products that help retain revenue.

Offering a BORIS (Buy Online, Return In-Store) return process eliminates a lot of friction from the returns experience. An in-store return policy for online purchases is far more convenient for customers, because refunds can be processed instantly with no wait time. They also don't have to navigate the complexities of printing return labels or shipping merchandise back to the warehouse. 69% of consumers get frustrated with they have to pay for a return label or return packaging.

Best of all, BORIS is a great strategy for merchants to give customers additional support. Store associates can seamlessly retrieve the correct size or color, 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 now using click and collect services buying additional items when they go in-store, this creates fertile ground for customers to begin looking for their next purchase.

5. Track reasons for returns

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 to understand how many e-commerce returns are preventable.

Your return rate simply tells you the rate at which your brand is accepting returns, not why they're happening in the first place. There's only one way to understand how many refunds could become exchanges with the right return process; by asking customers why they want to return their purchase.

For example, if a large percentage of your returns are listed as ‘different color than expected' or ‘wrong size' this indicates that your business isn't making exchanges seamless enough.

But if returns are due to compelling reasons such as product defects, you'll need to consider investigating possible issues with your suppliers.

6. Use a return automation tool to optimize exchanges

One of the biggest issues that e-commerce businesses face with processing returns and exchanges is that their systems aren't sophisticated enough to manage this seamlessly. Exchanges involve processing a returned item and sending out a replacement under the same order number. This can play havoc with your inventory levels if your online store isn't properly synced with your OMS (Order Management System). 

Investing in a third-party returns automation solution is one of the best ways to coordinate a returns process that makes exchanges the first port of call for customers. These tools enable you to 'set and forget' your chosen return policy and return workflow, such as putting exchanges as the first option in the menu above store credit and refunds.

For example, Ryder partner Loop Returns uses automation to suggest appropriate replacement items to your customer based on the reason for returning– and facilitate them with just one click. This helps you to keep customers in your sales funnel for longer and stimulate further sales activity.

What NOT to do: Only offer store credit or exchanges in your return policy

If you're wanting to reduce the number of refunds you're handing out, it might be tempting to stipulate in your return policy that you won't offer refunds due to a change of mind. Forcing customers to either exchange or take store credit will certainly lower your return rate – but at a price.

In the past, these kinds of return policies were commonplace as a way to combat returns fraud. But customer-centered retail has now 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 another online store that offers more flexibility.

This has caused consumer attitudes toward returns to harden. Put simply, customers expect brands to accept returns without question. Over half of U.S. consumers won't shop with an online seller that doesn't offer free returns, with 49% checking a brand's exchange and return policy before committing to a purchase.

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.

Ready to refresh your exchange and return policy? Check out our ecommerce return policy template here to enable a better exchange process.