Business Tips

Rethinking Return Policies: E-Commerce Returns Best Practices

Last updated January 2022


Mention the word “returns” to anyone in the e-commerce business and the question will be a likely source of anxiety as well as uncertainty.

Returns are often a logistical and financial nightmare for online retailers. On the other side of the table, they are also a major headache for consumers. So WHY are returns so prevalent in the e-commerce industry and more importantly, WHAT can we do about it? 

The sections below detail a roadmap for navigating these often murky thoroughfares. We’ll consider the returns process from the shopper’s point of view and detail how your business can decrease return rates and increase conversion rates at the same time. We’ll also discuss handling returns from the e-commerce business owner’s standpoint and outline how to use your Return Policy to build customer loyalty, stand apart from the pack, and prime your business for success. 

As you navigate through Rethinking Return Policies, feel free to jump to the sections that pertain most to your business.

  1. Returns by the Numbers
    1. Returns Aren’t the Problem
      1. Why do shoppers return items?
      2. Get your head out of the sand (Use your Return Policy as a marketing tool)
    2. Customer Happiness Pays
      1. How customer returns affect your business
      2. Exchanges vs. returns
      3. Opportunity for customer loyalty
    3. Stand Apart from the Pack 
      1. Elements of a great Return Policy
    4. Put a System in Place. Yesterday.
      1. Inventory systems affect return rates
      2. Build customer confidence (a.k.a. reduce your return rate)
      3. Incentivize exchanges over returns
      4. Seize the day – install company-wide efficiencies
      5. Solutions exist. Use them.
      6. Using Return/Exchange data to anticipate customer needs
    5. Return Reserve Fund
    6. 5 Things the RIGHT Return Policy can do for your e-commerce business
    7. Conclusion

1. Returns by the Numbers

In November 2019, Splitit and Google Consumer Survey conducted a joint survey with 500 respondents. The results showed that almost 60% of shoppers have returned at least one online purchase. A whopping 38% of shoppers return up to 10% of ALL online purchases! An ever-larger percentage – 48% – have participated in “bracketing,” where multiple versions of an item are purchased with the intention of returning items that aren’t wanted.

Furthermore, the costs to businesses are staggering, Statista reports that by 2020, return shipping alone will cost $550 billion.

On the surface, it would seem as if e-commerce retailers need to protect themselves from the scourge of returns, but 80% of shoppers are deterred from completing purchases by troublesome return policies! Eliminating your returns process would not be a solution. It would create even more damaging situations for your business.

Costs and numbers aside, it feels terrible to know that someone disliked your product enough to return it. This is especially true of mid-size and smaller retailers who truly believe in their product lines. Returns hurt emotionally and it can be tempting to ignore the impact they have on your business.

What’s a retailer to do?

2. Returns Aren’t the Problem

Returns are clearly the cost of doing business in online retail, but that’s not necessarily a bad thing. We are here to change the way you think about and approach your returns process. Returns are not actually the problem.

In fact, a good returns policy is fundamental to creating a positive customer experience. It can directly increase conversion rates and benefit your business overall. It’s an integral part of the retailer/shopper relationship.

Why do shoppers return items?

Shoppers return items for every reason under the sun. Aside from delivery problems (items arrive damaged, shipment is late), the most cited rationales are: 

Source: Salescycle

Here’s the good news — as an e-commerce business owner, most of these factors are within your control.

More about bracketing…

WordStream reports that 41% of shoppers admit to bracketing at least some products. This is especially true for apparel and footwear products. Where else can online shoppers try on clothes and shoes aside from their own home? There simply is no substitute for looking in a mirror. Make note that the shoppers driving the bracketing trend are women, people earning more than $100k, and millennials – incredibly desirable target consumers. 

Our advice: this isn’t the battle you want to fight. Embrace bracketing. Brands that reward customers by rounding out the shopping experience with at-home try-ons (and the inevitable, associated returns) will reap the rewards of higher lifetime value customers.

Get your head out of the sand. (Use your Return Policy as a marketing tool.)

When crafted with a positive consumer return experience in mind, your Return Policy can be one of your best marketing tools. Every return becomes an opportunity to impress and delight your shoppers, transforming them into lifetime buyers.

Shoppers factor Return Policies into their decision to complete a purchase. Splitit research reveals that 52% of shoppers have abandoned an online purchase because of apprehension about unexplained or cumbersome return processes. This statistic rises to 67% for millennial respondents. 

Splitit’s CEO Brad Paterson summed up these survey results accordingly: “Whether it’s a fear of buyer’s remorse or uncertainty about fit, our research shows that today, returns are a top consideration for consumers even before their purchase is completed.”

There’s a silver lining, however. Your returns policy can help shoppers subdue pre-purchase anxiety, thereby increasing conversion rates. This holds true even on larger ticket items, where free returns encourage 27% of shoppers to purchase items over $1000, whereas only 10% would purchase otherwise.

In other words, your Return Policy can also be the framework from which to install businesswide efficiencies, institute better customer service, and invest in business best practices. Expend the effort now to set your business up for long term success.

3. Customer Happiness Pays

How customer returns affect your business

Shipping expense, loss of a sale, manpower, restocking, time spent on customer service – we could go on and on. These are the obvious, costly, and all too familiar price of returns. They are also the tip of the iceberg. Effectively dealing with these issues can actually boost your business and help your bottom line, while an ill-conceived returns policy that doesn’t take customer happiness into account can damage your brand. The last thing your business needs is for complaints to begin appearing on Social Media. These can appear as comments under your ads and even make their way to browser search results. This type of damage to a brand’s reputation can be devastating.

Your Return Policy is like a dating profile. It helps shoppers decide if they want to commit to making a purchase and becomes the guideline they follow when making a return. It’s also only half of the story. Your “back end” return policies that shoppers do not see are your systems and procedures that are in place to deal with the process of returns. As of 2019, only 23% of large retailers in the US used some type of technology or software to help with returns. The numbers are likely even bleaker for mid-size and smaller retailers. 

Dealing with returns as one-offs (on the extreme end) or having an ad-hoc system  (a typical scenario) diverts resources that could best be spent elsewhere, from sourcing new products to advertising. Worst of all, if the time and expense of returns aren’t tracked and optimized, your business can’t be scaled. Don’t hinder your growth by leaving returns unaddressed.

Exchanges vs. Returns

Exchanges and returns share many key factors including the need for return shipping, restocking, and customer service effort. However, they are fundamentally distinct. If a customer wants to make an exchange, they are satisfied with the product and shopping experience overall but need to make an adjustment (perhaps for a different size or color). A returned product ultimately signifies a shopper’s dissatisfaction; the item fundamentally didn’t meet their expectations in some way. 

It’s vital to distinguish between exchanges and returns so you know which path to follow to process the customer’s request and what opportunities are available to your business. Promoting exchanges reduces refunds and is a great moment to suggest new products to shoppers. Every exchange is an opportunity to increase order value by upselling or cross-selling. Consider offering customers a deal if they exchange an item rather than return it. 

Opportunity for Customer Loyalty

Conventional wisdom states that it’s a lot harder and more costly to acquire a new customer than to keep a current one – five times more to be exact!  Furthermore, Forbes reports that 96% of shoppers factor customer service into their loyalty to a brand. Almost half of all consumers believe that a flexible return/exchange policy is the most important aspect of online customer service, 73% of shoppers will spend more money than they had planned and 57% will pay more for an item or service if they know they will receive good customer service.

Get it right with a hassle-free return/exchange process and you win lifetime customers. These lifetime customers are the holy grail for e-commerce businesses. They cost relatively little to maintain and as such can mean big profits for your business. Your Return Policy can convert one time shoppers into lifetime customers. It’s as simple as that.

4. Stand Apart from the Pack

Elements of a GREAT Return Policy

We could spend all day on this. In fact, we did. For step-by-step instructions on how to construct an outstanding returns policy, download our free roadmap: Return Policy Best Practices: 10 To-Dos for a Terrific Return Policy.

Your returns policy is a chance for your business to stand out in a crowded marketplace and to be memorable. Especially if your products are not unique or your prices are similar to competitors, it can be the determining factor when a shopper decides to complete their purchase. 

At minimum, offer free returns.  After that, be creative! Skip the boring legalese. As a shopper, what motivates you? What would you want to see in a Return Policy? As an online retailer, what returns/exchange goals will most benefit your company? How can you promote exchanges over returns via the text of your policies?

Consider the Return Policies of successful companies that you admire. Ikea’s Policy “It’s OK to change your mind” offers a generous 365 days within which to complete the return or exchange. Customers get peace of mind while the company takes advantage of the fact that the longer the return window, the less likely shoppers are to actually return the product. 

With an “if you can’t beat ‘em, join ‘em” attitude, Zappos is one of the most notable e-commerce businesses to embrace bracketing.  Even though Zappos charges more for their products than other e-commerce retailers, they have 75% higher customer loyalty and repeat buyers.

Your Return Policy is an extension of who you are as a business. Your vision and philosophies should be reflected here. No pressure, but it will likely be the most-read document on your website.

After you’ve done the heavy lifting and have spent considerable time and effort crafting the world’s best Return Policy, your Return Policy is only as good as its visibility. It should be easy to find and included in all of the following places:

        1. Website header bar
        2. Product pages
        3. Checkout
        4. Confirmation emails
        5. Packed with shipped products 

5. Put a System in Place. Yesterday.

If there was ever a time to “put a system in place,” this is it – and not just a returns/exchange system (although we’ll cover why that’s important too). 

Source: ReadyCloud

This means fully two-thirds of all returns are inadvertently caused by retailers themselves. The good news is that a lot of this is within your control. 

Inventory systems affect return rates

Running an e-commerce business is hard. When you’re not thinking about a new CTA or how to increase your conversion rates, you’re dealing with a supplier shortage or negotiating a shipping contract. It’s no wonder why 43% of small businesses do not track their inventory at all. Even less surprising – this same proportion, 43% of retailers, say that inventory management is their number one day-to-day challenge. 

Subpar inventory control is the business equivalent of shooting yourself in the foot. Investment in an inventory control system is just plain good business AND it can significantly cut your number of customer returns. Make sure your system has control measures to ensure that orders get out the door on time and that the right items go to the right customer. 

Build customer confidence (a.k.a. reduce your return rate)

A picture is worth a thousand words. A video is even better. There’s nothing worse than thinking you’ve found the perfect item online, anticipating its arrival, finally opening the box… only to find out the item is nothing like you thought it would be.  Disappointed, you return the item. Better website photos (from different angles), 360 degree viewing options, placing the item in context, showing the product next to a virtual measurement (image of a ruler, hand, body, etc.), and providing videos of the product can go a long way to solving this problem. Make better product imagery and descriptions part of your standard inventory and sales best practices.

At the risk of sounding obvious, size guides are a must for apparel and footwear retailers. Bracketing behavior is strongest in these sectors and almost always occurs because shoppers are not confident about the fit of the product. Size guides should be detailed and correlate to the real world. Don’t just take your supplier’s word for it. Double-check the measurements on real bodies and pass that information along truthfully to your customers. 

Product reviews are one of our favorite e-commerce tools. It’s well documented how their very presence on your website can increase conversion rates. Again they prove their worth by significantly lowering return rates. PETCO.COM found that products with reviews have a 20% lower return rate than products without reviews. They also noticed that products with more than 50 reviews are 135 times less likely to be returned than products with less than 5 reviews! 

Give shoppers the tools they need to make an informed purchase decision. Your customers will thank you by reducing their returns. 

Incentivize exchanges over returns

While exchanges do eat into retailers’ profit margins, they are clearly better than outright returns. If you have an efficient returns/exchange system in place, the cost of the exchange is the ‘there and back’ shipping fee. Compare the cost of acquiring a new customer to the cost of a shipping label. Unless the item requires custom freight shipment, the shipping label is likely way less costly! Plus your business gets an opportunity to build customer loyalty. Have you ever noticed that there are no “Restroom” signs in high-end restaurants? This is by design. It’s so that the diner must ask a staff member for directions, thereby increasing the chance for the customer to have a positive interaction.  We’re not saying that you should hide anything on your website (the opposite!) – but it’s our advice to take advantage of every chance to have a positive interaction with your shopper. 

Along with free returns, consider a Return/Exchange Policy that puts immediate credit into your shoppers’ hands. They can use this credit to purchase a different item or exchange it for the same item (different size, color, etc). By doing this, you’re telling your customer that you trust them to return the item in good faith. They, in turn, are trusting your business to send them an item they will love.

Seize the day – install company-wide efficiencies

Does your business have a formal procedure for dealing with returns and exchanges? Or does thinking about your company’s “process” make you cringe just a little? There’s no time like the present. Not having a returns/exchanges system is a monumental waste of time. Countless hours can be spent emailing back and forth with customers, approving requests, tracking shipments, inspecting and restocking returned items, processing refunds… shall we go on? 

Dealing with these tasks takes valuable time away from your team, pulling them away from other important work. What about hiring additional staff to handle returns and exchanges? While that seems like a viable solution, hiring additional staff will not allow you to understand why returns are happening in the first place nor will they offer customer insights to actually help your business market more effectively and increase conversion rates.

Efficient return/exchange systems keep track of why products are returned and enable you to spot trends as they unfold. Is there a problem with the size guides on your website? Is a supplier providing defective merchandise? Are your shipments leaving the warehouse late? You can only address problems such as these if you’re aware of them in real-time.

Solutions exist. Use them.

Return and exchange software can be a fairly straightforward tool for e-commerce businesses. There are a plethora of options that can be customized to fit your business model exactly, many that automate suggestions of new items to shoppers based on the  reasons they provide for their return. If returns are onerous for your staff and business, use the tools available – invest in return/exchange software or services so that you can concentrate on the other important aspects of your business such as providing great products and acquiring customers. 

A less overt, but equally important tool for retailers is an installment payment checkout solution. Including Splitit in your website’s checkout choices can reduce returns because:

Using return/exchange date to anticipate customer needs

Return and exchange insights provide valuable information about your customers. Specifically, you can use return data to classify shoppers who behave in similar ways.

This segmented information is solid gold for online retailers and can greatly influence and enhance your marketing strategy. E-commerce businesses can use this data to better meet online shoppers where they are and target messaging to specific clusters. For example, shoppers that have made two or more purchases but returned their last purchase can potentially be induced back by an email with a special offer.    

6. Return Reserve Fund

What is a return reserve fund and why does your business need one?

We’ve established that e-commerce retailers can greatly mitigate returns and their negative effects. We can also use returns to create efficient, company-wide policies and mine returns data for marketing strategies. However, at the end of the day, there’s still a cost associated with returns. That’s why most large retailers (i.e. Walmart, Target) have reserve funds for returns, usually 2-4% of sales. In practice, this means that for every purchase, 2-4% of that sale is recorded as an expense and put into a separate fund – a piggy bank for a rainy day. When returns occur (as they inevitably will), they are paid out from the already established return reserve fund. This will help keep your return expenses consistent, especially through holiday or seasonal periods.

7. 5 Things the RIGHT Return Policy Can Do for Your E-commerce Business

E Commerce Return Policy Best Practices

8. Conclusion

Rethinking your Return Policy is a lot of effort. If ever there was a case for ‘big effort big reward,’ this is it! Having the right Return Policy increases customer satisfaction and loyalty – bringing with it a host of benefits including increased conversion rates, increased average order value, increased lifetime customer value, and higher numbers of loyal shoppers. 

Supporting your Return Policy from the back end means installing efficiencies in many major areas of your business including inventory control, installment pay solutions, and creating the reserved cash-on-hand fund to take the “problem” out of returns. At the end of the day, you’ll have a winning combination of a loyal customer base and better business practices to prime your company for growth. 

Any questions? Contact Splitit for more info.