Retail Returns: How to Manage Returns and Exchanges (2024)

Retail returns

A retail return occurs when a customer brings purchased items back to a retailer in exchange for refund, store credit, or similar item. For example, a customer might return a shirt because it’s too large or a pair of shoes because they are too tight. 

Nearly 75% of retailers agree that returns are a necessary evil. It’s a part of doing business that often goes neglected, but has a massive impact on your brand. In fact, 84% of consumers polled by Doddle said the returns experience is important with regard to their opinion of a retailer.

Returns done right can improve customer lifetime value and retain revenue. Done wrong, which is easy to do, returns can lead to lower customer loyalty and satisfaction.

Unsure how to handle returns in your business? This guide discusses how to craft a return policy, create a returns process that’s easy, and what the future holds for retail returns.

Why is managing retail returns important?

Returns are an easy way to disappoint customers and lose their loyalty. Some 95% say a poor returns experience will make them less likely to shop with a brand again. 

The plague of retail returns

Retail returns are like a virus. They attack your profit margins, hurt customer loyalty, and threaten your business at the same time. Changes to the way consumers interact with retailers and making buying decisions have led to the increase in products returned to sellers, as reported by McKinsey.

Research from The National Retail Federation (NRF) shows that $428 billion in merchandise was returned in 2020, approximately 10.6 percent of total U.S. retail sales for the year.

The NRF also estimates the annual cost of returns at $101 billion dollars. Shoppers expect fast, free, and easy returns. This alone is pushing retailers to do more, such as offering “returnless refunds”, which is a refund granted to customers without requiring them to return the merchandise.

Meanwhile,returns continue to be a neglected issue for retailers. A McKinsey study found that managing returns is not among the top five priorities for a third of retailers, and a quarter of them don’t do it efficiently and effectively. 

Managing returns does come with a set of operational challenges, including consumer expectations, reverse logistics, and data limitations—but you are not powerless. There are many tools available to help manage returns in a friendly way, while maintaining profitability and operational success.

Hidden benefits of retail returns

Managing returns the right way can save you time and money. In fact, the retail industry as a whole could save up to $125 billion annually by focusing on returns reduction. Besides direct financial costs, there are also impacts on brand, customer, and environment. 


Customer loyalty is built through engagement, which happens even when merchants aren’t officially making money. Take for example the moment a customer has identified that they need to make a return. 

When customers know that they can get their money back just as easily as they can spend it, they’ll shop with more confidence and spend more.

Sanaz Hajizadeh, Happy Returns

This creates an opportunity either for a friendly, well-executed staff response or for the customer to be faced with a disgruntled worker who dreads the immediate next steps. Which would you rather experience? Better, which would you rather the customers in your store to experience?

Nearly 74% of consumers feel retailers’ returns experiences need to improve. Focusing on your returns process can help you stand out from competitors.

A customer returning something creates an opportunity to make them appreciate your customer service, potentially buy something new, and at the very least, build a more engaged customer relationship. It’s critical to sustaining a business, and this fact alone is why customer returns should not be dreaded, but rather welcomed as an opportunity to increase your long-term customer loyalty. 


Bad experiences can easily find their way to prospective customers. Whether it’s through word-of-mouth or a social media post, nearly 72% of customers share negative reviews about bad return experiences. This impacts your brand perception and can lead to lost future revenue. 

From reducing the number of returns to offering flexible return policies, tackling these challenges head-on can make meaningful changes to your brand perception. If you handle returns in a consumer-friendly way, you can get the side benefit of positive word of mouth from happy customers.


Did you know that 15 million metric tons of carbon dioxide are produced from transporting returns every year? From packaging to transportation to energy use, returns leave a heavy carbon footprint. By offering returnless refunds, you can reduce your environmental impact and save on shipping costs. 

Crafting your return policy 

It’s easy to create a return policy that states all returns must be made within 14 days of purchase and only store credits will be issued. But the easy way out doesn’t necessarily boost customer loyalty, does it? Instead, consider how a more strategic approach can help your business thrive.

Know your buyers

First and foremost, it’s important to create a return policy that doesn’t just make sense for the products you sell, but also the customers you target. For example, are kids your target audience, making parents, grandparents, and countless gift-givers your target buyers? If this is the case, you need to consider that purchases made in your store may not be the right purchase for a variety of reasons.

Choose a reasonable return period

Consumers have multiple retailers to choose from when making their purchasing decision, and one of the factors they will consider is an item’s returnability if it doesn’t meet their needs. Crafting a return policy that consumers are comfortable with will help put shoppers at ease about buying from your store. 

This means stepping outside your own comfort zone to introduce a policy that allows returns 30, 60, or even 90 days after the original purchase date. Naturally, some exclusions may apply — even Nordstrom had to make exceptions to the returns policy for their special occasion dresses due to the number of times customers abused this privilege.

A recent University of Texas-Dallas study published in ScienceDaily shows that leniency in retail return policies directly affects return rates. The research demonstrates that if a retailer wanted to curb returns, longer deadlines (i.e. a 90-day return window versus 30 days) to make a return were more effective. This flexibility in the return deadline actually reduced return rates. 

One of the study’s authors, UT-Dallas doctoral candidate Ryan Freling, postulated that the decrease in customer returns could be due to the “endowment effect” — the longer consumers have a product in their possession, the more attached to it they become, and the less likely they are to return it.

The cost of dealing with returns affects the bottom line. You want to look at the different dimensions of a return policy, because you may be able to manipulate the policy to achieve your goals.

Finding a balance between customer expectations and store inventory management is among the top considerations to make when designing your store return policy. It is important to be realistic from a business standpoint while also being fair to your customers. To help identify what will make the most sense for your store policy, consider the following: 

What is your average inventory sell-through?

For example, do you typically sell items within a 60-day cycle, meaning that from the time they were received in stock to the time they sell it takes less than 60 days? Or do you carry inventory longer than this, often pushing a quarter or even six months? The faster you turn inventory, the harder it is to push your return deadline out.

Do your vendors offer flexibility in terms of re-orders and other buying logistics? 

This is a key factor to consider when it comes to crafting your return policy because inventory is often controlled by its availability from your vendors. If a hot item, for example, sells out and is unable to be re-ordered, you should consider how this may influence your return policy. “One and done” is a common expression smaller merchants use when they refer to inventory management, suggesting that as you sell something, you’re comfortable with not replenishing it.

What are the return policies among your biggest competitors? 

As in most things in life, competition is important to consider in an effort for you to better manage your own actions. If your direct competitors offer a more flexible return policy, consider how this will influence consumers to decide between your store and their store for a future purchase. The reality is, competition does exist. It’s vital that you track what your competitors’ practices are, including return policies.

Do you have a history of return dilemmas, and if so, what are they? 

Often, merchants find that customer behaviors repeat themselves for a variety of reasons…and often, these reasons are fueled by the merchants themselves. Keeping this in mind, are your current return policies visible and easily understood for all customers to review? Do your employees share your policy with every customer anytime a new in-store or online purchase is made? Making sure both your policies and your staff communication and management of these are well executed can help eliminate consumer misunderstandings and ultimately returns, as well.

Are your customers typically first-time buyers or returning customers? 

The importance of this will vary depending on whether or not a customer is familiar with your store. Your communication should be consistent either way, with new customers getting a more complete explanation of your return policy to help avoid any confusion—and hopefully any returns.

By asking yourself these questions and thoughtfully reviewing your responses, you can better shape the ideal terms of your policy based on your customer’s needs, your inventory management, and your competition. Additionally, it can help you identify what you both want and need from your return policy—preparing you to create one that’s a better fit for your store.

Write your return policy

Considering 96% of people would shop with a retailer again based on an easy returns experience, let’s look at what to include in your return policy. A formal policy helps you communicate returns management to customers and employees. It’ll help you treat all returns equally instead of on a case by case basis, which is often less productive. 

Policies aren’t set in stone.You can adjust based on your business and the products you sell. But you’ll want to cover the basics:

  • What items can be returned
  • What items can be exchanged
  • What products are “final sale” (i.e., non-returnable, non-exchangeable)
  • When things can be returned or exchanged (i.e.. 30, 60, or 90 days past purchase date)
  • In what condition can items be returned (i.e., lightly worn, with tags still on, original packaging, original condition, etc.)
  • What products can be returned for (i.e., store credit, refund, a product of equal value, etc.)
  • How to initiate a return or exchange (i.e., an email address to contact or a web page to visit)

Why make returns easy?

Many merchants are understandably uneasy about the idea of making retail returns frictionless for customers.

“If I make returns easy, will that increase my return rate and jeopardize my profits?”

Our experience with over 100 Shopify merchants has shown us that, if implemented thoughtfully, making returns frictionless for your customers—and for yourself—can be quite healthy for your bottom line.


  1. Most customers don't decide to return an item because the return process is easy. They return it because the purchase genuinely didn’t work out. The decision to keep an item or return it is largely not a function of the ease or difficulty of the return process.
  2. Customers who want to return an item, but don’t because they find your return process cumbersome, are significantly less likely to shop with you in the future. Many studies confirm this, and you probably know it’s true from personal experience.
  3. For most merchants, your top customers account for a disproportionate share of your sales. These customers, almost universally, have the highest return rates—because they love to shop with you and try new products and styles. By making returns easy, you increase their frequency of purchases—more than their return rate—and their net purchases increase.
  4. And the simplest reason of all: When customers understand and believe that returns are easy, they’re more inclined to make purchases from you, and to make more frequent and larger purchases too. 

If you want one final proof point, consider this.

Of all the merchants who have ever worked with Happy Returns to make their return process easier for customers and themselves, the number who have changed their mind and decided to revert to a previous, friction-filled approach is… zero. Literally, not one.

Overall, they must believe improving their return process is beneficial, or at least manageable, for their business.

To those who might wonder, what about serial returners and those who abuse the system?

Yes, that can be an issue (whether your return process has friction or not), but that is best addressed by implementing processes to manage those particular customers—not by making returns grueling for all your (best) customers.

How to make retail returns frictionless 

1. Automate your return flow 

Putting returns on autopilot provides a painless return experience for both you and your shoppers, while freeing your team up to work on other tasks.

Merchants have a fantastic opportunity to use return apps to offload the burden of returns from Customer Experience teams and provide shoppers with a self-service experience. 

By utilizing best-in-class software to automate your returns, you can customize your online portal to include all of your policies and guidelines, including your return windows, return fees, final sale items, and much more.

You can go even further by including special features like “returnless refunds,” which let customers receive refunds for low-value items you specify, without requiring them to return the items. 

2. Automate your exchanges

Reduce refunds by making exchanges as effortless as possible, and giving your customers plenty of opportunities to choose this option on their own.

Again, by using software, you can proactively offer exchanges based on the shopper’s return reason, or automatically show them other options by size or color based on available inventory.

Automating your exchanges also helps deliver a customer experience that is similar to in-store shopping, where an associate would be on hand to help the shopper find the right color and size. 

3. Help your CX team automate return processing

While automation can help reduce the returns burden, there are often unique scenarios that require judgement calls and extra attention from CX teams.

For example, you may want to make exceptions to your return policy, whether that’s allowing a shopper to return past the window or allowing otherwise unallowed returns for VIP customers. Ensure your CX team has tools to manage these exceptions and a set of guidelines to follow when business decisions are required. 

4. Offer multiple return methods

Most retailers already provide several delivery options, including the ability for shoppers to pay more for expedited shipping. The same idea applies to exchanges and returns.

Empower your shoppers by providing multiple methods for returning, beyond the hassle and wait of returning by mail. This can include returns to your stores or in-person returns to a third-party network. Neither of these options require a box or label, and both offer the shopper an immediate refund or exchange.

5. Offer at least one highly sustainable option 

Various studies show that consumers prefer to buy from retailers with sustainable business practices, returns present a chance to go green, so consider offering returnless refunds for low value items to eliminate needless shipments.

Another great way to make your returns eco-friendly is by aggregating items into cardboard-free reusable boxes at a third-party location and shipping them in bulk. Not only does this method greatly reduce your costs by avoiding the unnecessary expense of individual shipping, but it significantly cuts down greenhouse gas emissions and fuel waste.

The planet (and your bottom line) will thank you. 

6. Offer a free return option 

Shoppers are being trained by that previously mentioned ecommerce giant to expect at least one free way to return an item, so it’s worth considering if this is something you can support.

We recommend you offer at least one free option for returning in person and then consider charging for returns by mail, since shipping is becoming increasingly more expensive. 

If you have brick-and-mortar locations, those are obviously able to serve as a hub for shoppers to make their returns without having to pay. But even merchants who only sell online can take advantage of free in-person returns by utilizing third-party networks as drop-off points.

In this way, merchants are able to make their free return option the one that is the least expensive for them to pay for. 

7. Keep your return policy simple

With a clear policy that leaves no room for interpretation, your shoppers know exactly what to expect, reducing the frequency of angry customer service calls down the line. When you draft a clear policy and make it prominent on your site, you can increase conversion rates and decrease customer churn.

Also, when you create a relatively simple policy that’s in line with customer expectations, you relieve them from the pain point of trying to keep track of your policy versus other merchants—a simple thing that goes a long way in raising lifetime value. 

8. Limit returns with basic best practices

When it comes to making returns frictionless, don’t forget to include the basic steps that will help limit them in the first place.

For example, make sure you post clear size charts to help avoid unnecessary returns due to size – the reason for 50% of all returns in footwear and apparel.

Similarly, it’s important to clearly mark final sale items, and to include customer reviews of your products, to help make your shoppers as confident as possible before they press purchase. 

9. Maintain a positive customer experience

One of the most obvious ways to maintain a positive customer experience is to avoid creating friction. Friction slows customers down, makes their lives more difficult, and generally hurts customers’ perception of your brand — and the chances they’ll become a loyal customer. To keep things positive and avoid friction, follow these best practices:

  • Make returns convenient. Avoid making customers jump through unnecessary hoops to return an item. If you sell online, let customers make returns in-store. Train all staff members to complete returns, so the process is quick and customers don’t have to search for the customer service desk.
  • Keep your return policy hassle-free. Every retail store needs a return policy to set appropriate expectations around returns and exchanges and mitigate risks like return fraud — but that doesn’t mean your return policy should cause extra hassle for customers. Be reasonable about the window of time customers have to return items and be flexible about the documentation required (i.e. receipts, tags, etc.)A no-hassle return policy can also help your bottom line by putting shoppers’ minds at ease. In ecommerce, particularly, knowing returns are easy and convenient helps mitigate customer indecision, leading to more sales.
  • Practice empathy. The biggest way to maintain a positive customer experience is to simply show empathy. What does that look like? For one, train staff to ask how they can make it right, especially if quality or satisfaction discrepancies caused the return.

You should also tailor your return policy based on the product itself. For example, give a little extra leeway for items where the right fit is hard to find (like women’s bathing suits). That goes double if you’re selling those items online.

Converting returns into exchanges 

Understanding where customers are coming from when making a return is the number-one key to turning a return into an exchange.

Merchant accepting return

Step 1: Ask the right questions

To make the right recommendations (with the best chance of creating a positive experience for the customer), you need to understand their needs on a deeper level. That means asking more than the standard, “Is there anything wrong with the item?”

  • Why are they returning the item? When the reason isn’t an outright problem with product quality, customers may not immediately offer a ton of detail here. But these are vital details that enable your staff to make the best recommendations for an exchange, so it’s important to probe deeply enough to really understand the motivation for the return.
  • What expectations did the product fall short on? This question can help staff determine where the disconnect between customer expectations and the actual product lies. That adds valuable context for understanding the real reason this return is happening.
  • How were you planning to use the product? Maybe the product isn’t designed to meet the customer’s needs. That’s key for staff to understand so they can make relevant recommendations for another product that will better satisfy those needs.

Step 2: Actually listen

Listening always seems simple, but active listening to understand (not just to respond) is a tough skill to master. And it’s an important skill for you to both cultivate in yourself and encourage your staff to focus on. Here are a few tips to help you and your staff work on active and empathetic listening:

  • Cut out distractions. Pay closer attention to what customers are saying by ignoring distractions, avoiding multitasking, and looking at customers while they speak.
  • Show that you’re listening. Stop what you’re doing to listen, nod, smile, and use your body language to communicate receptiveness to what customers are saying.
  • Respond. Don’t worry about formulating a response until after the customer has finished speaking. Once they have, rephrase what you heard and ask follow-up questions to ensure you have the whole picture.

Step 3: Cross-sell and make recommendations

Asking the right questions and practicing empathetic listening does two things:

  1. It helps you or your staff gather key information about the return — information that’s vital to successful cross-selling and making intelligent recommendations.
  2. It lets customers know they’re heard. Feeling respected and understood makes customers much more receptive to up- and cross-selling because they know it’s coming from a place of empathy.

Once you’ve gone through that process, the last thing you want is to lose customers here. That’s why you should spend ample time training staff on your products and how to cross-sell in a way that benefits the customer first and foremost.

Train staff on the benefits of each of your products and help them understand use cases in the wild. Teach them about product groupings that often go together. Above all, train your retail staff on creative problem-solving. Train them to think on their feet and offer intelligent product suggestions.

FURTHER READING: Training your staff poses its own unique challenges. Check out 10 expert tips that make it easier to get staff up to speed.

Mastering this step of the return and exchange process is where the opportunity to boost sales and inspire radical customer love really opens up.

Step 4: Look for patterns

Returns and exchanges are more than an opportunity to upsell and inspire customer loyalty — they’re also a valuable learning opportunity for your store. Returns and exchanges can give you all kinds of information around the individual products customers return and why they return them.

When someone makes a return, that signals a disconnect between customer expectations and the reality of a product. By looking for patterns in shoppers’ return and exchange activity, you can identify the products that lead to returns most often...then figure out why.

That means you can address the problem before it leads to a return. You can set the right expectations for customers before they even make a purchase, leading to fewer returns and more satisfied customers.

If you don’t manufacture your own products, tracking patterns in returns and exchanges can also help you identify products that are low quality for one reason or another (inaccurate sizing, for example.) That can help you ensure your store only stocks the best products for your customers.

The future of retail returns and exchanges

Seamless omnichannel return and exchange policies

No one wants to deal with a painful returns process whether you’re selling online or in-store. Your goal as a retailer is to make returns as easy as possible. If packages take a long time to return to the warehouse, or refunds take forever to process, it can hurt customer retention and loyalty. 

Download The Future of Retail Report: Trends for 2022

Consumers expect to be able to shop across channels in myriad combinations before making (or returning) a purchase, driving retailers to prioritize consistent and seamless shopping experiences across every channel where their customers are. Download The Future of Retail Report to learn more.

Download report

Online shoppers cannot touch or feel fabric, see colors or textures, try stuff on, etc. Some want to try before they fully commit. In-store shoppers may find the product wasn’t for them once they get home. Either way, customers expect the returns and exchange process to be quick and easy. 

A seamless returns process can meet both online and in-store customers where they are. It gives people the option to choose what is most convenient for them, be it visiting your store or mailing in a return. This can help improve exchange rates, conversion rates, and retained revenues.

51% of consumers said the ability to check out online and return items to a physical store had a very significant or significant influence on their decision to order a product online. 44% of brands said they planned on prioritizing this.

Using the right tools can help you create a seamless return experience for your customers. Some top Shopify apps for speeding up returns are:

1. Happy Returns, for automating returns and exchanges through a branded online returns portal. It also provides recommended exchanges based on return reason and available inventory. Customers can drop returns off at Happy Bars, or locations like FedEx Office and Ulta Beauty, and process them instantly. 

    Modern Retailer return methods

    2. AfterShip Returns Center, for fast-growing Shopify merchants that want to manage returns all in one place. 

      AfterShip Returns Center

      3. Returnly, for creating a powerful self-serve returns center for your online store.

        Returnly return center

        Returnless refunds

        Returns often result in added costs, such as shipping, processing, and even restocking fees. If the returned goods are broken or single-use only, you can’t even resell them. See how that gets real expensive, real quick?

        Data from UPS shows that the cost of processing returns can often be between 20%–65% (or more) of the cost of the goods sold. That’s where returnless refunds come in. 

        Returnless refunds are refunds given to customers who don’t have to return the merchandise. Amazon was first to introduce them in 2017, and they have since become a common practice for retailers looking to reduce costs associated with returns and improve customer satisfaction.

        Returnless refunds are often cheaper for retailers than having customers ship returned products back, which can cost up to twice as much as the sale price to process. They are also low friction for customers and offer faster refunds because they don’t have to wait until items are back in the warehouse to process a return.

        I believe returnless refunds will begin to become more prominent for lower-priced items and items that do not always make sense to ship back due to cost or inconvenience.

        LEARN MORE: Interested in offering returnless refunds in your store? Read Returnless Refunds 101: Everything Store Owners Need to Know for more information and examples of brands doing it right.

        Using returns as an opportunity to upsell

        Merchants are using special discounts to keep revenue from the sale and, in some cases, even increase the customer’s order value. 

        Consider giving shoppers returning a purchase the option of exchanging their order for a gift card of equivalent value. If they use the gift card the same day, they get a percentage off their purchase. 

        Some brands are viewing returns as an additional touchpoint, offering an extra discount at return if you use the store credit the same day.

        Savvy merchants are using this tactic to curb any losses incurred from returned items, while making the returns process a positive experience. 

        📌 GET STARTED: With Shopify, creating discount codes is easy. Plus, they work for both online and in-store purchases. To find out how often your returns discount code is used, view the Sales by discount report in Shopify admin.

        Ensure accurate reporting

        One mistake merchants who sell online and in-person make is deducting the value of online orders that are returned in-store against their store’s revenue. This effectively punishes the retail store for being the most convenient place for the shopper to return their order. 

        If left unchecked, this reporting mistake can lead to an inaccurate understanding of your store’s contribution to overall revenue. To fix it, consider deducting online orders returned in-person from your online store’s revenue rather than deducting the value from your retail store’s revenue. 

        Optimize returns for your retail customers

        Customer returns and exchanges are part of the deal when you run a retail store—but they don’t have to take a chunk out of your business. By practicing empathy, training retail staff, and working to mitigate the underlying causes of returns, you can delight customers and boost your bottom line. That’s a win-win!

        Manage store returns better with Shopify POS

        Only Shopify lets you accept returns and exchanges for online orders at any retail store and see inventory levels update instantly. Use customers’ online and in-store order history, gift cards, and discount codes to recommend alternative products and turn store returns into revenue.

        Retail returns FAQ

        How do retailers deal with returns?

        Different retailers have different policies when it comes to returns. Some retailers may offer a full refund for any items that are returned within a certain time frame, while others may only offer store credit. Some retailers may also have different policies for different types of items, such as clothing versus electronics.

        What is the average return rate in retail?

        Return rates can vary greatly depending on the type of product being sold, the store's return policy, and other factors. However, a study by the National Retail Federation found that the average return rate for all retailers was 8.8% in 2018.

        Do retailers lose money on returns?

        In most cases, yes, retailers do lose money on returns. This is because the retailer has to process the return and restock the item. Restocking an item can be costly because the retailer has to inspect the returned item, repackage it, and set it back out on the sales floor.

        What product is returned the most?

        It varies from store to store. However, some of the most commonly returned items include clothing, electronics, and home goods.