The 4 types of returns and how they impact LTV.

If you treat every return like its a refund when building your return policy and process, you'll miss out on opportunities to retain revenue, build relationships, and increase LTV.

Increasing LTV through returns

Many brands view returns as a cost center, but this is a HUGE mistake. The truth is that there are many reasons why a customer may want to return an item, and it’s not always because they want their money back. 

That’s why we encourage you to reframe the way you think about returns. When you don't view every return as a potential refund you will make big strides increasing your LTV.

How much of an impact do returns have on LTV?

Lifetime value is one of the hardest metrics to measure in ecommerce, and everyone measures it differently. Because everyone has their own take on the metric, it's hard to create benchmarks that will be accurate for everyone. Instead of trying to do that let's look at some independent research from one of the brands we work with in the DTC apparel space. 

This brand has asked to stay anonymous to protect sensitive business intelligence.

Impact of returns on customer lifetime value:

Customers with no return events = $165.96

Customers with at least 1 return event = $384.22

Customers with at least 1 exchange event = $417.35

There is a bit of a causation or correlation challenge here, but an increase of 131% in LTV between those who have interacted with the returns process and those who have not can't be ignored. 

You can also see how LTV increases further when you look at customers with an exchange event. This brand sees a further increase of 9%  when a customer exchanges.

I hope I have convinced you that viewing your return policy as a cost center is archaic, but it's important to understand how different returns impact your business. Let’s go into each in detail in the next section.

The 4 types of online returns

Now that we have seen how different returns impact LTV, let's explore the benefits and shortcomings of the 4 types of returns.

1. Variant exchange

60% of returns on Shopify happen because the customer receives the wrong size or style. This means that more than half of your returns can be resolved with a variant exchange, which is when a customer has the wrong version of a product and trades it in for the right one.

60% of returns on Shopify happen because the customer has the wrong size or style.

While there are ways to more clearly and strategically communicate sizing and minimize this type of return, sometimes the customer still ends up with the wrong size or color. In these situations, a variant exchange is the best type of return that brands could ask for. Not only do you get to retain the relationship and the revenue, but the exchange itself is a straightforward process for the customer.

A variant exchange:

• Helps you retain revenue since the customer isn't requesting money back

• Continues the customer relationship since they had a positive experience

• Reinforces brand loyalty since the customer now has the right product

• Increases the likelihood of repeat purchases since 62% of shoppers would shop again from a brand offering free exchanges

2. New product exchange

There are other reasons - besides sizing or style - why customers may want to exchange an item. For example, let’s say your customer decides to try a pair of your skinny jeans, even though they usually prefer a looser fit. When they receive the item, they realize they don’t like this style of jeans at all and don’t really want to try another pair. But they still love your brand and decide to apply the value of the jeans to a sweater instead.

This is a new product exchange. While it’s not as straightforward of a process as a variant exchange, it still provides the same amount of value. Sometimes it can even be more valuable if the customer decides to opt for a more expensive item.

A new product exchange:

• Offers the same benefits as a variant exchange including retained revenue, continued customer relationships, reinforced brand loyalty, and increased likelihood of repeat purchases

• Creates potential for an upsell since the customer may opt for a more expensive item while shopping for a new product

You might be asking why so few brands do this... it's tough to implement in a way that still creates an amazing customer experience. If you use Shopify, Loop makes it easy with what we call Shop Now. It makes a return feel just like shopping for something new with the return value.

3. Store credit

Sometimes customers like your brand but not the product they received - and they don’t want to take the time to pick out a new item right now. In this situation, they’ll request store credit to use later. While this isn’t ideal since the customer isn’t taking action today, it still outranks a refund because the customer can use that store credit with you in the future.

Store credit:

• Leads to retained revenue in the future

• Still presents an opportunity for customer relationship building

• Creates potential to build brand loyalty down the road 

Of course, the downside of store credit is that there’s no guarantee if and when the customer will use it. This means that the credit is a liability until it’s spent.

4. Refund

Refunds, unsurprisingly, are the least valuable type of online return. It means that the customer, unfortunately, didn’t like or resonate with what your brand had to offer. This likely signals the end of the customer relationship and lost revenue. 

The average brand before Loop has 80% of returns result in a refund.

At this point, you can try to use bonus credit to move customers from a refund to an exchange. But at the end of the day, refunds are to be expected when you run an ecommerce brand. In fact, when brands first start working with Loop about 80% of their returns are refunds. While we want to avoid refunds where possible, we also believe in leaving customers with a positive returns experience - regardless of which path they choose.

A refund:

• Still presents an opportunity to leave customers with a positive impression of your brand

Of course, the downsides of refunds are clear: you’re losing the revenue and the customer relationship with this type of return. That’s why, at Loop, we focus on helping brands do everything they can to move people from a refund to an exchange instead. 

Not all returns are created equal

Don’t operate under the assumption that all customers are looking for a refund. Instead, focus on getting the right product into their hands and craft your return policy and process with this priority in mind. If this is something your brand needs support with, let’s talk.