image of a black gift card box with a simple red ribbon tied around it at the top left and bottom right corners, two bows on the top right, blank white background
Source: iStock | merovingian

University research posits that offering product exchanges or gift cards for returns rather than crediting a customer’s card may be retail’s best option to reduce the cost of online returns. Consumers were found to be more open to spending money again with a retailer when consumers chose to accept an exchange or gift card rather than just get the money back.

“We theorize that this refund effect occurs because consumers psychologically realize the loss of money when purchasing products and earmark that money for spending,” wrote the researchers from the University of Toronto and Questrom School of Business at Boston University in the study. “Thus, consumers feel a smaller psychological loss when spending refunded money than unspent money on a subsequent purchase.”

Across six experiments, research participants were found to be more likely to spend money from a product refund than from a work bonus, for example. Participants were even more likely to spend refunded money than unexpected income, like lottery winnings and tax refunds.

The researchers, in a column for Harvard Business Review, cited Amazon.com asking customers by default if they’d like to use their return to buy a gift card as an example of cross-selling at the returns stage.

Shopify-partner Loop Returns, a returns platform that encourages exchanges and offers extra credit when the refund is used to make a new purchase, was also cited as an example.

The researchers argued that increasing transaction costs to consumers returning products (e.g., shipping costs, limited return windows) to offset return costs is costly to consumers. Alternatively, providing more information about products (e.g., reviews and FAQs) to reduce the likelihood of returns is costly to retailers.

“Creating return policies and practices informed by the refund effect can reduce revenue loss from product returns in a way that benefits both consumers and retailers,” the researchers concluded.

A ReturnsLogic blog entry explored how incentivizing exchanges with bonus credits, exclusive offers or additional loyalty points can drive retention as well as save costs.

Retailers have been shortening their returns windows and even charging return fees to mitigate rising costs tied to returns. PowerReviews’ latest returns survey fielded in November 2022 found 87 percent of consumers would be at least a little likely to stop shopping with a brand or retailer that stopped offering free returns; 39 percent would be very likely to do so.

BrainTrust

“Gift card credits and time-boxed incentives are creative ways to mitigate the cost of returns— and savvy retailers are leveraging them to save the proverbial sale.”

Natalie Walkley

Sr. Director, Marketing @ Optoro


“Gift card credits and time-boxed incentives are creative ways to mitigate the cost of returns— and savvy retailers are leveraging them to save the proverbial sale.”

Natalie Walkley

Sr. Director, Marketing @ Optoro


“Retailers know that 51% of U.S. adults forget to redeem their gift cards. That’s over $15 billion worth of goods and service paid for but never used!”

Ken Morris

Managing Partner Cambridge Retail Advisors

Discussion Questions

DISCUSSION QUESTIONS: Are retailers missing a major opportunity to encourage or incentivize exchanges at the returns stage? Do you see exchanges potentially significantly reducing the cost of returns?

Poll

How would you rate the opportunity of encouraging exchanges to help reduce the cost of returns to retailers?

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16 responses to “​Will Gift Cards And Exchanges Cut The Cost of Online Returns?”

  1. Mark Ryski Avatar
    Mark Ryski

    Consumers have been trained to expect free, unlimited returns and it will take time and the collective effort of all retailers to rein this in. Creating incentives to exchange at the return stage makes a lot of sense. While there is likely no single way to minimize returns, anything that can help minimize returns and the costs associated with them is worth exploring.

  2. Gary Sankary Avatar
    Gary Sankary

    Return policies, liberal or otherwise, are a marketing tactic. They ebb and flow based on competitive pressures and consumer demand. At the moment, the pendulum has swung toward the retailers, and they’re tightening up their policies. At some point, someone will disrupt this with generous return policies, and we’ll see it slide back the other way. The bottom line for retailers is this: do what’s right for your customers, especially your “best” customers. Remembering that life time value is more important than a short-term negative experience.

    1. Natalie Walkley Avatar
      Natalie Walkley

      Agree that return policies can’t disregard the customer. While many retailers have started charging for returns, there are other creative ways to crack the returns code.

  3. Ken Morris Avatar
    Ken Morris

    Retailers know that 51% of U.S. adults forget to redeem their gift cards. That’s over $15 billion worth of goods and service paid for but never used! So, combine this with the “refund effect” and it sounds like bottom line magic. But wait! What about the long-term effects on the customer’s relationship with the brand? Giving a gift card or encouraging an exchange instead of traditional returns could alienate your best customers. Isn’t lifetime loyalty still the holy grail of retail?

    Also, retailers should use caution and not make returns too desirable. Offering bonus points for returns could backfire by encouraging even more returns. So, while it is an investment, the biggest win for reducing returns still might come from getting sizing and product descriptions right in the first place.

  4. Natalie Walkley Avatar
    Natalie Walkley

    Gift card credits and time-boxed incentives are creative ways to mitigate the cost of returns— and savvy retailers are leveraging them to save the proverbial sale. There has been a paradigm shift with regard to returns, and many retailers now view it as a top priority to solve. In fact, 87% of retailers revised their returns policy between 2022-2023 according to the 2023 State of Returns Report published by Optoro. Returns are no longer viewed as a cost of doing business, but also a strategic lever to create a great customer experience and drive retention.

  5. David Naumann Avatar
    David Naumann

    Encouraging customers to opt for an exchange instead of a refund has been a common retail returns strategy. However, if the shopper can’t find a suitable substitute at the current moment, a store gift card credit is a smart alternative to a refund. During the holiday gift buying season, promoting gift cards is another good strategy to reduce returns by allowing the gift recipient to select their own merchandise.

  6. Bob Amster Avatar
    Bob Amster

    I can take all the suggestions from my Braintrust colleagues and we would have the perfect returns policy. As mentioned, there is no single silver bullet for dealing with the losses due to returns, but this discussion clearly shows that there are myriad opportunities to address the issue and, in most cases, to the satisfaction of both; retailers and customers. “One, two, three, four; what are we waitin’ for.”

  7. Allison McCabe Avatar
    Allison McCabe

    Handling merchandise is costly. Handling merchandise and failing to have a sale result is more costly. Handling more merchandise to get the same sales $ provides some return on investment vs no return at all but less return than if the initial sale was made. It’s about the math vs. customer experience. There is no perfect answer. Each business needs to rank its priorities, do the math using those priorities and product mix, and set profit expectations from there. It’s calculated risk vs. rewards.

  8. Jeff Sward Avatar
    Jeff Sward

    Gift cards will change the math of the return problem, but will do nothing to solve the root cause. Gift cards do have the benefit of incentivizing future purchases, and because they are not redeemed 100%, there’s a margin bonus for the retailer. But the gift card does nothing to address whether or not it was the right product to begin with. And what if it’s a brand I want to experiment with? If the product just isn’t what I was expecting, do I want a gift card for another future purchase? Nope. I’ll just keep scrolling. Free returns have always been a great customer acquisition tool and a great mechanism for a shopper getting acquainted with a new brand. But the free return window should close at some point. Fees for convenience, customer time saved, and offsetting retailer handling costs are fair and reasonable.

  9. Georganne Bender Avatar
    Georganne Bender

    You might be surprised at the number of customers who say yes when asked if they’d like a gift card during a return. It’s what we recommend store associates suggest before offering an exchange or a refund.

  10. Mel Kleiman Avatar
    Mel Kleiman

    Retailers are missing a great opportunity by not giving gift cards when items are returned for several reasons.
    1. The whole objective of customer service is to get the customer to return, which is exactly what giving them a gift card does.
    2, When you give a gift card for an exchange, it will make many of the customers feel less guilty that they are returning the item.

  11. Shep Hyken Avatar
    Shep Hyken

    No doubt an “unlimited return policy” looks attractive and sometimes helps make a sale. A liberal return policy that gets a refund in the form of a gift card is a reasonable compromise. Will this cut down on sales? Yes, especially with the people who take advantage of returns. However, it will cut down on returns. So, while sales may slightly suffer, you have to consider the savings of not having to accept merchandise that might be unsalable or put back on the rack at a discounted price.

  12. Craig Sundstrom Avatar
    Craig Sundstrom

    People usually know what they want…or don’t, want. If by “incentivize” we mean a quick, ‘helpful’ suggestion…fine; if it equals coercion, or actually making returns difficult, then I’m agin’ it.

  13. Kenneth Leung Avatar
    Kenneth Leung

    There is no silver bullet for returns since different shoppers return for different reasons. Some order multiples expecting to return most of them just before they can, no amount of information is going to stop them. Some order assuming a fit and it turns out there isn’t, and exchanges work when it is a sizing difference that can be addressed. In some situations gift card return is better for the retailer than credit card chargeback due to cost reasons. The key is a broad strategy to control return costs balanced against loss of sale due to restrictive return policies

  14. Roland Gossage Avatar
    Roland Gossage

    The data in this survey is interesting since it’s reporting a shift in consumer sentiment on returns. Given today’s competitive retail landscape, switching to exchanges or gift cards initially looks like a significant risk for an eCommerce brand to take, even if it can lessen the financial impact of returns.

    However, the number one reason behind online returns has long been the customer ordering the wrong size or product. If a piece of clothing doesn’t fit right or the product turns out to be the wrong shade of blue to match the rest of their kitchen, exchanging the product for one that fits better or suits other needs is an ideal solution for both the customer and the retailer. In this way, incentivizing exchanges can be a major opportunity for retailers.

    That said, retailers can also invest in technologies that help customers find the right products the first time to help minimize returns and exchanges as well.

  15. Allison McGuire Avatar
    Allison McGuire

    It’s definitely time to rein in the free return policies. Exchanges, small return fees, and gift cards are all viable alternatives and should be seriously considered by all ecommerce and retail stores. This is a fair solution that benefits both sides.

16 Comments
oldest
newest
Mark Ryski
Mark Ryski
1 month ago

Consumers have been trained to expect free, unlimited returns and it will take time and the collective effort of all retailers to rein this in. Creating incentives to exchange at the return stage makes a lot of sense. While there is likely no single way to minimize returns, anything that can help minimize returns and the costs associated with them is worth exploring.

Gary Sankary
Gary Sankary
1 month ago

Return policies, liberal or otherwise, are a marketing tactic. They ebb and flow based on competitive pressures and consumer demand. At the moment, the pendulum has swung toward the retailers, and they’re tightening up their policies. At some point, someone will disrupt this with generous return policies, and we’ll see it slide back the other way. The bottom line for retailers is this: do what’s right for your customers, especially your “best” customers. Remembering that life time value is more important than a short-term negative experience.

Natalie Walkley
Natalie Walkley
  Gary Sankary
1 month ago

Agree that return policies can’t disregard the customer. While many retailers have started charging for returns, there are other creative ways to crack the returns code.

Ken Morris
Ken Morris
1 month ago

Retailers know that 51% of U.S. adults forget to redeem their gift cards. That’s over $15 billion worth of goods and service paid for but never used! So, combine this with the “refund effect” and it sounds like bottom line magic. But wait! What about the long-term effects on the customer’s relationship with the brand? Giving a gift card or encouraging an exchange instead of traditional returns could alienate your best customers. Isn’t lifetime loyalty still the holy grail of retail?

Also, retailers should use caution and not make returns too desirable. Offering bonus points for returns could backfire by encouraging even more returns. So, while it is an investment, the biggest win for reducing returns still might come from getting sizing and product descriptions right in the first place.

Natalie Walkley
Natalie Walkley
1 month ago

Gift card credits and time-boxed incentives are creative ways to mitigate the cost of returns— and savvy retailers are leveraging them to save the proverbial sale. There has been a paradigm shift with regard to returns, and many retailers now view it as a top priority to solve. In fact, 87% of retailers revised their returns policy between 2022-2023 according to the 2023 State of Returns Report published by Optoro. Returns are no longer viewed as a cost of doing business, but also a strategic lever to create a great customer experience and drive retention.

David Naumann
David Naumann
1 month ago

Encouraging customers to opt for an exchange instead of a refund has been a common retail returns strategy. However, if the shopper can’t find a suitable substitute at the current moment, a store gift card credit is a smart alternative to a refund. During the holiday gift buying season, promoting gift cards is another good strategy to reduce returns by allowing the gift recipient to select their own merchandise.

Bob Amster
Bob Amster
1 month ago

I can take all the suggestions from my Braintrust colleagues and we would have the perfect returns policy. As mentioned, there is no single silver bullet for dealing with the losses due to returns, but this discussion clearly shows that there are myriad opportunities to address the issue and, in most cases, to the satisfaction of both; retailers and customers. “One, two, three, four; what are we waitin’ for.”

Allison McCabe
Allison McCabe
1 month ago

Handling merchandise is costly. Handling merchandise and failing to have a sale result is more costly. Handling more merchandise to get the same sales $ provides some return on investment vs no return at all but less return than if the initial sale was made. It’s about the math vs. customer experience. There is no perfect answer. Each business needs to rank its priorities, do the math using those priorities and product mix, and set profit expectations from there. It’s calculated risk vs. rewards.

Jeff Sward
Jeff Sward
1 month ago

Gift cards will change the math of the return problem, but will do nothing to solve the root cause. Gift cards do have the benefit of incentivizing future purchases, and because they are not redeemed 100%, there’s a margin bonus for the retailer. But the gift card does nothing to address whether or not it was the right product to begin with. And what if it’s a brand I want to experiment with? If the product just isn’t what I was expecting, do I want a gift card for another future purchase? Nope. I’ll just keep scrolling. Free returns have always been a great customer acquisition tool and a great mechanism for a shopper getting acquainted with a new brand. But the free return window should close at some point. Fees for convenience, customer time saved, and offsetting retailer handling costs are fair and reasonable.

Georganne Bender
Georganne Bender
1 month ago

You might be surprised at the number of customers who say yes when asked if they’d like a gift card during a return. It’s what we recommend store associates suggest before offering an exchange or a refund.

Mel Kleiman
Mel Kleiman
1 month ago

Retailers are missing a great opportunity by not giving gift cards when items are returned for several reasons.
1. The whole objective of customer service is to get the customer to return, which is exactly what giving them a gift card does.
2, When you give a gift card for an exchange, it will make many of the customers feel less guilty that they are returning the item.

Shep Hyken
Shep Hyken
1 month ago

No doubt an “unlimited return policy” looks attractive and sometimes helps make a sale. A liberal return policy that gets a refund in the form of a gift card is a reasonable compromise. Will this cut down on sales? Yes, especially with the people who take advantage of returns. However, it will cut down on returns. So, while sales may slightly suffer, you have to consider the savings of not having to accept merchandise that might be unsalable or put back on the rack at a discounted price.

Craig Sundstrom
Craig Sundstrom
1 month ago

People usually know what they want…or don’t, want. If by “incentivize” we mean a quick, ‘helpful’ suggestion…fine; if it equals coercion, or actually making returns difficult, then I’m agin’ it.

Kenneth Leung
Kenneth Leung
1 month ago

There is no silver bullet for returns since different shoppers return for different reasons. Some order multiples expecting to return most of them just before they can, no amount of information is going to stop them. Some order assuming a fit and it turns out there isn’t, and exchanges work when it is a sizing difference that can be addressed. In some situations gift card return is better for the retailer than credit card chargeback due to cost reasons. The key is a broad strategy to control return costs balanced against loss of sale due to restrictive return policies

Roland Gossage
Roland Gossage
1 month ago

The data in this survey is interesting since it’s reporting a shift in consumer sentiment on returns. Given today’s competitive retail landscape, switching to exchanges or gift cards initially looks like a significant risk for an eCommerce brand to take, even if it can lessen the financial impact of returns.

However, the number one reason behind online returns has long been the customer ordering the wrong size or product. If a piece of clothing doesn’t fit right or the product turns out to be the wrong shade of blue to match the rest of their kitchen, exchanging the product for one that fits better or suits other needs is an ideal solution for both the customer and the retailer. In this way, incentivizing exchanges can be a major opportunity for retailers.

That said, retailers can also invest in technologies that help customers find the right products the first time to help minimize returns and exchanges as well.

Allison McGuire
Allison McGuire
1 month ago

It’s definitely time to rein in the free return policies. Exchanges, small return fees, and gift cards are all viable alternatives and should be seriously considered by all ecommerce and retail stores. This is a fair solution that benefits both sides.