What to Consider When Creating a Return and Exchange Policy

What to Consider When Creating a Return and Exchange Policy
Everything you need to know to create a return and exchange policy for your retail business.
by Deborah Findling, Maya Rollings Mar 02, 2023 — 11 min read
What to Consider When Creating a Return and Exchange Policy

This article is for educational purposes and does not constitute legal, financial, or tax advice. For specific advice applicable to your business, please contact a professional.

Returns are a normal and expected part of running a retail business, but if it seems like the amount of returns you’re getting has increased recently, you’re not wrong. According to the latest research from Appriss and the National Retail Federation (NRF), U.S. retailers took back returns totaling $816 billion in 2022, representing just over 16% of overall sales. In 2020, the number was $428 billion. Online returns doubled from $102 billion in 2020 to $212 billion in 2022, significantly contributing to the overall increase. 

While retailers often factor returns into their yearly forecasting, it doesn’t change the fact that handling returns can be costly. Returns processor Optoro estimates that it will cost retailers $33 to process a $50 returned item, which is up 59% over 2020. This recent increase is largely being attributed to supply chain issues, higher transportation costs, and losses from discounting and liquidation. 

Although no retailer looks forward to a return, viewing it as an opportunity instead of a liability can help improve your business. According to the NRF, your best shoppers often make the most returns, and how you handle the process can help build loyalty. In-store returns are also a great way to meet and convert an online buyer, especially if they received the item as a gift and are unfamiliar with your store. The key is to make the process customer-centric, with flexible policies that help build relationships and customer loyalty. 

How to write a return policy

To improve customer confidence, make it easy to return your goods. A comprehensive and transparent policy establishes rules and timelines for returning or exchanging unwanted products. While your return policy will reflect the type of products you sell, consider including the following information.

Consider these return policy legal requirements

Be sure to check your state legal requirements when it comes to creating, communicating, and enforcing a return policy. While there is no legal requirement to offer a return policy, you could be penalized for not clearly communicating your policy, depending on where you operate your business. Be sure to consult federal and state laws and regulations around refunds before drafting your policy.  For example, in the state of California, retailers who do not offer a refund or credit must clearly display their policy, depending on the type of item being sold. 

Determine eligibility for returns

As you create your return policy, consider which items can be returned, which items can be exchanged, and the condition required for those returns or exchanges. 

Create a timeframe for returns

Setting a timeframe for returns means customers will have a certain amount of time to determine if they are satisfied with a purchase before they make an exchange or return. They may have a certain number of days, weeks, or months to make that return. Once the deadline passes you could deny a return outright or offer an alternative, such as an exchange or store credit.

Set conditions for returns

Returns can be contingent on the state of the purchased goods. For example, you may decide to accept returns of items in their original condition, such as in the sealed box or with tags attached. You may also decide to require a receipt for a return or an exchange without a receipt. 

Here are some sample conditions a business might place on returns:

Exclusion conditions from returns

You can also identify items considered “final sale,” such as something custom-made, personalized, or deeply discounted for liquidation. Marking these items as such and establishing they are not subject to the terms in the return policy can help communicate to customers that an exchange or refund is not possible. 

Establish a process for returns

The process for completing a return may vary from business to business, depending on your needs.Your business operations will impact your return policy. Whether you’re brick-and-mortar only, online-only, or a combination of both, the way you store, source, and manage goods could be impacted. For example, you may accept items in your store or ship them to your eCommerce warehouse. The return policy should state who pays for shipping if returns are accepted by shipping. You can also encourage exchanges by paying for return shipping when the customer swaps out the product instead of asking for a refund. Some retailers choose to include return labels in their packaging to make returns quicker and easier for customers. 

Your return policy can and should clearly communicate how customers can and should process returns. Many business owners experience friendly fraud or chargebacks that a customer might issue despite receiving a good or service. For example, retailers may experience this type of chargeback if a customer receives a package later than expected and charges back before receiving it. Clearly communicating with your customers, including notifying them of the rules and restrictions of your refund and exchange policy, can better set their expectations.

How to maximize a return

Upsell or cross-sell with exchanges

When a customer comes to return an item, encourage them to explore other options with an exchange. Talking to them about any issues they might’ve had with their purchase is a great way to understand your opportunity. If the customer complains that the item doesn’t fit exactly the way they wanted, let them know about other options that you have available in-store or online. They may come across a different item they want to exchange their return for, and depending on the price, the new item could work to bring in the same amount or more than the initial purchase. 

Offer store credit

Allowing customers to return items in exchange for store credit helps prevent your store from losing revenue. Because the return amount becomes a cash equivalent only useful at your store, it encourages continued shopping and loyalty. While on the hunt for a way to spend their store credit, they may make one or several trips to your store in search of the perfect item. Even if they don’t find exactly what they’re looking for or decide to hold out until a new collection launch, they still may come across items they want to purchase, or even something better, that can help make them a repeat shopper.

Store credit can also be a helpful way to offset return fraud. When customers make a return without a receipt, offering store credit instead of a cash refund can help you minimize loss. 

Consider a resale marketplace

When items are returned, minor damage may be noticed when they’re added back to the floor. This causes items to lose retail value and your store to miss out on a sale at full price. While sales can still be made via a clearance section or selling them at a reduced price, there are other ways to use this item to reach a larger audience of potential shoppers — the secondary or resale market. A resale marketplace gives your items a second life for customers who are interested in sustainable ways of living or simply getting an item for a discounted price. While this model has been popular with shoppers for years, more and more retailers are discovering ways to own their resale opportunities and increase their revenue.

How to accept a return

Accepting returns in-store

In-store returns are one of the most common ways shoppers make returns. Making it quick, easy, and convenient can go a long way with building the customer relationship and encouraging shoppers to return to your store. Buy online, return in-store (BORIS) is one way to bring this to life. Allowing shoppers to buy something from your website and return it in your store saves them time they would otherwise spend printing shipping labels, repackaging the item, going to the post office, awaiting confirmation of receipt, and more, ultimately turning a lengthy process into one simple step.

More importantly, it brings customers into your store, increasing the opportunity to upsell, cross-sell, exchange the item, and encourage them to begin an entirely new shopping journey. 

Accepting returns throughout the store

It’s one thing to accept returns in-store, which usually takes place at the same counter as checkout. But separating your return process from your checkout process could be the one thing that sets your store apart. Having a mix of customers with a variety of needs can make for lengthy lines and even longer wait times.

Using mobile POS systems to set up flexible return stations throughout your store can expedite the process and bring customers to different parts of the store they may not regularly frequent, increasing the opportunity for them to buy more. Expediting the process can also encourage customers to return to your physical store more often.

Square for Retail makes it easy to accept returns or exchanges –  in one single transaction-regardless of if you’re at a checkout counter or a flexible return station throughout your store. Investing in tools and solutions that can make this process quick and seamless for customers can make your store more desirable to shoppers and should be an important consideration when choosing your POS system.

Accepting returns at third-party drop-off sites

Third-party drop-off sites are another emerging way to accept returns and make the process seamless for customers. For customers who shop at your online store but live too far away from your physical store, these drop-off points ensure that they benefit from a quick and easy return process too. This method can also be useful for regular in-store shoppers who may need to make a quick return and a drop-off site is simply more convenient. 

Third-party drop-off sites are able to process returns and send the item back to your store, keeping your business running smoothly and your customers happy. It can also help you retain staff (especially during peak seasons) by reducing the load on your associates.

Refunds and replacements

How to issue refunds by payment types

There are a range of ways you can refund a payment to your customers. Some may want a refund issued online, others in person. Here are some ways you might consider when it comes to issuing refunds by payment type:

How to communicate a return policy 

Once you’ve created a concise and comprehensive return policy, ensure it’s implemented consistently across your company. Inform your customers about your policy, and make it clear. 


According to a 2020 Inmar Intelligence survey, two-thirds of shoppers check the returns page before making a purchase. By publishing your policy in various areas, you reduce the risk of confusion for your customers and avoid disappointment later, which can negatively impact the customer experience. 

Your return policy should also be considered part of your overall training process. Make sure your associates understand how to accept a return and process an exchange on your POS system, as well as knowing which questions to ask about how they can positively impact the shopping journey. Some retailers only allow managers to process returns, which can help reduce return fraud. However, during busy seasons you may want to ensure that having this manager-only policy doesn’t slow down business, inconveniencing your shoppers and leaving a negative impression. Peak seasons are also when retailers tend to change their policies or extend the return window. If this is the case for your store, be sure to emphasize that to customers and train your staff to answer any questions or concerns.

Choosing a POS system that allows you to process returns and exchanges efficiently can also help you better communicate with customers. Software that adds the product back to your inventory if the item is returned helps you manage your inventory, letting shoppers know what’s available. If the item is damaged, however, you may want the option to skip the restocking process so you don’t inadvertently sell an item online that isn’t available for delivery or pickup.

Questions to ask customers during returns

Consider collecting information from the customer, asking for the reason for the return. Common questions you might ask are:


Capturing this information can provide some insight into your product selection and operations. Damaged or incorrect items could indicate problems in your warehouse, either in receiving inventory from your vendors or in your shipping processes. If you see a lot of items returned for improper fit, that could indicate a need for better sizing charts. Review your returns data when you order inventory to ensure that you’re offering products your customers like.

Returns and exchanges can be viewed as a sales opportunity, especially during the holidays when the customer may be new to your store. The easier you make it, the greater the chance you encourage customers to return to your store to make more purchases in the future.

Fees and penalties to consider

Whether you process refunds with Square or another payment provider, there are some costs to consider for your business, some of which you may want to communicate to your customers.

Fees to communicate to customers


Retailers have a range of ways they can accept refunds, perhaps making them free in-store or for an exchange but with an added fee if it requires the business to pick up the item or send prepaid shipping labels. For example, Abercrombie & Fitch offers customers a return service for a $7 fee off their refund if a customer made the purchase online and returned it by mail. Other retailers like R.E.I deduct $5.99 for shipped returns. They also offer longer return windows for members versus non-members. If you are a Square seller you can check your online Square Dashboard and leverage tools to track your sales, returns, and item exchanges. 

Costs that may impact your business

When you refund an item, whether it is a partial or full refund, your business could incur some fees. Not only might you incur fees related to processing the initial payment, there are other fees to consider when crafting your return and refund policy.

If you are trying to reach potential customers, there are costs of acquisition like marketing or advertising. In order to stock the items for sale, you may need staff. Additionally, you might pay for shipping and packaging costs in order to send that item to a customer. Once the item is returned you may need staff to restock it or it might not be in a condition for resale at all. If you consider the costs of acquisition, labor, shipping, and opportunity costs, a refund could cost you more than the price of the item. Think about ways you might build a return policy that helps offset these costs.

Deborah Findling
Deborah Findling is an editor at Square, where she writes about investment, finance, accounting and other existing and emerging payment methods and technologies.
Maya Rollings
Maya Rollings is an editor at Square where she writes about all things customer experience, from building a solid customer base to leveraging tools and technology that meets them where they are in their journey.


Keep Reading

Tell us a little more about yourself to gain access to the resource.

i Enter your first name.
i Enter your last name.
i Enter a valid email.
i Enter a valid phone number.
i Enter your company name.
i Select estimated annual revenue.
i This field is required.

Thank you!
Check your email for your resource.

Results for

Based on your region, we recommend viewing our website in:

Continue to ->