The way retailers design return policies can affect how well customers are attracted to their offerings, as well as how likely they are to return purchased products. This can be important for year-round, holiday and/or special event sales. (Consider, for instance, consumers who buy big-screen TVs before large sporting events only to return the sets the following week.)
A University of Texas at Arlington study published in Journal of Retailing in 2016 says policies that give back more of the purchased amount are likely to increase consumer purchases more than those that require less paperwork (e.g. the original receipt) to return the product.
The same study, which analyzed the results of 21 papers "examining the effect of leniency on purchase and return decisions," found businesses can reduce costly returns by offering more time to return items and by not accepting returns on discounted items. And almost any policy allowing returns is better than not allowing returns, according to the study.
"By and large, return policies increase purchases more than they increase returns," says Narayanan Janakiraman, assistant professor of marketing at the University of Texas at Arlington and lead author of the study. However, Janakiraman notes, not all policies work equally well.
The 5 Elements of Return Policies
Certain types of return policies tend to help by increasing sales, while others can hurt by increasing returns. Janakiraman identified five main elements of a retailer return policy: money, time, effort, scope and exchange. Tightening or loosening any one of these may have different effects on purchases and returns.
For instance, retailers can offer 100 percent monetary value for returns or lesser amounts after deducting restocking, shipping or other fees. Janakiraman found offering more value for returns tends to increase purchases.
—Bill Blodgett, general manager, Xerox
Effort is another variable affecting purchases. Some returns require a receipt, filling out a form or other effort by purchasers. Less effort equals more purchases, generally speaking, Janakiraman says.
If a retailer is dogged by excessive returns, one way to manage that may be to allow exchanges for store credit rather than cash. Janakiraman found offering exchanges for store credit only tends to reduce returns.
Interestingly, Janakiraman found increasing time leniency—allowing buyers to return products long after a sale—also tends to reduce returns. He says this counterintuitive result is likely due to customers becoming more attached to products when they own them for longer periods.
Only one feature of return policies, scope, was found to generally increase returns when it was made more lenient. An example of increasing scope would be allowing customers to return products purchased while on sale.
Leniency can selectively be applied to these five main traits alone or in combination. For instance, retailers may tighten scope and value by allowing gifts to be returned only for store credit rather than cash. This sort of selective leniency can help business owners fine-tune their return policy and compete more effectively with larger rivals, Janakiraman says. Some return policies make sense for specific markets or industries. Sellers of technology, for instance, may want to restrict time for returns because their products can quickly become obsolete.
Return Policies' Balancing Act
But retailers may not want to make returns any more difficult than necessary.
"No retailer wants their business to be feared, so it's crucial for them to have clear and fair return policies," says Bill Blodgett, Xerox's general manager for high-tech, industrial and retail sectors. However, Blodgett added that retailers should keep in mind that returns can generate additional foot traffic in stores.
Balancing sales and returns is not the only concern retailers face when crafting return policies. Fraud is also an issue and not a small one.
A 2015 report by the National Retail Federation on Consumer Returns in the Retail Industry pegged the value of merchandise return fraud and abuse between $9.1 and $15.9 billion in the United States. Senior loss prevention executives from 62 retail companies were surveyed for the report. According to the report, "total merchandise returns account for over $260.5 billion in lost sales for U.S. retailers"—about 8 percent of total retail sales—of which at least 3.5 percent would be fraudulent.
Janakiraman says time leniency might be a return feature to look at for businesses experiencing high levels of fraudulent returns. "There's a small segment of the population who tend to abuse the return system," he says, "They may be more likely to take advantage of time leniency."
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