The Surprising Profitability of Product Returns
I usually feel guilty when returning merchandise to a store—like some over-indulged child, ungrateful for what he has, or unwilling to finish all the nutritious food on his plate. But recent research shows that if people like me can get over the guilt, companies actually make more money from us. How does that work?
Research over the last few years has shown that encouraging customers to return things for any reason and at any time encourages them to buy things about which they are uncertain. Trying new products no longer feels risky or expensive. Don’t like the taste? No problem. Realized your shoes hurt after a full day of walking? Send them back for a full refund.
Two researchers (Petersen & Kumar, 2010) demonstrated with six years of customer-level data at a large national retailer that every company has an optimal rate of return. For the company they studied, it was 13%. Returns falling below that rate meant that customers were buying less, and the company generated less profit. Returns higher than that meant that customers were buying more, but profits sagged under the cost of handling returns. The researchers summarize recent findings thus:
“When a company has a lenient product-return policy, which allows customers to return almost any product at any time, they are more willing to make other purchases. The knowledge that they can return a product reduces the risk customers might perceive in purchasing it in the first place. The studies also find that a satisfactory product return can provide another touch point for building a successful buyer-seller relationship. Reducing customer risk and increasing customer satisfaction, across purchases and product returns alike, can increase the number of future purchases and thus raise the company’s revenue from sales.”
Here are some other interesting facts about return policies we found while browsing through several recent articles on this topic in academic journals and the business press:
- On average, customers return 5% to 6% of all retail goods they buy. But this number is skewed higher by a small group who consistently use an “over-buy and return most of it” shopping strategy.
- Only 5% of product returns are because of defects.
- Generous return policies increase a customer’s willingness to pay higher prices, again because it lowers the perceived risk of paying for a product that is not worth it.
- Longer-term return policies (for example, allowing one year for a return) results in fewer returns than restrictive policies (for example, allowing thirty days). The reason is that customers put off doing it if they can, and the longer they delay, the more likely they will never do it.
I bought four kinds of lip balm, opened them right away, then went to the return desk for a refund on three. It still felt like an accusation when the manager asked “Well, is there anything wrong with these?” But now they have a customer buying a new brand and a new product. That’s exactly what a retailer should want. Hmm, what else should I try?