How to Design a Return Policy

Return policies are offered by retailers to help reduce customer risk and act as an incentive for product purchase. Post purchase, if the consumer changes their mind, then the product goes back, the cost for which is often borne by the retailer. Anecdotal evidence suggests that return rates in excess of 20% can be enough to wipe out a retailer’s operating profit, which makes retailers cautious about offering a lenient return policy to help stimulate customer demand. In fact, retailers often choose to offer return policies with checks and balances, ones that include some lenient terms but with restrictions as well.

In a recent paper in the Journal of Retailing, the two of us along with coauthor Ryan Freling, identify five common factors that are varied in return policies to make them more or less lenient. They are:

• Monetary Leniency: How much of the price of purchase is refunded
• Time Leniency: The duration within which returns are accepted
• Effort Leniency: How hard it is for consumers to return the item
• Exchange Leniency: Whether refunds come in the form of store credit or cash
• Scope Leniency: The scope of products that can be returned ‚Äî for instance, whether discounted items are included or not

The good news from our research is that offering a lenient return policy can increase the number of items purchased more than it increases the number of items returned.

However, increasing purchases via a more lenient return policy does lead to higher returns, and the exact impact depends on the policy. Some aspects of a return policy affect purchases more than returns, while others affect returns more than purchases.

We find that offering to refund the full price of the product (monetary leniency) or making returns easier (effort leniency) work best in getting consumers to purchase the product. If, on the other hand, the focus is on trying to reduce the number of returns, then offering more time and not accepting returns on discounted items is more effective. Further, since the money returned back to the customer is often less than the full amount paid by the customer, store credit paid in full triggers more returns than cash payments paid in part.

But what type of return policies do retailers actually choose in the real world?

To learn more about this, we conducted an analysis of the return policies of 79 U.S. retailers that publish their policies online. We found that the most common form of restriction was monetary, meaning limits on how much money you could get back as a refund. Second most common were effort-based descriptions like asking customers to retain receipts or fill out a form for return. The average deadline across stores for returns was 57 days. The average restocking fee – a fee on returns that counts against the amount the consumer gets back — was 14%. And 93% of the firms did not offer refunds on shipping costs. Finally, stores that sold durable products imposed more monetary and effort restrictions than stores than sold non-durable products.

Can retailers do better? We think so. Below we offer six strategies that a retailer can use to selectively offer leniency in order to increase purchases while also reducing returns.

• Be selectively lenient based on cause of the return. For example, Gap has a return policy of forty-five days for any exchange, but offers an unrestricted return policy for all defective products.
• Be selectively lenient based on time. Niemen Marcus offers 100% money back for returns less than 60 days after purchase, 75% back for 60 to 120 days after purchase, and so on.
• Be selectively lenient for cheaper products that need a quality prop. Allowing private label brands to have ‚Äúdouble-your-money-back‚Äù might increase quality perceptions of the brand, since lenient return policies not only reduce risk perceptions but also act as signals of quality.
• Be selectively lenient for your more important customers. Sam‚Äôs Club requires a receipt (an effort-based restriction) for non-members, but not for its members.
• Start the return policy later so the ‚Äúendowment effect‚Äù kicks in. Force a product trial window that softens the effect of buyer‚Äôs remorse (the regret we feel after we make a purchase) by helping build a sense of ownership, or endowment effect, which increases with the duration of ownership. One way to implement this might be accepting no returns for the first 15 days, and beyond that allowing a 15-day window for returns. As an example, RC Willey gives its mattress customers up to 100 days to make a one-time re-selection from date of delivery, but, only after a minimum of 30 nights of trial.
• Limit gift returns. At Burlington Coat Factory, if the returnee did not make the purchase they are eligible for store credit, whereas if they did make the original purchase they can get cash instead.

Beyond this specific advice, retailers should approach return policies as a balancing act between increasing demand and limiting returns. And they should remember that they have a portfolio of options to choose from when picking a return policy. The right policy depends on the retailer, and what they are trying to achieve.