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Lenient Return Policies Increase Lift

Peter Sobotta
March 8, 2016

When you’re watching your post-holiday product return rates creep up, it’s tempting to clamp down with tighter return policies in an effort to stem the losses. Don’t do it.

Lenient Return Policies Drive More Sales

The lenient product return policies fueling higher return rates do indeed correlate with more returns. But they are even more strongly correlated with an increase in purchases and sales lift.

A team of researchers at the University of Texas-Dallas proved it by sifting through dozens of academic research papers that looked at purchases, returns or both. They chose 21 papers from fields including economics, marketing, decision science, consumer psychology and operations research and conducted a meta-analysis of their findings. The study was published in the Journal of Retailing.

The academic team’s overall finding was that leniency in return policies increases purchases more than it increases returns. But they also uncovered some strategies retailers can use to fine-tune their returns policies to accomplish their business goals. Researchers found they can do this through five product returns policy levers:

Time: The deadline for a return.
Monetary: Whether a full refund or a portion of the purchase price is refunded.
Effort: The level of hassle imposed on customers to return a product
Scope: The categories of items considered “return-worthy,” such as whether sale merchandise can be returned.
Exchange: Whether returns are for cash refunds, store credit or product exchange.
 

One finding was that leniency in scope – making more products returnable -- increased returns, because they cause the consumer to take a chance on a product knowing they can send it back.

Another finding sounds counter-intuitive, but here it is: Leniency in time – allowing a long deadline to return the product -- reduced product return rates. Researchers speculate that’s due to the endowment effect: The longer consumers possess a product, the more attached to it they become and less likely there will be a product return. So an effective way reduce or prevent returns is to extend returns deadlines. When apparel retailer 3rd Power Outlet extended its return policy from a 14 to 90 days, it decreased returns and increased sales, according to DigiDay.

The right product return policy for a particular retailer depends on their unique situation: Business goals combined with the nature of the products they sell. As researcher Ryan Freling, a UT Dallas doctoral candidate, told The Washington Post, “Depending on whether it’s a durable good or a consumable good, whether it’s high-fashion or fast-fashion, those different segments of the market have different reasons for buying and they have different concerns for risk and quality.”

As the UT researchers have highlighted, very little about products returns is intuitive. Close analysis of returns and sales data reveals important lessons, some of them counter-intuitive. Tracking and analyzing returns data is a must for retailers looking to thrive in a customer-centric world.