In today’s fast-paced, highly competitive business world, top-rated customer service is everything — but as a business owner, where do you draw the line?

Creating a return policy is a prime example. Approximately 5-10% of in-store purchases are returned, rising to 15-40% for online purchases. With the way eCommerce continues to grow, this could become a trillion-dollar problem for online retailers. Research suggests that return rates over 20% can be high enough to wipe out a retailer’s profit. 

One of the reasons for these high rates is lax return policies. Companies are trying to remain competitive, but at what cost?

Here’s how to create a return policy that benefits both you and your customers. 

Why a Good Return Policy Is Important 

Being in business is tough. It’s a constant balancing act between what’s best for your business and what’s best for your customers. When you find that happy medium, success will follow. 

Research shows that return policies influence consumer buying habits. A Voxware survey reported that 95% of consumers say how well retailers handle returns determines whether they support that retailer in the future. For example, when it comes to online purchases, 88% of consumers surveyed said they want to have the option to return items to a physical location or through a pre-paid shipping method. 

The link between a good return policy and customer satisfaction remains clear. How you handle the returns process influences customer loyalty and your brand’s overall reputation, both of which impact your ongoing growth and success. 

Read more: How understanding your customer experience can boost revenue

The Psychology of Return Policies

Researchers at the University of Texas-Dallas looked deeper into how return policies affect shopper behavior. The goal was to determine whether lenient return policies — for example, offering customers a lengthy period for returns — help or hurt a business. 

These findings were based on a meta-analysis of 21 research studies, which included a total of 11,662 subjects.

As expected, a lenient return policy did correlate with more returns. However, there was an even stronger correlation between a lenient return policy and an increase in purchases. This means that retailers benefit from reassuring customers with a return policy — but only under certain circumstances. 

Not all return policies are created equal. Some of the characteristics of a return policy that the researchers looked at included:

  • Time, such as whether a customer has 14 days or 90 days to return 
  • Money, based on whether a customer will get a full reimbursement 
  • Effort, relating to what someone needs to provide, such as a piece of ID or a receipt 
  • Exchange, relating to whether a customer is limited to store credit 

What was surprising was that greater leniency on time limits was linked to a reduction in returns. This may be because a longer time frame creates less urgency around the decision to bring something back.

The researchers concluded that there are many variables to consider and it is complex to pinpoint the most “optimal” return policy. However, it may be best to create more detailed, complex return policies that have different rules for different products. These policies could be based on different segments. 

How to Create a Return Policy That Benefits Everyone

When wondering how to create a return policy, one of the most important things is to be clear about what the policy is. This makes consumers feel more secure. For example, when a retailer offers a guarantee on the products they sell, consumers often see this as a reflection of trust. Retailers are confident in what they sell, which makes customers more comfortable when purchasing a product or service. 

So, what type of return policies are retailers offering? Harvard Business Review published their findings following an analysis of 79 U.S. retailers. 

  • The most common form of restriction was monetary, with limits set on how much money customers could get back as a refund 
  • The second most common was based on effort, with retailers asking customers to fill out a form or retain receipts 
  • The average restocking fee was 14%
  • For online returns, 93% of businesses did not offer refunds on shipping costs 
  • Stores selling durable goods had more effort and monetary restrictions than stores that sold non-durable goods 

Based on these findings, six strategies were offered to help increase purchases while reducing returns. 

  1. Be selectively lenient, considering the cause of a return. For example, you may offer a return policy of 30 days if a consumer wants to make an exchange but offer an unrestricted return policy if an item is defective. 
  2. Be selectively lenient based on time. For example, you may offer customers 100% money back for returns within 30 days of purchase or 50% back for returns within 30 to 60 days of purchase. 
  3. Be selectively lenient for cheaper products to increase quality perception and risk perception. 
  4. Be selectively lenient for VIP customers. For example, if you have a membership program, you may require non-members to present a receipt for returns, but not members. 
  5. Begin the return policy later to initiate the “endowment effect” — which makes it more likely that a customer will place a higher value on something they already own. This makes it more likely that they will keep a purchase. To do so, force a product trial. For example, you might not accept returns for the first 15 days, and following that period, a 15-day window for returns. 
  6. Limit gift returns, making a returnee that did not make the purchase ineligible for a money-back return. Instead, they will receive store credit. 

About NMA

NMA is a merchant advocacy group dedicated to reducing or eliminating the unnecessary fees associated with accepting credit card payments. Since 2004, NMA’s payment processing solutions have been delivering tailored solutions, best-in-class customer service, and high-quality service offerings for businesses across multiple industries.Whether it’s high-risk or low-risk, brick-and-mortar or eCommerce, NMA will create the best processing experience for your company. For more information, visit us at www.nationalmerchants.com or call (866) 509-7199.