Lenient Return Policies Can Increase Sales

Lenient return policies can lead to an increase in purchasing, according to a recent study from the University of Texas at Arlington.

A team led by assistant professor of marketing Narayanan Janakiraman analyzed 22 academic papers related to return policies for the study, published in the Journal of Retailing. Janakiraman says the team found lenient monetary return policies—for example, a 100% money-back guarantee—can increase purchases but could also increase returns.

“The idea would be that once you walk into a store, at the time of purchase or when you’re making the decision, if you see that you’re likely to get 100% money back, then it aids your purchase,” Janakiraman says.

He adds that choosing leniency in time or effort may not increase purchases as much as monetary leniency, but it likely results in fewer returns.

In all, the team analyzed five dimensions of returns, including monetary, time, effort, scope and exchange.

Lower Return Hassle Leads to Lower Perceived Risk for Customers

J. Andrew Petersen, an associate professor of marketing at Pennsylvania State University, led a study published in the Journal of Marketing Research in April 2015 that found a satisfactory return experience led to a lower perceived risk on the customer’s part for future purchases when the customer is unsure whether a product is exactly what they want. 

“Your willingness to pay goes up when you perceive that you can return the items for less hassle or no hassle,” Petersen explains. “So I might be willing to pay $25 for the shirt at this store but will pay $30 for it at that store because the [latter] store is willing to let me return it if I don’t want it.”

Both Petersen and Janakiraman suggest time leniency in return policies can work because customers feel less pressure to make a decision on the product.

“If you offer people more time, they’re more likely to forget or more likely to postpone making the decision and so forth,” Janakiraman says. He does, however, caution against return policies that are too lenient with time. For example, a lifetime return policy can result in people taking advantage and upgrading as new versions of a product are released.

The perfect return policy, Janakiraman says, depends on the type of product and consumer. If a company wants to increase purchases and is not concerned with what the returns are, he suggests offering 100% money back; however, for companies with products that are too expensive to be returned or have an expiry datem, he recommends offering some restrictions such as restocking fees.

Considering Returns and Which Customers Make Them Can Steer Marketing

“Many, many companies we talked to haven’t looked at the return side of things,” Petersen says. “And if you don’t factor in both how much a return impacts your bottom line as well as how that return might influence somebody’s behavior, you aren’t as good at predicting whom you should allocate your marketing efforts to.”

Customers who do not buy much but also have low return rates may be encouraged to engage in behaviors that can lead to more purchases, but could also lead to more returns. Petersen gave the example of cross-buying. If a customer regularly purchases products in one category—shirts, for example—the company can offer a coupon for another category, such as shoes.

“We found that cross-buying usually leads to more returns because you’re exploring a new category that you’re not as familiar with,” Petersen says. “But now if I get you buying shirts and shoes, I’m getting more of a share of your clothing budget, whereas I was just getting the shirts before.”

He says a positive return experience can make customers more likely to venture into a new category, and a store may not have to offer as deep a discount for this customer to consider purchasing.

Marketing can also be tweaked for those who return a lot of items. Petersen says people are less likely to return items they purchase on sale, so sending sale fliers to customers with high product return rates could be one way to increase sales to such customers while decreasing returns.

Lenient Return Policies Can Strengthen Customer-Company Relationships

Janakiraman says his informal conversations with firms suggest there are a variety of reasons people return products, so different return policies can prevent customers from returning something or aid in a purchase without worrying about returns.

Petersen says companies often think a lenient return policy will cost them, but he argues that the experience can be a positive one.

“There’s potential that giving somebody a satisfactory return experience is another interaction that strengthens the relationship,” he says. “That can lead to incremental buying by that customer, as well as potentially spillover effects of referrals, word of mouth and other things.”

Article Citation

J. Andrew Petersen and V. Kumar (2015) Perceived Risk, Product Returns, and Optimal Resource Allocation: Evidence from a Field Experiment. Journal of Marketing Research: April 2015, Vol. 52, No. 2, pp. 268-285.