Admit it, you’re jealous. As hardware (physical product, widget, eCommerce) entrepreneurs, we envy software and publishing businesses when it comes to return and refund policies. Their cost of return is zero. But you, unfortunately, do not have that luxury. Fear not! This is the Definitive Guide to help you craft a customer-friendly return policy, while maintaining your bottom line.
YOUR OWN SALES CHANNELS
These channels include your own eCommerce website, your online market place at Amazon or Etsy, and your own retail store. You have absolute control over the return process and can dictate the customer experience.
RETURN POLICY IS MANDATORY
You need to have a refund policy in place.
In a 2013 study commissioned by UPS and conducted by comScore, more than 3,000 US consumers provided insight into their shopping behaviors, and the results were clear. If an online retailer offers a hassle-free return policy:
- 67% would shop more with that retailer
- 64% would recommend the retailer to a friend
Best selling author and sales expert Grant Cardone puts it perfectly:
“Your return policy isn’t there to make unhappy customers happy. It’s there to increase sales. Your return policy should result in an increase in sales greater than the cost of returns, restocking, and other costs.”
The bottom line: make sure you have a return policy in place.
EASY TO READ
Your return and refund policy should be easy to read. This is not the place for you to bust out words like “utilize” and “synergy.” Derek Halpern, founder of SocialTriggers, studied research from Princeton and confirmed:
“The data is clear. Using big words makes people think you’re stupid. Stop using them!… using big words has also been proven to be a wallet closer. When you’re in business, you might be tempted to over-describe what you do with complex language to make it sound like you’re a badass, but people don’t buy what they don’t understand.”
Here’s the full video.
The bottom line: use simple, concise, and clear language in describing your return policy.
5 FACTORS TO CONSIDER
While every product or business is different and requires an individualized policy, there are critical factors that every return policy should address. Here are the most important ones.
1) Return Timeframe
There are two major considerations when determining your return timeframe.
The first one is credit card and Paypal time restrictions. For example, with Paypal, refunds can only be processed from your account within 60 days. Anything after that and you will not be able to issue a refund to your customers through the system and recover Paypal’s processing charge. American Express and other major credit cards’ refund timeframe is set at 90 days.
Based on this, you might think it’s a good idea to set a shorter refund timeframe. But there is another consideration – psychology.
In a study conducted by Narayan Janakiraman and Lisa Ordóñez from the University of Arizona, titled Stricter return policies: The effect of time to return an item on product returns, the researchers found:
“If stricter return policies exacerbate perceived risk, then from prior research, one would predict that this would lead to increased propensity to return an item…If stricter return policies lead to higher perceived time pressure, this would in turn lead to more returns. Taken together they suggest that less time will lead to higher returns…We show that shorter return time limits create a sense of time pressure that then leads to increased return rates.“
So, the shorter your return period is, the more likely customers will return the item. The trick is to find a balance between the above considerations.
30 to 60 days can be a reasonable timeframe. Of course, you also need to consider the nature of your product. Is it perishable?
2) Return Shipping Fee
Who should pay the return shipping fee? In a paper published in the Journal of Marketing titled Return Shipping Policies of Online Retailers: Normative Assumptions and the Long-Term Consequences of Fee and Free Returns, researchers found:
“When consumers received free shipping on returned items, their purchases over the next two years increased by between 58 percent and 357 percent.”
If you can afford it, offer free return shipping.
That being said, you also need to consider your current profit margin. Is it enough to at least break even?
Increasing purchases over the next two years by 58 to 357 percent is great, but if you aren’t profitable enough and can’t survive through the next 6 months, ask the customer to pay for it.
3) Restocking Fee
A restocking fee is disgusting. I hate it. You hate it. Your customers hate it. Avoid it if at all possible.
A Forrester Consulting research study commissioned by UPS revealed that a restocking fee is the 2nd biggest problem consumers face when making online purchases:
Also, comScore added:
“Consumers find restocking fees to be the most offensive inhibitors with only 33% willing to complete a sale if a restocking fee is involved.”
The bottom line: don’t include a restocking fee.
4) Cash vs Store Credit
Your policy should clearly state whether customers will receive cash or store credit on returns before they make the purchase. In the US, there are no laws mandating when each should be used, so it’s up to you to determine the balance between margins and customer experience. Some suggestions below.
Issue cash refund when:
- You have no product diversity, and customers can’t buy anything else with store credit.
- The product is unopened or unused so you can easily resell it.
Issue store credit when:
- The product is used and you can no longer resell it at retail price.
- The product was on sale.
- The customer wants to return the item after your specified timeframe.
As the business, issuing store credit is better for your immediate bottom line. Do so as long as it makes sense for the customer and does not create a negative experience.
5) Return Fraud Protection
Return fraud happens when a customer purchases an item, uses the item for a period of time, and the subsequently returns it for a full refund. Rinse and repeat. Unfortunately, this is something we all have to deal with and often leads to stricter policies that negatively impact the shopping experience for the honest majority.
According to NFR’s 2012 Return Fraud Survey:
“Overall, retailers estimate 4.6 percent of holiday returns are fraudulent…Wardrobing – the return of used, non-defective merchandise like special occasion apparel and certain electronics – is a huge issue, with nearly two-thirds (64.9%) saying they have been victims of this activity within the last year”
Protecting yourself against return fraud is a vast and complex subject. You need to tweak your policy based on data. However, here are some simple guidelines to get you started:
- Monitor data on your returns. Where are they coming from? How often? Any patterns you can identify? Are all the returns from Nigeria?
- Implement store credit rather than cash refunds.
- Call customers and find out what the problem is – the personal touch will delight honest buyers and deter fraudsters.
- Create high margin products to buffer the inevitable loss due to return fraud.
The bottom line is, protect yourself but make sure your policy doesn’t offend the 95% of honest customers.
EASY, BUT NOT TOO EASY
Make your return process easy, but not so easy and automated that you miss out the chance to talk to customers. Finding out what your customers are unhappy about can reveal valuable feedback on how to improve your products and processes.
Not only that, it can also reduce your return rate.
In a study conducted by Accenture titled Reducing the Quantity and Cost of Product Returns in Consumer Electronics, researchers found:
“By reaching out to customers in the first 24 hours after the purchase, the collaboration cut buyer’s remorse returns by up to 20 percent.”
There are 2 simple ways to engage the customers before they make the decision to return the product:
1) Setup an email auto-responder with Mailchimp or a similar email services. Send out an automated email a few days after the customer receives the item, and ask if they have any questions or concerns. Proactively address anything that comes up.
2) If your business is low volume and high price/margin, pick up the phone and call each customer after they receive their product to check on them.
With the above guidelines in place, structure your team and customer service to make exceptions. Follow the established return policy, yes. But give your customer support staff the power to override it if they see an opportunity to delight or appease a customer.
A single angry customer can have some serious negative impact on your new hardware consumer good company.
“If you make customers unhappy in the physical world, they might each tell six friends. If you make customers unhappy on the Internet, they can each tell 6,000.” – Jeff Bezos, CEO of Amazon
In research conducted by Colloquy, over 3,000 US consumers were surveyed with the following results:
“26% said they are far more likely to spread the word to family, friends and coworkers about a bad experience with a product or service than a good one.”
You might be thinking, and so what if some angry customers blast their complaints over social media, who cares? Well, according to other comScore research commission by UPS:
“One in three of all shoppers and over half of Millennials said their purchases are influenced by social networks…retailers should be on guard as a small but vocal minority post their dissatisfaction. Telling friends and family elevates the reach and influence and can be very detrimental to brands if service levels are poor and response times to social media are lacking.”
The bottom line is, if a customer gets enraged, it’ll usually be more profitable for you in the long run to refund the customer in full, rather than having the person become vocal against your product and brand.
3RD PARTY SALES CHANNELS
In addition to your own sales channels, your products should be in 3rd party retail and online stores.
In most cases, 3rd party stores will have their own return policies, and will override whatever you think is appropriate for your product. Not much you can do here, and your main objective is to prevent people from returning the product through your messaging, packaging, and the product itself. I will go over strategies to prevent returns in another post.
Do you have any strategies that work well for you? Let me know below.
Do you have a friend will benefit from the return policy strategies outlined in this article? Make sure to share it with them.