Marketers and sellers hate product returns, but smart companies aren’t passively accepting them as bitter pills to be swallowed. They’re managing product-return policies to maximize future profits.
Many companies see customers’ product returns as a major inconvenience and an eroder of profits. After all, product returns cost manufacturers and retailers more than $100 billion per year, or an average loss per company of about 3.8% in profit.1 The electronics industry alone spends some $14 billion annually on product returns through reboxing, restocking and reselling. And because only about 5% of products are returned as a result of defects, it appears that product returns will remain an inevitable part of the customer-company relationship even as manufacturing continues to improve product quality.
For some companies, the solution has been to create product-return disincentives, such as limited time frames for returns (say, within 30 days after purchase), product customization that allows returns only when the product is defective, and nonrefundable purchase costs (shipping costs or restocking fees, for example). But are these practices, which reduce the costs and frequencies of product returns, ideal for the bottom line? Despite the company’s handling costs and its revenues lost from refunds, the customer’s ability to return products may have a positive effect on his or her future purchases and actually increase long-term profits.
The Leading Question
How can marketers manage product-return policies to maximize future profits?
- Marketers can target and manage customers by taking information about both their purchase and return behaviors into account.
- Lenient product return policies yield more profits than strict product-return policies.
- Managing product returns in an optimal way increases profits even during tougher economic times.
Several recent studies have in fact begun illuminating the potential benefits of allowing customers to return products with impunity. This research finds that when a company has a lenient product-return policy, which allows customers to return almost any product at any time, they are more willing to make other purchases.2 The knowledge that they can return a product reduces the risk customers might perceive in purchasing it in the first place. The studies also find that a satisfactory product return can provide another touch point for building a successful buyer-seller relationship.3 Reducing customer risk and increasing customer satisfaction, across purchases and product returns alike, can increase the number of future purchases and thus raise the company’s revenue from sales.