Magazine Spring 2010 Research Feature

Can Product Returns Make You Money?

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.

J. Andrew Petersen and V. Kumar Reading Time: 12 min 

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Image courtesy of Flickr user cafemama.

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?

Findings
  • 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.

Topics

About the Authors

J. Andrew Petersen is an assistant professor of marketing at the Kenan-Flagler Business School, University of North Carolina at Chapel Hill. V. Kumar is the Richard and Susan Lenny Distinguished Chair in Marketing, executive director of the Center for Excellence in Brand and Customer Management and director of the Ph.D. program in marketing at the J. Mack Robinson School of Business, Georgia State University, Atlanta.

References

1. D. Blanchard, “Supply Chains Also Work in Reverse,” IndustryWeek, May 1, 2007.

2. N.N. Bechwati and W.S. Siegal, “The Impact of the Prechoice Process on Product Returns,” Journal of Marketing Research 42, no. 3 (August 2005): 358-367.

3. A.B. Bower and J.G. Maxham, “Customer Responses to Product Return Experiences,” working paper, McIntire School of Commerce, University of Virginia, 2006.

4. J.A. Petersen and V. Kumar, “Are Product Returns a Necessary Evil? Antecedents and Consequences,” Journal of Marketing 73, no. 3 (May 2009): 35-51.

Acknowledgments

The authors would like to thank Company 1 and Company 2 — two major catalog retailers — for providing data and running a field experiment for this study.

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Comments (4)
Marie Rose
Great article! Indeed, vendors tend to earn more repeat business, and therefore money, by handling product returns the right way.

Proper product returns handling is a classic "Risk Reversal" strategy to make the customers feel that they do not have a risk of making the purchase.

Actually, only if most sellers implement a quick returns management system and make it really obvious for customers then that feature alone can help remove buyer's remorse. 

Here's what sellers specially those with online presence must do right away. Rollout a returns management system similar to this popular system http://RMAportal.com - immediately your site's reputation will get better. Other than a sophisticated returns processing, you can also get a much better idea of what items tend to be most problematic.

In addition, giving customers unexpected benefits would really help. An an example, Zappos (online shoe retailer) is  doing this by shipping orders much faster than what the customer originally expected.
TashiaMBurton
Here in the states returns usually have to 14-30 days after purchase with original receipt when returning.  I have also know people to go buy some extravagant dress for a wedding or social event wear the dress then return it after wearing it, to me that is abuse of some sort.
Steve
Certainly in the UK there is a law that expressedly permits you to return items for any reason whatsoever for upto 14 days after purchase. I've known people buy an item of clothing for an event, wear it to the event and then return it!
The law here is somewhat being abused I would suggest. How it could be tightened up but still allow genuine returns though is another question and a very difficult one at that
nomadichie
This article is an eye opener. it makes a great deal of sense to note that a company with a "satisfactory product return can provide another touch point for building a successful buyer-seller relationship." However, from my personal observation, the collorary argument "...benefits of allowing customers to return products with impunity" seems to more often than not, hold sway. Little wonder why the term Jay Customer was introduced into the management literature. 

I have, nonetheless, also written about a new jargon in the management literature "jaymarketer" in my description of Egg Card's decision to fire over 160,000 of its "unprofitable" customers in the UK - where my arguments on the potential loss of business for these kinds of firms was underlined. Perhaps the UK budget hotel chain, Travelodge, may also take a cue from this article for refusing to refund my booking which was for reasons beyond my control - the volcanic ash disruption of air travel in Europe.