January is prime time for returns in the retail industry, the month where shoppers show up in droves to trade in an ill-fitting sweater from grandma or to unload the second and third “Frozen” dolls that showed up under the Christmas tree.
This post-Christmas ritual has always been costly for retailers, comprising a large share of the $284 billion in goods that were returned in 2014. But now it is arguably becoming more urgent for the industry to think carefully about return policies, as analysts say the rise of online shopping is bringing with it a surge in returns. The return rate for the industry overall is about 8 percent, but analysts say that it is likely significantly higher than that online, since shoppers are purchasing goods without seeing them in person or trying them on.
Against that backdrop, researchers at University of Texas-Dallas sought to get a better handle on how return policies affect shopper behavior and, in turn, whether lenient policies such as offering a lengthy period for returns actually helps or hurts a retailer’s business.
Overall, a lenient return policy did indeed correlate with more returns. But, crucially, it was even more strongly correlated with an increase in purchases. In other words, retailers are generally getting a clear sales benefit from giving customers the assurance of a return.
But of course, not all return policies are created equal, and that’s where the findings get interesting. The team examined several potential characteristics of a return policy: Time (such as whether you must return within 14 days or 90 days); money (whether or not you get a full reimbursement); effort (whether you must provide a receipt or other forms); scope (whether even sale merchandise is eligible for return); and exchange (whether you’re limited to getting store credit for your return).
One surprising finding: More leniency on time limits is associated with a reduction — not an increase — in returns.
This may seem counterintuitive, but researchers say it could have varying explanations. Ryan Freling, who conducted the research alongside Narayan Janakiraman and Holly Syrdal, said that this is perhaps a result of what’s known as “endowment effect.”
“That would say that the longer a customer has a product in their hands, the more attached they feel to it,” Freling said.
Plus, the long time frame creates less urgency around the decision over whether or not to take it back.
“Since they don’t feel pressure to take it right back to the store, they kind of sit with it and live with it and say, ‘Well it’s not that bad,” Freling said.
(If you’ve ever found a blouse lurking in the back of your closet with the tags on it months after you bought it, this is probably a familiar feeling.)
The researchers found that leniency around the time you have and the amount of money you can get back are most effective in increasing overall sales. Making it easier to return, with no questions asked, for instance, also increases purchases, though not quite as much.
So why does any of this matter? Retailers are desperate to figure out how to curb costly returns in the era of online shopping. This is why you see them rolling out website features such as apparel fit predictors, and it’s why they’re hounding you via e-mail to write a review of your latest purchase. They’re trying to create an environment in which their customers buy the right thing on the first try.
But re-evaluating return policies could be another lever to pull as they aim to get this balance right. The UT-Dallas research suggests that it is complex to pinpoint an optimal return policy. Limits on scope, or what items are eligible for return, were found to be powerful in cutting down the number of returns, even if they weren’t especially effective in raising overall sales. So, a retailer might have to choose what’s more important to the business: Boosting overall sales or cutting the number of returns.
The researchers, who conducted a meta-analysis of 21 research studies that together include 11,662 subjects, suggest that retailers might also want to consider creating more complex return policies that have different rules for different products.
“Depending on whether it’s a durable good or a consumable good, whether it’s high-fashion or fast-fashion, those different segments of the market have different reasons for buying and they have different concerns for risk and quality,” Freling said.