Will a lenient returns policy drive sales or drive you out of business?

Many businesses wrestle with how generous we should be with our returns policy. Too lenient and we risk losing time and money processing refunds, too stingy and we risk losing the sale in the first place.

Thankfully, there has been some research on getting the balance right.

The role of a returns policy in the sale

Before we get into what your policy should be, let’s remind ourselves why a returns policy is important in the first place.

From a behavioural perspective, anxiety is the number one killer of conversion. People will simply not proceed if they feel scared about what the commitment – clicking a button, giving you their email, or agreeing to purchase – entails.

That means that if you are selling something, whether in person or online, your task is to reduce this negative tension and get them over the line. One of the key strategies to do this is by giving them nothing to lose.

“Nothing to lose” means taking away reasons for any uncertainty.

Social norms (eg testimonials and reviews) are useful in this regard to show that other people have done business with you and that you can be trusted.

But the most powerful approach is to guarantee your product or service, and that can include your returns policy.

A returns policy signals to the prospective customer that you stand behind your product and that they will not be left stranded if it is not what they expected. By taking away their fear, you increase your odds of commitment.

How generous should you be?

We may all love the concept of providing our customers with a returns policy, but when it comes to the crunch, processing a refund hurts our cash flow and stock levels.

How can we be sure that offering a generous returns policy won’t come back to bite us?

First, keep in mind that processing a refund is a very tangible, salient cost whereas it’s hard to quantify sales you missed out on by not having a returns policy. That means you will overweight the ‘cost’ of your returns.

Second, take comfort in knowing that the net effect will be a positive one.

Researchers recently undertook a meta-analysis of 21 related research papers across over 11,600 subjects. They found that while overall, the more generous the returns policy, the more likely it would be to increase returns, it would also be more likely to increase purchases to a greater extent. So returns go up, but purchases go up more.

Further, the researchers discovered that you can design the extent and terms of your returns policy to drive desired behaviour.

To increase purchases, for instance, a policy that gives a refund in full is more attractive than an exchange or partial refund. Likewise, a returns process that perceived as simple for the customer is more likely to increase their willingness to purchase.

To decrease returns, on the other hand, the researchers found a longer rather than shorter returns policy more successful.  What? Surely that should be the other way around? No. Perhaps counterintuitively, longer returns policies (eg 90 days vs 30 days) decreased people’s likelihood to seek a refund, with the researchers hypothesising that the longer someone possesses the item the greater sense of ownership they feel (aka the endowment effect).

Lastly they found that having a generous policy in terms of what you would accept as a return (eg sale items) would increase returns.

So, the upshot is this. Although it feels risky and uncomfortable to offer a generous returns policy, and you may end up with fractionally more returns, the growth in your sales will outweigh any downside. Guaranteed.

Bri Williams runs People Patterns, a consultancy specialising in the application of behavioural economics to everyday business issues.