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Marketing & Strategy Innovation

Customers Who Return Products – Not as Bad as We Thought?

by John Caddell on 2 December, 2009 - 23:31

There’s been lots written about customers who deserve to be fired. “Bad” customers call customer service constantly, return products willy-nilly, and otherwise misuse the gifts that corporations bestow on them with their products and services.

But there’s another side to the story. By clamping down on returns (or even selectively penalizing “serial returners”), companies can depress their overall sales, write Andrew Petersen of the University of North Carolina and V. Kumar of Georgia State University in the most recent WSJ Business Insight section (”Get Smart About Product Returns“):

For every retailer, there is an optimal rate of returns. Higher returns, up to a point, have been shown to result in higher future sales. So if the rate of returns is too low, the retailer is missing out on potential sales. But if the rate of returns is too high, the costs to the company outweigh the benefit of the increase in sales.

Petersen’s and Kumar’s insights are based on their study of a large catalog retailer. They compared sales during a period with a liberal return policy with another period with a more restrictive return policy. In this brief podcast, Petersen further illuminates their findings. Lenient return policies caused purchasers to buy more, and also encouraged referrals, which were found to be extremely valuable. In the end, the amount returned by frequent returners (and the study found them – 5% of shoppers made 75% of all returns) was outweighed by the increased purchases from all other shoppers.

Retailers dwelling on getting ripped off by “serial returners” would do well to think about what their policies do to all the other customers out there, who end up buying somewhere else.

[Here's a little taste of the moral quandary posed by returning a product that you shouldn't.]