by Art Piccio . July 25th, 2012
Wondermark, by David Malki!
Surprisingly, most new entrepreneurs wouldn’t give much thought to how their returns policy affects their business. But they should.
All industries are affected by returns policies to some degree; some obviously more than others – you don’t really get a refund on a massage or a concert ticket that often. The retail industry however, has a different story.
According to studies conducted by the National Retail Federation (NRF) and the Loss Prevention Research Council $9.6 to $14.8 billion per year is lost to fraudulent returns alone. One may safely assume twice or more this amount when you include legitimate returns.
With a sizable percentage ( around 2/3) of the 15 trillion US GDP estimated to be dependent on retail consumption, it seems a drop in the bucket. But for small businesses in retail, it’s anything but that.
Larger players like Walmart and Target have a disproportionate share of the market and are able to absorb losses through sheer sales volumes – most others aren’t so fortunate. Small businesses (for our purposes, those with less than 100 employees) comprise over 90% of the players in the retail industry, and estimates put 20% of all small businesses in retail.
Return (or steal) a pair of jeans from Walmart (we’re not saying you should) and you’d be lucky if they notice. Return a pair of jeans bought from a small business, and they might be forced to put it on sale or ultimately discard. This means lost time and opportunities to sell it to someone without bad intent, and probably a net loss – and they’d feel it.
Crafting a good returns policy isn’t just something entrepreneurs looking to make a dent in the retail industry have to pay attention to. Wholesalers, manufacturers -pretty much all businesses on and off-line are faced with scenarios where they may have to refund their customers in case when they mess up. History and common sense tells us mistakes are inevitable – especially in a field as human as business.
When you make a returns policy first you must ask yourself how this fits in not just with your bottom line, but with your branding. Zappos made waves with its extremely generous returns policy, paying for shipping and even allowing purchases made on Feb. 29 to be returned the following leap year!
We wouldn’t recommend you do the same unless you’re able to manage levels of customer service similar or better than Zappos in other areas. We definitely won’t recommend such a generous policy in all instances. The way you treat returns has to be tailor made for your business model.
The unfortunate reality though is that while customers will be honest, there are enough bad apples to significantly affect things for everyone. The incidences of “friendly fraud” where purchases are made with no intent of long-term ownership (such as buying tools for a short-term job, only to return them) are enough to force everyone to include the losses as part of the cost of doing business.
And unlike Walmart or Zappos, smaller businesses have a harder time compensating in volume.
What’s a new entrepreneur to do? Make your returns policy restrictive, and you lose goodwill – which you’ll need a lot of when you start out. Make it too lax and people will abuse it. Fortunately there are a few rules of thumb to help newbies on their way:
In a lot of cases you can afford to get away with a fairly generous return policy. Fast food joints and salons for instance, generally don’t make it too hard to get refunds or do-overs since profit margins are generally high – and you’d just lose out on labor and opportunity costs and time.
In other cases you can’t – custom musical instrument makers or high-end car detailers for instance, may not have such a generous policy as all material, labor, and time inputs are significantly higher.
It’s not like they could afford to just take a return and sell what they made at marked down prices. Secondhand stores and thrift shops can even get away with denying any and all returns. Also note that online retailers need a return policy because you need to address a customer’s inability to actually experience items first hand. So online entrepreneurs, bookmark this page.
Using the Zappos example, they allow returns up to 365 days after purchase, and up to four years if the purchase was made on Feb. 29. Why don’t they just have a 4 year return policy for everything then? Because they might be cute, but they certainly ain’t dumb. They’re prepared to absorb the losses of their current policy and write it off as part of their branding costs. Don’t give yourself more trouble than you’re prepared to get.
If a child couldn’t understand your policy after a short run-through, revise it. It should be less complicated than a board game, and kids get those. This also makes it less likely customers will make mistakes when attempting returns.
If they make honest mistakes and end up not getting a return, then you’d better hope that it wasn’t a regular customer you just disappointed. Also make sure that there is no question at all about who will be covering shipping costs. Just remember – it always looks better if you offer to pay for shipping.
Inconsistent returns policies not only make them easier to exploit, they can also tick-off customers with legitimate reasons for making returns and hurt good-will in the process. This can’t always be done if you’re operating in several markets, but as much as possible you’d want to reduce the number of exceptions.
We’ve all experienced nasty surprises when we’ve found we can’t get refunds just because an item you bought was purchased in a different branch even though it was from the same company. Updated inventory, communications, and point-of-sale systems can help you reduce the need for inconsistent policies.
Many businesses that sell high-end or specialty products such as Zippo and Saddleback Leather offer to instead replace or repair damaged and defective goods in part or as a whole. Not only does this preserve any personalization or favorable wear-and-tear on a product, it has an environmentally-friendly cachet as well.
Pretty self-explanatory. As your business grows and your markets change, you’ve got to be aware that what was good for your business a few years back might not be the best thing right now.
Many entrepreneurs think nothing of updating their stores or websites in order to facilitate a better customer experience. Well, returns are all about the customer experience. Updating these policies to respond to changes is not just a way to respond to abuse- it can also be a way to better customer relations as well.
You might enjoy our Basic Marketing Concepts series!
The Marketing Mix: The 4 P’s of Marketing
Customer Relationship Management
The Sales Process
The Purchase Funnel
Arthur Piccio manages YouTheEntrepreneur and has managed content for major players in the online printing industry. He was previously BizSugar's contributor of the week. His work has appeared multiple times on The New York Times' You're the Boss Small Business Blog. He enjoys guitar maintenance and reading up on history and psychology in his spare time.