Can Product Returns Make You Money?

Many companies see customers’ product returns as a major inconvenience and an eroder of profits. But
recent studies have 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, customers are more willing to make other
purchases, thereby raising the company’s revenues from sales. The authors’ own research extended these studies by exploring the trade-offs between the costs of product returns–particularly when customers deem such experiences satisfactory–and their long-term benefits to the company. Analyzing six years of purchase, product-return and marketing-communications data from “Company 1?–a large national catalog retailer that sells apparel and accessories–they confirmed that ignoring product return behavior, or even trying to discourage it directly by not marketing to customers who return
products (such as by not sending them catalogs), would be a mistake. In fact, managers should embrace
customers’ product-return behavior and offer them a satisfactory experience.

In a field experiment with a second catalog retailer, “Company 2,” which sells footwear, apparel and
other accessories through the Internet and mail-order catalogs, the authors found that under a lenient
product-return policy, customers’ purchases, induced profits and referrals were greater than under a
strict policy (which discourages and limits product returns). These measures could be raised even further through a catalog-mailing strategy that takes into account the expected future profits from each
customer and the relationship between purchases and product-return behavior–i.e., through an optimal
allocation strategy.