Types of Return Policies

As mentioned in previous articles, return policies can be very important from a consumer’s point of view. There have been several surveys conducted which show that most customers (especially online customers) do take return policies into account before they make a decision to shop with a particular retailer.

Retailers which have stricter return policies have been known to have a higher cart abandonment rate online as well as lower sales in offline stores.

However, having an extremely liberal return policy can also be problematic. This is because consumers may start treating each return as a refund. Hence, the company may lose a lot on a significant amount of revenue. This in turn could have an impact on the long-term value created by the retailer.

The problem is that a lot of retailers have the wrong financial classification for returns. This means that a lot of retailers do classify their returns as a cost centre. Hence, there is an effort to minimize the returns. This can be a counterproductive approach because if customers are not able to return or replace their products in genuine cases, they will start buying fewer products which could have a bigger impact on the bottom line of the firm.

Over the years, retailers have realized that different types of return policies are suitable in different situations. There are many different variants of return policies which must be understood by the retailers before they decide to implement one for their own business.

Variant Exchange

The variant exchange policy is at one extreme end of the return spectrum. This is the most conservative return policy which a retailer could provide to their customers (apart from not providing any return at all).

A variant exchange means that the customer has purchased the wrong size or style of a particular product. In such cases, the customers only want to trade in the wrong product for the one with the right fit or colour.

Even the most conservative retailers would feel that this is a legitimate demand from the customer and it would be inappropriate to ask them to continue with the same product even though it does not meet their needs. As per surveys conducted by retailing organizations, having the wrong size or style is probably the reason responsible for more than half of the returns. Hence, having this basic return policy can also increase the customer satisfaction in more than 50% of the cases without any corresponding loss to business.

Some of the advantages of such a policy have been listed below:

  1. Retailers who offer such return policies are able to retain revenue. They do not have to pay back the money owed to the retailer. Instead, they can simply exchange the product

  2. Customers are more likely to have a positive experience as a result of this exchange. Hence, they are likely to be more loyal and continue with the overall relationship.

  3. Such an exchange policy statistically increases the likelihood that the customer will make a repeat purchase from the same retailer.

New Product Exchange

A new product exchange works somewhat like a variant exchange. This means that the retailer does not pay back the customer in monetary terms. Instead, they provide the customer with an alternative product.

In case of variant exchange, the alternative has to be a variant of the same product. However, in case of new product exchange, the retailer allows the customer to choose from a broader range of products and services. This means that if a customer has purchased some clothing from a retail store, they could exchange the clothing for footwear or accessories provided by the same brand. The exchange could be made for a single product or for multiple products.

However, the important thing to notice is that the refund doesn’t have to be paid back. There are many retailers which provide this type of policy since it becomes possible for the retailer to upsell to their customers. Many times customers end up buying higher value or higher profitability items when they try to exchange their products.

Some of the benefits related to new product exchange have been explained below:

  1. Retailers do not lose any revenue since the cash is not refunded. Instead, a different product is sold to the consumer

  2. Cash flow management becomes easier since retailers do not have to keep cash on hand so that it can be returned to the customers whenever required

  3. Inventory management becomes slightly more complicated since customers can return products after significant time may have elapsed which could possibly make the product outdated.

  4. Creates upselling opportunities which can be used to sell higher value or higher margin items to the customer

Retailers need to be mindful of the fact the new product exchange should not allow customers to purchase products which have been purchased during regular business days with products which may be purchased during periods when special discounts are being provided.

The fact of the matter is that different return policies have different financial impacts on the retailer as well as affect customer satisfaction differently. The two most conservative types of policies which are provided by almost every retailer have been explained above.

In most cases, 75% of the customers will be happy and satisfied even if such basic forms of return policies are implemented by the retailers. However, there are certain types of customers which expect more liberal return policies from retailers.

Store Credit

Store credit is a much more liberal return policy as compared to new product exchange or variant exchange. This is because the customer is given liberty in terms of two aspects. First, they may not be required to pick a product from the same brand or even the same store.

Customers are given store credit which is a credit note i.e. a piece of paper which can be used as money within any store of the same chain. Secondly, the users are given more liberty in terms of time.

When customers receive store credit, it may generally be valid for a few months to a year. Hence, customers are not compelled to pick up another product from the store at the very same time even if they do not like it. They can instead visit the store at different points of time during the specified duration and only pick a product if they like it!

Store credits tend to provide a high level of satisfaction to the customer without causing huge financial losses to the retailers. Some of the benefits of store credit are as follows:

  1. Store credit also helps retailers retain their revenue. As a result, they do not have to go through the hassle of returning cash to their customers which causes hassles such as cashflow management and transaction fees

  2. Store credit creates an opportunity for building customer loyalty. Customers tend to visit the stores multiple times when they have store credit and are likely to make purchases in excess of the credit amount. Hence, store credit actually ends up increasing the sales of the customer.

  3. A lot of the times, customers simply forget to utilize their store credit. In such cases, the amount can simply be booked as profit by the retailer after a certain amount of time elapses.

  4. The availability of store credit policy encourages people to shop for gifts at a particular store. This is because they know that even if the recipient of the gift does not like that particular gift, they can exchange the same for store credit and purchase something they like. This increases the overall sales of the store!

Cash Refunds

The last and the most liberal type of refund policy offered by retailers is cash refunds. In this case, the retailer agrees to return the cash taken from the customer if the customer returns the product unused and without any damage.

Most companies that provide refunds do so within a certain time frame. For instance, refunds will only be provided for 15 days after the sale. This is because of the fact that companies need to account for their revenue and if they provide a very large time frame for refunds, they will not be able to predict their cash flow accurately.

There are certain advantages as well as disadvantages of cash refunds. The details regarding the same have been mentioned below:

  1. Even though cash refunds may appear to be dangerous from the retailer’s point of view, most retailers are aware that a large percentage of customers do not intend to return their products. However, a large number of people do end up buying a lot more if they are assured that they can return the product if they want to. Hence, the financial gain which happens in the form of increased sales is actually much larger than the financial loss which may be caused by excessive returns.

  2. The flipside is that retailers need to provision for returns. They need to make sure that they have enough cash on hand that they can fulfil the promises which have been made to the customers

  3. Cash refunds can also disrupt the inventory management practices of retailers. If multiple customers decide to obtain refund for a certain product, then the company may suddenly face an excess inventory in that product.

  4. When retailers offer cash refunds, they are also more likely to become targets for return frauds. There are many cases where customers try to return used products for refunds.


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Finance in Retail