If you're in the financial organization of a retailer, chances are that you'll get involved with product return policy. According to an article in the 11/30 Wall Street Journal, "Get Smart About Product Returns," it is a big mistake to assume that fewer returns mean greater profitability. Often it is quite the opposite, insist the authors of the article, academicians who have studied the issue closely.
If a retailer's return policy is unduly strict with regard to time limits and the availability of full refunds, this often acts as a damper on sales. This is especially true with new customers and with old customers who are purchasing new product categories from a given retailer for the first time. If the return policy is too strict, they will be very wary of getting stuck with an item that they decide against keeping.
Discounted sale merchandise tends to be the least likely to be returned. Generous return policies also tend to increase the likelihood that existing customers will refer yet more business.
A study conducted by the authors on sales data from one leading catalog retailer indicated that a 13% rate of returns would be optimal for that company. Customers who return at a lower rate, they conclude, represent untapped sales potential. Shoppers like these should be given, in their opinion, incentives to try new product categories, such as through coupons. Bottom line: the authors find that retailers should understand the factors that lead to returns, analyze this by client segment or demographics, and adjust their marketing efforts in response. In my opinion, financial staff definitely needs to be in on the discussion and the analysis.