Product returns have become the new normal of e-commerce. The dramatic increase in online sales has boosted return rates. As customers can’t physically examine products before purchase, a growing trend is emerging: intentional returns. Many shoppers buy more items than they intend to keep to compare options and systematically send back those they don’t like.
The unstoppable growth of returns has prompted many companies to review their returns policies due to the complexity and high cost of reverse logistics. Some retailers have even started to charge a fee for returns. But new research from Ivy College of Business published in the Journal of Business Research reveals that any changes retailers make in their return policy can become a double-edged sword.
“A retailer’s changes to its return policy, such as limiting the return period, may be perceived as a psychological contract violation by its customers,” says Robert Overstreet, lead author of the research and a Professor in Supply Chain Management at Ivy College of Business, Iowa State University.
Companies need to carefully plan their return policy in order to keep their customers happy
In the study, Stemming the tide of increasing retail returns: Implications of targeted returns policies, the researchers conducted several experiments with over 500 participants experienced in online purchasing to examine their reaction to return policy changes. The results suggest that companies need to carefully plan their return policy in order to keep their customers happy and avoid negative word of mouth.
Beware of generalised return policy changes
When a retailer changes its return policy, some customers may view this modification as appropriate, given the number of people abusing it. But others may see this action as a broken promise.
Companies that need to modify their return policy should avoid tarring everyone with the same brush. “A generalized return policy change may be viewed as a psychological contract violation because all customers are being affected due to the actions of a few buyers who have violated the terms,” says Overstreet. “Our findings demonstrate that customers perceive the generalized return policy change as unfair, and their feelings regarding this type of change are overwhelmingly negative,” he adds.
Instead of applying generalised changes for everyone, the findings point to a better strategy: retailers that need to address increasing returns in their supply chains are better off introducing targeted policy changes. Why? According to the experts, a return policy that only targets buyers who breach a retailer’s terms decreases the likelihood of other customers spreading negative word of mouth about the company.
To shed additional light on the emotional reaction of buyers, the researchers asked participants to express their feelings regarding generalised versus targeted return policy changes.
The results confirm that customers don’t want to pay for other people’s misdeeds. “When the return policy change was generalized, 64% of participants expressed negative emotions, and only 2% showed a positive reaction. However, a targeted return policy change elicited positive emotions from 44% of the participants, while only 13% expressed negative emotions.”
Customer satisfaction and negative word of mouth
The research findings demonstrate a direct link between return policy modifications and fluctuations in customer satisfaction.
When retailers applied a generalised policy change that affected all buyers equally, 45% of the participants indicated that they would speak negatively to family and friends about the change. Many participants showed dissatisfaction with the retailer, with statements expressing strong emotions such as the following: “Not only would I tell my family and friends about that egregious action. I would go on social media and personally roast the retailer and drag its name through the mud. I would tell everyone how unfair the retailer is.”
The research findings demonstrate a direct link between return policy modifications and fluctuations in customer satisfaction
When the return policy was targeted, however, 35% of the participants said they would speak with family and friends to convey that the retailer made a modification without expressing negative feelings. In fact, participants showed a positive reaction with thoughts including the following: “I would talk to family and friends by saying I am happy that they are taking action to protect themselves from cheaters,” or “Yes, we would talk about how great it is that we won’t be paying for others’ misdeeds. Our honesty is going to be rewarded, and we should all rejoice.”
Switching to another retailer
Could changes in a return policy make buyers move on to another retailer? The answer, the researchers say, is a clear yes, but only when customers have started to spread negative word of mouth among family and friends.
“Our results show that once a customer shares negative word of mouth, he or she is more likely to behave consistently with the message and switch to a different retailer’s website,” state the authors.
Embracing communications to drive customer loyalty
One way to mitigate the risk of customers switching to another retailer is to improve communications. The study shows that companies that effectively communicate their returns policy changes can reduce a customer’s intention to spread negative word of mouth.
“When publicizing a returns policy change, retailers should use effective CRM [customer relationship management] communication through multiple channels,” the researchers advise. “Without adequate communication, customers may perceive a psychological contract violation for which they blame the retailer.”
By establishing clear communications, retailers can assist customers as they evaluate the change and prevent them from developing concerns or feelings of unfairness. “When a retailer communicates a change in its returns policy across multiple channels, customers are more likely to accept the modification and have a positive perception of the change and the company.”
The decision to change a return policy shouldn’t be made lightly, as the consequences of any modification can alter customer satisfaction. Companies must examine the pros and cons of their returns strategy — and remember that when making any policy changes, customers are more likely to remain loyal if businesses harness communications and make targeted modifications that only affect those who don’t comply.
Retailers looking into reviewing their return policy would be wise to consider these research findings to make sure the changes don’t become a double-edged sword.
Original research publication: Overstreet, Robert E., Tyler R. Morgan, Russell N. Laczniak, and Patricia J. Daugherty. 2022. “Stemming the Tide of Increasing Retail Returns: Implications of Targeted Returns Policies.” Journal of Business Research 151 (November): 551–62.