Free product returns have major impact on future sales, study finds

The study, "Return Shipping Policies of Online Retailers: Normative Assumptions and the Long-Term Consequences of Fee and Free Returns," was conducted by Amanda Bower, professor of business administration/marketing at Washington and Lee University's Williams School of Commerce, Economics, and Politics. She was the lead author with James G. Maxham III, the Chesapeake and Potomac Telephone Company Professor of Commerce at the University of Virginia.

The research was conducted in field studies with two leading online retailers over 49 months using two surveys and customer spending data. It demonstrated that when consumers received free shipping on returned items, their purchases over the next two years increased by between 58 percent and 357 percent.

In contrast, when consumers had to pay for return shipping, their subsequent purchases decreased by between 74 percent and 100 percent.

Product returns are a widespread and expensive problem for retailers. For example, product returns of consumer electronics cost retailers and manufacturers almost $17 billion in 2011, representing a 21 percent increase in returns since 2007. Consequently, online and distant retailers are motivated to limit or avoid paying return shipping costs.

According to Bower, many retailers have adopted an "equity-based" return shipping policy, where the retailer determines who is to blame for the product return -- the customer or the retailer -- and assigns responsibility for the return shipping costs accordingly.

"Obviously, their philosophy is that if it's your fault, you'll be fine paying for it, and it won't affect your future spending at all," said Bower. "So we wanted to look at that assumption and determine how consumers actually act. What we found was that, on almost every count, retailers who have these equity-based shipping policies are completely wrong."

The study found that the number one response that determined whether consumers would buy from a retailer again, based on whether they did or didn't pay have to pay return shipping, was regret or the anticipation of regret.

"For example, I've already paid $7 shipping and the piece of clothing arrives at my home. I try it on and it doesn't fit," explained Bower. "Now I've got to pay $7 return shipping, so I'm out $14 and I don't have anything. I've paid that money for the privilege of trying on clothing. So the really dominant driving characteristic is how much do I regret having spent $7 on return shipping in the past, and is it really worth it to risk paying that money again in the future?

"In contrast, free returns are similar to the saying 'What would you do if you knew you couldn't fail?'"

The study also discovered other reasons customers base future purchases on shipping charges. For example, customers believe that retailers have a greater responsibility to absorb return shipping costs as part of the cost of doing business. Equity-based shipping return policies also assume that less blame to the retailer necessarily means more responsibility to the customer, whereas customers assess blame independently -- it could be nobody's fault. In addition, retailers' attempts at assigning blame in a manner consistent with the perceptions of customers are largely inaccurate, getting it right approximately as often as they get it wrong.

Bower noted that retailers do not have to rely on the study to judge consumer sentiment on the issue. "Marketers can look at their own data and see if this is something that would work for them," she said. "It's the proverbial 'don't take our word for it.' The only caveat I would put on that is that if they look at their own data set they should make sure they aren't only seeing what they want to see."

Bower acknowledged that one of retailers' concerns is that people could abuse a free return policy. "It's interesting that for the two years after they returned a product, not one of the customers in our study returned another product. It's fairly easy to quickly find people who are abusing the system. But punishing everybody because of a couple of people is not good for the retailer in the long run.

According to Bower, retailers need to look more at establishing a positive and trustworthy relationship with customers by not trying to make each discrete exchange a plus for the retailer.

"I'm fascinated by questioning and researching fundamental assumptions people make about how consumers behave, and the counterproductive things that marketers do," said Bower. "Retailers need to have a firm grip on reality, on how consumers are actually going to act, not on what retailers think consumers should do or what they consider fair."

The study appears in the Journal of Marketing, Volume 76, Number 5, September 2012, published by the American Marketing Association,