4 steps to a fair returns policy

8th December, 2015

Whether you’re an online retailer or a traditional bricks-and-mortar shop owner, your existing sales return policy could either sink your business or make it flourish. 

If you adopt a more restrictive and complex returns policy — where shoppers feel like you are trying to manipulate or catch out them out in the fine print — you will do more harm than good to your long-term sales.

A simple and hassle-free return policy can boost your sales because shoppers will be more willing to buy from you when they know they can return purchases without any problems. On the flip side, too generous a returns policy will drain your profit and valuable cash flow.

Here are tips to help you design and implement a simple but yet fair returns policy to build repeat customer loyalty and boost your bottom line performance.

1. Know consumer rights

The Australian Competition & Consumer Commission (ACCC) outlines certain guidelines that retailers must follow when goods are returned to them. A simple check on the ACCC website is essential for you stay within the law and know your own rights and as well as your customers’ rights. The last thing you want is to get into a heated argument with a customer who then takes legal action against your store, your business and your brand.

2. Know your industry – online versus bricks and mortar

Published industry statistics show that bricks and mortar stores have different return rates than online businesses. For example, with the traditional physical store, the hassle of the customer getting into their car, driving back to your store, finding a parking space, getting out and then bringing the product in is often a barrier to making a return. Therefore, return rates for this market are typically lower when compared to online retail.

However, if you’re an online retailer, your return rate can be as much as 30 percent of your sales, especially if you have a free postage return policy. You’re at the whim of your online customer who can simply repackage your product and drop it in the nearest mailbox, at no cost to them. You then have to wear the cost of return postage, including the cost of restocking, reshelving and processing the refund. This can bite into your bottom line if not controlled properly.

As an online retailer, it may be worthwhile to design a return policy that will charge the customer a restocking and return fee. You don’t want to have thousands of products returned to you simply because people changed their mind and you made it too easy to do so.

There is also a cost of your staff’s time to manage returned goods. You need your customers to understand that they could bear this cost. Legitimate returns for products that don’t work or do not live up to their expectations must be accepted. Consider taking these situations into account with your suppliers — they should wear some of the risk for products that don’t work.

READ: 10 steps to keeping your customers happy

3. Segment your products into high-return risk categories

Market research has shown that certain product categories tend to be returned more often than others. Products that are fit sensitive, such as clothing, shoes and apparel, tend to be returned at a higher rate simply because they don’t live up to customer expectations in terms of exact fit, look and feel.

Other products such as electronic consumer goods, books and domestic household goods are not fit sensitive and hence have a lower rate of return unless they are faulty.

Consider segmenting what categories your products fall into and plan a return policy accordingly to match the return risk level. A tighter return policy may be appropriate for fit-sensitive items that can be returned because the customer doesn’t like the colour or the exact fit. A weak policy on high-risk return products will eat into your bottom line. You need to protect your business against this.

For low return risk products, have a simple and generous return policy. This will go a long way to building customer loyalty and repeat buying.

Here are two examples that demonstrate this point:

Point 1: Fit-sensitive products: If your gross annual sales of clothing and apparel is approximately $400,000, then applying a 30 percent return rate means $120,000 worth of sales will could be returned and refunded. It will also cost your staff time for restocking and processing these returns.

Point 2: Non fit-sensitive products: If gross annual sales of your domestic products are $400,000, then using an industry average of 10 percent sales returns, then you are facing only $40,000 in potential sales returns.

Design and implement a returns policy that is simple and easy to use but takes into account the nature of what you sell. Consider incentives such as free shipping to the low risk categories, but a shipping and restocking fee to the higher risk categories.

4. Encountering exploitative customers

While having a simple and hassle-free returns policy builds customer loyalty, be careful that it doesn’t get exploited by manipulative customers who return goods after they have used them.

In one episode of Seinfield, Elaine tries to return a dress to the store claiming that she hadn’t worn it. Truth be told, she only purchased the dress to wear to a function that night with the intention of returning it the very next day. The dress ends up stained, and the shop refused to take it back and issue a refund.

To help you avoid the “Elaines” of the world, have a strict policy on those types of items, typically clothing and apparel, where you will not accept items that have been worn or used unless they are truly defective. Have clear wording and signage in your shop and online explaining your policy of only accepting returns that are new and unused.

Don’t forget, it is your business and cash flow and your bottom line are critical.

Having too generous a returns policy may see your profits diminished by manipulative shoppers. At the same time, you are also in business to build and retain a loyal and repeat customer base. Find a balance between the two and reap benefits for you, your business and your customers.