Refund Effect: Why have American retailers changed their refund policies?

Refunds tend to be a problematic obstacle that all companies need to address. On the one hand, one is motivated to have a "no refund policy" as it avoids having to deal with refunds altogether. On the other, having refunds is pretty much a must if you wish to have a decent level of customer satisfaction. So, is there a way to offer refunds without having to bear the substantial financial load of doing so? Is it even possible to use refunds as a way to make a further profit for your customers? Well, fortunately, certain modern approaches help turn a refund from a problem to an opportunity. Let's discuss the refund effect.

Traditional way of dealing with refunds

The traditional way of dealing with refunds simply entails doing whatever is possible to avoid them. This includes:

Detailed product descriptions

A common reason why a person might refund a product is simply because they were unaware of what it entails. This is why companies go out of their way to provide accurate and detailed descriptions of products and services. This includes high-quality images or videos, as well as detailed written content. Clear and transparent information helps customers make informed purchasing decisions, reducing the likelihood of dissatisfaction.

Sizing and measurements

This is mostly related to clothing and other items with size variations. Namely, it is quite common for people to ask for refunds if their clothes don't fit. Therefore, clothing companies provide accurate sizing charts or measurements to help customers select the right size. This reduces the chances of returns due to incorrect sizing.

Effective customer service

Both of the aforementioned methods imply that the customer will do their due diligence, and research your brand before shopping. Spoiler alert, they do not. This is why, to avoid refunds, companies need to offer excellent customer support to address any pre-purchase inquiries promptly. Clear communication can prevent misunderstandings and dissatisfaction, reducing the need for returns.

Detailed policies

Lastly, even though you don't want your customers to refund their purchase, you still need to outline a policy for doing so. And an easy way to disincentive refunds is to make the refund process arduous. It is still vital that you communicate your refund and return policies to customers before they make a purchase. Otherwise, the policy will seem predatory and dishonest. It is important to include information on eligibility, timeframes, and any restocking fees. This manages customer expectations and reduces surprise or dissatisfaction with the brand itself.

These methods all serve to minimize the number and scale of refunds, therefore avoiding their financial burden. As you can imagine, this can have financial benefits but can hurt your brand reputation. With social media and UGC, it is becoming more and more important to present yourself as a customer-friendly brand. And the only way to do so is to have a refund policy that your users will find fair. Well, this is what marketing researchers came up with.

Modern approach

To solve the problem of refunds, marketing researchers took a closer look at how customers perceive them. And, through a couple of experiments, they managed to find something interesting.

How customers perceive refunds

If we take the idea of refunds as it is, there is nothing much to add to it. A customer spends money on something. The customer is not satisfied. You return the money to the customer. Plain, simple, ineffective. But, what if we would to add an extra step?

What the researchers did was to not return the money to the customer, but offer a sort of store credit. So, instead of getting your money back, you are simply asked if you wish to spend that money on something else in the store. You, as a customer, could of course get the money back. But, that is a procedure in it. Meanwhile, buying something else is quick and easy. The result of this, seemingly little change was surprising. It turns out that customers are far less reluctant to buy something if they perceive the money already spent. Mind you, they won't spend it on a similar item that they are getting refunded for, as that already has a bad connotation. But, they will be more than happy to get something else, for the same amount. This is called the refund effect.

The refund effect

In practice, the refund effect is done by utilizing store (or brand) credit for cross-selling. By not outright returning the money to the customer, they will still feel that they should spend it. And because you are not trying to sell them the same product as before, they will have little to no reservations in doing so. In this way, refunds can help boost your sales and encourage customers to do business with you, even if they came to get their money back.

The key aspect is the setting aside of their money. Psychologically, they already perceive it as allocated for spending. If it were a part of the rest of their budget, they would be as ready to spend it as they usually are. But, because that money is put aside, they are far more willing to spend it.

How to best tackle refunds

The refund effect might seem fairly simple in principle, but it can be difficult to implement. The goal is to present the store (brand) credit as a matter of convenience vs the inconvenience of getting the full refund in cash. To make this possible, there are a couple of steps you need to take in mind.

Outline the refund policy

Having a refund policy should be a thing of pride. So, if you do plan on implementing it, don't shy away from promotion. When people make purchases, make it crystal clear that you have a refund policy. In that, you should also outline what the terms of it are. Outline what makes a customer eligible for a refund, and what time window they have to claim it. By doing so you will ensure that your refunds don't come off as predatory, even if they are a bit inconvenient to go through.

An easy road to brand credit

If a person chooses to ask for a refund, and they are perfectly eligible to do so, you should help them get to the brand credit stage as soon as possible. If this occurs online, you should outline a quick and easy journey where they get their brand credit back in a couple of clicks. You can opt to ask them for reviews or to leave a reason why they are refunding their item, but this should be done sparingly. Keep in mind that the customer likely isn't that happy, since they are opting for a refund. Therefore, you should try to get their mind off the undesirable product/service that they've purchased from you as quickly as possible.

A moment of pause

Now comes the tricky part. Here you need to make an offer of cross-selling where they can use their brand credit. Done well, and you might even convince them to spend more money than they already have. But, if not properly handled, it can easily lead to them asking for their actual money. So, this is the crux of the matter that you need to tackle with due care.

Ideally, based on their prior purchase and personal info, you will have a decent idea of what the customer is like. You can use the questionnaire in the previous step to get more personal info about them. The reason for doing so is simple. You want to offer the product your customers will most likely find interesting. This, as you may have already guessed, requires personalization. Age, gender, prior purchasing behavior... All these can give you a better idea of what your customer is like and what they might find interesting.

The more precise you are with this, the more likely it is that your customer will agree to spend their brand credit. Just avoid recommending an item that is similar to the one they've refunded as doing so might rekindle the negative feelings they've just put aside. Keep in mind that you should be aware of any holiday deals or seasonal sales, as offering them can give the customer a fear of missing out on a good deal.

Proceeding with the purchase

If they do choose to purchase something with their store credit, you should make the process as straightforward as possible. Since you already have their financial info, you shouldn't ask them too many questions. Simply assume that it stays the same, and first subtract from their brand credit. Ideally, they will be done with their purchase in two to three clicks.

Opting for a full refund

If, on the other hand, the customer chooses to get their money back, you shouldn't stop them. But, you should make doing so a bit more inconvenient. Feel free to ask further questions about why they are unsatisfied, and whether your brand can improve on something. Keep in mind that this is bound to happen sometime, as a customer who is dissatisfied with your entire brand (not just the item they are refunding) might not be receptive to other items. You can offer them some benefits for keeping their store credit with your brand (like discounts or loyalty points, or try some other way to engage them before they leave. But, at the end of the day, you need to have a system where you will give people their money back.

Final thoughts about the refund effect

All things considered, the refund effect can be a great solution to a fairly modern problem. Customers tend to value good customer service more and more. And a clear staple of solid customer service is a refund policy. Some customers, whether they tend to refund or not, will opt for a brand with a refund policy simply to feel that they have an option to do so. Therefore, having a refund policy will be great for both customer acquisition and retention. The great thing about what we've outlined is that having a refund policy doesn't have to entail a hit on your revenue. It can bring you even more. Especially in the long run. So, consider carefully whether the time has come to introduce and outline a clear refund policy for your brand.