Return rates add up to a big negative on the balance sheet, driving many retailers to revisit their returns policies and often, tighten the rules in an effort to stem the losses.

It’s much more productive, though, to look at returns policies as a positive. Because it turns out, a great policy can actually drive consumers to buy more. That’s just one of the counter-intuitive findings that researchers have uncovered about returns policies.

For example, the top finding from a meta-analysis of 21 academic papers conducted by researchers at the University of Texas-Dallas, published in the Journal of Retailing, was that leniency in return policies increases purchases more than it increases returns. It has a lot to do with reducing customers’ feeling of risk associated with the purchase.

Research from ComScore confirms the power of leniency:

Source: Online Customer Experience Study, May 2012, By ComScore for UPS

But leniency isn’t the only factor in a well-crafted returns policy.

Think of returns policies not as the gearshift in your car, where generally you pick one gear and go with it. Instead, returns policies are more like the levers on a music synthesizer, with each rule – time limits, covered products, stocking fees, etc. – a separate control that can be finely manipulated to arrive at the right policy for your business.

Get those return policy settings just right, and you can both limit “bad” return behavior that hurts your business and drive “good” return behavior that fosters long-term relationships with high-spending customers.

Professors J. Andrew Petersen of the University of North Carolina at Chapel Hill and V. Kumar of Georgia State University have studied returns for years, and have discovered that “a satisfactory product-return experience can lead to increases in customers’ future purchases and referrals and in the profit they yield for the company.”

The University of Texas-Dallas researchers identified the five key returns levers as:

1) Time: The deadline for a return. Researchers determined that allowing a long deadline to return the product reduced product return rates. They attribute this to the endowment effect: The longer consumers keeps a product, the more they get attached to it they become and less likely they will be to return it.

2) Monetary: Whether a full refund or a portion of the purchase price is refunded, as well as who pays shipping. A National Retail Federation study found that about 59% of retailers currently offer free return shipping, which research by JDA Software and others have found is important: JDA found 62% of consumers are frustrated when asked to pay for return postage and packaging.

3) Effort: The steps customers must undertake to return a product. The JDA research also found 88% of customers agree that ease of product returns is a key factor in where they shop. Omnichannel return policies are often about reducing the effort and increasing convenience for customers by giving them lots of return options.

4) Scope: The categories of items considered “return-worthy,” such as whether sale merchandise can be returned. University of Texas researchers found making more products returnable increased sales, because they cause the consumer to take a chance on a product knowing they can send it back.

5) Exchange: Whether returns are for cash refunds, store credit or product exchange. It’s important to understand how customers feel about each option: McKinsey & Company determined that a single negative experience has four to five times greater relative impact than a positive one, so retailers want to get this right.

There is no one correct setting for each of these levers. As one the University of Texas researchers told The Washington Post, “Depending on whether it’s a durable good or a consumable good, whether it’s high-fashion or fast-fashion, those different segments of the market have different reasons for buying and they have different concerns for risk and quality.”

To find the right balance, it’s important to remember that returns policies are about customer behavior. This means gaining a deeper understanding of your customers. One valuable but often neglected strategy for doing so is by collecting better information about returns than most retailers do now. Here’s how:

1) Get better customer feedback. Rewrite the reason codes on returns forms to really fit what you sell. Include a comment box so customers can describe the issue in their own words. Collect social media comments that mention returns. Customers want to know you care about their experiences with your product, and you want to understand their behavior.

2) Take a closer look at returned goods. Build a process for returns staff to inspect products that come back and note not just reason codes, but also visible problems with the item, as well as the vendor, product categories, etcetera. Encourage free-form notes on product condition. Consider taking images of returned goods.

3) Quickly spot patterns in returns though analytics. With these two steps in place, you will quickly build a database of returns data. Locked inside are all sorts of insights about your customers and their returns behavior. The best way to get them out is through returns analytics tools that quickly spot patterns, but even a simple spreadsheet can already reveal some trends in data.

4) Apply what you know about customers. Chances are you have already segmented your customers for marketing purposes. Matching up segments to returns patterns can reveal behaviors you want to encourage, such as your best customers buying multiple sizes and returning those that don’t fit, when those purchases lead to more buying. All these insights will help you set return levers at the spot that best fits your business needs, products, and most importantly the behaviors of your customers. Knowing why they return is just as valuable as knowing why they buy, and by applying analytics to gain insights into those behaviors, you can craft returns policies that speak to what’s important to them. Thanks to the granular control of ecommerce, it’s possible to test different return policies with small groups of customers to help fine-tune those levers to reach the right balance, or even offer different policies to different segments.

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According to Aberdeen Group, more and more businesses are catching on to the connection between customer satisfaction and returns: 64% are targeting returns management as an avenue to improve overall customer satisfaction. The more retailers can understand why their customers buy and what their concerns before making a purchase, they better they can craft return policies that balance cost control with the customer preferences, and transform returns from a money pit into a profit center.

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Peter Sobotta
Peter Sobotta is the Founder and CEO of Return Logic, a software and analytics company that enables retailers to manage and optimize their product returns strategy. Peter is a known industry expert and thought leader in the field of reverse logistics, ecommerce and supply chain management.