managemnet company strategy managemanet How Retailers Can Capitalize on the “Refund Effect”

How Retailers Can Capitalize on the “Refund Effect”

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In 2022, US consumers returned 16.5% of purchases, costing retailers an estimated $816 billion in lost revenue. Research suggests that cross-selling products during the return process is an effective strategy to reduce lost revenue. In many experiments, researchers have found that consumers treat refunds as money already lost, so it is less painful to spend these funds on another purchase, as long as the cross-selling occurs in the left still reissue money in the original payment method to customers and consumers. initially expected to keep the items they planned to buy. The researchers also found that this “refund effect” applied across categories. Creating return policies and practices that are informed by the impact of refunds can reduce the loss of revenue from product returns in a way that benefits both consumers and retailers.

Product returns are a major challenge for retailers. By 2022, US consumers are back 16.5% of merchandise purchases, costing retailers approx $816 billion in lost revenue. Common strategies to reduce lost revenue on product returns include reducing the likelihood of returns by providing more information about products (e.g., reviews and FAQs) and increasing the financial and transaction costs of consumers returning products (eg, shipping costs and limited return windows. ). But the former strategy is expensive for retailers, and the latter is expensive for consumers. Our new RESEARCH REVEALS introduces an effective strategy to reduce this loss of income that benefits everyone: cross-selling products during the product return process.

In six experiments we found that consumers treat refunds as money gone, so spending these funds on another purchase is less painful. Research participants were more likely to spend money from a product refund than a bonus, and were more likely to spend the refunded money than windfalls, such as lottery winnings and tax refunds . We call this “the refund effect.”

In a laboratory experiment, for example, we gave all participants $4. Some of the participants were asked to use the money to buy a stress ball that they later learned they could return, which many did. Others in a control group had no prior purchase. We then offered everyone the opportunity to keep their $4 or use it to purchase a $5 Starbucks gift card at a discount. Only 48% of the control group used their $4 to purchase the gift card, while 78% of the participants who received the refund purchased the gift card. We replicated this study with an online sample where the returned product was a gift card from a big box retailer (ie, Best Buy or Kohls). In this experiment, only 10% of the control group chose to buy the Starbucks gift card, while 25% of the participants with the refunded money used it to buy the Starbucks gift card.

Marketers who understand the dynamics of the refund effect — when, why, and how it works — stand to ease one of the industry’s constant headaches. Here are three things retailers should keep in mind to take advantage of the refund effect:

Cross-selling opportunities occur during the returns process — before reissuing money to customers’ original payment method.

The refund effect is less likely to increase sales after the money is returned to a credit card or checking account. Why? The effect of the refund is dependent on the creation and maintenance of a “earmark” reminding consumers that money is missing. Our research found that when refunded money is pooled with money from other sources the earmark is removed and consumers spend it no differently than money from other sources. For example, research participants were more likely to use a refund from a pair of sneakers to buy a shirt if they had not yet received their money back. Once the money is deposited into their checking account, they are no more likely to purchase the shirt than participants who only saw the shirt online.

Some retailers are already using this cross-selling strategy effectively. Typically, Amazon asks customers if they want to use their return to purchase a gift card. Customers who decline this cross-sell will receive their refund. Clothier Todd Snyder allows customers to use their refund to purchase other products immediately before they send in their return. The rest of their refund will be issued when the return is received. These cross-selling strategies tend to work because customers buy from the refund before getting the money from their returns.

The refund effect only works if consumers expect to lose money.

Our research shows that consumers must first expect to keep the goods and services they purchase to make the earmark that makes the refund effect. “Try before you buy” strategies, where consumers do not expect to pay for returned goods, are unlikely to produce a refund effect when the goods are returned.

For example, research participants who imagined buying two pairs of shoes to try on with the expectation that they would return one pair were less likely to spend their refund on a jacket than controls who only imagined seeing the jacket. and pay out of pocket. Conversely, participants who did not expect to return a pair of shoes when they purchased them were more likely to use the refund from the shoes to purchase the jacket.

The refund effect applies across categories.

Since the refunded money seems to have been lost, the refund effect applies to cross-sold products in the same category and products in other categories.

For example, research participants in a fifth experiment were more likely to spend a refund from a returned bottle of wine on either a gift card from a grocer or from an athleisure brand than on a purchase of any kind of gift card with money from their pocket. This is good news for sellers who offer a variety of product categories.

Sales strategies such as upselling and exchanges during the product return process should equally benefit from the refund effect, and it may be better for customer relationship management than increasing the cost of product returns. . New companies have entered this market. For example, Loop Returns helps 1,500 Shopify merchants, such as Allbirds and Brooklinen, cross-sell, upsell, and exchange products during the product return process, save. 28% of income which otherwise disappears.

The lesson for retailers? Instead of resorting to practices whose harsh transaction costs can keep customers awaysometimes permanently, creating return policies and practices that are informed of the impact of refunds can be an effective way to reduce the loss of revenue incurred by product returns in a way that benefits both consumers and sellers .

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