Stop Losing Money on Refunds and Returns
Your previous customer walks back into your shop or contacts you again. For one reason or another, they would like to return their previous purchase and get their money back. What most businesses don’t realize when starting out or releasing new products is the unfortunate reality of refunds and returns. Before we can get into solving this conundrum, what is the difference between them?
What is the difference between a Refund and a Return?
A refund and a return are similar in that they both require the merchant to reverse the funds to the customer for the original sale. The difference is if products are being returned to the merchant in exchange for the funds or if the sale is being refunded without any exchange of goods or services. Typically, businesses that offer physical goods (i.e. apparel, grocery, and other retail products) will offer a return whereas non-physical goods and service providers will only be able to offer a refund.
Refund/Return: the Opposite of What Every Business Wants.
Be it a refund or a return, your company has an unhappy customer or at least one looking to reverse the decision they previously made. If you think that a refund or return will not happen to your business, think again.
According to the National Retail Federation the average retailer has a return rate of 14.5%. That means, for every $100 that an average retailer profits, they only made $85.50! This does not include all the other costs of being a retailer that must be included like your cost of goods, storefront, utilities, employees, and even taxes… and we haven’t even gotten to the fees in accepting that money, like with card processing. If you are an online retailer, your return rates are at 17.6%. Instead of only making $85.50, you made $82.40. If that wasn’t enough, according to Invesp, 79% of consumers wanted free return shipping.
The Solutions
You need to make sure your refunds or returns are as low as possible. But how?
1) Have an “All Sales Final” Policy. This may seem obvious but is easily overlooked. Your business can simply just say “no”. Many businesses choose this, and it can be very helpful. This may seem like the exact solution you need, but it comes with its downsides and requirements.
a. According to state laws and card processing regulations (like Visa and MasterCard) you simply need to post it clearly in store or, if you are an eCommerce business, on your website. This doesn’t just mean a fine print policy on your website or a little segment at the bottom of the receipt. This means a clear posting for the customer that will be made visible to them BEFORE the sale is made. As a good rule of thumb, if you, playing the role of a customer, do not see it the first time you walk into the store, it is not clear enough. It should also be said that in some states, like California, you may be held to a higher standard of your return policy’s posting.
b. An “All Sales Final” policy isn’t always literal. For instance, the U.S. Magnuson-Moss Warrantee Act states that if a product comes with a written warranty, it must be honored regardless of the “All Sales Final” policy.
c. Lastly, there are chargebacks. A chargeback is a dispute that is brought up to the card brand (i.e. Visa and MasterCard) where a cardholder can dispute the validity of a transaction for any number of reasons including a product being “defective, misrepresented, or not delivered.” As you can imagine, “defective” or “misrepresented” are very broad categories and easily manipulated by customers. If you have a return policy, customers will avoid a chargeback. If you do not, this may be their only option. A chargeback is costly for a business and, if you have enough of them, your card processor could shut down your account permanently.
2) A Limited Refund/Return Policy. Many businesses don’t list a return policy and thus it is assumed by the customer that they can return an item at any time. This only allows for more refunds to be made. By adding a limitation to the policy, you allow customers the flexibility to return an item without risking unnecessary refunds. Here are a couple types of limitations you can add:
a. Limited Time. By adding a refund policy with a time constraint, you give the customer the ability to return the item, if need be, in a window when the item is most eligible for resale. If you are a standard retailer of non-consumable items, this can help you limit your loss and resell your item, even if at a discounted price, to another customer. A common timeline is 30 or 60 days.
b. Limited Amount. Another option is to simply limit the amount refunded. You can have a policy that has a maximum or minimum refund amount. For example, offering a maximum return amount, you can offer a refund for anything under $100 but all product greater would not be allowed and thus All Sales Final. Beware, selling large ticket items is already hard enough. Telling customers that there is now risk involved as you will not allow a return will make your sales even more difficult. Alternatively, you can offer a refund minimum where you only refund items above a given amount. To use the inverse of the previous example, only products over $100 can be returned. This will help you sell the larger ticket items and eliminate refunds under said amount.
3) List Item Reviews and Detailed Descriptions. If you are an online store, making sure your customers can experience the product as much as possible, even if just virtually, is critical. Pictures of the product are important, but customers know they can be manipulated or misleading.
a. One of the best ways to ensure a customer knows what they are buying is by having other customers post reviews and experiences. This not only helps them see it through the eyes of another customer, but it also adds trust in the product by ensuring a non-biased perspective.
b. Detailed descriptions help the customer see all it has to offer. In addition, adding detailed specs helps customers know they are buying the exact right product ahead of time. Adding product dimensions, power outputs, or any other technical details of the product will help you in case of a chargeback or avoid one altogether. It is hard for a customer to dispute that the item was misrepresented when all its technical specifications are clearly listed.
4) Proudly Offer Returns or Refunds. It may seem counterintuitive, but it is better to have a higher number of sales and more refunds than significantly fewer sales and no refunds. According to the National Retail Federation, businesses offering flexible return policies often see higher long-term sales volume due to enhanced customer trust and loyalty. It is widely agreed that customers don’t want to refund an item that they already have. It is extra time and effort for them. Helping them feel confident in the sale, and making it as risk-free as possible, can help you get more sales. If, by offering returns or refunds, you get $100 in more sales which leads to $14.50 in more refunds, you still made an extra $85.50 you otherwise wouldn’t have.
With local businesses having to compete more and more with large corporations, you can compete in your return policy. According to ABC News, Amazon, Target and REI are all “tightening up” their return policies. Perhaps it is time to show your customers that your business is the better option.
The original question may have been about lowering the number of refunds or returns, but the whole point of a business is to make money, right?
Which Is Best For You?
Creating the right refund policy for your business is critical and often overlooked. When dealing with electronic payments, like card processing, it is very important to not only know what policy is best for you, but also what policy is being used by your competitors. Here at Nationwide Payments, we are more than just a Payment Processor. We see ourselves as Payment Consultants. We are invested in your business’s success. From knowing what policy is best for you to implement based on your business type, sales model, and competition, to finding you the system you want – not the system a random salesman wants to sell you – is our job and honor. If that isn’t enough, we will do everything we can to get you savings on your processing… and we have yet to come up short on savings with any of our clients. We look forward to creating a relationship with your business and learning how we can help you succeed. All consultations are free and always will be.