Free Purchase Returns?
Lenient Returns Policies for Customized Products May Increase Companies' Profits
Consumer purchases were returned in record numbers last holiday season, as noted in a recent Freight Waves article. Holiday purchase returns also set records in 2020 and 2019. Can retailers find a way to reverse this trend? Recent research says the answer is “yes.”
In the Management Science paper, “Customization and Returns,” researchers including Paolo Letizia of the University of Tennessee, Knoxville’s Haslam College of Business Department of Business Analytics and Statistics, used analytical modeling to study when it is most profitable for firms to sell only standard, only custom or both products and under what conditions to allow returns of one, neither or both types.
“For instance, in the sportswear industry, Puma sells only standard shoes, whereas Nike and Adidas offer customizable options,” Letizia said. “Nike, however, accepts returns of both standard and customized products, while Adidas only allows returns of standard products.”
The researchers’ conclusions? Counterintuitive as it might seem, selling standard and customized products and offering relaxed return policies on personalized purchases may lower overall returns and increase profits. Many companies that sell customized products will probably be leery of this proposal, not wanting to be stuck with unsaleable stock. That’s understandable, Letizia says.
“Customized products are more expensive to make than standard, and if they are returned, firms do not have much chance of doing anything with them,” he says. “No one is going to buy an item with someone else’s name on it. So, it’s just trash to the firm.”
However, this perspective doesn’t account for the factors that Letizia and his fellow researchers examined. First, consumers who customize products are more apt to do their homework before they buy. They research what they want so the products they order are more likely to meet their expectations and less likely to be returned. (A recent article in Sourcing Journal says the return rates for customized goods may be lower than 3 percent, whereas those for standard items may run as high as 20 percent.)
Second, people tend to value an item more if they feel they had a hand in its creation, so even if one aspect of a personalized product is slightly off (perhaps the color is navy blue instead of black), the consumer is still too attached to it to return it. Letizia says this tendency has become recognized as the “IKEA effect.”
Third, guilt or sheepishness may play a part in not returning a customized good. “People may regret or feel bad about returning a product because they know that this was made just for them,” Letizia says.
The upshot is, consumers are less likely to return personalized purchases, and the research suggests companies are not taking as much of a risk as they fear in offering generous return policies on customized products. The challenge for retailers is to induce customers to choose these pricy items over standard ones. Giving shoppers more leeway to return customized products could lure them to do so.
“Making returns available nudges consumers to switch from purchasing standard products to purchasing higher-priced, customized ones, which better match consumer preferences and are less likely to be returned,” Letizia says. “Even with customized products’ higher production and return costs, by offering to accept customized product returns, firms can achieve a win-win with higher profits and lower returns.”
