Posted by: OurKudos | April 15, 2011

Returns policies are contentious and scary!

Zappos is famous for having a “no-hassle” return policy that includes refunding the customers’ shipping charges. This creates “no-risk” purchasing for their customers. It is also said to create “fans” out of potentially unhappy customers. The idea is that these now-happy customers will buy more in the future and tell their friends about their great experiences with Zappos.com.

Given their amazing success in spite of very high return rates, they must be doing something right! The question is “does it work for other businesses?”

We are going through these discussions internally. I’ve long been a believer in the high “lifetime value” of a customer, having seen the value of happy customers in my past businesses. Happy customers become your best marketing tool and buy more in the future. To me, it’s obvious – treat your customers well and they’ll reward you with loyalty, future business and invaluable word-of-mouth referrals.

The other side of the argument is that it’s too speculative and hard to quantify customer goodwill, while it’s easy to calculate losses due to paying customers’ shipping charges for returned items. Sell 1,000 items that cost $10 each way to ship and you’ve “lost” $20,000 before you’ve even included restocking fees and so on. Those are scary numbers for the bean counters because they’re so easy to prove.

And so these discussions get very contentious. I argue for highly liberal customer return policies while my more conservative partners cite “industry standard” policies requiring customers to pay their own shipping costs. Arguments get ugly because it’s all very scary with the pros being speculative while the cons are concrete.

In our case, I’ve calculated that if a happy customer who returns an item results in 2.5 more sales in the future, we break even compared with an unhappy customer who returns an item and never buys another from us. Those are hard numbers based on a given return rate, cost of shipping, etc. etc.

What have you found to be the case? Do happy customers actually buy much more than those who have a neutral or negative experiences? Have you quantified this? If so, what has been your experience?

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