Thursday, October 25, 2012

Free Returns Lead to "Escalation Effect"

A new study published in the September 2012 issue of the Journal of Marketing indicates that consumers will spend MORE with online retailers that pay for shipping on returned goods.

Of course e-tailers will pay for returns on goods that are defective, broken in transit, or when the order is filled incorrectly. Many, however, require customers to pay for shipping when they return something that doesn't fit or is the wrong color or just isn't what customers expected.

According to this study, when companies like Zappos pay shipping both ways, their customers tend to buy more. Why? Because of the escalation effect--the idea that the customer is willing to try purchasing more items or more expensive items because there's no risk in the purchase, no shipping fees to pay to return unwanted purchases.

In the study, customers who'd previously returned one or more items (without paying return shipping) bought significantly more later from the e-tailer offering free returns. In contrast, customers who had to pay for return shipping reduced their future purchases with that e-tailer.

The study's authors conclude:
The findings suggest that online retailers should either institute a policy of free product returns or, at a minimum, examine their customer data to determine their customers' responses to fee returns.
The founder of Fits.me, a company specializing in virtual dressing rooms that enable customers to "try on" clothing before purchasing online, also notes the other side of the equation: "Returns cost retailers enormous sums of money; not just the transportation of it, but the re-warehousing of the garment and, often, its subsequent discounting for resale."
 
The bottom line for retail marketers: Know your customers' behavior patterns and test to see whether you'll get a better financial return from offering free returns.

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