Research finds that consumers treat refunds as money they’ve already spent.
by
by
June 15, 2023
Lori Andrews/Getty Images
Tweet
Post
Share
Annotate
- Save
- Get PDF
Buy Copies
Summary. In 2022, U.S. 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 this revenue loss. Across a number of experiments, researchers found that consumers treat refunds as money already lost, so it’s less painful to spend these funds on another purchase, so long as cross-selling occurs before the money is reissued to the customers’ original payment method and consumers initially expected to keep the goods they were planning to buy. The researchers also found that this “refund effect” applies across categories. Creating return policies and practices informed by the refund effect can reduce revenue loss from product returns in a way that benefits both consumers and retailers.
Tweet
Post
Share
Annotate
- Save
- Get PDF
Buy Copies
Product returns pose a major challenge for retailers. In 2022, U.S. consumers returned 16.5% of merchandise purchases, costing retailers an estimated $816 billion in lost revenue. Typical strategies to reduce revenue lost to 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 to consumers who do return products (e.g., shipping costs and limited return windows). But the former strategy is costly to retailers, and the latter is costly to consumers. Our recent research identifies an effective strategy for reducing this loss of revenue that benefits everyone: cross-selling products during the product-return process.
Read more on Consumer behavior or related topics Sales, Sales and marketing and Retail and consumer goods
Chang-Yuan Lee is assistant professor of marketing at the Rotman School of Management at the University of Toronto.
Carey K. Morewedge is a professor of marketing and Everett W. Lord Distinguished Faculty Scholar at the Questrom School of Business at Boston University.
Tweet
Post
Share
Annotate
- Save
- Get PDF
Buy Copies
Read more on Consumer behavior or related topics Sales, Sales and marketing and Retail and consumer goods
I'm Chang-Yuan Lee, an expert in consumer behavior and assistant professor of marketing at the Rotman School of Management at the University of Toronto. I've dedicated my research to understanding the intricacies of consumer decision-making and the impact it has on retailers. Together with Carey K. Morewedge, a distinguished professor of marketing at the Questrom School of Business at Boston University, we've conducted research shedding light on a crucial aspect of consumer behavior.
In the article you mentioned, published on June 15, 2023, we explore the significant challenge that product returns pose for retailers in the U.S. In 2022 alone, consumers returned a staggering 16.5% of merchandise purchases, resulting in an estimated loss of $816 billion for retailers. Traditional strategies to mitigate these losses include providing more information about products to reduce the likelihood of returns and increasing financial and transaction costs for returning products. However, these approaches come with their own set of challenges and costs.
Our research introduces an innovative strategy to address this issue: cross-selling products during the product-return process. The key finding is that consumers tend to treat refunds as money already lost. This psychological effect makes it less painful for them to spend refunded funds on another purchase. This strategy is particularly effective if cross-selling occurs before the money is reissued to the customer's original payment method, and if consumers initially intended to keep the goods they were planning to buy.
The research, based on a series of experiments, demonstrates that this "refund effect" is not limited to specific product categories but applies across the board. By understanding and leveraging this consumer behavior, retailers can develop return policies and practices that minimize revenue loss from product returns. This approach benefits both consumers and retailers, offering a win-win solution to a longstanding challenge in the retail industry.
For those interested in delving deeper into the research and its implications for consumer behavior, sales, marketing, and retail, you can find more information in the full article by Chang-Yuan Lee and Carey K. Morewedge, available for reference.
