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Cross-sell when refunding products

People were 66% more likely to buy a gift card when using refunded money because it feels like money that has already been spent.

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📝 Intro

Product returns are a natural part of business.

Despite their negative impact on short-term revenue, evidence shows us that you’re still better off offering free returns in the long term.

But what if there’s a way to greatly reduce that initial negative impact on revenue?

Simple, cross-sell other products during the refund process.

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Topics: Customer Experience | Ecommerce | Retail store
For: B2C. Can be tested for B2B
Research date: April 2023
Universities: University of Toronto, Boston University

📈 Recommendation

When customers are asking for a refund for returning a product, cross-sell other products to them, whether related or not. They will be more likely to buy. This is most effective at driving sales if you do it before the money is refunded to them.

For example, if someone is returning a pair of hiking boots, you could recommend they buy a substitute (another pair of boots) but also other outerwear or camping equipment. 

🎓 Findings

  • People are more likely to buy when using refunded money.

  • As part of a series of 5 online experiments, researchers found:

    • 78% of people chose to spend a refund buying a Starbucks gift card, compared to 47% of people buying with money that was not refunded.

    • When buying a shirt from Nike, people were 2.5 times more interested in buying when using refunded money compared to buying the item normally.

    • After deciding to return a pair of winter shoes, people were 27.6% more likely to buy a jacket, compared to buying the jacket on its own.

  • The effect 

    • Holds for any product, not only products related to the one people return

    • Disappears when people buy the original item expecting to return it for a refund (e.g. buying shoes in two sizes to return the one that doesn’t fit as well)

🧠 Why it works

  • When we buy something, we’ve set that amount aside as spent money, or a loss. 

  • If the money is returned to us, spending it again doesn’t feel as painful since we already consider the amount as spent.

  • We’re also more likely to spend this money, as we’ve already earmarked the money for spending, and it seems like less of a loss to spend it again. This is the same reason we’re more willing to spend unexpected money like a tax refund or lottery winnings.

  • When refund money goes back into our bank account, it’s part of our overall funds again, so we go through the decision-making of setting the money aside to spend again.

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  • The research focused on product categories with relatively low involvement (gift cards, groceries, clothing). It’s likely products with higher involvement (e.g. furniture, perfumes) would have a different effect.

  • It’s likely that this refund effect would be stronger for non-essential purchases as compared to staples (e.g. groceries) or for altruistic purchases, where the loss of money spent is offset by the positive impact of supporting an important cause.

  • The study didn’t look at how the timing between a purchase and a refund might impact this effect. It’s possible that as time increases, the money earmarked is more firmly established, but it may also be the case that it’s forgotten if enough time passes. Other research indicates that giving refunds instantly increases future purchase intentions.

🏢 Companies using this

  • Some companies successfully deploy this technique, although they remain relatively few. For example:

    • Clothing brand Todd Snyder prompts customers to make a return to buy other items with the money instead of refunding it.

    • Loop Returns is a Shopify integration that helps cross-sell and upsell during the return process

    • Return Logic offers API integrations for e-commerce brands to manage returns, including options for offering alternative products.

Loop Returns integrates with Shopify and offers options to configure cross-sell and upsell opportunities during returns.

⚡ Steps to implement

  • Add an option on your website or store, for customers returning items to buy other products instead of opting for a refund. You can add this as part of your returns section before the actual refund is issued to them.

  • For physical stores, train your salespeople to cross-sell when processing a customer return - after adding the initial item back into your inventory, have them suggest alternatives to the customer before moving ahead with the refund.

  • To maximize the effectiveness of this, add recommendations of other products to your returns page as alternatives to a cash refund. The recommendations don’t have to be limited to replacement items - you can also offer gift cards, and complementary or substitute products.

  • To maximize this, try offering an additional benefit to push your customers to buy the alternative immediately. For example, offer $100 of credit on a $90 refund.

  • Make sure your return and refund process is as smooth as possible for your customers.

P.S.: if you’re wondering when to offer free shipping or charging a fee (and how much) I explain that in this Ariyh Pro Q&A.

🔍 Study type

Lab and online experiments

📖 Research

Mental accounting of product returns. Journal of Consumer Psychology (April 2023)

🏫 Researchers

  • Chang-Yuan Lee. Rotman School of Management, University of Toronto

  • Carey K. Morewedge. Questrom School of Business, Boston University

Remember: This is a scientific discovery. In the future it will probably be better understood and could even be proven wrong (that’s how science works). It may also not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.

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