Refunding Money: How to Create a Refund Policy While Increasing Revenue

By Alexandra Sheehan

$351 billion. That’s how much product consumers returned in 2017. 

Sounds like a huge number, right? 

It’s only 10% of total retail sales that year. 

While technically speaking, refunds involve taking money out of your pocket and putting it back into your customers’ wallets. In other words, it’s a loss.

But a refund policy is actually a powerful tool in your customer relationship management (CRM) arsenal. Create a policy customers love, and they’ll love spending money with your business. 

Here’s why and how you should do it to help grow your biz: 

Why refunds are a good idea

While it sounds counterintuitive, refunds actually help your bottom line. This is because it’s a customer-first strategy — when done well. 

For example, I’m always happy to spend some extra money to purchase outdoor gear from REI. They offer free returns for up to a year from the purchase date — no original packaging needed. This helps me feel confident in my purchase. 

It’s a fact backed up by research, too. The Washington Post reports

“Overall, a lenient return policy did indeed correlate with more returns. But, crucially, it was even more strongly correlated with an increase in purchases. In other words, retailers are generally getting a clear sales benefit from giving customers the assurance of a return.” 

“Although a lenient return policy increases the number of returns, it has a stronger positive effect on sales,” says Felix Sebastian, managing editor at Termly. Consumers actively seek to do business with companies that will offer a grace period for refunds. 

According to one survey, 88% want to be able to make returns to a physical store or through a prepaid shipping method, and 95% believe that how smooth the process is influences whether they’ll buy from that business again. “A store’s refund policy and process is clearly a factor that customers place a high value on,” Sebastian says.

John Linden works as a designer at Mirror Coop, a shop that creates beautiful, custom-designed mirrors. Here’s his take: 

“Refunds have come up a lot because we make mostly custom products, so the stakes are a bit higher when a project has to be returned, since it can’t be resold. Refunds are good because they give small businesses a sense of legitimacy. Customers, knowing there is a refund policy, will feel much more comfortable spending larger amounts of money on products and services. After all, if they’re dissatisfied, they can get a refund. This increases customer loyalty and profits. Business models that include permissive refund policies show greater profits in the long-term despite the majority of customers being in the ‘used refunds’ group.”

Beyond your bottom line and depending on where you conduct business, a refund policy could be a legal requirement. Non-compliance could mean hefty fines or, worse, closing down. We’ll touch on legalities later.

Challenges of offering refunds

While refunds are almost always a great idea, that’s not to say there are no associated challenges. You are giving money back, after all — and that ultimately cuts into profits.

A lenient refund policy, while good for customers and sales, also makes your business vulnerable to another type of fraud: refunds and returns fraud. 

“Common forms of return and refund abuse include returning stolen products, returning used products when it’s against store policy, and returning products using fake receipts,” says Sebastian. “Serial returners are yet another challenge small businesses have to deal with.”

This also adds another facet to your employee’s responsibilities. They have to be knowledgeable of the policy and know how to qualify refund requests, not to mention process them. This also takes them away from other duties where they could proactively contribute to your bottom line. 

That being said, the risk is often worth the reward with a refund policy.

How to create a refund policy

Check your competitors’ refund policies

A good place to start is with some competitive research. Identify your top competitors and investigate their refund policy. Can’t find it? Here’s a trick: Do a Google search for “refund policy site:competitorURL.com”. Google will search their entire site (and only their site) for anything resembling a refund policy. 

Remember to only use this as inspiration. “While it may be tempting to copy or modify a competitor’s return policy, crafting a custom policy is a far safer approach,” Sebastian says. “Business owners have access to a wealth of resources on the internet for creating a custom refund policy.”

Start with a refund policy generator

“Many SMBs choose to use a refund policy generator,” says Sebastian. There are tons of options available online. “Many of these templates are downloadable, free, and come in different formats like Word documents or PDFs.” 

Don’t forget your audience and who’s reading the refund policy. While it’s technically a “legal document” everyday consumers need to be able to understand it. “When choosing an online template to use, it’s essential that you avoid policies with excessive jargon and legalese, which can be intimidating to potential customers,” he says. 

It’s also important to make customizations so the template is tailored for your specific business. “What matters is that the policy is unique to a business’s operations and customers,” says Sebastian.

Here are some refund policy generators to check out: 

Tell customers exactly how to get a refund

Businesses can choose the refund process, and there are many circumstances which might necessitate a refund through different processes. For example, you’ll need to outline how to request a refund for a product the customer just doesn’t like vs. one with a manufacturer defect.

You’ll want to outline exactly what the customer needs to request a refund. Common requirements could be: 

  • Proof of purchase (receipt, for example)
  • Customer name
  • Member/customer identification number
  • Shipping address (if it wasn’t in-person)
  • Original packaging (many stores, like REI and Costco, don’t require this, by the way)
  • Reason for refund request
  • Item description

Then outline the steps they need to take. Do they fill out a refund request form on your site? Send you an email? Call a phone number? Or just go ahead and visit the store? Athleta explains everything in detail on their site, even breaking it down into subcategories:  

Consider shipped returns vs. in-person. Shipped returns require a shipping container and label and either a package drop-off or coordinating a pickup. How will customers get the shipping label? How do they know where to ship to? Which company should they use? (Pro tip: One study found that free shipping on returns increased customer purchases over the next two years by up to 357%.)

Don’t forget to include a note about sales or discounted items. Many retailers have a “final sale” policy on all discounted items, meaning no money back no matter what. If this is the case for your business, this needs to be clearly stated — along with any and all other exceptions. 

Include the refund policy on every commerce channel

Depending on where your business is located, you might be legally required to post the refund policy in certain places. (In New York, all businesses are required to post their return policies, for example.)

But even if it’s not a requirement, it’s a good idea to make the policy well-known. The more educated customers are on your return policy, the less likely they’ll commit friendly fraud or process a chargeback with their credit card company. 

Some places to put your refund policy:

  • Receipts (on printed receipts and in or linked to from email receipts)
  • Cash register
  • Website footer
  • Checkout page
  • Product page
  • Product tags
  • In-store signage
  • Merchandising displays
  • Near the store entrance/exit

It’s also important to train your employees about the refund policy and to encourage them to inform customers at the point of purchase about what they need to do to get a refund if they’re unhappy with the purchase.

Some refund policies are even worth talking about. If yours is particularly unique or customer-centric, pitch it to media outlets and journalists to see if it’d make for a good story. 

Refunds: best practices for SMBs

Avoid fraud and abuse

Refund policies make businesses more susceptible to an additional kind of fraud: returns fraud. $22.6 billion of returns are fraud or abuse of store return policies — everything from fake receipts to buying something with the intention of wearing it once before returning it.

Take a look at L.L. Bean, for example. The retailer changed its famous return policy in 2018. Taking back their lifetime returns, the brand has limited it to just one year. This is because they found lots of people abusing the program — returning decades-old items in exchange for brand-new outdoor gear. The change also drew a lot of backlash to the company. 

“While a lenient refund policy can increase sales, it can also become a liability to small businesses if fraud and serial returns are left unchecked,” says Sebastian. 

Related: How to Prevent Friendly Fraud in Your Small Business >

Sebastian recommends keeping track of returns and using your data to identify serial returners. “Consider blacklisting serial returners and other customers who repeatedly abuse the store’s policies,” he says. “Implement anti-fraud measures — such as making proof of purchase mandatory, or through investing in employee training for fraud detection.”

Related: How to Deal With Chargebacks >

Know the law

We’ve mentioned this a few times already: There are often state laws that vary depending on where you’re located. “While around 30 states leave return and refund policies to the discretion of the business, the other states have return policy-related laws with varying levels of strictness,” says Sebastian.

For example: 

  • California: If you don’t offer refunds, it needs to be clearly displayed.
  • Florida: Consumers are entitled to refunds requested within 7 days from the purchase date. 
  • Illinois: These consumers get 3 days — and only for qualifying purchases.
  • Minnesota: Signs posting about your refund policy must have a font size of at least 14 points.
  • North Carolina: It’s completely up to the merchant if they want to allow for refunds or not. 

And in the European Union, “a trader must repair, replace, reduce the price or give you a refund if goods you bought turn out to be faulty or do not look or work as advertised. If you bought a good or a service online or outside of a shop (by telephone, mail order, from a door-to-door salesperson), you also have the right to cancel and return your order within 14 days, for any reason and with no justification.”

It’s always best to do the research unique to your location and specific circumstance. 

End refunds altogether

The best advice? Avoid situations that require refunds altogether. You can be proactive to reduce how many refunds you process. 

Be clear about your offering in the first place. “SMBs can also drastically cut down on refunds by identifying the main causes customers return products and then rooting out those causes,” Sebastian says. If you’re getting feedback that the product isn’t what they expected, maybe you need to change the marketing and messaging around those promotions. 

“For example, a common reason for customers returning electronics items is that the items didn’t meet their expectations,” he says. “By making a sample item available in the store, customers can try out the product before they buy it, making them less likely to return it and claim a refund.”

Maybe your product is too hard to use. “Another typical reason for returning products is the difficulty of installing or setting up the product like furniture or complex electronics,” says Sebastian. “SMBs can solve this problem by providing installation or technical support.” You could also create helpful content and send it in the email receipt or other post-purchase communications. 

Consider the effect your policy has on returns rates too. “Wider return windows have proven to make shoppers less likely to return items,” says Sebastian. “Return and refund policies that make it easy for customers to exchange or replace products for longer periods after purchase are likely to help an SMB reduce the impact of returns.” 

No luck? Try offering an alternative to a straight cash refund. “Offer store credit or another product of similar value in lieu of cash refunds,” says Sebastian. 

How to issue refunds

Sometimes, there’s no way around issuing refunds. In some cases, you can offer a partial refund. Here’s how to do it in a few different channels: 

Conclusion

Sure, the idea of issuing refunds sounds like bleeding money from your business. But it can actually pay off in the long run, especially when approached with a customer-centric mindset. What kind of refund policy do you have for your business?