small business returns policy

What’s the Best Returns Policy for Your Small Business?

Gene Marks

If you’re a Costco customer, you can return most items you’ve purchased, so long as it’s within a 90-day period. It’s a generous policy. But sometimes it backfires. For example, some of their customers have been known to test the company’s policy by returning Christmas trees in January, a half-eaten steak, or an empty bottle of wine (“It just took me a while to realize it wasn’t a Chardonnay, okay?”). Welcome to the world of retail.

Return Policies Vary

Returns are a headache for the merchant—both big and small—and no one really seems to know the best way to handle them. A sampling of return policies from major retailers proves this:

  • Amazon, for example, has a 30-day period where customers can return their items, no questions asked. Amazon merchants, however, are free to determine their own return policies.
  • Home Depot, Walmart, and Target all give 90 days.
  • Macy’s generally allows customers to return items with 180 days.
  • Ikea lets customers return goods within a full year of purchase—which makes sense, because that’s about the time it takes for me to assemble one of their products.
  • Nordstrom has no stated time limit for returns.

Most of the return policies from these retailers require proof of purchase and the original packaging, and almost all of the policies have some exceptions—for example, the time frame is cut significantly shorter if you’re trying to return a diamond or a half-gallon of milk, for obvious reasons.

Returns Are Part of Doing Business

So, let me repeat: If you’re a merchant, you know that returns are a huge pain in the neck. Sometimes you can return an item back to your suppliers. But there are occasions where you’ve just got to eat the cost. Unfortunately, it’s not just eating the cost of the product. A return requires extra time spent by your employees to handle the transaction, and sometimes it costs you an unhappy customer. A return is a loss, all around.

Can you avoid returns? The answer is, of course, no. We do not live in a perfect world. We live in a world constructed by humans, so by definition there will be errors, mistakes, and poor decisions. Products will be defective. Customers will make the wrong choices. Things won’t work as promised. People will make up reasons why they don’t like a product. And, of course, there will always be the guy who wants to return a half-eaten steak because…hey, why not give it a try?

This is why most companies have reserves—and so should you and your small business. According to recent research, product returns account for more than 4% of global retail sales—that’s more than $642 billion every year! Which is why—if you dig deep into the financials of the major, publicly traded retailers like Walmart and Target—you’ll find that they all have a reserve for returns and it’s usually around 2 to 4% of sales, depending on their experience.

This means that, for every sale, they record an expense of 2 to 4% of the sale value. When an actual return occurs, it’s charged against the already-established reserve. By keeping a consistent reserve, you avoid potentially significant fluctuations that may occur if for one reporting period there are higher (or lower) returns than usual.

Setting Your Small Business’s Return Policy

So, what should your small business’s return policy be? In my opinion, it should be as loose as possible.

One of the biggest advantages of running a small business is that you don’t have to be so hard and fast with the rules as the big-box retailers do. You’re not subject to public scrutiny and Wall Street. You have the benefit of being able to tell your customers that “reasonable returns are accepted” and leave it there. That gives both you and your employees the discretion to determine what’s fair and what’s not.

A good customer brings back an article of clothing she didn’t like and wants a refund? Fine. A jerk wants to return a half-eaten steak? Forget about it. The more written rules you establish, the more you paint yourself into a corner. Deal with the situation when it happens and do your best to be consistent.

Oh, and always have a reserve. Returns are a normal cost of doing business, and accountants are very particular about recording all the costs you expect to incur for each transaction. Regardless of what sort of return policy you put in place, you’re going to have this cost, so accept that fact, build it into your pricing, and be ready to handle it.

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