Return policies are the rules retail merchants establish to manage the process by which customers return or exchange unwanted or defective merchandise that they have purchased previously. Return policies are an extension of the customer service retailers provide; they tend to be fairly liberal as a consequence. For this reason many consumers hold the mistaken belief that they can always return merchandise for a full refund regardless of the circumstances. In reality, both regular and online merchants enjoy great leeway in establishing individual policies. As returns have become more prevalent and more costly, some merchants have imposed tighter restrictions on merchandise returns.

The most generous return policies—which are usually found at large, upscale retailers—permit customers to return any merchandise at any time for a full refund, with or without a receipt. But most retailers place restrictions on one or more aspects of this process. For example, many merchants will not accept merchandise for return unless the customer can produce a dated receipt proving that he or she actually purchased the item at that store within a reasonable amount of time. Other merchants have slightly more liberal return policies and will accept items without a receipt as long as the sale tag is still attached. Still others will provide a store credit rather than a cash refund when no receipt is forthcoming. Some retailers have even tighter return policies and prohibit returns on sale merchandise or on certain types of items, like bathing suits, or impose a limited window of time when returns are accepted.

The goal for retailers is to balance the need to satisfy customers against the cost and hassle associated with merchandise returns. Setting too liberal policies may encourage customers to abuse the system. For example, a customer might purchase a dress for a formal occasion, wear it once, and then return it. Similarly, a consumer might purchase a top-of-the line computer, use it for several months until an even faster model becomes available, and then return it. Finding the right balance between self-protection and customer service can be a particularly important issue for small business owners. Much more than big retailers, they depend on superior customer service to keep people coming back to their shops and Web sites. Larger merchants can generally afford to be more liberal in allowing returns; smaller outfits may need to raise prices in order to compensate for the added expense. After all, returned items that cannot be resold must either be returned to the manufacturer or sold to a jobber, which costs the retailer extra in transaction and transportation fees.

There are several steps brick-and-mortar retailers can take to discourage abuse of their return policies. For example, they can attempt to reduce the volume of sales returns by posting their policy for customers to see. Although some types of products are easier to resell after being returned, it is advisable to have a single policy and to adhere to it rather than attempt to attach different rules to different types of items sold in a store.


Establishing fair return policies while limiting the cost of returns is of particular importance to online retailers. After all, returns are a fact of life in electronic commerce. "How well you handle online returns will likely determine your future success—or failure—in the dotcom world," Melissa Campanelli wrote in Entrepreneur. "Unfortunately, returned merchandise is a major byproduct of increased Internet growth, especially as consumers become much more comfortable purchasing items over the Net." Some experts claim that the nature of electronic commerce invites large numbers of merchandise returns because consumers are not able to see and touch the items they purchase online. Recent technological developments promise to address this problem, however, and enhance the online shopping experience. "There's incredible technology at work in making touch, feel, color, look, size, and fit issues more user-friendly," Irwin Barkan of the data services organization told Campanelli.

A survey by found that 86 percent of online shoppers rated return policies of significant importance in choosing an online merchant. Consumers were especially concerned about whether the policies permitted them to receive a refund immediately after items were returned, return online purchases to a brick-and-mortar store, exchange items as needed, and have the convenience of postal pickup at their homes. But the number-one priority of online shoppers was not having to pay return postage for items they ship back to e-tailers. In a survey of the top 50 online merchants, however, 85 percent said that they required customers to pay return postage. Requiring customers to pay for shipping tends to discourage frivolous returns, according to some online retailers.

According to the survey reported in Entrepreneur, the main reasons online shoppers returned their purchases included: that the product was not what they expected (25 percent); that the product did not fit properly (17 percent); that the merchandise was damaged (17 percent); that the wrong items were delivered (16 percent); that the products were of poor quality (10 percent); and that they simply changed their minds and did not want the product (15 percent). Of the consumers who returned items purchased online, 78 percent said they were satisfied with the experience, while only 6 percent described it as unsatisfactory. Of those who had a bad experience returning merchandise, however, 62 percent said they would not return to the offending Web site afterward.

The most popular way to handle online returns is to provide postage-paid return labels. Both the U.S. Postal Service and United Parcel Service (UPS) provide merchants with a service where customers can generate labels online and print them on their home computers. Retailers can open an account at a local post office to use the U.S. Postal Service's easy return system. There is a minimum charge of 30 cents per return for the merchant. The UPS system is similar but also separates merchandise that is returned because it is faulty or damaged from that returned because the customer changed his/her mind. Both systems allow retailers to track packages online.

Another option for electronic retailers is outsourcing returns to a return management solution (RMS) company, like These firms handle all aspects of merchandise returns, from generating labels and return authorizations to the physical handling and processing of merchandise. Some RMS companies integrate their computer systems with retailers' in order to facilitate tracking and routing of packages. According to Campanelli, using an RMS firm generally involves an installation fee of around $10,000 plus a transaction fee for each package handled.


Arya, Anil and Brian Mittendorf. "Using Return Policies to Elicit Retail Information." RAND Journal of Economics. Autumn 2004.

Biederman, David. "Many Happy Returns: Companies wrestle with post-holiday merchandise returns." Journal of Commerce. 5 December 2005.

Campanelli, Melissa. "Many Happy Returns." Entrepreneur. January 2001.

Haeberle, Matthew. "Return to Sender: Best Buy streamlines its merchandise returns through a third party." Chain Store Age. September 2004.

Plunkett, Jack W. Plunkett's Retail Industry Almanac 2006: The Only Complete Reference To The Retail Industry. Plunkett Research, Ltd., 2005.