Good For You, Better For Them: The Truth About Retailer Guarantees

Wal-Mart's new money-back guarantee, like most retailer promises, look terrific on first glance. But the reality is that these guarantees are mainly empty marketing tactics, the commercial equivalent of a date pulling out his wallet with no intention of paying.

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Stores today seem almost to be begging customers to refund purchases. The latest example comes from Wal-Mart, which introduced a new money-back guarantee on produce: Customers don’t even have to bring back spoiled fruits and vegetables; showing a receipt is enough for a refund.

Wal-Mart’s money-back guarantee, like most retailer promises, look terrific on first glance, and there’s no doubt some customers will use them to make returns. But the reality is that these guarantees are mainly empty marketing tactics, the commercial equivalent of a date pulling out his or her wallet with no intention of paying.

As the New York Times reported this spring, Wal-Mart has been struggling to keep stores stocked with fresh food, and many consumers have complained about subpar produce. To allay the concerns of shoppers and gain traction with grocery sales, Wal-Mart launched the new money-back guarantee. Reuters noted that other supermarket chains have similar guarantees on produce.

What all of these seemingly generous return policies have in common is that, perhaps surprisingly, they deliver more benefit to the retailer than to the customers who could ostensibly be taking advantage of them.

The truth is that the vast majority of purchases are never returned. Across all retail categories, about 5% or 6% of purchases get returned. According to David Just, assistant professor of applied economics and management at Cornell University, the percentage would be even smaller were it not for a minority of serial returners — the shoppers who make a habit of buying a shirt in three sizes or colors and only keeping one — who skew the overall average higher.

(MORE: Why a Good Return Policy Is So Important for Retailers)

Groceries historically have a return rate far below average, says Just. “When it comes to the food guarantees, it’s usually window dressing,” he says.

Wal-Mart’s produce policy is better than the satisfaction guarantees offered by food manufacturers, which sometimes require the customer to ship the spoiled item or packaging back to the company; Wal-Mart customers just have to bring back their receipt. But most of us know at a glance, squeeze or sniff if produce is past its prime, which lowers Wal-Mart’s risk. What’s more, Just says that a phenomenon called the “endowment effect” — subconsciously acting as if items are more valuable after we’ve bought them — is especially high with food. All of these factors conspire to limit the likelihood of many folks ever taking Wal-Mart up on its money-back guarantee, which is one of the reasons why the retailer offers the guarantee in the first place.

Another surprising truth is that stores actually benefit when customers return a certain amount of stuff. For one thing, liberal return policies generate loyalty: Return something painlessly once, and you’re more likely to go out on a limb and purchase a new item you wouldn’t buy if returning it was a headache. A report published in the Wall Street Journal studied one catalog-based seller of clothes and accessories, and found that its optimal return rate was 13%.

Then there’s the unconscious value we assign to the privilege of returning things. Just says that without a money-back guarantee, a seller would have to lower the price by about a third before people would buy it. With that guarantee, we happily pay the higher price. Money-back guarantees “evoke a positive emotional response, thereby increasing consumers’ purchase intentions and willingness to pay a price premium,” says a 2011 Journal of Retailing article.

(MORE: 12 Things You Should Always Haggle Over)

The length of a retailer’s accepted return period also plays a curious role in the equation. Two University of Arizona professors found stores that offer long, generous-sounding return periods earn brownie points with customers, but longer return periods actually lead to fewer returns. “We show that individuals are more likely to return products when deadlines are shorter and effort requirements are lower,” says assistant professor of marketing Narayan Janakiraman, one of the study’s authors. “There are fewer returns when deadlines are longer or when effort requirements are increased.”

If customers know it’s going to be a hassle to return something and they also know they have a long window of time to do so, they’re more likely to just keep putting it off. That hassle effect is huge. Just says about half of the respondents to a survey his team conducted among mall shoppers said returning stuff was a pain. Among those who didn’t think it was a hassle, more than three-quarters had made a return within the past six months, compared with only about a third of those who thought returning items was a pain in the neck.

For retailers, then, it’s a balancing act. The goal is to craft a guarantee or return policy that sounds generous and simple enough to attract customers, get them to put their guards down, and make purchases without pausing to worry much. At the same time, the policy must be one that relatively few customers will actually take advantage of, due to laziness or the perception that returning is somewhat of a hassle.

(MORE: The Bait and Switch Behind Price-Match Guarantees)

In addition to money-back return guarantees, price-matching guarantees do a terrific job of sounding more generous than they really are. Many consumers view the price-matching policies offered by Target, Walmart, and Best Buy as if they were a form of insurance or an implicit low-price guarantee. This isn’t how price-matching guarantees work, though. The onus is always on the consumer to proactively shop around, find a cheaper price, and then force the retailer to make good on the guarantee. In fact, price-match guarantees make people less likely to comparison-shop, says Sridhar Moorthy, professor of marketing at the University of Toronto.

As with returns, only a small percentage of shoppers ever ask for price matches. According to a Minneapolis StarTribune article about the price-matching policy Best Buy implemented in March, fewer than 5% of customers ask for a price match, even though Best Buy typically charges more than Amazon. Dave Brennan, a University of St. Thomas marketing professor, offered a comment to the StarTribune about Best Buy’s policy that applies to most retailer guarantees:

“It’s more about perception than reality, but it’s a strong goodwill gesture.”