Using behavioral science to profit from refunds

A refund doesn’t have to be the end of the transaction – it can be the start of the next one. By optimizing refunds for good customers, merchants can turn a loss into an opportunity to drive loyalty and revenue.

Customers are more likely to re-spend refunded sums, says research. A person who has $50 from a refund is more likely to spend it than a person who has a spare $50.

At Ravelin, we’re in the business of blocking refund abuse. But our products also help companies ensure that good, legitimate customers can enjoy smooth refunds and returns free from friction and holdups. Moreover, by highlighting customer lifetime value (CLV) and analysis of customer refund patterns and historical spending, companies can better identify VIP shoppers who they will want to further reward or incentivize.

Let’s bring all this together and consider how merchants can leverage recent research into consumer behavior to boost profits instead of losing money to returns and refunds by optimizing refunds.

Refund money more easily spent, say researchers

Recent experimental studies into consumer psychology by Yu, Cryder and LeBoeuf came to the conclusion that a consumer who receives money from a refund is more prepared to quickly re-spend this money compared to money that has not been refunded.

The Washington University researchers explain:

“We find that, when people receive a refund and do not need to replace the originally purchased item, they are more likely to spend the refunded money on a discretionary purchase than they are to spend non-refunded money that is otherwise identical.”

This is what Coglode calls “the refund effect”. Apparently, to the average consumer:

1. Refunds feel like free money.

2. Refunds make consumers feel richer.

3. Refunds inspire consumers to spend more.

4. Items refunded often have to be replaced.

Because refunded money has already been earmarked for spending, shoppers find it easier to part with than usual.

What does this mean for merchants?

Merchants might want to shift the way they view refunds in relation to profit. Rather than the refund confirmation being the final step, there could be one more step.

If refunded customers are more likely to spend their money, nudging them in the right direction could lead to more sales and more revenue.

And this means that we can look at refunded money not as a loss to the business but as an opportunity to upsell.

This starts with distinguishing the right customers – accurately separating legitimate refund claims from fraudulent ones, using all of the available information, as well as automating this selection.

Then, having identified the different cohorts:

• Block fraudsters and serial refund abusers paying with stolen cards, requesting refunds onto gift cards, returning switched goods or empty boxes, etc. Known professional fraudsters can be blocked for good, so they are banned from attempting further purchases and filing for refunds.
  
  
• Rehabilitate opportunist refunders who are trying their hand at first-party refund abuse by misrepresenting the truth – for example, by claiming they didn’t receive an item when they did. Experienced fraud managers rehabilitate opportunist refund abusers by sending emails and/or triggering pop-ups that alert them to the illegitimacy of their behavior.
  
  
• Identify good customers filing for a legitimate refund, and make their refund experience as quick and smooth as possible. This is the cohort you’ll want to focus on, where there is the opportunity to present offers or recommendations for new purchases of similar value to the money they have been refunded.
  

Ravelin’s Refund Abuse solution can help you confidently know the intentions of a customer who files a refund claim.

It provides a wealth of data not just to recommend whether a refund request is honest and genuine or the opposite, and should be blocked, but also the customer’s full purchase and refunds history, behavior over time, lifetime value, and buying trends.

This information can help you identify the right customers to nudge in the right direction – perhaps those with high lifetime value (CLTV) or those who have been buying more in recent months.

How to boost profit from good customers returning merchandise

You can optimize the refund outcomes for your business in three stages:

1. Achieve confidence and clarity on who is a good customer – or group them down further, not just finding good customers but your actual high-keep rate, high-lifetime value VIPs.

2. Give these great customers a quick and painless refund. This could be near-instant for known good customers – for example via your app or following a link from the order email.

3. Advertise similar, slightly more expensive products to the customer who received the refund via email, popups on the website, or even within the refund confirmation message.

As the science suggests, this customer is more likely to part with their money according to science, and thus following steps like the above increases the likelihood they spend it – or, ideally, that they spend even more.

Parting thoughts

We recommend merchants approach refund abuse dynamically, so they can optimize refunds for everyone – including for good customers.

Optimizing refunds for good customers means building loyalty, selling more, and increasing return custom.

To learn more about Ravelin’s Refund Abuse solution, read our product page.