Why You Should Allow Returns on Customized Products

Product returns are booming. According to the National Retail Foundation, in 2020, consumers returned approximately $430 billion in merchandise to retailers — about 11% of total U.S. retail sales. Returns of online purchases are particularly high at 30% on average, having doubled since 2019 because of the increase in online shopping during the Covid-19 pandemic.

The high volume is mainly due to firms’ widespread adoption of lenient returns policies — they recognize that consumers are more willing to purchase a product if they know that they can return it in case the product does not match their expectations. For online transactions, lenient returns policies are even more crucial as consumers cannot touch and feel the product before buying. Returns are seen today as a necessary cost of doing business.

This leniency, however, has generally been restricted to standard products. It has not been extended to customized products, which have become an increasingly important part of firm offerings. Consumers can choose the base color of their jeans at Levi’s or the material of their guitars’ body at Fender, or engrave their name on their baseball bats at Marucci Sports, but products like this are typically not easily returnable.

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A few companies are bucking that trend. Consider the different approaches taken by Nike and New Balance, which both sell a variety of standard shoe models and offer options to customize some of them, allowing consumers to pick colors for different parts of the shoe and add engraved text. The two firms have similar return policies for standard products, in that they both allow returns for a full refund of the selling price. But while Nike states that “you can return items for any reason within 60 days. These include custom Nike By You sneakers,” New Balance’s policy states that “Non-returnable items include custom shoes.”

So who’s right?

We studied this question in a recent research article titled “Customization and Returns” (forthcoming in Management Science) and found that the principle of adopting lenient returns policies for standard products and stringent for customized is generally correct. However, that approach misses an important factor that firms might also consider.

Standard products are obviously easier to resell than customized (who would buy a product with another name stitched on it?) and cost less to produce. It makes sense to make returning them easy. But these are not the only factors to consider: the volume of returns also matters.  Firms that offer customized products report a 40% decrease in their returns.

This happens for two reasons. To begin with, consumers learn what they really want through interacting with the customization engines — and as a result, the end product is more likely to match their desires. For instance, Sephora offers its customers the opportunity to try on makeup products virtually to understand which one fits best. What’s more, customization is akin to product co-creation between the firm and the consumer creating an “attachment” to the firm that reduces the likelihood of a return even more.

We found that these behavioral nudges not only increase the demand for products overall, but also push consumers to switch from purchasing standard products to purchasing customized ones. Instead of purchasing standard products and returning them at high rates, consumers customize and then return at much lower rates. Firms with lenient returns policies for customized products could under certain circumstances benefit both from expanded sales (because of the leniency) and from overall lower returns (because of the lower perceived risk to the customer of customizing) — a win-win outcome.

Getting the win-win outcome.

We explored the conditions under which we could expect a win-win outcome from adopting a lenient returns policy for customized products. Four factors seem to be critical:

Making customized products more salvageable.

This would reduce the net cost of a return and can be achieved by changing the product design or finding secondary markets for returned products. For instance, Nike sells returned shoes, either standard or customized, in a few of its Nike stores in the United States and has plans to expand this service to more locations. Big Data and AI-driven solutions could also help, perhaps for finding consumers whose color preferences and even initials match those of a returned customized product.

Adopting tech innovations that reduce the cost of customization.

Advanced manufacturing technologies, such as robotics and 3D printing, have reduced the difference in cost between producing a customized and a standard product. For instance, the Italian brand XYZ Bag created a collection of handbags, called “DADA,” which can be fully customized at low price thanks to the use of 3D printing. Mass customization is widespread nowadays; it refers to the firms’ ability to produce large amounts of customized products without giving up the efficiencies of mass production. As such, firms have some leeway to adjust the price premium for customized products, which in turn would attract more consumers to customize them.

Reducing or eliminating customization fees.

Many companies charge a customization fee, and change it regularly to find its optimal value. Given the possibility of reducing returns through customization, firms could consider reducing or even eliminating the customization fee in order to encourage customers to customize. Nike and Apple Watch are two examples of companies that do this.

Providing improved, user-friendly interfaces.

Lastly, firms could improve the very process of customization through which consumers learn their preferences, reveal them to the firm and start loving their purchase before it arrives. A successful customization interface uses high-quality 3D images and allows customers to progressively disclose the customization features. For instance, Rimowa indicates the customizable parts of the luggage directly on the image: wheels, handle, and tag. By clicking on each of these components, the consumer opens the associated configurator and can customize that particular component.

Thanks to the incredible technological advances in manufacturing and logistics, firms are able to offer customized products at scale. But that ease also upends traditional thinking about returns. As our work shows, allowing customers to return customized products could incentivize them to switch from higher-return-rate standard products to lower-return-rate customized products, which could both increase profits and reduce returns.