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Crafting a Refund Policy That Works for Your Business

Learn all about refund policies and what to include in one that will work best for your business.

As a business owner, you hope that every customer will be a satisfied customer. But it's inevitable that some will need to return a product, exchange a purchase, or request a refund. Every business that sells goods or services should plan ahead and have a policy in place to make the process clear and easy. Read on to learn about why you need a refund policy, what should be included, and how to craft your own policy.

What is a refund policy?

A refund policy is a written statement that spells out your company's policy and process for customers who wish to return, exchange, or receive a refund for goods or services. Whether they're unhappy with the purchase or need to request a refund for some other reason, a well-written policy is beneficial for your business and your customers.

Why every business needs a refund policy

You may think that you can handle every return or refund request on a case-by-case basis. But there are several reasons why that plan isn't a good idea.

Saves you time and money

Since returns are inevitable, a clear policy will allow you to deal with requests in a timely, organized way. Without a written policy, every customer who needs to return or exchange something would have to contact you individually and you or your staff would have to spend time letting them know whether their request can be accommodated and how it will be handled. Instead, with a policy in place, many customers will find the answers to their questions there and won't need to reach out.

Meets legal requirements

While return and refund policies are not legally required by United States federal law, each state has its own requirements for refund policies, often including where they must be posted and what information they must contain. If you do business in other countries, their laws may differ as well. Make sure to check the regulations of the state where your business is located and anywhere else you do business. For example, California's regulations are explained on the state attorney general's website.

In general, refund policies are considered enforceable contracts between a business and a customer and are legally binding. However, that means that laws about contracts also apply to return and refund policies, which must be clear, agreed to by the customer (agreement is implied if the policy is clearly available when making a purchase), and reasonable. While you can put, for example, a 30-day time limit on refunds, it's not reasonable to limit refunds to 30 minutes! Make sure your policy is in legal compliance with your state and local requirements.

Builds customer confidence

Every successful business is built on a loyal and happy customer base. Sometimes that means addressing an issue with an order that didn't go as expected. Customers who make a purchase and then need to request a refund or return may be more likely to come back in the future if their request is handled professionally, courteously, and within a few business days.

In addition, knowing that it's possible to request a refund assures potential customers that they're not risking anything by trying a new business.

Gathers valuable information

Think of every return or refund request as a chance to learn something about what is and isn't working for your business. Is one particular product returned more than others? Studying the information about refund requests can help you find patterns and opportunities to improve and eventually reduce refunds.

Protects you from fraud

Having a clearly stated policy is more than just a convenience. It can also protect your business from significant loss from refund fraud and false complaints. Refund fraud is when someone returns an item to a store for reasons that aren't genuine or gets a refund on a product that they didn't actually buy.

For example, someone may buy an item of clothing, wear it once, and return it as new with the tags still on. Another person may dispute a credit card charge, despite there being no problem with the item or service that was paid for.

According to the National Retail Federation, retail fraud totaled $25.3 billion in 2020. It's impossible to eliminate all fraud, but a well-written policy can reduce it. Consider implementing the following conditions:

  • Requiring proof of purchase for refunds or exchanges
  • Returning the refund amount to the original form of payment
  • Collecting contact information for returns
  • Inspecting returned items for signs of after-purchase damage or use

Types of refund policies

Refund policies aren't one-size-fits-all. Unless your business sells clothes that are, customers are occasionally going to request to exchange for a different size, return a duplicate item, or receive a refunded payment for a service that didn't meet their expectations.

Because your business is unique, you'll need to write a refund and return policy that's tailored to you. Read on to learn about the different types of policies and when you might want to consider each one.

Full refund

The most generous refund policies offer free returns, full refunds, and easy, no-fee exchanges. This type of policy is great for buyers, of course, but it can cost your business money if customers abuse it. If you decide to honor all refund requests, consider if it makes sense to establish a time limit.

For example, the retailer L.L.Bean is known for their generous return policy. In fact, until 2018 the company would accept any return requests for any reason. Since then, they've instituted a one-year time limit but still consider returns past that date if products are defective.

Exchange only

On the other hand, you may decide not to offer a refund option at all but still acknowledge that customers need a way to exchange products if they're the wrong size, damaged, or have another reasonable issue. In that case, your policy may be to exchange the unwanted item for one that better fits the buyer's needs rather than offering a partial or full refund.

Store credit

Another option is to offer store credit instead of a payment refund. Store credit policies bring people back to your store to use the credit, keeping the value of those goods and services part of your revenue.

In addition, some customers may not return to use their credit, meaning that you are able to keep those funds, while others may make another purchase that the amount of credit doesn't cover, adding additional revenue to the transaction. While those are all benefits to you, many consumers don't like receiving store credit because it can only be used at your business, so consider this option carefully.

All sales final

Sometimes it makes sense to institute a strict no-refunds policy where all sales are final. Custom or personalized items may be difficult to resell and discontinued items or products sold on clearance may only be available for final sale. In addition, products that are of a personal nature like undergarments or hygiene products often can't be returned. But even if you plan to say no to customers who request a refund, consider making reasonable exceptions if products are defective.

Hybrid

Most businesses offer a combination of the above as part of their standard return policy. For example, an online service provider may offer no-questions-asked full refunds for the first month of service to encourage customers to give their business a chance. After that, they may have a policy that a monthly payment is refunded only when there has been a problem with the service after that.

As another example, an electronics store may have different policies depending on the returned product. It might offer returns or exchanges for any unopened products, require exchanges or store credit for products that were opened but unsatisfactory, and make all products from the previous year's models non-refundable.

Refund policies by business type

Your business may consist of a single brick-and-mortar location, dozens of franchise stores, an online shop only, or a mix of types. When it comes to your refund policy, there are special considerations for each type.

E-commerce stores

Selling products online has advantages. The lack of a physical store keeps costs down and customers around the world have access to your business. But when it comes to returns and refunds, it presents some additional challenges.

People may be more likely to request returns or exchanges when they can't look at products up close before a purchase. Clothing can be the wrong size, a color may not look the same as it does online, or an item may not work as expected. Problems can arise in shipping and delivery—damage or theft, for example—and since there's no store to return things to, customers need to repackage and ship products back.

E-commerce stores need to take all of these factors into account when crafting a refund policy. Information about return shipping and who is responsible in the case of a delivery issue are especially important for online sales. Offering a preprinted return shipping label is also a good idea.

Brick-and-mortar

Returning items to a physical store seems straightforward. But there are important factors to consider here as well. If your business has more than one location, can items be returned to any location or do they need to come back to the original point of purchase? For companies that offer sales both in physical stores and online, are purchases eligible for a refund or exchange through either sales method or do they need to be returned the way they were bought?

Digital products

If you sell digital products like downloadable software or online subscriptions, your process will be different. If a customer cancels a monthly subscription, will they lose access to the product immediately and receive a prorated refund, or will the subscription end at the end of the current month? Make sure to clarify issues like this in your policy.

Services

It's clear why businesses that sell products need a clear return policy. But even if you only provide services, you'll almost certainly deal with requests for refunds too. Service-based businesses may receive requests for payment refunds from customers unhappy with the service or unable to use it as promised. While there's no product to send back, you should institute a fair and reasonable refund policy for your customers as well.

What to include in your refund policy

The amount of information you should include in a refund or return policy can seem overwhelming. You may wonder if you need to specify whether customers qualify for a full refund, can receive money back to the original payment method, or must pay fees. We break down some of the most important information here.

How customers can submit a refund request

Make sure your return process is as clear as possible for both your customers and your team. Many online retailers now offer a simple, automated return process that generates a return shipping label and a tracking number so customers can make sure their item is on its way back to you. Even if you're not an expert computer programmer, most e-commerce platforms offer easy HTML code that can be inserted into your website to streamline the process.

No matter how thorough your policy is, there will always be customers who have questions or need additional information. Make it easy to find the contact information for your business or customer service representative.

Conditions under which you'll accept returns

If you decide not to have a no-questions-asked return policy, think about the conditions under which someone can receive money back on a purchase. For example, do products need to be sent back in the original packaging? Is it necessary to have a receipt or an order number?

In addition, consider scenarios under which customers may request refunds. Do you make a lot of sales before the holidays? You may have many exchange or refund requests after the holidays for items that arrive without an original sales receipt. How will those be handled? The more thought you can put into your policy ahead of time, the more smoothly transactions will go.

Refund timeframe

Most businesses specify a certain period of time during which they will accept returns, exchanges, or requests for refunds. How long after the date of purchase will you accept requests? How long can customers expect to wait for an exchanged item or for the payment to be returned to them? If, for example, you offer no-questions-asked refunds within 14 days, make sure to specify whether those are calendar days or business days. If your company gets busier during certain times of the year, make sure that customers understand when exchanges or refunds may be significantly delayed because of high volume.

Refunds, returns, or exchanges?

Depending on the type of product you sell and the nature of your business, you may offer one, some, or all of these options to your customers. You may offer refunds for all products or only those that are defective or refunds for services that weren't up to your high standards.

Sometimes there's something about a purchase that's not quite right. If it's clothing that's the wrong size or an item that is defective, the customer may want to exchange the purchase for a different item. Consider whether exchanges will be subject to a fee to cover shipping or restocking and whether that fee will be waived in the case of a problem with the quality of a product.

Fees associated with returns or refunds

Sometimes it makes sense to charge a fee for a return, exchange, or refund. If you sell tickets for travel or events, will you charge a change fee in addition to the value of the original ticket price? If a ticket needs to be canceled, is there a cancellation fee? If you sell a product, restocking items that are re-sellable can cost time and money. Make sure to inform customers of any applicable fees that will apply, and whether the fees will need to be paid up-front or will be deducted from the refund amount.

In-store credit vs. payment method refund

Many customers prefer to receive a refund to the original form of payment such as a credit card account or cash. Some retailers also choose to offer store credit in cases where there's a dispute about the return—perhaps it's past the posted return deadline, but you still want to keep the customer happy. Offering credit can be a good middle ground.

Exclusions

If your refund policy has exclusions for certain products or circumstances, note those as well. If you sell food or other perishable products, you may offer a no-return policy and refund payment only in the case of a problem with the order.

Six tips to make your refund process simple and user-friendly

It's unlikely that any of your customers will be reading your return and refund policies for fun! They'll want to find what they're looking for quickly and easily. So your policy should be comprehensive and easy to understand and use.

Even if someone isn't satisfied with a purchase, making sure they have a positive customer service experience when they want to return an item or cancel a service will help encourage them to come back in the future. Following are some tips for making the process of writing your refund policy simple and straightforward.

Tip #1: Use a refund policy template

One way to make sure that you include all the necessary elements is to use a template and customize it to your business. There are many options for free templates online, including ones tailored to specific types of businesses.

Here are links to a few templates available for free:

  • Shopify asks users to input some basic information on their website and then emails them a custom policy along with a free trial of their other e-commerce services.
  • WebsitePolicies offers several templates for different types of businesses, including digital, physical, and perishable products.
  • At Termly, you can either download a policy template or fill in information to generate a custom policy. The site will even let you customize your form for your local currency if you don't operate in the US.

Tip #2: Consider automating simple requests

If a customer simply needs to exchange something for a different size or color or return an item in its original packaging, there are easy e-commerce solutions that can automate that process. Consider offering the option to click a few boxes, download a shipping label, send off the item, and get money back if they're eligible for a refund without talking to an employee. This makes it simple and convenient for them and easy and economical for you.

Tip #3: But have customer support staff available for more complex issues

No matter how simple your process seems to you, there will be people who have questions or need help. Certain types of businesses may find it necessary to rely more on live customer service agents, and some may even need to handle urgent requests outside of business hours. For example, a travel agent may want to have a 24-hour on-call service for clients who have to change travel plans quickly in an emergency.

If it doesn't make sense to provide full-time customer service, consider offering customers the chance to leave a voicemail or send a message, then make sure to reply as quickly as possible.

Tip #4: Put your policy somewhere easy to find

Whether you have a refund process with many different options or a simple, straightforward "all sales final" policy, be sure to make that clear immediately. Your policy should be easily accessible when making a purchase.

Don't make anyone work hard to find your policy. Retail locations often post their policy near the checkout counter or print it on a purchase receipt. Some retail shops that don't accept returns ask employees to let customers know before they pay.

For online sales, many sites use a website footer to keep the policy available no matter what page of the site you're on and include it in an online order email confirmation or as a final page before checkout. Websites that don't offer full refunds may have customers check a box acknowledging the policy.

Tip #5: Make your policy easy to read and understand

Customers who are unhappy with a purchase may already be frustrated and short on patience. The simpler and clearer you can make your policy, the better. In addition to making it easy to find in your store or on your website, consider using clear headlines for sections about specific issues like whether sale items are eligible for returns, whether refunds will be made to the original form of payment, and how store credit will be handled.

Tip #6: For complex policies, seek professional legal advice

Because refund and return policies are legal agreements, you may want to check with a lawyer to make sure that more complex policies are compliant with the law. You'll appreciate the extra step you've taken the first time someone asks for a purchase to be refunded past your time limit or wants their money back in a form different from the one they used when they paid.


You put a lot of hard work into your business. Handling refund requests on a product or service may not be the most fun aspect of being an entrepreneur, but it is an important one that will save you time and effort down the line.

With this guide, you should have all the information you need to determine whether a policy is legally required; what to consider when someone wants to return a product, get a refund, or cancel an account; and places to find a policy template form to make the task easier.

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