Refunds are a part of most service and inventory-based businesses. They are a key part of keeping customers happy and providing value. For service-based businesses, refunds can be used to retain customers, while for inventory-based businesses they can be used to ensure the right product is delivered. Retail giants like Amazon have always offered free refunds, with no cost passed onto the customer.
So who does the cost get passed to? Unfortunately, returns and refunds become a major strain on small businesses. Not only do they have to deal with the financial burden of providing refunds, but they also must bear the cost of labor and shipping associated with processing returns. Furthermore, unhappy customers can lead to lost sales and damage to a business’s reputation.
If refunds are a part of your business, you’ll want to know these 4 tips to save you time and money.
1. Payment processors don’t have to return merchant fees on refunds that you process
Scenario: a customer makes a $100 purchase from you and pays by credit card. You use a payment processor (like Moneris, Chase Clover, Square, etc.) and pay 2% + $0.05 in merchant fees, for a total of $2.05.
The customer comes back a few days later to return the purchase. The $100 is returned to their credit card. The sale and return washes out, right?
Not exactly - what about that $2.05? Well, your payment processor no longer has to return it back to you, leaving you to eat the cost. Not only that, but they can charge you extra fees for processing a refund (be sure to read that fine print!)
Depending on the value and volume of your transactions, this can result in a very unexpected expense that will hit your bottom line.
So what can you do about this? Well, since October of last year, businesses in Canada are allowed to pass on merchant fees to the customer. Even if you’re not charging customers a card processing fee on purchases, you can consider adding it on when it comes to returns - for examples of what to call this fee, see #2 below. You must, however, explicitly disclose this surcharge to your customer.
Alternatively, if your payment processor's contract is open to negotiation, make sure that merchant fees are always returned to you when processing refunds.
2. Restocking fees are an option for inventory and service-based businesses
In this inflation-riddled economy, restocking fees are becoming increasingly common as a way for retailers to recoup their losses from returns. They are typically charged when customers return items that have been opened or used, and can range from a few dollars to the full cost of the item.
Charging a restocking fee could be a good option for your business if the product your customer is returning is not fit for resale, and would be destined for landfill. A different name might sway your customer’s emotions about paying the fee, for example, "recycling fee". Other names for restocking fee include environmental or recycling fee, handling charge, return shipping, refurbishing cost, etc. If you're a service-based business, consider names like "administrative fee" or "processing charge".
If your product was defective or damaged in shipping, then providing your customer with a replacement for the product that was damaged during shipping can make them more likely to buy from you again, and won’t result in as much of a cost to your business as a full refund would.
3. Consider gift cards or credit memos for refunds and returns
Whether you are a product or service-based business, gift cards (or credit memos for those with customers on account) are another option when it comes to refunds.
Many companies are turning to gift cards or credit memos as a way to handle refunds and returns. This allows customers to get their money back quickly while also providing an incentive for them to shop with your company in the future.
Gift cards do have many laws surrounding them in Canada (like how they cannot expire, and are non-taxable) and require more steps in accounting. You’ll also need to add to your Chart of Accounts depending on the method of accounting for the gift cards.
Gift card fraud is another thing to consider - it's been on the rise in Canada for a number of years. You’ll want to have a concrete tracking method in place, and frequently check the balances of available cards.
4. Clear up your refund policy
Regardless of the type of business you run, you need to make sure you have a straightforward refund policy in place. This is essential for customer satisfaction and loyalty.
So before you process your next refund, revisit (or create) a solid return policy. We don’t recommend hiding it in the fine print - it’s much better to be clear about this to your customer than for them to be surprised at the time of return. Online reviews are everything nowadays, making customer service another essential factor in the refund process.
Need help employing these strategies?
Simcoe Office Solutions can assist you in making smarter returns and refunds, while saving you time and money. Contact us today for more information on how we can help.