So what happens to all that money?
It’s a matter of interest Ata Jamiassistant professor of marketing at Kellogg.
“A lot of previous research has looked at the potential benefits of returns to retailers, or what might increase or decrease the likelihood of returns,” says Jami. After all, “retailers don’t like returns,” he says. “They want to sell something and be done with it, but they have to have return policies that actually improve sales.”
In other words, much of the existing literature views refunds on the retailer’s side as a problem to be solved—and an important one, given that Americans return close to 15 percent of all retail purchases.
Jami, instead, wanted to examine how customers perceived these refunds. “I was wondering if people are spending or saving,” he says. “Refunds are fungible, just like money in your wallet or bank account, so logically speaking they shouldn’t change your behavior with them.”
But Jami believed that people might spend refundable money differently than other funds, in part because he had observed the same treating returns differently. If a consumer had already spent that money once, he wondered, would they be more willing to part with it again?
Indeed, in a series of studies, Jami found that participants spent the money they got back more easily and on more luxurious, unplanned items. He attributes the effect to a phenomenon called “payment pain,” which is lower when people use money they’ve already spent.
When the money comes back
Jami examined spending patterns associated with refunding through multiple experimental studies.
For example, in one original study, participants were told to imagine that they had $100 to spend on pants at a clothing store and had found the pair that fit perfectly. However, some were told they had just returned items worth that much to the store, while others were told the money would come from their wallet. Everyone had to imagine that on their way to the register they saw a shirt they really liked. Those who believed they were spending money with a refund were 28 percent more likely to make an unplanned purchase than those who would need to reach for their wallet. This supported Jami’s hypothesis that it is easier to spend money that we have already spent in the past.
Jami found similar results when participants were asked to imagine they had left the clothing store wearing the pants they bought and saw a cell phone case they liked in a nearby store. Those with refunds in hand were more likely to say they would buy the case. In another study with the same premise, Jami found that spending cash-back instead of out-of-pocket money pushed people toward more luxury items (in this case, a luxury cell phone case) over utilitarian ones—even when the items in question were the same price.
The results held up when consumers made real-world purchase decisions. As part of compensation for participating in an unrelated experiment, some participants received $5 in cash, while others received a flash drive that could then be immediately “returned” to the experimenters for $5 in cash—meaning that these cash back. All participants were then given the option to use the cash to buy snacks. Those who used cash back spent 53 percent more on snacks than those who were given cash directly.
Tight, wasteful and a pain to pay
So what makes us more willing to spend cash back?
It largely comes down to a concept called payment pain, says Jami. “Different payment experiences elicit different levels of pain or pleasure. Paying a ticket or fine leads to a lot of pain. But necessities like groceries or gas are easier to rationalize, which lessens the pain of paying.”
In deciding whether to spend, then, we weigh the pain of the expense against the pleasure we expect from the purchased item.
In a separate study, Jami found that participants felt less pain in paying when they spent money to buy an unplanned pair of shoes than money from a wallet—in this case, 11 percent less, which was able to relate statistics to group differences’. willingness to buy shoes.
“People usually don’t go through the pain twice for the same money because they don’t think of it as an additional deduction from their wallet,” says Jami, especially when some time has passed since the initial purchase.
Another study suggested that people who moodily find it painful to spend money—you can think of them as innate attachments—are more sensitive to the difference between money from a wallet and money back. In contrast, spendthrifts are more willing to make an unplanned purchase overall, regardless of the source of the money.
Be careful with refunds
Jami hopes the research helps consumers become more aware of our natural spending habits. After all, money from a refund “has the same value, the same impact, everything as money that was not spent before it went to a purchase. Consumers who are concerned about spending in particular should pay more attention to this.”
As a solution, he recommends that those who receive a refund take some time before spending it, in the hope that “maybe after a while you’ll forget about it,” which can take some of the pain of paying back money back.
Retailers, of course, will have a very different perspective on this. “They want you to spend your refund,” says Jami. “Real returns are a necessary evil, but retailers also benefit when people return something because they’re more likely to spend it in the same place and spend it on more upscale options that typically have higher margins.”
Online retailers, for example, could leverage findings from these studies by making purchase recommendations to customers at the point of refund and attempting to minimize the gap between returns and subsequent purchase decisions. “Maybe you return a jacket, but you see a lot of opportunities for cross-selling, so the money stays in the store, even if the refund comes as cash and not just store credit,” says Jami. “But overall, the customer and the retailer have conflicting incentives about what happens with the refund.”
