Nordstrom Returns

The Nordstrom return policy was famously generous, allowing you to return garments without receipts and for long periods after the initial purchase. The argument for changing these policies is that the social contract changed. People started exploiting these arrangements. And now it is costing Nordstrom real cash. Basically, Nordstrom is burning money for no reason.

Or is that true? What did a lenient returns policy actually create? Fundamentally, it treated customers as adults. “We are being generous. Please don’t take advantage of this.” Or more pointedly: “This is a long run relationship. If you break trust with us, we will not be here tomorrow”. Implicit in this arrangement is agreement that this is a long run customer to retailer relationship and one you could rely on for more than a few years.

But then people started treating their relationship with retailers as isolated and separate from the social contract. Change to policy that treated customers as potential fraudsters changed the relationship as well and reinforced this shift.

But what about the money Nordstrom was losing? They were just burning it for no reason. Can you think of any other activity that is like burning money with an uncertain return? What about digital advertising? You just bought the item and now you are seeing ads for it. Why is that? Because it allows an advertiser to suggest they caused the purchase. So why do this? It’s just burning money. Well there is a belief that there is always a tiny chance that you will be convinced by an ad.

But back to returns? Nordstrom forgot what that policy created: a long run relationship with the retailer. “Free” advertising from happy customers who could return items flexibly. “Buy that at Nordstrom, they have a great returns policy”. Ultimately, the returns policy is simply another way of spending money to create long run customer satisfaction. In this case, the customer (your client!) ultimately gets the benefit. Not a third party.

So, what is the lesson here: sometimes a business will stumble upon a practice that naturally generates long run attachment to the business. In this case Nordstrom’s returns policy created an implicit long run relationship built on the idea that trust would be rewarded with flexible returns and a business that will be around in the future.

More practically the question is: are there other means of creating this attachment explicitly and in a way that a business can manage its risk exposure? Ultimately, the trick is to let a customer know that they are valued, and the business is willing to lose some money in order to prove that.