This is an MIT Sloan Management Review article. Many companies see customers' product returns as a major inconvenience and an eroder of profits. But recent studies have begun illuminating the potential benefits of allowing customers to return products with impunity. This research finds that when a company has a lenient product-return policy, which allows customers to return almost any product at any time, customers are more willing to make other purchases, thereby raising the company's revenues from sales. The authors' own research extended these studies by exploring the trade-offs between the costs of product returns -particularly when customers deem such experiences satisfactory -and their long-term benefits to the company. Analyzing six years of purchase, product-return and marketing-communications data from "Company 1"-a large national catalog retailer that sells apparel and accessories -they confirmed that ignoring product return behavior, or even trying to discourage it directly by not marketing to customers who return products (such as by not sending them catalogs), would be a mistake. In fact, managers should embrace customers' product-return behavior and offer them a satisfactory experience. In a field experiment with a second catalog retailer, "Company 2,"which sells footwear, apparel and other accessories through the Internet and mail-order catalogs, the authors found that under a lenient product-return policy, customers' purchases, induced profits and referrals were greater than under a strict policy (which discourages and limits product returns). These measures could be raised even further through a catalog-mailing strategy that takes into account the expected future profits from each customer and the relationship between purchases and product-return behavior -i.e., through an optimal allocation strategy.

The customers who buy the most from you are probably not your best marketers. What's more, your best marketers may be worth far more to your company than your most enthusiastic consumers. Those are the conclusions of professors Kumar and Petersen at the University of Connecticut and professor Leone at Ohio State University, who analyzed thousands of customers in research focused on a telecommunications company and a financial services firm. In this article, the authors present a straightforward tool that can be used to calculate both customer lifetime value (CLV), the worth of your customers' purchases, and customer referral value (CRV), the value of their referrals. Knowing both enables you to segment your customers into four constituent parts: those that buy a lot but are poor marketers (which they term Affluents); those that don't buy much but are very strong salespeople for your firm (Advocates); those that do both well (Champions); and those that do neither well (Misers). In a series of one-year experiments, the authors demonstrated the effectiveness of this segmentation approach. Offering purchasing incentives to Advocates, referral incentives to Affluents, and both to Misers, they were able to move significant proportions of all three into the Champions category. Both companies reaped returns on their marketing investments greater than 12-fold--more than double the normal marketing ROI for their industries. The power of this tool is its ability to help marketers decide where to focus their efforts. Rather than waste funds encouraging big spenders to spend slightly more while overlooking the power of customer evangelists who don't buy enough to seem important, you can reap much higher rewards by nudging big spenders to make referrals and urging enthusiastic proponents of your wares to buy a bit more.