Here's a story about how a simple decision turned a small store into a retail giant amidst a recession.
A simple decision about an extraordinary return policy.
It’s the Depression. Seattle is going bankrupt. Hardly anyone can afford new shoes. There’s a company called Nordstrom, a small business based in Seattle operating two shoe stores. It’s owned by three brothers. The three brothers hate dealing with unjustified return claims (an inevitable part of retailing), so they decide to change their approach. They will no longer fight any return claims. They tell the clerks of their decision. "If the customer is not pleased, they can come to us and we’ll give them what they want.” Meaning, an unconditional return policy. From this moment on, Nordstrom stores will take virtually anything back and give customers a full refund. No questions asked. Regardless of when the item was bought or whether they have a receipt. A beat-up five-year-old pair of shoes? No problem, Nordstrom will take them back. A return policy that's as radical as it gets. Did it work? Yes. The policy helped Nordstrom thrive and grow through an era when most regional retailers went bankrupt or taken over by one of the national giants. Because of its extraordinary customer service overall, Nordstrom has been one of America’s most influential retailers, cited by consultants and business professors, reported on by 60 Minutes, and studied by managers in many industries who want to serve customers better. Why it worked It may sound absolutely crazy, especially to a “rational” business person. But someone savvy of behavioral economics can smell what’s cooking. Nordstrom's return policy combines three key human tendencies:
Regret avoidance. It encourages people to buy by taking regret out of the equation. If you think you might be stuck with a purchase forever, you may refuse to purchase something even if you think—but aren’t sure—you’d like it. Behavioral economists call this “regret avoidance.” The pain of making a bad decision far outweighs the satisfaction of making a good decision on the same scale.
Attribution bias. In trying to rationalize the radical return policy, people come up with the plausible explanation that Nordstrom merchandise is high quality. If it weren’t, the company wouldn’t be willing to guarantee it. Hence, the policy acts as a signal of quality.
The endowment effect. We value something that we own more highly than we value the same thing if we don’t own it. Ordinary items become treasured possessions once we own them, and the longer we own them, the more treasured they become. In effect, after you buy something, and the longer you own it, the endowment effect makes you ever less likely to return it.
How it could go wrong
Such a policy gives rise to some important paradoxes.
One, Nordstrom isn’t a charity. It’s a competitive, growth-oriented retailer that expects their salespeople to meet ambitious sales goals—meaning net sales, or sales minus returns. How are sales staff to navigate the potentially conflicting signals: Move as much merchandise as possible out the door, but take back anything and everything with a smile?
And two, Nordstrom pays salespeople on commission, which can lead to awful customer experiences with predatory, high-pressure clerks. How can customer service remain helpful and discrete when people's livelihoods depend on making the sale?
How Nordstrom made it work
Rumor has it that, on day one, new hires are told of Nordstrom’s rules: “Rule No. 1: Use good judgment in all situations. There will be no additional rules.”
In reality the actual policy book of the company is long. But this foible goes to show how Nordstrom empowers their employees to move heaven and earth in finding a solution on behalf of the customer.
There are countless stories—true ones—about salespeople heroics. Running across the street to buy from a competitor (at a higher price) an item that Nordstrom didn’t have in a customer’s size. Taking back shrunken shirts from a customer who admitted it was his fault—he hadn’t followed the laundering instructions—and who wasn’t even seeking a refund, just advice on how to undo the damage.
Empowerment is great. But why should employees accept returns when it will mean less commission for them? The answer is because of the culture.
The culture, the norms and values that pervade daily life in the company tell employees that they can balance the contradictions in those paradoxes. It may be that this week's commission will be lower but they know the big-picture strategy works. They understand it, they see it, they experience it. And so providing excellent customer service becomes their personal goal as well.
Topping up empowerment and culture with control systems signals to employees that the company has their back.
As fraudulent returns are growing faster than retail spending, costing tens of billions annually in the US alone, the company is using information technology to safeguard against serial fraudsters.
The technology helps to keep better track of customers and their behavior. It can identify those who abuse the return policy (at least some of them) and ask them not to come back.
🤨True fact: Some people go dumpster diving to find receipts for items that were bought with cash; then they go to the store, shoplift those items, and take them to the return counter with the receipts.
Take-aways for extreme customer service empowered employees + culture + control systems = happy employees + happy customers