Nordstrom is so famous for its liberal return policy that its greatest customer-service myth — that they'll take back snow tires they've never sold — is actually true. Well, close enough: In the 1970s, the company bought a store in Alaska that once included a tire retailer. When a customer brought back tires, Nordstrom figured he had bought them there and allowed the return.

Clearly, at that moment, Nordstrom lost money on the deal. After all, it honored a return on an item it didn't even sell. Then again, the company has been feasting off the good public relations of that event since 1975. The web has only made it more viral; there's even an entry on Snopes.com explaining how it's true. For the price of a set of snow tires, the retailer bought itself decades of good will.

Still, returns are expensive to retailers, costing them billions. That's why some are getting tougher by shortening the time customers can return anything, usually within 30 to 90 days, requiring tags, receipts, and identification, limiting customers to a certain number of returns, asking for reasons for the return, and imposing other conditions.

A retailer's return policy, however, is not just a numbers game. It's a complex formula that must take into account a retailer's brand, its relationship with its customers, and the psychology behind returns.

Liberal return policies please customers and retailers can mitigate their costs

Nordstrom still maintains a policy of considering returns on a case by case basis, something that at times, for some customers, is an invitation to attempt returns of years-worn merchandise. Even then, the company says, it aims to find a solution in every case, with the goal of “taking care of the customer.” Nordstrom’s return policy is a great part of why it enjoys a laudable reputation for customer service. 

When liberal return policies are part of a retailer's commitment to its brand, it can take steps to minimize their costs. For e-retailers like Zappos.com, for example, returns are not just part of a customer service policy — they're actually baked into the sales strategy. With free shipping and free returns, Zappos expects its customers to shop freely without necessarily committing to the purchase.

Making returns easy allows the company to compete with physical stores, where customers can try on shoes and apparel before they buy anything, so Zappos considers the policy a marketing expense rather than an inefficiency. To minimize the inevitable extra shipping costs, Zappos uses warehouses close to its shippers and offers rush shipping for purchases only, not for returns.

Meanwhile, working with customers to help them choose the right item in the first place can also cut down on returns. In store, that means giving customers attention, helping them find the right size, and being honest when clothing or any other item doesn't quite work for them. Rue La La, an e-retailer that like Zappos spends a lot of money on returns, has leveraged information about its customers' orders to help cut down on changes of mind that lead to them. The company tested a system that gives customers information about past purchases so that next time they’re more likely to make a purchase that will stick. If a customer consistently returns items that are too small, the program pops a question the next time the customer chooses that size, suggesting a larger one instead. 

Liberal return policies can be expensive

Returns do lead to losses, and liberal policies contribute to that. The National Retail Federation in its 2013 report on consumer returns found that total merchandise returns account for some $270 billion in lost sales in retail, and fraudulent returns — which include returns on stolen merchandise —​rose 2.6% in 2013 over the year before, totaling $9.1 billion. “Friendly fraud,” where consumers fight credit card charges after buying online, accounts for a fifth of the fraud suffered by e-merchants. 

Even legitimate returns can be a significant source of loss. A third of internet purchases are returned, and that may be increasing. Returns are such a significant part of an online retailer’s business that shipper United Parcel Service offers comprehensive services to meet the need in the most cost-effective and comprehensive way possible. 

Overly strict policies can lose customers and actually drive returns

While liberal return policies give customers a sense of security that can help seal the deal, when things are too loose and too many customers take advantage, you might think it wise to crack down or scale back. But here's where consumer psychology kicks in: Getting stricter about returns, which many retailers have begun to do, doesn’t necessarily cut down on fraud, save money, or simplify the supply chain.

In fact, strict return policies can backfire, making customers less likely to buy, and, perhaps most surprising, more likely to return a purchase. A University of Arizona study published in the Journal of Consumer Psychology looked into the consequences of stricter retail return policies and found that when customers have a smaller window or more hoops to jump through to return an item, they’re actually more likely, not less, to return it. 

Worst of all, strict return policies can leave customers feeling burned, sometimes enough to turn them off of a brand completely. Lululemon garnered a ton of negative publicity earlier this year when it enforced not just its Draconian return policy — no returns after 14 days, even on gifts, and only on items in mint condition with tags intact — but also its policy not to allow re-selling of its goods on marketplaces like eBay. Customers had been reselling to get around the fact that it is nearly impossible to unload even brand-new items back to the store.

When Lululemon cracked down on re-selling, customers fumed in large numbers over social media and blogs, including the company's own pages. Within days Lululemon walked back its re-selling policy. But even so, for days and days there were constant reminders that the activewear retailer has a return policy that even its most loyal customers hate.

It’s a fine line

Clearly a retailer has to find the sweet spot between allowing customers leeway on returns and losing their shirt —​ or at least the expense of taking back shirts customers decide they don't want. Kit Yarrow, a behavioral psychologist who consults with many companies about consumer behavior, says that a strict return policy, even if it saves money on each dollar, can inflict costly injury to a brand’s otherwise well cultivated relationship with its customers. Returns are one of the all-important opportunities to demonstrate to customers how a company acts on the promises it essentially makes through its projected image. 

“A simple and easy return policy boosts sales, as shoppers are more willing to make purchases with the knowledge that returning them won’t be a hassle,” she writes. “On the other hand, if too many returns are made, it causes havoc to the retailer’s bottom line. There’s a dance going on because authenticity, transparency and ‘living up to promises’ are important values to consumers. Retailers use imagery, emotion, and symbolism to craft an enticing image—which becomes the personality of the store.”