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Return policies: Does no good deed go unpunished?

(MoneyWatch) For decades, outdoor retailer REI has taken back any product, no matter how old, no matter the reason, absolutely no questions asked. But over time the policy became badly abused: Customers were returning 30 year-old, hard-worn clothing just to get more current styles, and some were even boasting online about gaming REI's system. So what's a customer-loving company to do?

This summer, the company did exactly what it had to do when put in such an untenable position: It reined in its guarantee, accepting no-questions-asked returns for a year, and quality-related returns for life. Still extremely customer-friendly and generous, but more controllable. Yet even with a great policy still in place, some people complained, as if the company had lost its service ethic, when in fact it was a case of customers taking (at times outrageously) unfair advantage of that ethic and forcing REI's hand.

Of course, REI is not the first or only company to offer crazy-good return privileges. L.L. Bean has a similar anything-goes return policy. Zappos allows 365 days for returns with free round-trip shipping. And of course, Nordstrom's policies and service have become veritable textbook studies.

Luggage manufacturer Briggs & Riley has built much of its reputation on its "Simple as That" lifetime guarantee, which promises to repair any of its products, at any time, regardless of the cause of damage. I spoke with the company's CEO, Richard Krulik, about his 20-year experience offering such comprehensive assurances. According to Krulik, "Our goal with the guarantee is to win customers for life. So even though we'll keep their old luggage in service, sooner or later they will want or need something new, and we want them to come back to us. Keeping customers loyal to the brand more than justifies the cost of the guarantee." Krulik adds, "If you are going to offer an 'extreme' warranty, it also helps to make things really well from the start."

Of course, as Krulik acknowledges, there are differences between manufacturers and retailers when it comes to guarantees. But many of the principles, risks and challenges are the same, so when crafting your company's satisfaction policies, consider these fairly universal guidelines:

- A good company is motivated to do whatever it can to win loyal customers and make them happy. But it is obligated to run a financially-sound business, first-and-foremost, as without that, everything else is moot.

- The ideal satisfaction policy is one that does as much as it possibly can for the customer, and always errs in her favor, without crossing the line of making the company a doormat. It is perfectly fine -- and in fact, good business -- to be willing to lose a little money "episodically" when it's the right thing to do to make customers happy. You must also accept that generous policies mean you'll be taken advantage of at times. But those times must be the exception, and an acceptable cost of doing business; if customers are blatantly running roughshod over your largesse -- as was clearly the case at REI -- you need to dial it back.

- Satisfaction policies should be appropriate to the product: If a 2 year-old dishwasher has problems (regardless of the manufacturer's warranty), a customer has a right to be upset -- if a well-worn 5 year-old shirt gets dirty or just boring, he does not. The basic quality of a product should always be covered for an appropriate time by any credible company, so should a reasonable period of initial purchase satisfaction (both are obviously very subjective, but good judgment and intentions will usually get you there). But after a certain point -- and especially after continued use -- someone not liking, wanting or using something anymore is no longer the company's responsibility.

- Guarantees do not have to be all-or-nothing propositions; there are many alternatives to simply giving back money or exchanging products without limitation. Depending on what you sell, you can offer trade-in allowances, progressive/limited warranties (where the coverage changes over time) or other accommodations that are friendly to the customer, fair to the company, and financially responsible.

Handled properly, there is nothing about this that conflicts with the absolute best practices of an exceptional service company. At the risk of being immodest, my own company has been rated among the top 5 percent among thousands tested by an independent customer service rating firm. But our return policies are not unlimited -- they are reasonable, appropriate to what we sell and are able to do as a small business, and always friendly. We can't fully serve our customers and employees in the long run without running a healthy business.

If your company is able to pull off and sustain an unlimited satisfaction policy, more power to you -- it's an amazing marketing tool. But for the majority of businesses that can't, it's all about intention, fairness, customer-focused execution and common-sense flexibility. As with all things service-related, customers will always look favorably on a company if they believe it acts in their interest and in good faith.