Customer Return Rate Evolution

Abstract

Customer return rate evolution—whether return rates decrease or increase over the course of the customer-firm relationship—is of great economic importance to retailers. Analyzing the complete purchase and return behavior of about 8,000 customers of an online fashion retailer over seven years, we show that the average customer’s return rate increases by 40% from their first to tenth purchase. We identify three effects that show how customers’ past behavior explains returns for their current purchase and ultimately return rate evolution: 1) A greater number of previously purchased items indicates a decrease in return rate. We call this the brand experience effect. 2) A greater share of previously returned items indicates an increase in return rate. We call this the return habit effect. 3) A greater number of past purchase occasions indicates an increase in return rate. We call this the relationship effect. For managers, return rates evolution has important implications. If managers at the focal retailer ignored customers’ return rate evolution, they would overestimate cumulative customer value after 10 purchases by about 40%.