Forays into omnichannel: An online retailer’s strategies for managing product returns

Abstract

E-commerce has witnessed a steady growth with advances in digital technologies. However, one of the challenges faced by online retail is its inability to provide customers with the opportunity to “touch-and-feel” a product before purchasing, thereby resulting in a higher rate of product returns. To address this, online retailers, nowadays, are adopting various omnichannel configurations. Using a stylized model, we study three such omnichannel configurations: selling the product online, establishing a showroom while selling the product online (‘Experience-in-Store-and-Buy-Online (ESBO)’), and selling the product through both a brick-and-mortar (B&M) store and the online channel while allowing in-store product returns (‘Buy-Online-and-Return-In-Store (BORS)’). Based on product attributes such as product standardization and valuation we recommend optimal omnichannel strategies. Our results show that depending on whether a premium product is highly personalized or standardized, opening an additional showroom or a B&M store becomes optimal for the retailer. In contrast, for a low-valued, highly personalized product, the retailer prefers opening an exclusive showroom. Otherwise, for a low-valued, standardized product, the retailer opens an additional B&M store or continues to operate only online based on the product return rate and valuation. If the unit cost of transporting the returned products from customers is low, the retailer prefers to sell the product online only. Moreover, if the hassle cost of online purchase is too high, the strategy of in-store return becomes uneconomic. We also analyze the impact of customers’ exchanging returned items at the B&M store and their product fitness heterogeneity on the retailer’s optimal omnichannel strategy.