Abstract
Free shipping promotions have become popular among online retailers. We propose that free shipping promotions produce a higher-than-usual return share not due simply to zero return costs, but because free shipping induces customer exploration and exploration in turn produces more returns. Exploration can be manifested in two forms: buying more product categories than usual (breadth), and spending more per category than usual (depth). We empirically study an online retailer for whom return shipping is always free. However, the retailer offers periodic free shipping promotions on outbound shipping. We estimate a four-equation model that traces the impact of these promotions on purchase incidence, depth and breadth (exploration) and share of the customer’s order that gets returned. We find that indeed free shipping promotions increase both depth and breadth and depth and breadth increase return share. This is validated in a field test. A simulation shows that the exploration effect decreases the incremental profits generated by free shipping promotions by 56%. Hence, profit calculations of free shipping promotions must take into account their impact on product returns.
Published Version
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