Mail back or in-store dropoff? Optimal design of product-exchange policies in omnichannel retailing systems

Abstract

Online retailing has been booming over the past several years as people grow increasingly comfortable with it and accustomed to its ease and speed. A major drawback of online retailing is the lack of consumer–product interaction before a purchase is finalized, which often leads to consumer dissatisfaction due to mismatched expectation of the received product. In response, retailers usually promise that online orders may be returned or exchanged free of extra charges, which can be processed either online (e.g., by mail) or onsite i.e., in-store dropoff. In this work, we study the implications of both online and onsite exchange policies in the setting of a queueing model that offers omnichannel services. Taking into account customers’ behavioral responses to these policies, we aim to inform the retailer of the one that generates a higher system revenue. Our results reveal that the online exchange policy is a double-edged sword: On the one hand, it helps eliminate the inconvenience cost for exchange customers to revisit the store; on the other hand, it can trigger more feedback orders and render a higher system congestion level, which in turn, deters future customers from placing orders. Specifically, we discover that online exchange becomes an inferior policy relative to in-store exchange when the market size is large.