Optimal Shipping Strategy and Return Service Charge Under No-Reason Return Policy in Online Retailing

Abstract

Under no-reason return policy in an online setting, online retailers must determine whether to offer free shipping services when delivering products to consumers, and how to charge consumers for returns. To address such decision-making challenges, we develop a theoretic model to derive the optimal shipping strategy and return service charge (RSC) for an online retailer under two decision scenarios, in which decisions on shipping strategy and RSC are made either jointly or separately. We find that the retailer is better off in joint decision scenario than in separate decision scenario; a shipping free strategy is usually accompanied by a higher RSC, while a shipping fee strategy is typically accompanied by a lower RSC. We also find that, market parameters (e.g., the base return quantity, product price, consumers’ sensitivities of shipping fee on demand, RSC on demand and return quantity) have important effects on the retailer’s decisions on shipping strategy and RSC. Our findings suggest that the retailer can benefit from taking positive actions toward influencing the market to determine the favorable shipping strategy and RSC. Furthermore, our results can provide theoretical explanations for widely used shipping strategies and RSCs within the context of no-reason return policies in online settings. In particular, our analytical results explain why some real-world online retailers offer both free shipping and free return services to certain consumers.