Generous Return Policies Research Articles

Strategies for the retail platform to counteract match uncertainty: Virtual showroom and return or exchange policy

In a duopoly market consisting of a brick-and-motor (BM) store and a retailer platform, we explore strategies for the platform to counteract product match uncertainty. Three counteractive strategies are proposed: introducing virtual showrooms, offering a full-refund return policy and offering an exchange policy. Accordingly, duopoly competitive models are constructed to examine the roles of these strategies in mitigating product match uncertainty. In addition, the interaction among these three counteractive strategies is also explored. Results show that: these three strategies have positive effects on the platform’s demands but adverse effects on BM store’s. Both the full-refund return policy and the exchange policy can benefit the platform, especially the exchange policy. Nevertheless, whether introducing virtual showrooms can benefit the platform mainly relies on the establishing cost. In most cases, it is more advisable for the platform to offer an exchange policy rather than a full-refund return policy. Generally, introducing virtual showrooms and offering a return policy (an exchange policy) are two complementary methods, but the refund return policy can be seen as a replaceable measure for the exchange policy. In extensions, we explore the impacts of endogenous signal accuracy, managerial optimism and the partial-refund return policy. Several findings are also achieved: it is always beneficial to establish virtual showrooms if the platform can endogenously determine the accuracy of the information disclosed by the virtual showroom. Compared with managerial pessimism, managerial optimism generates more profits for the platform. A generous return policy leads to a higher selling price and greater profits for the platform.

Targeted Incentives, Broad Impacts: Evidence from an E-commerce Platform

Digital platforms sometimes offer incentives to a subset of sellers to nudge behaviors, but how do these targeted incentives affect all sellers? In this paper, we study a policy change on a large e-commerce platform that offers financial incentives only to platform-certified sellers when they provide fast handling and generous return policies on their listings. We find that both the targeted and non-targeted sellers become more likely to adopt the promoted behavior after the policy change. Exploiting a large number of markets on the platform, we find that in markets with a larger proportion of the targeted population---hence more affected by the policy change---non-targeted sellers are more likely to adopt the promoted behavior and experience a larger increase in sales with little price changes. This finding is consistent with our key insight that a targeted incentive may increase demand for non-targeted sellers if both the targeted type and the promoted behavior are observed and valued by consumers. Our results have managerial implications for digital platforms that use targeted incentives.

Using transactions data to improve consumer returns forecasting

AbstractAlthough generous return policies have been shown to have marketing benefits, such as a higher willingness to pay and a higher purchase frequency, counterbalancing these benefits is an increased volume of consumer returns, which presents significant operational challenges for both retailers and original equipment manufacturers (OEMs). Since accurate return forecasts are inputs into strategic and tactic decision support tools for operations managers, advancements in better forecast accuracy can yield significant savings from the returns management practice. We propose a forecasting approach that incorporates transaction‐level data, such as purchase and return timestamps, and predicts future return quantities using a two‐step “predict‐aggregate” process. To enhance the generalizability of our framework, we test it on two distinct datasets provided by a bricks‐and‐mortar electronics retailer and an online jewelry retailer. We find that our approach demonstrates significant forecasting error reduction, in the range of 10–20%, over benchmark models constructed from common industry practices and the existing literature. As our approach leverages the same data inputs as existing models, it can be easily adapted by practitioners. We also consider a number of extensions to generalize our approach into contexts such as restricted return time windows, new product returns, and inflated same‐day returns. Last, we discuss broad implications of return forecast accuracy improvements in the areas such as inventory management, staffing level, reverse logistics, and return recovery decisions.

Optimal production strategy for a manufacturing and remanufacturing system with return policy

This paper considers a monopolistic producer who produces new product in the first period and provides manufactured and remanufactured products in the second period. A return policy in the first period and the competition between the manufactured and the remanufactured products in the second period are jointly considered to develop the optimal production quantity strategies analytically and numerically. We find that if the two products are substitutable, the quantities of the new products manufactured in the first period and the remanufactured products produced in the second period are non-decreasing in the return policy, but the quantity of the manufactured products in the second period is decreasing in the return policy. In this case, the return rate determines the profit level, but the collection rate has little impact on the profit. If the two products are complementary, there is a critical value of the collection rate. When the collection rate is smaller than this value, the production quantities increase in the return policy; otherwise, they decrease in the return policy. In this scenario, the return policy and the collection rate mutually make a positive impact on the profit. Additionally, although a generous return policy is always profitable, it may lead to less production of manufactured and remanufactured products, especially when they are complementary.

Increasing customer purchase intention through product return policies: The pivotal impacts of retailer brand familiarity and product categories

This study gauges customer perspectives to investigate how return policy generosity (the degree to which a retailer imposes minimal restrictions on returns) influences customer-perceived value and customer purchase intention. It also examines two moderators, retailer brand familiarity (the extent to which the retailer brand is well-known) and product categories (the difference between products with respect to the magnitude of effort required to make a return). An experiment with a 2 × 2 × 2 factorial design was conducted. The results show that return policy generosity increases customer purchase intention by enhancing the perceived value of the policy. Lesser-known retailers benefit more from generous return policies than their well-known competitors, particularly when a product requires significant return effort. Well-known retailers benefit from offering generous return policies only for product categories that involve low levels of return effort. The findings of this study suggest that if a retailer formulates a return policy without considering the moderating effects of retailer brand familiarity and product category, then it will tend to over-invest if the return policy is generous.

How much do online consumers really value free product returns? Evidence from eBay

Consumer return rates have been steadily rising in recent years, resulting in growing costs for retailers who must manage the returns process and the disposition of returned products. This cost pressure is driven in part by extremely generous return policies, such as giving consumers a full refund upon return. Interestingly, this common retail practice of full refunds is inconsistent with the recommendations of many analytical models of returns, which nearly always show that a partial refund is optimal. Such inconsistencies between theory and practice might arise when the decision drivers included in the analytical models do not match the decision drivers in practice. It might also be the case that retailers are overly optimistic about the value that consumers assign to a full refund, and thus assume that the value of such a policy outweighs its costs. In this paper, we use data collected from eBay, where identical products are sold with different return policies, to investigate these open questions in the literature. We analyze both the return policy drivers from the retailer's perspective and the return policy value from the consumer's perspective. Our results suggest that the value of a full refund policy to consumers may not be as large as one might expect, and it also exhibits a large heterogeneity across buyers with different levels of online purchase experience. In addition, we provide empirical evidence for what has long been suspected by online retailers – that a non-refundable forward shipping charge quickly erodes any value that consumers assign to return policies. The generality of our results is limited by the fact that eBay differs from traditional retail contexts in many respects, including the fact that eBay buyers may not be representative of the general buyer population. However, our study of how eBay consumers value free returns provides new insights into an understudied area, and it can serve as a starting point for future studies of the value of return policies in other retail contexts.

Goodwill Can Hurt: A theoretical and experimental investigation of return policies in auctions

Will generous return policies in auctions benefit bidders? We investigate this issue using second-price common-value auctions. Theoretically, we find that the symmetric bidding equilibrium is unique unless returns are free, and when returns are free there exist multiple equilibria with different implications for sellers. Moreover, more generous return policies mitigate the winner's curse, but also push the bids higher, thus hurting bidders by eroding their surplus. In the experiment, bids increase and bidders' earnings decrease with more generous return policies as predicted. With free returns, many bidders bid above the highest possible value, subsequently returning the item regardless of value. Though consistent with equilibrium behavior, this is not optimal for sellers.

Product quality and return policy in a supply chain under risk aversion of a supplier

This study aims to identify the relationship between return policy and product quality decisions in a decentralized system. We consider a supply chain situation, as in a retail or OEM supply chain system, where a buyer decides a return policy for consumers and delegates the product quality decision to a supplier. We consider the supplier׳s different risk attitudes, whether risk averse or risk neutral. A penalty contract is introduced to control the supplier׳s hidden action, conveying external failures due to returns to the supplier. We show the conditions for supply chain coordination and demonstrate that product quality enhancement needs to precede a generous return policy setting in view of the prevalent business environment and current supply chain management practices. Moreover, we indicate the optimal conditions for a generous return policy setting without quality enhancement.

Price Competition with Optimal Product Demonstrations

We develop a game theoretic model of price competition in which an innovating firm can offer product demonstrations. Placing minimal restriction on the firm’s ability to design demonstrations, we show that the equilibrium demonstration resolves some but not all customer valuation uncertainty and allows the innovating firm to attract customers while maintaining a high price. Consumer surplus may be lower with endogenous demonstrations than without demonstrations. Regulation requiring firms to provide fully-informative demonstrations (e.g., generous return policies or inspection periods) can further reduce consumer surplus. The ability to design demonstrations also creates incentives for innovating firms to limit the market appeal of their products, suggesting another mechanism through which product demonstrations can reduce market efficiency. The results have implications for firm management and pricing strategies and for consumer protection.

Sales Talk, Cancellation Terms and the Role of Consumer Protection

This article analyses contract cancellation and product return policies in markets in which sellers advise customers about the suitability of their offering. When customers are fully rational, it is optimal for sellers to offer the right to cancel or return on favourable terms. A generous return policy makes the seller's “cheap talk” at the point of sale credible. This observation provides a possible explanation for the excess refund puzzle and also has implications for the management of customer reviews. When customers are credulous, instead, sellers have an incentive to set unfavourable terms to exploit the inflated beliefs they induce in their customers. The imposition of a minimum statutory standard improves welfare and consumer surplus when customers are credulous. In contrast, competition policy reduces contractual inefficiencies with rational customers, but it is not effective with credulous customers.

Adverse Event Reporting for Herbal Medicines: A Result of Market Forces

Herbal products are readily available over the counter in health food stores and are often perceived to be without risk. The current Canadian adverse event reporting system suffers from severe underreporting, resulting in a scarcity of safety data on herbal products. Twelve health food store personnel in the Greater Toronto Area were interviewed about their responses to herbal product-related adverse reactions. They generally fostered customer loyalty by offering generous return policies, which included collecting contact information to be sent to the manufacturers with the returned product. Thus, despite the public's lack of knowledge about the formal reporting system, adverse reaction information was directed to manufacturers whenever it resulted in a product return. The relationship between health food stores, industry and Health Canada provides a new opportunity to facilitate adverse event reporting. Additional information could be collected during the return process, and educational initiatives could be implemented to augment current post-market surveillance procedures for herbal products.

A dynamic model for optimal design quality and return policies

A clearly explained and generous return policy has been established as a competitive weapon to enhance sales. From the firm’s point of view, a generous return policy will increase sales revenue, but will also increase cost due to increased likelihood of return. Design quality of the product has been used as a competitive weapon for a long time. This paper recognizes the relationship between design quality and price of the product, and the firm’s return policy. Quality level in the product would influence the amount of return directly. When the product quality is higher, the customer satisfaction rate will increase and the probability of return will decrease. We develop a profit-maximization model to jointly obtain optimal policies for the product quality level, price and the return policy over time. The model presented in this paper is dynamic in nature and considers the decisions as the product moves through the life cycle. We obtain a number of managerial guidelines for using marketing and operational strategy variables to obtain the maximum benefit from the market. We mention several future research possibilities.

Optimal return policy and modular design for build-to-order products

A build-to-order product gives the firm the opportunity to customize the product to the requirement of the customers. The firm will see an increase in demand, but face some operational difficulties. One of these is related to the return policy which is now a recognized tool to win customer orders. This is even more true for increasingly popular Internet sales where the opportunity to physically examine the product is absent. A tremendous advantage can be gained by the Internet firm if it could offer a return policy for BTO products. We propose the use of modularity in the product design as a solution to this problem. From manufacturer's point of view, following a policy of modularization and offering a generous return policy would increase revenue, but also increase the cost due to increased likelihood of return and increased cost of design. We develop a profit maximization model to jointly obtain optimal polices for return policy and modularity level in terms of certain market reaction parameters. We obtain a number of managerial guidelines for using marketing and operational strategy variables to influence those reaction parameters so as to obtain the maximum benefit from the market.

Reverse logistics in e‐business

In an Internet direct sales supply chain, the customers buy direct from the manufacturer sacrificing the benefit of physical inspection of the product. This increases the likelihood that customers will have some dissatisfaction with the product and would like to return it. A clearly explained and generous return policy, then, will be welcome by the customers and therefore will enhance demand. From the manufacturer's point of view, this will increase revenue, but will also increase cost due to increased likelihood of return. This paper develops a profit‐maximization model to obtain optimal policies for price and the return policy in terms of certain market reaction parameters. It obtains jointly a number of managerial guidelines for using marketing and operational strategy variables to influence the reaction parameters so as to obtain the maximum benefit from the market. The paper mentions several future research possibilities.

Retail borrowing: insights and implications on returning used merchandise

Defines a particular form of returned purchases and explores its pervasiveness. Consumers who engage in “retail borrowing” purchase items with the deliberate intention to return such items once they have been used satisfactorily. To facilitate the purchases of good and to act responsibly when purchased items may be defective retailers have extended generous return policies to consumers. Increasingly however some consumers have taken advantage of such policies to “borrow” needed items from retailers. Provides an insight into retail borrowing and the type of most commonly “borrowed” products. Also identifies reasons that trigger the willingness to “borrow” from retailers and discuss the emotions and thoughts that accompany the behavior. Discusses the managerial and social perspectives of the phenomenon.

Return policies and the optimal level of “hassle”

Return policies vary significantly across retailers; some offer very generous return policies, while others impose many restrictions on returns. We employ an analytical model to help identify potential causes for variation among retailers’ return policies. A retailer is more likely to offer a low-hassle return policy when: 1) its products’ benefits cannot be consumed in a short period of time; 2) its product line offers opportunities for cross-selling; and 3) it can obtain a high salvage value for returned merchandise. Data collected from a variety of retail stores gives support to our theoretical predictions.

Using science for decision making: The chula vista bayfront local coastal program

Consumer return rates have been steadily rising in recent years, resulting in growing costs for retailers who must manage the returns process and the disposition of returned products. This cost pressure is driven in part by extremely generous return policies, such as giving consumers a full refund upon return. Interestingly, this common retail practice of full refunds is inconsistent with the recommendations of many analytical models of returns, which nearly always show that a partial refund is optimal. Such inconsistencies between theory and practice might arise when the decision drivers included in the analytical models do not match the decision drivers in practice. It might also be the case that retailers are overly optimistic about the value that consumers assign to a full refund, and thus assume that the value of such a policy outweighs its costs. In this paper, we use data collected from eBay, where identical products are sold with different return policies, to investigate these open questions in the literature. We analyze both the return policy drivers from the retailer's perspective and the return policy value from the consumer's perspective. Our results suggest that the value of a full refund policy to consumers may not be as large as one might expect, and it also exhibits a large heterogeneity across buyers with different levels of online purchase experience. In addition, we provide empirical evidence for what has long been suspected by online retailers – that a non-refundable forward shipping charge quickly erodes any value that consumers assign to return policies. The generality of our results is limited by the fact that eBay differs from traditional retail contexts in many respects, including the fact that eBay buyers may not be representative of the general buyer population. However, our study of how eBay consumers value free returns provides new insights into an understudied area, and it can serve as a starting point for future studies of the value of return policies in other retail contexts.