Study on firms' return policies offers guidance on pricing, returns, refunds

April 30, 2020

Because customers who shop online cannot try on their purchases, a third of all Internet sales get returned. But handling these returns is costly, giving retailers that have both physical stores and digital sales a clear advantage over retailers that operate only online. A new study examined the decisions around the pricing and return policies of a retailer with both stores and online sales to help explain why some firms opt to fully refund customers for their returns while others charge a fee for online returns. The findings offer guidance to retailers about pricing and policies on returns and refunds.

Conducted by researchers at Carnegie Mellon University and the University of Washington, the study appears in Management Science.

"Our study can help firms with stores and online sales decide when to offer full refunds or charge a fee for online returns," says Soo-Haeng Cho, Associate Professor of Operations Management at Carnegie Mellon University's Tepper School of Business, who coauthored the study. "Our work shows that firms should consider offering full refunds whenever they can salvage online returns at mild discounts or if most of their customers choose to visit their stores before purchasing. They may also want to charge a fee for online returns to push customers toward using free in-store returns."

Researchers examined a retailer that sold a product through two channels--in stores and online--to customers who faced uncertainty about the valuation of the product--that is, they didn't know how much they would like the product. The customers differed in how they resolved that uncertainty--some evaluated the product in person at a store before deciding to purchase it while others bought the product online with the option of returning it if it did not fit. The cost of a product was the same whether it was purchased in the store or online, and the firm allowed free returns to its stores, but charged a fee for some products returned by mail (referred to as online returns).

The study found that when customers returned products online, the optimal refund given by a firm with both store and online sales was more generous than refunds given by firms that sell their products only online or only in a store. The refunds were often larger than the salvage value (how much the firm can get from the product after it is returned, either by selling it again or by recycling it) and may even have been a full refund. The findings help explain why some firms with both stores and online sales choose to offer full refunds while others charge a fee for online returns.

Specifically, the study found that firms with both physical stores and online sales that have good salvage partners (companies that will buy returned items for a reasonable price) for online returns (e.g., Nordstrom and firms like it that own their own outlet stores) and those with more customers who use their physical stores (e.g., Macy's) may offer full refunds. Similarly, the study found that firms have incentives to offer full refunds for products that customers are more likely to inspect in store (e.g., Express for footwear).

The authors suggest that firms with a significant network of stores and better in-store salvage opportunities (e.g., J.C. Penney) might be better off charging a fee for online returns to encourage customers to return items in stores. But they note that firms with both stores and online sales should be cautious in making the return process more convenient and improving accessibility to its stores because these seemingly beneficial policies, when combined with a policy offering partial refunds, could undermine firms' overall profit.

"Our work is a first step in capturing the complex dynamics that motivate different firms' choices surrounding return policies," explains Leela Nageswaran, Assistant Professor of Operations Management at the University of Washington, who coauthored the study (Nageswaran received her Ph.D. from the Tepper School of Business). "Return policies can be a valuable tool for firms with both stores and online sales, especially when firms use them to sway customers' choice of the way they return items as well as how they purchase products."
-end-


Carnegie Mellon University

Related Customers Articles from Brightsurf:

Bus drivers more likely to let white customers ride for free
A new paper in The Economic Journal finds that bus drivers are more likely to let white riders ride for free and less likely to let Black riders ride without paying the fee.

Restaurant customers frown on automatic gratuities, particularly after good service
Automatic gratuities leave restaurant patrons with a bad taste, even when the meal and the service were excellent, new research from Washington State University indicates.

Why businesses should offer free trials to existing customers
Offering free trials to existing customers might seem counterintuitive, but new research shows it can increase sales.

Study on firms' return policies offers guidance on pricing, returns, refunds
A new study examined the decisions around the pricing and return policies of a retailer with both stores and online sales to help explain why some firms opt to fully refund customers for their returns while others charge a fee for online returns.

Business-to-business customers expect personal service in online chat
Companies engaged in business-to-business (B2B) sales are also increasingly moving their activities online, but their online chat services and customer interaction have not been studied much yet.

How customers search for hedonic versus utilitarian purchases
Consumers browse social media and product pages two weeks before final hedonic purchases, utilize third-party reviews up to two weeks before final utilitarian purchases, and use search engines, deals, and competitors' product pages closer to utilitarian purchases.

Pharmacies leave customers hanging when it comes to disposing of antibiotics and opioids
A telephone survey conducted by researchers at UC San Francisco found that fewer than half of California pharmacies provided disposal instructions meeting US Food and Drug Administration guidelines, and just 10% followed the FDA's preferred recommendation to take back unused medications from their customers.

APS tip sheet: Modeling supermarket traffic jams
Modeling supermarket layouts could help reduce aisle congestion.

I quit: How poor treatment by customers leads to high turnover in the service industry
According to a new study led by the UBC Sauder School of Business, customer conflict plays a big role when it comes to service industry workers saying 'I quit' -- and how supervisors manage that conflict helps decide whether employees stay or go.

To get customers to buy more in the future, help them buy a gift
A new study finds that retailers can leverage gift purchases as an effective relationship-building marketing instrument to engage customers with the brand and drive future purchases.

Read More: Customers News and Customers Current Events
Brightsurf.com is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.