Product returns in retail markets have huge economic and environmental impacts. Optoro estimates that returns cost retailers $400B each year in the US alone2. In addition, every year the United States generates 15 million tons of carbon emissions due to product returns. Emerging new technologies and new trends of transformative marketing and operations management have further intensified the complexity of handling product returns in the retail markets. These new trends and the huge economics of the product returns in retail markets necessitate a careful investigation of strategies to manage product returns. These strategies range from setting product price, refund levels, and restocking fees to marketing strategies of information provision and return leniency adjustment.
Salvage value of returned products is an obvious factor impacting outcomes of product returns for the retailers, therefore return management strategies are to be devised noting this major factor. In the following, we assess the impact of this factor on such strategies for a monopolist retailer who faces a heterogeneous market base, including customers that differently value a retail product. Discussions are based on the results of a research project jointly conducted at the University of Massachusetts Boston and the University of Rhode Island. For simplification and generalization, results are presented for two major cases; the low salvage value situation corresponding to the cases where the salvage value is less than 50% of the cost of acquiring and selling the product, and the high salvage value situation where the salvage value is more than 50% of the same cost. Of course, the high expenses of reverse supply chains often result in low overall salvage values for the returned products. On average, the salvage value of a typical product is about 40% of the original selling price4,5. There are industries and businesses where the salvage values of the returned products are even less than this.
PRICING TO PRODUCT
Product price is the most evident factor impacting customers’ purchase and return decisions. The results of the research show that while the salvage value impacts the other strategies in question, it does not majorly impact the optimal product price. The optimal price is mostly impacted by other factors cost of acquiring and selling the product, market uncertainty, and customers’ attachment to the product after owning the product which is expressed in terms of the endowment effect.
SETTING REFUND LEVEL AND RESTOCKING FEES
Apart from price, the most obvious factor affecting the purchase and return decisions is the refund amount. Although most retailers offer full refunds, some retailers offer partial refunds or charge restocking fees.
When uncertainty is low, the optimal refund remains quite unaltered by the salvage value. It only slightly increases when the cost of acquiring the product is low, and salvage value becomes very high (close to the cost of acquiring the product). But when uncertainty is high and the endowment effect is also high, a higher salvage value slightly increases the optimal refund for a low cost of acquiring. On the other hand, at low uncertainty, low endowment effect, and low cost of acquiring, increasing salvage value results in steady increase in refund level. But for high cost of acquiring, only slight increases in optimal refund happens at high levels of salvage value.
ALLEVIATING MARKET UNCERTAINTY VIA PROVIDING INFORMATION
Customers’ uncertainty regarding the valuation of products is the main cause of the product returns. This is particularly the case in e-commerce, where customers cannot examine products up-close before the purchase. As a result, a customer can only estimate the value of a product before the purchase, and it is only after the purchase when the true value of the product is revealed. The customer’s uncertainty can be alleviated via information regarding the product which is provided online in classic formats, or trending fashions such as comparison tools or simulation software.
Information provision does not necessarily increase the expected profit of the retailers . Our research shows when there is a low endowment effect, low levels of information provision are beneficial if the cost of acquiring the product is relatively high as it is compared with the customers’ average valuation for the product. Otherwise, the information provision practice is not beneficial. Salvage value plays an important role here. When the salvage value is relatively low, the information provision practice has no impact, while with a relatively high salvage value, this practice turns harmful for retailers.
On the other hand, when the endowment effect is high in the market, and uncertainty is high, salvage value does not impact the information provision strategy. At low levels of uncertainty, however, a high salvage value amplifies the results. Under such circumstances, moderate practices of information provision are beneficial for the retailer and a higher salvage value increases the positive monetary results.
ADJUSTING RETURN LENIENCY
There is an increasing trend in the frequency of product returns in retail markets. The COVID-19 pandemic has further intensified the product return problem while further shifting the customers’ purchases toward e-commerce7, where at least 30% of all products are returned compared to 8.89% in brick-and-mortar stores8. On the other hand, many retailers have been implementing some measures of return leniency to ease the hassle of returns for customers, which in turn increases the frequency and applicability of the product returns. This trend is being further intensified during the COVID-19 pandemic by adopting new policies such as a longer return window time that make product returns even easier9,10. However, the return leniency can be the result of varying factors of time, money, effort, scope, etc.
The research results show the salvage value does not considerably impact the optimal strategies of retailers in adjusting their return leniency level if the profit maximization strategy is solely sought by the retailers. But if the overall social welfare is aimed, including the profit of retailers and utility gain of customers, then salvage value is highly impactful. Following this objective, implementing measures that increase the return leniency is not socially beneficial if the salvage value of the product is relatively low. This is an important result, which illustrates the product return benefit for the customers cannot overweigh the adverse impacts of returns. But when the salvage value is high, higher return leniency is socially beneficial, particularly at low levels of the endowment effect.
1 Leading retailers and brands use Optoro to revise how they process, manage, and sell returned and excess inventory. www.optoro.com
2 Creating Value from Returns this Holiday Season https://rla.org/media/article/view?id=1179
3 Research and Markets – The World’s Largest Market Research Store. https://www.researchandmarkets.com/reports/4911530/the-environmental-impact-of-e-commerce-2020?utm_source=dynamic&utm_medium=GNOM&utm_code=xmpm26&utm_campaign=1344501+-+2020+Report+on+the+Environmental+Impact+of+E-Commerce&utm_exec=joca220gnomd
4 Return Season Hits Hard https://www.pymnts.com/newes/retail/2020/return-season-hits-hard-some-retailers-see-bright-side-of-customer-experience/
5 U.S. Industrial & Logistics ViewPoint: Reverse Logistics Stress Test 2020 https://www.cbre.com/insights/viewpoints/us-industrial-and-logistics-viewpoint-reverse-logistics-stress-test-2020
6 Product Information Strategies to Soothe E-Commerce Returns. Reverse Logistic Magazine, #114.
7 The pandemic has pushed more sales online, and that means more returns, too https://www.post-gazette.com/business/money/2020/09/14/retail-shopping-covid-19-pandemic-sales-online-in-store-returns/stories/202009130028
8 E-commerce Product Return Rate – Statistics and Trends [Infographic] https://www.invespcro.com/blog/ecommerce-product-return-rate-statistics/
9 Pandemic Alters Retail Return Policies https://www.practicalecommerce.com/pandemic-alters-retail-return-policies
10 Retailers face another challenge during coronavirus: Handling returns https://www.cnbc.com/2020/04/14/coronavirus-dealing-with-returns-could-be-bigger-burden-for-retailers.html