The Impact of Online Product Reviews on Product Returns

Abstract

Although many researchers in Information Systems and Marketing have studied the effect of product reviews on sales, few have looked at their effect on product returns. We hypothesize that, by reducing product uncertainty, product reviews affect the probability of product returns. We elaborate this hypothesis starting with an analytical model that examines how changes in valence and precision of information from product reviews influence the purchase and return probabilities of risk-averse, but rational, consumers. We then empirically test our hypotheses using a transaction level dataset from a multi-channel, multi-brand North American specialty retailer. Harnessing different consumers’ purchases and returns of the same products, but with varying sets of product reviews over two years, we show that the availability of more reviews and the presence of more ‘helpful’ reviews, as voted by consumers, lead to fewer product returns — after controlling for customer, product and other context-related factors. Analyzing the purchase behavior of the consumers, we find that when fewer product reviews are available, consumers buy more substitutes in conjunction with a product, potentially to mitigate their uncertainty. Purchase of substitutes, in turn, leads to more product returns. Finally, leveraging a discontinuity in the displayed average ratings, we find that when products are shown with an average rating that is higher than the true rating they are returned more often. These results support the predictions of our theoretical model — unbiased online reviews indeed help consumers make better purchase decisions leading to lower product returns; biasing reviews upwards results in more returns. The presence of online reviews has important cost implications for the firm beyond the cost of reprocessing the returns; we observe that when consumers return products they are more likely to write online reviews and these reviews are more negative than reviews that follow a non-returned purchase.

Keywords: product returns, online reviews, purchase uncertainty, return cost