Competitive Returns Management: Why Higher Salvage Values are Not Necessarily Better

Abstract

Online e-tailers face return rates of up to 50%, sharply reducing profits. They pursue two classes of mitigation-actions: First, proactive returns management controls the number of returns by adjusting, e.g., retail price, restocking fee, and hassle costs. This makes returns less attractive, yet also discourages purchases. Second, salvaging generates additional revenue. It weakens returns' negative impact by reselling them at original retail price in the primary market, at a discount in the secondary market, or to the manufacturer at wholesale price. Recognizing the importance of salvaging, we analyze the impact of non-zero salvage values on retail price, restocking fee, and profit under competition. In case consumers can return and exchange their purchase and salvage values are below production cost, a higher salvage value does not necessarily increase profit due to competitive pressure on prices, profits may decline in the salvage value. Counter-intuitively, there is a salvage value from which further increasing it actually reduces profit. Not being aware of this dynamic and simply striving for the highest salvage value endangers a firm's profitability. To the contrary, for salvage values above production cost, salvaging decreases restocking fee and retail price while increasing profit. Here, restocking fees should be zero. While this runs counter to current academic thinking, various e-tailers capitalize salvage values as high as the original retail price. Implementing our findings results in more consumer-friendly procedures for returns and higher profits, creating a win-win situation for consumers and retailers.

Keywords: returns management, competitive strategy, pricing, salvaging