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

23 Pages Posted: 2 Oct 2017

See all articles by Dominic Seeberger

Dominic Seeberger

WHU - Otto Beisheim School of Management

Arnd Huchzermeier

WHU - Otto Beisheim School of Management

David I. Schroeder

Zalando GmbH

Date Written: September 3, 2017

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

Suggested Citation

Seeberger, Dominic and Huchzermeier, Arnd and Schroeder, David I., Competitive Returns Management: Why Higher Salvage Values are Not Necessarily Better (September 3, 2017). Available at SSRN: https://ssrn.com/abstract=3045102 or http://dx.doi.org/10.2139/ssrn.3045102

Dominic Seeberger (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

HOME PAGE: http://www.whu.edu/prod

Arnd Huchzermeier

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany
+49-261-6509380 (Phone)
+49-261-6509389 (Fax)

HOME PAGE: http://www.whu.edu/prod

David I. Schroeder

Zalando GmbH ( email )

Germany

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