Consumer Return Policies in Omnichannel Operations
62 Pages Posted: 3 Oct 2017 Last revised: 2 Sep 2019
Date Written: August 29, 2019
We study the pricing and return policy decisions of an omnichannel retailer serving customers who differ in how they realize their uncertain valuation for a product -- by inspecting in-store before purchase, or by purchasing online and possibly returning misfit products. Customers may return misfit products either to stores for a full refund or online as per the firm’s return policy. We model prices to be identical across channels, allow cross-channel returns, and endogenize customers’ purchase and return decisions, capturing typical features of an omnichannel setting. Our analysis helps explain why some omnichannel firms choose full refunds while others charge a fee for online returns: We find that omnichannel firms with good salvage partners for online returns (e.g., Nordstrom) as well as those with more store-based customers (e.g., Macy’s) should offer full refunds. Similarly, firms are incentivized to offer full refunds for products that customers are more likely to inspect in-store (e.g., Express for footwear). In contrast, firms with a significant store network and better in-store salvage opportunities (e.g., J.C. Penney) might be better off charging a fee for online returns in order to nudge customers to return in-store. Finally, an omnichannel firm should be cautious both in making the return process more convenient and in improving accessibility to its stores, as these seemingly beneficial policies, if combined with a partial refund policy, could undermine the firm's overall profit.
Keywords: Product Returns, Retail Operations, Omnichannel, OM-Marketing Interface
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