Managing Opportunistic Consumer Returns in Retail Operations
37 Pages Posted: 14 Nov 2018 Last revised: 28 Nov 2018
Date Written: November 4, 2018
Retailers use lenient returns policies to stimulate demand and increase revenues, as such policies help customers assess uncertain product valuations at low (or no) return cost and yield higher equilibrium prices. However, generous refunds also yield unintended consequences such as "opportunistic returns," which take place when customers intentionally "rent" a product for short term use. Accounting for 11% of all product returns in 2017, opportunistic returns prompt retailers to seek tactics to address adverse revenue and cost implications. We consider two alternative proposals using a price- and refund-setting newsvendor framework with two customer types: "honest returners" and "renters." The first proposal, "targeted-refunds," uses retail analytics firms to distinguish renters from honest returners, and implements return policies tailored for each segment. The second proposal, "menu-of-refunds," presents customers multiple price-refund pairs, and lets them self-select. We compare and contrast the optimal decisions and the profit implications of both proposals with respect to two benchmark settings: one without any renters (Su, 2009), and another, the "uniform-refunds" proposal, wherein the retailer merely re-optimizes its decisions while acknowledging that renters exist. We characterize the menu-of-refunds proposal which separates customer types for products with low salvage value. For products with high salvage value, we shoe that menu-of-refunds pool customers, being equivalent to uniforms-refunds, and thus the targeted-refunds dominate. As free-returns practices are widely implemented, we also analyze full-refund proposal variations. We find that full-menu-of-refunds separate customer types for products with low salvage value, and even outperform full-targeted-refunds if the fraction of renters is sufficiently low.
Keywords: Operations/Marketing Interface, Consumer Returns, Retail, Newsvendor
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