Design of Contingent Free Shipping Policy: The Role of Return Environment

46 Pages Posted: 1 Mar 2021 Last revised: 6 Oct 2021

See all articles by Sahar Hemmati

Sahar Hemmati

University of Maryland - Robert H. Smith School of Business

Wedad J. Elmaghraby

University of Maryland - Robert H. Smith School of Business

Ashish Kabra

University of Maryland - Robert H. Smith School of Business

Nitish Jain

London Business School

Date Written: September 30, 2021

Abstract

A contingent free shipping (CFS) policy offers free shipment of an order only if it satisfies a pre-specified threshold amount. Such a policy may induce customers to pad below-threshold orders to meet the threshold. On the one hand, such padded orders economize the retailer's logistics cost; on the other hand, it exposes the retailer to enhanced return costs as customers may engage in bubble purchases—orders with spuriously padded items that are later returned. A retailer designing the policy's terms—threshold and shipping fee—should attempt to balance these competing trade-offs. We study how the selection of these CFS terms is moderated by the retailer's returns policy and associated customers' ease-of-return experience.

We collaborate with a retailer who switched across multiple CFS policies over time. Our empirical strategy builds on the quasi-natural experiments induced by these switches, and location-based variation in the retailer's returns policy. We find, that in markets with a convenient ease-of-return process, customers pad 15.7% to 23.0% of below-threshold demand, and that 2.9% to 18.5% of these padded orders are bubble purchases. Interestingly, we find that, in markets with modest inconveniences in the returns process, the beneficial order padding is prevalent (13.2% to 20.3%); however, bubble purchases are altogether eliminated. Our counterfactual analysis illustrates that ignoring this moderating role of ease-of-return experience when selecting a CFS policy can result in selection of suboptimal terms, with a loss of 13.2% in profits.

Our study documents a novel determinant of optimal CFS terms: ease-of-return experience. To reflect its impact on the CFS policy’s embedded trade-offs, a manager shall apply the following counterintuitive adjustment; set lenient (resp. stringent) CFS terms when the customer return process is convenient (resp. inconvenient).

Keywords: Online Retail Operations, Contingent Free Shipping, Product Returns Policy, Shipping Threshold, Shipping Fee, Empirical OM, Causal Inference, Natural Experiment

Suggested Citation

Hemmati, Sahar and Elmaghraby, Wedad J. and Kabra, Ashish and Jain, Nitish, Design of Contingent Free Shipping Policy: The Role of Return Environment (September 30, 2021). Available at SSRN: https://ssrn.com/abstract=3794442 or http://dx.doi.org/10.2139/ssrn.3794442

Sahar Hemmati

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Wedad J. Elmaghraby

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Ashish Kabra

University of Maryland - Robert H. Smith School of Business ( email )

7621 Mowatt Ln
Apt 1116
College Park, MD 20740
United States
6158779203 (Phone)

Nitish Jain (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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