Mental Accounting of Product Returns

Lee, C. Y., & Morewedge, C. K., Mental accounting of product returns. Journal of Consumer Psychology. doi: 10.1002/jcpy.1354 (Forthcoming)

24 Pages Posted: 1 May 2023

See all articles by Chang-Yuan Lee

Chang-Yuan Lee

University of Toronto

Carey Morewedge

Boston University - Questrom School of Business

Date Written: April 18, 2023

Abstract

Product returns incur a substantial financial loss for retailers. We demonstrate how, when, and why cross-selling during the product return process can reduce this loss in revenue. We find consumers more readily spend money refunded from product returns than unspent money. We theorize that this refund effect occurs because consumers psychologically realize the loss of money when purchasing products and earmark that money for spending. Thus, consumers feel a smaller psychological loss when spending refunded money than unspent money on a subsequent purchase. In six experiments, we find consumers spend refunded money more freely than unspent money, even more than windfall gains like lottery winnings, on products in similar and different product categories (e.g., groceries vs. apparel). However, the refund effect only holds when consumers do not expect to return products at the point of purchase and before refunded money is commingled with money in other accounts. Our findings identify a new fungibility violation due to mental accounting and illustrate its value for generating, validating, and explaining revenue retention strategies.

Keywords: mental accounting, product returns, refunds, loss realization

JEL Classification: D03

Suggested Citation

Lee, Chang-Yuan and Morewedge, Carey, Mental Accounting of Product Returns (April 18, 2023). Lee, C. Y., & Morewedge, C. K., Mental accounting of product returns. Journal of Consumer Psychology. doi: 10.1002/jcpy.1354 (Forthcoming), Available at SSRN: https://ssrn.com/abstract=4422620 or http://dx.doi.org/10.2139/ssrn.4422620

Chang-Yuan Lee (Contact Author)

University of Toronto ( email )

United States

Carey Morewedge

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

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