Product Returns in a Retail Setting
(A2025-126305)

AUTHORS

Dionysius Ang, University of Leeds; Maarten Gijsenberg, University of Groningen; Alexander Mafael, Stockholm School of Economics; Sara Valentini, Bocconi University, Italy; Stijn Maesen, Imperial College Business School

ABSTRACT

Product returns are a widespread and expensive problem for retailers. In the US alone, returns cost retailers about $400 billion annually. Since retailers incur additional transportation (Zhou and Hinz 2016), and processing costs to handle returned items (Ambilkar et al., 2021), product returns erode profitability. Thus, it is imperative to ascertain (1) what drives product returns and (2) how to leverage returns to maintain profitability. Throughout this session, we uncover how dynamic price discounts and Buy-Now-Pay-Later (BNPL) payment methods impact returns. We will also showcase how to harness returns to increase profitability. In the first paper, "Promoting Product Returns? The Impact of At-Purchase and Post-Purchase Discounts on Customers' Return Behavior," Gijsenberg, Bijmolt, and Hirche investigate the influence of at-purchase and post-purchase discounts on product returns. Using a unique database of a large European online retailer, they show that at-purchase discounts decrease product returns linearly, while post-purchase discounts increase product returns non-linearly. In the second paper, "The Impact of Buy Now, Pay Later (BNPL) on Customer Shopping Behavior in Online Retail," Baldauf, Mafael, and Colliander document how Buy-Now-Pay-Later (i.e., Pay after 30 days) impacts returns behavior at the order-level. Using quasi-experimental data from a multinational fashion retailer, they show that customers who adopt BNPL order more items across a wider range of categories and spend more. At the same time, the authors observe a substantial increase in returns once customers use BNPL. In the third paper, "Free-Riding Product Returns to Drive Profits," Valentini, Montaguti, and Neslin contend that returns can be harnessed to increase profits. They estimated a four-equation model that traces the impact of marketing on purchase, order size, decision to return, and the amount returned. Results show profits can be substantially increased by incorporating dynamics in the empirical and optimization models. In sum, the firm can "free-ride" returns' virtuous cycle by using marketing. In the fourth paper, "Buy Now, Return Later? The Impact of Installment Payments on Returns," Ang and Maesen combine consumer-level transaction data with experiments to investigate how BNPL installments (i.e., Pay in 4) influence returns. They find that adoption of BNPL installments is associated with a reduction in product return rates. Further experiments show that paying in BNPL installments (vs. lump sum) affects mental budgets to lower returns.