Returns policy and quality risk in e-business
作者：Huang, Tingliang Ren, Hang Chen, Ying-Ju
来源：Production and operations management. 2012,21(3),pp. 489-503
Abstract
Recent years have witnessed a rapid growth of Internet channels due to the advance of information technology. From the consumers’ viewpoint, however, this e-business revolution gives rise to an additional concern regarding the quality risk. Consequently, Internet sellers typically offer returns policies, and these returns policies vary across industries and stores. In this paper, we investigate the interplay between the returns policy, the pricing strategy, and the quality risk. We define quality risk as the possibility of product misfit, defect, or unconformity with the consumers’ perception. These notions of quality risks differ in return policy restriction, residual values, and whether it is possible to unambiguously reduce the probability of mismatch.
Using a stylized two-segment market setting, we demonstrate that consumer returns are offered only when the high-segment consumers incur a higher hassle cost, and both the quality risk and the valuation of the low segment are moderate. Moreover, it is possible to wisely design the returns policy that eliminates all inappropriate returns. Furthermore, the seller with a high quality risk may offer a refund that exceeds the selling price, which provides a theoretical ground and specific operating regime for the satisfaction guaranteed policy used in some e-tailers. On the other hand, when the quality risk is relatively low, further improvement on mitigating the quality risk may not necessarily benefit the seller. Finally, we observe that the restocking fee may be non-monotonic in product quality; thus, a more generous returns policy does not necessarily indicate a lower quality risk.
Keywords: consumer returns, quality risk, restocking fees, satisfaction guaranteed.
1 Introduction
Electronic business has dramatically changed consumers’ purchasing behaviors. As an example, if one intends to purchase a pair of shoes, she can simply browse through various websites such as Amazon, Famous Foorwear, OnlineShoes, Payless, RoadRunner Sports, Shoebacca, ShoeBuy, ShoeMall, and Shoes.com. Essentially, in this “clicks-and-mortar” model, a complete transaction requires simple clicks online and the consumer can then wait at home for the product delivery. From the consumers’ viewpoint, however, this e-business revolution gives rise to an additional concern. Compared to the traditional “bricks-and-mortar” supply chains, consumers who intend to engage in Internet transactions now are unable to actually see and inspect the products before making their purchases. In response to this significant uncertainty about product quality, Internet manufacturers/retailers typically offer returns policies to the consumers as a protection. Rogers and Tibben-Lemke (1999) conduct a survey and find that among the respondents, 63 percent believe that one of the most important tools for Internet manufacturers/retailers to stay competitive is to offer clear and attractive returns policies. In two other independent surveys (Pinkerton (1997) and Trager (2000)), more than 70 percent of consumers claim that they typically evaluate returns policies of the stores before they decide to shop.
As we browse the Internet, the returns policies in e-business vary across industries and stores. Along with the conventional 100% money back guarantee, there are other surcharges, restrictions, time window limits, and special instructions on labeling, packaging, and tagging. Some Internet manufacturers/retailers charge handling/restocking fees (typically ranging from 15% – 50%) that depend on the conditions of the returned products (whether the products are opened, used, marked, etc.), and the shipping costs of the original shipment or the returns are not refundable. Others are rather generous in that the return shipping costs are covered either when the return results from consumer satisfaction (essentially no-question-asked) or a manufacturing defect. Further, some e-tailers charge restocking fees and at the same time cover consumers’ shipping costs of returns (in case of manufacturer defect or e-tailer’s error). From the 13 Internet stores that sell shoes and their contemporary returns policies listed in Table 1, there seems to be a huge variation on the returns policies among Internet stores, even if the merchandise is similar. Of particular interest is the “free returns in-store” policy (also adopted by some leading retailers with large retail chains such as Target). Essentially, these Internet stores allow the consumers that purchase online to return the products either to their Internet center or to a physical store, whereas sending back to their Internet center requires either additional shipping rates or refund deductions. This variation is also prevalent in other apparel/home appliance e-retailers such as KayakProShop, Akinaiblog Japan Shop, The Yellow Tags, Soccer Shirts Online, and Massive24.com.
Table 1: Various returns policies of Internet shoes stores.
This paper offers an economic rationale for why various Internet sellers may adopt different returns policies. To fix ideas, we call the Internet seller the “manufacturer” throughout this paper. We show that, partially in contrast with the conventional wisdom, the product quality is not necessarily positively related to the generosity of the associated returns policy. We define product quality broadly as “the performance, features, styling, and other product attributes that enhance the fitness for use of utility for the consumers” (Fine (1986); see also Garvin (1984)). Consequently, product misfit (Su (2009) and Swinney (2009)), product defect (Emons (1989), Grossman (1981), and Shieh (1996)), and product unconformity to the consumers’
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