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For Online Retailers, Many Happy Returns

A welcoming policy for unwanted products increases customer loyalty and spending.

(originally published by Booz & Company)

Title: The Customer Consequences of Returns in Online Retailing: An Empirical Analysis (Fee or subscription required)

Author: Stanley E. Griffis (Michigan State University), Shashank Rao (Auburn University), Thomas J. Goldsby (Ohio State University), and Tarikere T. Niranjan (Indian Institute of Technology)

Publisher: Journal of Operations Management, vol. 30, no. 4

Date Published: May 2012

The boom in online retailing persists: Online stores registered 11 percent sales growth in 2009 even as the economy slumped, according to a 2010 study. But that study also found that almost 40 percent of Internet users still resist buying online because they worry about the difficulty of returning unwanted items.

Historically, companies have viewed returns as a negative, if inevitable, part of operations. But online retailers should flip that perspective around, this paper says. In fact, they might want to encourage returns as an unlikely but effective way of increasing business. In an empirical study of an online retailer with international customers, the authors found that an efficient return experience has the potential to increase customers’ loyalty and spending, and could draw in new shoppers who have remained skeptical about Internet purchases.

To be sure, returns are difficult for online retailers to manage. For example, unlike bricks-and-mortar retailers, they cannot thoroughly inspect returned products at the point of sale; they must wait until the products reach a processing facility. Some large retailers who operate in both worlds have restricted their online return policies to cut down on fraud and “product borrowing,” a practice in which consumers use items for as long as possible before sending them back.

Nevertheless, this paper finds that investing in the returns process, and liberalizing its rules, is worthwhile for online retailers. The researchers studied an online retailing company located in Asia with customers around the world. The company sells books, magazines, CDs, DVDs, and other media products. In terms of annual sales, the firm would rank among the top 1,000 online retailers in the United States.

Given access to the firm’s servers, the authors tracked almost 200 customers who sent back a product between December 15, 2009, and January 15, 2010 — a busy time for returns — and studied their purchase pattern over the next year, comparing it with their shopping behavior the year before the return.

The authors contrasted this group with 250 active customers who did not return any purchases during the period under study. In their regression analysis, the researchers controlled for the customers’ purchase history with the company and for the dollar value of the returned items, reasoning that customers might be more tolerant of defects in lower-priced products.

The results showed that shoppers who returned something went on to place significantly more orders, select more items in their average order, and buy higher-priced items than they did pre-return or in comparison with the control group. And the variable determining how much more they bought was the speed with which the return was processed and a refund was issued, the authors found.

“Importantly from an operations perspective, as the speed of returns processing increases, the beneficial impact upon future purchase behavior increases as well,” the authors write.

There are several implications for managers, the paper suggests. One simple idea is to allow customers to post a review of their return experience. Although most online retailers encourage customers to rate merchandise or order fulfillments, there is rarely a place for them to comment on the return process. But since a favorable return experience can engender loyalty and keep customers coming back, inviting them to talk about it could be valuable.

Managers should also consider how they sequence the processing of returned items, giving higher priority to customers who shop more frequently or spend more money. “Operationally speaking, this means that when confronted with a bin full of returns, the returns operation [should ensure that] the high relationship value customers are assigned the highest priority,” the authors write.

And although retailers bear the cost of returns, the resulting customer loyalty and purchasing decisions are worth it, the authors note, citing a recent survey in which 88 percent of online retailers said they could process a return for less than US$15. “The increased purchase frequency and willingness to buy higher priced (and, potentially, higher margin) products could more than offset this cost of returns processing,” the authors say.

Because the analysis showed that the speed of credit issuance is important to customers, even simply informing them that their refund has been approved could make a difference. When a third party is involved, companies can’t control how quickly customers get their money back — various credit and debit card companies, and other financial services such as PayPal, take different amounts of time — but telling shoppers that a refund is on the way may be reassuring.

Typically, the authors write, operations managers would prefer to handle the fewest returns possible, and sales executives would rather keep customer purchases on the books. But actively encouraging returns could attract customers who have been uncertain about online retail or hesitant to try new products, the authors argue.

Investments in this area “should be rewarded in the marketplace with more loyal customers who purchase more, and with greater frequency,” they conclude.

Bottom Line:
Handling online returns proactively and effectively can increase customers’ repeat purchases and the amount they spend. Rather than being seen as the bane of operations and logistics managers, Internet returns should be viewed as an important opportunity to engage with customers and add to the bottom line.

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