How Does a Return Period Policy Change Affect Multichannel Retailer Profitability?

Abstract

Problem definition: This study extends the literature on consumer returns by assessing the impact of return period policy change on a multichannel retailer performance. Academic/practical relevance: Many retailers have recently sought to tighten their return policy by decreasing the return period window. We investigate the impact of such a policy change on sales, returns, and profitability for a multichannel retailer. Methodology: We conduct a multimethodology research in which we (1) develop theoretical predictions using an analytical model, (2) empirically test analytical predictions using data from a jewelry retailer that changed its return policy from 100 days to 60 days, and (3) extend the empirical analysis to estimate the impact of the policy change on profitability. Results: We find that the return period policy change does not have any statistically significant effect on sales and return rates for online stores, whereas it decreases sales by 8%, return rate by 2.7 percentage points, and profit by 7.3% per brick-and-mortar store, corresponding to a 2.7% decrease in annual sales for the retailer. The two likely explanations for the insignificant effect for online stores are (1) the low proportion of online customers affected by the policy change and (2) the return displacement effect—in response to the policy change, some affected customers likely accelerate their product evaluation to return within the restrictive policy period. Our analysis also demonstrates that a return period policy change may increase retail profitability if a majority of retail stores operates under high sales volume and high return rates. Managerial implications: Our study suggests that managers of multichannel retailers that consider a change in their return period policies should carefully assess their operational structures and evaluate consumer return behavior at each channel, particularly over the time window between the proposed policy period and the existing policy period.