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And they returned happily ever after

Can lenient return policies boost retailer profits? Professor Ahmed Timoumi's research suggests that retailers should embrace the 'buy it-use it-return it' tactic used by customers to increase profitability

Published: Feb 6, 2020 02:28:03 PM IST
Updated: Feb 6, 2020 02:37:38 PM IST

And they returned happily ever afterImage: Shutterstock

ISBInsight: In your research, you talk about opportunistic behaviour that customers engage in. While it does seem that most retailers might fight this sort of behaviour, in your research you recommend that retailers leverage it.  How should retailers respond?
Ahmed Timoumi: The phenomenon where a customer buys a product, uses it for a short time and returns it to the store either for a partial or full refund is called ‘wardrobing’. For example, customers might return a Halloween costume after Halloween, or even perhaps a wedding dress or a tuxedo after a wedding. This opportunistic behaviour is not just restricted to clothing. Customers might even return a set of tools after a one-time home improvement job or an LCD projector after a business meeting, or a big-screen TV after the Super Bowl.

Wardrobing behaviour is very predictable. If one were to see the product returns in the television category in 2017, customers returned twice as many TVs between January and March compared to October through December. February is the typical Super Bowl season in the United States.

What is odd is that retailers do not completely stamp out this opportunistic behaviour. If wardrobing is an opportunistic behaviour that needs to be curtailed, retailers can refuse to accept any returns and totally prevent it. Alternatively, they can charge high restocking fees in order to discourage returns. Instead, retailers accept returns for a partial or full refund. Could it, therefore, mean that ‘wardrobing’ is not as reprehensible as it is depicted?

In our research, we unravel this puzzle by analysing the costs and benefits of wardrobing. Our research shows that the retailer is better off allowing for wardrobing and accepting returns rather than preventing it. This is in direct contrast to the way wardrobing is traditionally perceived.

In our analysis, we categorise customers as ‘regular’ and ‘opportunists’. The key difference between both segments is the “psychological” hassle cost that a customer in either segment incurs when returning the product. Regular customers incur a high hassle cost that deters them from returning a fully functional product and engaging in “unethical” behaviour. The opportunist customer incurs no such psychological, moral or ethical hassle cost in returning a product.

If you are wondering what retailers do with the returned products, the retailers resort to selling them as ‘open-box’ products. These open-box products allow the retailer to practise price discrimination.

How does wardrobing allow the retailer to practise price discrimination?
Wardrobing offers the retailer the ability to practise price discrimination among regular customers who vary in their willingness to pay for the product. The retailer is now able to sell two versions of the same product with different perceived quality at two different prices. Therefore, he or she can charge a higher retail price for the new and high-quality products sold to customers with a high willingness to pay for the product. They can also sell open-box products to customers with low willingness to pay, who might not even be able to afford the new products.

If the retailer benefits from wardrobing because he or she can sell open-box products and practise price discrimination, wouldn’t the retailer be tempted to “slash” boxes himself or herself and offer open-box products without wardrobing?
The core benefit of embracing wardrobing behaviour is the retailer’s ability to practise price discrimination by charging a higher price from customers with a higher willingness to pay.

When a retailer indulges in box slashing, he or she does not earn a restocking fee equal to the difference between the original and refunded price. However, after the box slashing, the retailer must charge a lower price because the customer perceives the product to be of lower quality.  Although both the new and the open-box versions have the same acquisition cost, they have different perceived quality. Therefore, the retailer would not have any incentive to sell the low-quality i.e., slashed box version of the product.

However, in the case of open-box products generated by customer returns, the retailer earns a restocking fee that “lowers” the actual cost of the open-box product. This makes price discrimination feasible and profitable.

What would be the key insights that retailers can take away from your research?
The retail industry is transforming, and the retail of the future is even more focused on customer experience, whether shopping online or in-store.

Embracing the practice of wardrobing and having lenient return policies can help increase a retailer’s profitability. Retailers underestimate the size of the market for open-box products. By offering open-box products, retailers can create a new internal marketplace within their store rather than let the customer seek other alternate channels.  Customer-friendly return policies help sell products to a wider customer base. Allowing a secondary market to arise through wardrobing can thus be a profitable move.

About the Researchers:
Ahmed Timoumi is Assistant Professor of Marketing at the Indian School of Business.

Anne T. Coughlan is Polk Bros. Chair in Retailing Professor of Marketing at the Kellogg School of Management, Northwestern University.

[This article has been reproduced with permission from the Indian School of Business, India]

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