The Option Value of Returns: Theory and Empirical Evidence, Marketing Science
When a firm allows the return of previously purchased merchandise, it provides customers with an option that has measurable value. While the option to return merchandise leads to an increase in gross revenue it also creates additional costs. Selecting an optimal returns policy requires balancing both demand and cost implications. In this paper, we develop a structural model that incorporates a consumer's decision to purchase and return an item. The model enables a firm both to measure the value to consumers of the return option, and to balance the costs and benefits of different return policies. We apply the model to a sample of data provided by a mail order catalog company. We find considerable variation in the value of returns across customers and categories. When the option value is large there are large increases in demand. For example, the option to return women's footwear is worth an average of more than $15 per purchase to customers and increases average purchase rates by more than 50%. We illustrate how the model can be used by a retailer to optimize its return policies across categories and customers.
Eric T. Anderson, Karsten Hansen, Duncan Simester
Anderson, T. Eric, Karsten Hansen, and Duncan Simester. 2009. The Option Value of Returns: Theory and Empirical Evidence. Marketing Science. 28(3): 405-423.