Operational Determinants of Product Returns in Internet Retailing – The Role of Physical Distribution Services

Shashank Rao, Auburn University College of Business
Elliot Rabinovich, Arizona State University

Pressure continues to build on internet retailers to squeeze out inefficiencies from their day to day operations.  One major source of such inefficiencies is product returns.  Indeed, product returns in Internet retailing have been shown to be, on average, as high as 22% of sales.  Yet, most retailers accept them as a necessary cost of doing business.  This is not surprising since many retailers do not have a clear understanding of the causes of product returns.  While it is known that return policies of retailers, along with product attributes, are two important factors related to product return incidents, little is known about which operational aspects of the online retail transaction make such a purchase more return-prone.

In the current study, we seek to address this issue.  We use a large data set of customer purchases and returns to identify how process attributes in physical distribution service (PDS) influence product returns. The first attribute involves the disclosure of scarcity conditions in inventory availability by retailers to consumers. Our results show that orders in which items are sold after these conditions are revealed to shoppers have a higher likelihood of being returned than orders in which these conditions are not revealed. While prior research has argued that inventory scarcity perceptions have a powerful effect on purchases, our findings suggest that they also have a substantial effect on the likelihood of these purchases being returned.

The second attribute involves the reliability in the delivery of orders to consumers. We find that the likelihood of orders being returned depends on the consistency between retailer promises of timeliness in the delivery of orders and the actual delivery performance of the orders. Moreover, we find that the effect that consistency in the delivery has in the likelihood of returns is stronger for orders that involve promises for expedited delivery than for orders with less expeditious promises. That is, although the occurrence of returns depends on the delays in the delivery of orders to consumers relative to the initial promises made by the retailers, this effect is more notable for orders that involve promises of fast delivery.

 

Rao, S.; Rabinovich, E. “Operational Determinants of Product Returns in Internet Retailing – The Role of Physical Distribution Services.” Working Paper