Returns Policies and Smart Salvaging: Benefiting from a Multi-Channel World

Abstract

Up to 50% of online purchases are returned, reducing e-tailers’ profits. E-tailers employ two mitigating measures. First, returns management affects the number of returns via restocking fees and hassle cost; a restrictive policy leads to fewer returns but also depresses demand. Second, salvaging increases e-tailers’ revenue via the resale of returned items. We unite these two and analyze how to most profitably allocate returns to different salvaging channels and how this depends on and influences the returns policy, price, as well as profit. A competitive retailer must adopt a smart salvaging approach while simultaneously setting the price and restocking fee. The result is a profit-maximizing portfolio of salvage opportunities—which includes the primary market, the secondary market, and returns to the manufacturer (RTM)—as applied by highly profitable e-tailers such as Zalando. Yet in reality, most e-tailers salvage returns exclusively in the primary market; that strategy is suboptimal because it reduces profits and yields a too-strict returns policy. The alternative, smart salvaging policy reduces both price and restocking fee but still increases profit. Such a policy requires that managers respond dynamically: new competition calls for more salvaging of returns by RTM; increased market concentration calls for salvaging more in the primary and secondary markets. Products with a longer (resp., shorter) selling time are more profitably salvaged in the primary market (resp., via RTM). A firm’s investment in salvaging opportunities will not pay off unless these considerations are taken into account. We derive implications for e-tailers and recommend managerial strategies for remaining competitive.