Leveraging product returns to maximize customer equity

Product returns occur when a customer brings back a previously purchased product with the intent to receive a repair, refund, or replacement. Product returns provide a significant expense to businesses, with some studies showing that product returns cost US manufacturers and retailers an estimated S100 billion annually, reducing profits by around 3.8 percent on average per retailer or manufacturer (Blanchard, 2007). And, this cost is only likely to rise as retailers increasingly engage in multi-channel strategies. The increasing flexibility of retailers to allow customers to shop and purchase both online and offline has offered numerous benefits to consumers such as increases in value and convenience. However, it has also impacted customer product return behavior. Product returns are potentially more costly in this environment as customers cannot ‘touch and feel’ the product before purchase online and purchases online are often returned to the retail store (Ofek, Katona, and Sarvary, 2011). This is likely to decrease profit for the retailer through both increases in product returns and increases in product return management costs.