New research highlights how retailers can optimize online returns

Large and small retailers can benefit from return shipping insurance, but University of Florida research suggests which type is most optimal for various retailers.

GAINESVILLE, Fla. – With the rise of online shopping, online returns have also grown. At least 30% of all products ordered online are returned, and U.S. return delivery costs have risen from $350 billion to $550 billion from 2017 to 2020.

Retailers understand the importance of offering lenient return policies to customers. In fact, 79% of consumers preferring free return shipping, but there are costs associated with offering such options. With free return shipping options, retailers not only incur the return shipping cost but also the risk of something happening to their product once it’s been shipped for return.

Return shipping insurance is an innovative insurance tool that helps alleviate concerns about product returns, both for retailers and consumers. New research from the University of Florida highlights which return shipping insurance is optimal for retailers.

“We find that return shipping insurance can further improve a retailer’s profitability, no matter if they offer a full or partial refund product policy,” explained Amy Pan, Associate Professor and co-author on the study. “The most optimal return shipping insurance for retailers depends on a few factors, though, including consumers’ regret behavior.”

There are two types of return shipping insurance (RSI) policies: the Retailer-RSI policy, in which online retailers purchase RSI from insurance companies and provide it to consumers for free, and the Customer-RSI policy, in which the retailer offers an option for consumers to purchase RSI directly from the insurer during the merchandise checkout stage.

While one might assume that retailers would prefer the Customer-RSI policy over the Retailer-RSI policy, since customers pay the return shipping insurance themselves, most retailers actually choose to incur the cost with a Retailer-RSI policy. But is this the best option for retailers?

Pan and her co-authors find that taking consumer behavior into account helps determine the most optimal return shipping insurance policy for retailers. Specifically, they considered two types of consumer regret: aversion to the regret from not buying RSI (uninsured regret) and an aversion to the regret from buying RSI (insured regret).

“Retailer-RSI raises the product price, exacerbating the adverse selection problem, but may expand the consumer demand, while the Customer-RSI policy always lowers product price, mitigates the adverse selection problem, and shrinks consumer demand,” Pan explained.

As a result, the researchers find, Retailer-RSI is optimal if the retailer’s return handling cost is relatively low and the consumers’ return shipping cost is medium. In contrast, the Customer-RSI policy is best when there is a relatively high return handling cost and intermediate shipping cost.

“Under the optimal Retail-RSI policy, the retailer always charges a higher product price than under no RSI, and surprisingly the consumer demand could expand,” the researchers note. “In contrast, under the optimal Customer-RSI policy, the retailer always sets a lower product price, but resulting in consumer demand shrinkage.”

Based on their findings, Pan and her co-authors offer insights for large and small retailers looking to offer return shipping insurance.

“For major retailers that can repackage and resell returned products more economically, Retailer-RSI seems the optimal choice,” Pan said. “For small sellers that incur more costs to handle returned products, Customer-RSI may be the best policy. Our findings suggest that both types of retailers, as well as insurers, can advertise a cheap insurance premium and expensive product return shipping cost to raise the consumers’ uninsured regret level to encourage more consumers to purchase Customer-RSI.”

The complete research, “Optimal Return Shipping Insurance Policy with Consumers’ Anticipated Regret,” is forthcoming in Production and Operations Management.