CLASH OF THERETURN POLICIES

VS.

QUESTIONQUESTION

What factors make What factors make having a return policy a having a return policy a profitable strategy? profitable strategy?

How do varying types of How do varying types of return policies differ in return policies differ in their effect on their effect on consumers?consumers?

InspirationInspiration

FREE 27’’ FLAT SCREEN TVFREE 27’’ FLAT SCREEN TV Free things are used as marketing Free things are used as marketing

promotions.promotions. If everyone took advantage of the If everyone took advantage of the

marketing promotion, they wouldn’t work.marketing promotion, they wouldn’t work. Why do these marketing promotions work?Why do these marketing promotions work?

HypothesisHypothesis

Several factors which could affect customer Several factors which could affect customer utilization of return policies. utilization of return policies.

1) Endowment effect 1) Endowment effect 2) Guilt / Obligation 2) Guilt / Obligation 3) Forgetfulness 3) Forgetfulness 4) Too much effort 4) Too much effort 5) Attachment5) Attachment

Experiment Set-upExperiment Set-up

2 Parts2 Parts

Part 1 – Testing endowment effectPart 1 – Testing endowment effect

Part 2 – Testing reasons for returnsPart 2 – Testing reasons for returns

Part 1Part 1 Distribution of coffee mugs from the Yale Distribution of coffee mugs from the Yale

bookstore, worth $7. bookstore, worth $7. Given to 8 out of 16 people in the class (ID #’s 1-Given to 8 out of 16 people in the class (ID #’s 1-

8). We then passed out a survey stating “How 8). We then passed out a survey stating “How much would you be willing to sell this mug for?” much would you be willing to sell this mug for?” (exhibit B), or conversely, to the people without a (exhibit B), or conversely, to the people without a mug “How much would you be willing to buy this mug “How much would you be willing to buy this mug for?”. mug for?”.

This was to test the existence of the endowment This was to test the existence of the endowment effect. If such an effect existed, we would expect effect. If such an effect existed, we would expect to see the price for those with mugs to be to see the price for those with mugs to be somewhat higher on average than those without, somewhat higher on average than those without, due to the higher valuation they ascribe to it due to the higher valuation they ascribe to it solely by virtue of possessing it. solely by virtue of possessing it.

Part 1, continuedPart 1, continued After this, we held an auction allowing those with After this, we held an auction allowing those with

a mug to sell it to any potential buyers. a mug to sell it to any potential buyers.

The intention here was to give us another The intention here was to give us another measure to gauge people’s valuation, and measure to gauge people’s valuation, and discover a possible endowment effect. discover a possible endowment effect.

Despite the length of the auction (5 mins.), there Despite the length of the auction (5 mins.), there were very few bids, and only one potential sale.were very few bids, and only one potential sale.

After, we distributed mugs to everyoneAfter, we distributed mugs to everyone

Part 2Part 2

Instructions on how to return the mugs, Instructions on how to return the mugs, saying that after a certain amount of time saying that after a certain amount of time the mugs had to be returned, or else $7 the mugs had to be returned, or else $7 would have to be paid for them. would have to be paid for them.

Important NoteImportant Note Departed somewhat from a realistic simulation of Departed somewhat from a realistic simulation of

return policies. return policies. However, we felt it would not be fair to charge However, we felt it would not be fair to charge

the class members money up-front, since there the class members money up-front, since there was no way for them to opt out of the experiment was no way for them to opt out of the experiment entirely entirely

Came up again at the end of the experiment. Came up again at the end of the experiment. Despite what was written on the return Despite what was written on the return instructions, we didn’t end up making people pay instructions, we didn’t end up making people pay the money if they wanted to return the cup, but the money if they wanted to return the cup, but did so after the time limit had expired. We feel did so after the time limit had expired. We feel that this did not have much bearing on the that this did not have much bearing on the outcome of the experiment, however, because outcome of the experiment, however, because up until the end of the experiment, everyone was up until the end of the experiment, everyone was under the impression that they would have to under the impression that they would have to pay the money pay the money

Part 2, continuedPart 2, continued

2 types of return policies2 types of return policies Free- TrialFree- Trial Money- Back guaranteeMoney- Back guarantee

Subdivided further into 7 and 17 day time-limitSubdivided further into 7 and 17 day time-limit

Money-back GuaranteeMoney-back Guarantee (If you are not completely satisfied with our product, (If you are not completely satisfied with our product,

return it within return it within days and get your money days and get your money back)back)

You have _______ days to keep the item before you You have _______ days to keep the item before you need to make a decision on whether you want to keep need to make a decision on whether you want to keep it. If you don’t return it before it. If you don’t return it before days is up, then days is up, then on the ______ day on the ______ day you must pay $_________ for it.you must pay $_________ for it.

You cannot return the item during class time. You You cannot return the item during class time. You must return it at McClellan entry A.must return it at McClellan entry A.

You may return it anytime between 5 - 11 pm Monday-You may return it anytime between 5 - 11 pm Monday-Wednesday, or anytime between noon and 10 pm Wednesday, or anytime between noon and 10 pm Thursday-Sunday.Thursday-Sunday.

If returning, please call either Chris (440-476-7749) or If returning, please call either Chris (440-476-7749) or Dwayne (203-214-7995) to make sure one of us is in. Dwayne (203-214-7995) to make sure one of us is in. Thanks.Thanks.

Free Trial PeriodFree Trial Period (This product is yours to try free of charge for (This product is yours to try free of charge for

days. If you are not satisfied, return the product and days. If you are not satisfied, return the product and owe us nothing)owe us nothing)

You have ________ days to keep the item before you You have ________ days to keep the item before you need to make a decision on whether you want to keep need to make a decision on whether you want to keep it. If you don’t return it before ______ days is up, then it. If you don’t return it before ______ days is up, then we will contact you on the ________ day, and you can we will contact you on the ________ day, and you can either return it, or pay $_________ for it and keep it. either return it, or pay $_________ for it and keep it. We will remind you periodically by e-mail of how many We will remind you periodically by e-mail of how many days you have leftdays you have left

You cannot return the item during class time. You You cannot return the item during class time. You must return it at McClellan entry A.must return it at McClellan entry A.

You may return it anytime between 5 - 11 pm Monday-You may return it anytime between 5 - 11 pm Monday-Wednesday, or anytime between noon and 10 pm Wednesday, or anytime between noon and 10 pm Thursday-Sunday.Thursday-Sunday.

If returning, please call either Chris (440-476-7749) or If returning, please call either Chris (440-476-7749) or Dwayne (203-214-7995) to make sure one of us is in. Dwayne (203-214-7995) to make sure one of us is in. Thanks.Thanks.

Part 2, cont.Part 2, cont.

Survey as to the reason for return / not Survey as to the reason for return / not Minimum that they would be willing to Minimum that they would be willing to

return the cup for. return the cup for. again test the endowment effect. Even if Part again test the endowment effect. Even if Part

1 confirmed its existence, we wanted to see if 1 confirmed its existence, we wanted to see if it specifically applied in this case, by seeing if it specifically applied in this case, by seeing if the price that they were willing to return for the price that they were willing to return for was higher than the price they had previously was higher than the price they had previously stated to buy/sell at.stated to buy/sell at.

Endowment EffectEndowment Effect

Seen in 1Seen in 1stst part, not in 2 part, not in 2ndnd part part

Received cup vs. NotReceived cup vs. NotBefore the experiment we assigned people into 2 groups. One group received the cup Before the experiment we assigned people into 2 groups. One group received the cup

and another group did not. We asked how much the people who received the cup would and another group did not. We asked how much the people who received the cup would be willing to sell the cup for. The other group was asked how much they would be willing be willing to sell the cup for. The other group was asked how much they would be willing

to pay for the cup. to pay for the cup.

RECEIVED CUPRECEIVED CUP Before experiment Before experiment

they were willing to they were willing to sell cup for $6.81sell cup for $6.81

After experiment the After experiment the least they would least they would accept to return the accept to return the cup was $5.00cup was $5.00

DIDN’T RECEIVE CUPDIDN’T RECEIVE CUP Before experiment they Before experiment they

were willing to buy cup were willing to buy cup for $5.37for $5.37

After experiment the After experiment the least the would accept least the would accept to return the cup was to return the cup was $4.57$4.57

Endowment Effect Part 2Endowment Effect Part 2

We feel that this may be due to poor We feel that this may be due to poor design of this part of the experiment, design of this part of the experiment, as well as poor wording of the as well as poor wording of the question. The question on the 2nd question. The question on the 2nd survey stated “What is the minimum survey stated “What is the minimum amount you would be willing to return amount you would be willing to return this cup for?” Since we were charging this cup for?” Since we were charging a fee for not returning the cup (rather a fee for not returning the cup (rather than giving them money back for than giving them money back for returning the cup), the lower price on returning the cup), the lower price on the 2nd survey may actually have the 2nd survey may actually have reflected that people have a greater reflected that people have a greater utility decrease from losing an amount utility decrease from losing an amount of money, compared to the utility of money, compared to the utility increase from gaining the same increase from gaining the same amount of money.amount of money.

Out of 13 people:

-7 decreased their valuation

- 2 raised it.

No evidence of the existence of this effect.

Money-Back vs. Free-TrialMoney-Back vs. Free-TrialPeople were split into 2 groups a money-back condition and a free-trial conditionPeople were split into 2 groups a money-back condition and a free-trial condition

MONEY-BACKMONEY-BACK 2 out of 7 people 2 out of 7 people

returned cupreturned cup No returns were on No returns were on

timetime 6 out of 7 people 6 out of 7 people

forgot about the cup forgot about the cup

FREE-TRIALFREE-TRIAL 5 out of 7 people 5 out of 7 people

returned the cupreturned the cup 3 out of the 5 returns 3 out of the 5 returns

were on time were on time 2 out of 7 people 2 out of 7 people

forgot about the cupforgot about the cup

7 vs. 177 vs. 17Half of each group were required to return the item after 1 week and the other half after Half of each group were required to return the item after 1 week and the other half after

17 days17 days

7-DAY CONDITION7-DAY CONDITION 1/2 of the people 1/2 of the people

bought the cupbought the cup None of the cups None of the cups

were returned on timewere returned on time

17-DAY CONDITION17-DAY CONDITION 1/2 of the people 1/2 of the people

bought the cupbought the cup

Reasons for Not Returning CupReasons for Not Returning Cup

0

1

2

3

4

5

Decided it was worthmore than the amount

for returning

Forgot option Forgot Time limit Not Worth the Effort Felt Guilty Other (specify)

Reasons for Not Returning CupsReasons for Not Returning CupsMoney-back vs. Free-trialMoney-back vs. Free-trial

0

1

2

3

4

5

Decided itwas worthmore than

theamount

forreturning

Forgotoption

ForgotTime limit

NotWorth the

Effort

FeltGuilty

Other(specify)

0

1

2

3

4

5

Decided itwas worthmore than

theamount

forreturning

Forgotoption

ForgotTime limit

NotWorth the

Effort

FeltGuilty

Other(specify)

Reasons for Not Returning CupReasons for Not Returning Cup7-Day vs. 17-Day7-Day vs. 17-Day

0

1

2

3

4

5

Decided itwas worthmore than

theamount

forreturning

Forgotoption

ForgotTime limit

NotWorth the

Effort

FeltGuilty

Other(specify)

0

1

2

3

4

5

Decided itwas worthmore than

theamount

forreturning

Forgotoption

ForgotTime limit

NotWorth the

Effort

FeltGuilty

Other(specify)

Reasons for Returning CupReasons for Returning CupMoney-back vs. Free-trialMoney-back vs. Free-trial

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Reasons for Returning CupReasons for Returning Cup7-Day vs. 17-Day7-Day vs. 17-Day

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Limitation of ExperimentLimitation of Experiment

a) sample size a) sample size b) lack of anonymity b) lack of anonymity c) not a perfectly realistic model c) not a perfectly realistic model d) not necessarily an item that they d) not necessarily an item that they

actually wantedactually wanted

Real World ApplicationsReal World Applications

Money-back guarantee may be a more Money-back guarantee may be a more effective return policyeffective return policy

Time period did not effect percentage of Time period did not effect percentage of people returning cuppeople returning cup

Companies may be able to use data such Companies may be able to use data such as this to determine which return policy is as this to determine which return policy is better for them.better for them.

Disclaimer: Our results may not be Disclaimer: Our results may not be applicable to other items.applicable to other items.

Ideas for Future ResearchIdeas for Future Research Testing whether the cost of a product affects the Testing whether the cost of a product affects the

return ratereturn rate Testing how various restrictions (such as having Testing how various restrictions (such as having

to fill out forms, or having to mail the item back to fill out forms, or having to mail the item back rather than taking it back to a store, or having to rather than taking it back to a store, or having to obtain a Return Merchandise Authorization obtain a Return Merchandise Authorization (RMA) number by calling the store or (RMA) number by calling the store or warehouse)warehouse)

Requiring receipts for returnsRequiring receipts for returns Testing whether level of anonymity affects return Testing whether level of anonymity affects return

rate (eg. Small neighborhood store vs. large rate (eg. Small neighborhood store vs. large chain / department store)chain / department store)

Creating very long time limits for returns, and Creating very long time limits for returns, and comparing these to return rates for shorter time comparing these to return rates for shorter time limitslimits