In the competitive world of retail sales, product assortment is a very important strategic marketing decision. Factoring returns into the equation has often been an afterthought - an operational decision simply to be dealt with. In online sales, where returns can be up to 35% of sales compared to 6% of sales in general, the impact of returns on profitability implies greater attention to the return-assortment dynamic. New research by ITOM Professor Aydin Alptekinoglu and co-authors shows that return policy and product assortment have a greater relationship than previously thought, including when to carry "eccentric" or less popular products.

According to previous research, the annual value of returned goods in the U.S. is about $100 billion with more than $40 billion spent on reverse logistics to process returns. "Given more online sales, how much attention is being paid to returns?" Alptekinoglu questions. "My impression is that returns are treated as a cost-center - as a fact of life to deal with at a minimum cost. This was our starting point for the research." The authors wondered whether retailers considered the nature of their return policies when picking their assortments. For instance, was it true that a retailer with a more lenient return policy would carry a narrower assortment? Another factor in the assortment decision given return policy is whether a merchandiser should carry eccentric (less common items) or popular (more commonly purchased) products. An eccentric product in this case could be an odd-ball color of a Ralph Lauren classic shirt or the metallic gold go-go boots at shoebuy.com.


Modus operandi matters too

A retailer should also consider the operational mode, how they carry inventory, as it plays a role in the return-assortment decision. The research analyzes retailers operating under a make-to-order (MTO) mode, where the purchaser sees a show room model and then orders to their preferences, as in Ethan Allen furniture stores for example. Another MTO case is online sales at REI.com where much of the sports gear sold online is drop-shipped from a third-party. If the firm has a strict return policy (meaning they require, say, a 25% re-stocking fee) like the former Circuit City did for home theater set purchases, then firms should be more inclined to carry some number of eccentric products. Why? Because, eccentric products are more likely to be returned. When choosing less popular products, purchasers are more likely to have post-purchase dissatisfaction for one reason or another. However, if the return policy is more lenient (toward a full refund), then they will want to carry more popular products. More popular products are less likely to be returned.

Take the case of Amazon. Amazon carries a vast assortment of products in numerous variations, eccentric or popular. Amazon operates in a MTO mode when they have another specialty retailer ship the goods, i.e., Amazon doesn't own this particular inventory. When Amazon owns the inventory, they are operating in a make-to-stock mode (MTS). Under MTS merchandising, when the firm's refund policy is strict (not offering a full refund), the authors find that the merchandiser should carry a mix of most eccentric and most popular products.


Returns and assortment strategy

Given today's more challenging sales environment, Alptekinoglu observes that return policies are getting stricter. "To be careful on the cost side, firms may want to impose higher restocking fees. "And, if firms do slide to stricter return polices, they should certainly consider offering eccentric products."

Alptekinoglu says their paper sees an interaction between returns and product assortment that has formerly not been studied. Returns do have a more strategic quality than previously thought, because they impact assortment decisions. If the refund is 100%, then conventional wisdom holds, Alptekinoglu states, "Carry some number of most popular products. Understand what is most popular; rank order colors that are best liked, in an apparel merchandising situation for example, and choose so many top colors." He adds, "However, if due to market conditions a firm chooses a more strict return policy, they should consider carrying eccentric products."

In online sales, the results of this paper may be more important than for traditional brick-and-mortar retailers. With online retailers, there are more returns because of the way in which online products are purchased - seen as a JPEG but untouched. In online settings and given more returns, this type of retailer moves into the region where assortment and return policy interact strategically.

Additionally, even if a customer can re-sell their item, say on e-Bay, rather than returning it to the retailer, the paper's findings still hold true.


The paper "When to Carry Eccentric Products? Optimal Assortment under Product Returns" by Aydin Alptekinoglu of SMU Cox School of Business, Alex Grasas of Universitat Pompeu Fabra, and Elif Akçali of University of Florida is under review.

Written by Jennifer Warren.