Contingent free shipping (CFS) policies, whereby consumers get free shipping if their orders exceed a certain amount, are commonplace. A CFS policy aims to nudge customers to place larger orders by adding additional items and/or buying more expensive items (order-swelling). However, a less desirable possible outcome is that customers pad their
orders to avoid paying the shipping fee but then return the opportunistic/impulse-purchase items later (return-swelling).
A retailer designing the CFS policy’s terms—threshold and shipping fee—should balance these competing trade-offs. We study how the retailer’s return environment, specifically the ease-of-return experience (EOR) for customers, moderates order-swelling or return-swelling behavior induced by a CFS policy.
We collaborate with a retailer who switched across multiple CFS policies over time. Our difference-in-differences empirical strategy builds on these switches and location-based variation in the EOR. We find that the EOR can considerably impact the relative profit performance of the CFS policies. EOR moderates both the order- and return-swelling
responses. Our counterfactual analysis reveals that return-swelling is the key driver of the observed difference in the relative profit performance of CFS policies across the two EOR market types.
Our study documents a novel determinant of the financial performance of a CFS policy: the ease-of-return experience. Our analysis indicates that our collaborating retailer would be better off selecting a (relatively) lenient CFS policy in more convenient EOR markets and a (relatively) stringent CFS policy in less convenient EOR markets.
Ashish Kabra (NTU), Wedad Elmaghraby (UMD), Nitish Jain (LBS)
Production and Operations Management