CLASH OF THE RETURN POLICIES VS.

QUESTION  What factors make having a return policy a profitable strategy?  How do varying types of return policies differ in their effect on consumers?

Inspiration  FREE 27’’ FLAT SCREEN TV  Free things are used as marketing promotions.  If everyone took advantage of the marketing promotion, they wouldn’t work.  Why do these marketing promotions work?

Hypothesis  Several factors which could affect customer utilization of return policies.  1) Endowment effect  2) Guilt / Obligation  3) Forgetfulness  4) Too much effort  5) Attachment

Experiment Set-up  2 Parts  Part 1 – Testing endowment effect  Part 2 – Testing reasons for returns

Part 1  Distribution of coffee mugs from the Yale bookstore, worth $7.  Given to 8 out of 16 people in the class (ID #’s 1- 8). We then passed out a survey stating “How much would you be willing to sell this mug for?” (exhibit B), or conversely, to the people without a mug “How much would you be willing to buy this mug for?”.  This was to test the existence of the endowment effect. If such an effect existed, we would expect to see the price for those with mugs to be somewhat higher on average than those without, due to the higher valuation they ascribe to it solely by virtue of possessing it.

Part 1, continued  After this, we held an auction allowing those with a mug to sell it to any potential buyers.  The intention here was to give us another measure to gauge people’s valuation, and discover a possible endowment effect.  Despite the length of the auction (5 mins.), there were very few bids, and only one potential sale.  After, we distributed mugs to everyone

Part 2  Instructions on how to return the mugs, saying that after a certain amount of time the mugs had to be returned, or else $7 would have to be paid for them.

Important Note  Departed somewhat from a realistic simulation of return policies.  However, we felt it would not be fair to charge the class members money up-front, since there was no way for them to opt out of the experiment entirely  Came up again at the end of the experiment. Despite what was written on the return instructions, we didn’t end up making people pay the money if they wanted to return the cup, but did so after the time limit had expired. We feel that this did not have much bearing on the outcome of the experiment, however, because up until the end of the experiment, everyone was under the impression that they would have to pay the money

Part 2, continued  2 types of return policies  Free- Trial  Money- Back guarantee  Subdivided further into 7 and 17 day time-limit

 Money-back Guarantee  (If you are not completely satisfied with our product, return it within days and get your money back)  You have _______ days to keep the item before you need to make a decision on whether you want to keep it. If you don’t return it before ­­ days is up, then on the ______ day you must pay $_________ for it.  You cannot return the item during class time. You must return it at McClellan entry A.  You may return it anytime between pm Monday- Wednesday, or anytime between noon and 10 pm Thursday-Sunday.  If returning, please call either Chris ( ) or Dwayne ( ) to make sure one of us is in. Thanks.

 Free Trial Period  (This product is yours to try free of charge for days. If you are not satisfied, return the product and owe us nothing)  You have ________ days to keep the item before you need to make a decision on whether you want to keep it. If you don’t return it before ______ days is up, then we will contact you on the ________ day, and you can either return it, or pay $_________ for it and keep it. We will remind you periodically by of how many days you have left  You cannot return the item during class time. You must return it at McClellan entry A.  You may return it anytime between pm Monday- Wednesday, or anytime between noon and 10 pm Thursday-Sunday.  If returning, please call either Chris ( ) or Dwayne ( ) to make sure one of us is in. Thanks.

Part 2, cont.  Survey as to the reason for return / not  Minimum that they would be willing to return the cup for.  again test the endowment effect. Even if Part 1 confirmed its existence, we wanted to see if it specifically applied in this case, by seeing if the price that they were willing to return for was higher than the price they had previously stated to buy/sell at.

Endowment Effect  Seen in 1 st part, not in 2 nd part

Received cup vs. Not 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 be willing to sell the cup for. The other group was asked how much they would be willing to pay for the cup.  RECEIVED CUP  Before experiment they were willing to sell cup for $6.81  After experiment the least they would accept to return the cup was $5.00  DIDN’T RECEIVE CUP  Before experiment they were willing to buy cup for $5.37  After experiment the least the would accept to return the cup was $4.57

Endowment Effect Part 2 We feel that this may be due to poor design of this part of the experiment, as well as poor wording of the question. The question on the 2nd survey stated “What is the minimum amount you would be willing to return this cup for?” Since we were charging a fee for not returning the cup (rather than giving them money back for returning the cup), the lower price on the 2nd survey may actually have reflected that people have a greater utility decrease from losing an amount of money, compared to the utility increase from gaining the same 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-Trial People were split into 2 groups a money-back condition and a free-trial condition  MONEY-BACK  2 out of 7 people returned cup  No returns were on time  6 out of 7 people forgot about the cup  FREE-TRIAL  5 out of 7 people returned the cup  3 out of the 5 returns were on time  2 out of 7 people forgot about the cup

7 vs. 17 Half of each group were required to return the item after 1 week and the other half after 17 days  7-DAY CONDITION  1/2 of the people bought the cup  None of the cups were returned on time  17-DAY CONDITION  1/2 of the people bought the cup

Reasons for Not Returning Cup

Reasons for Not Returning Cups Money-back vs. Free-trial

Reasons for Not Returning Cup 7-Day vs. 17-Day

Reasons for Returning Cup Money-back vs. Free-trial

Reasons for Returning Cup 7-Day vs. 17-Day

Limitation of Experiment  a) sample size  b) lack of anonymity  c) not a perfectly realistic model  d) not necessarily an item that they actually wanted

Real World Applications  Money-back guarantee may be a more effective return policy  Time period did not effect percentage of people returning cup  Companies may be able to use data such as this to determine which return policy is better for them.  Disclaimer: Our results may not be applicable to other items.

Ideas for Future Research  Testing whether the cost of a product affects the return rate  Testing how various restrictions (such as having to fill out forms, or having to mail the item back rather than taking it back to a store, or having to obtain a Return Merchandise Authorization (RMA) number by calling the store or warehouse)  Requiring receipts for returns  Testing whether level of anonymity affects return rate (eg. Small neighborhood store vs. large chain / department store)  Creating very long time limits for returns, and comparing these to return rates for shorter time limits