Should Customized Products Be Returnable?

Wherever newfangled technology meets marketing smarts, you’ll likely find a happy consumer. Today, with the emergence of 3-D printing at scale and advanced manufacturing systems, we see the stirrings of a new age of mass customization of products to suit any weird taste. Lacoste, for example, invites its customers to express their “inner Crocodile” and personalize their polo shirt or sweatshirt based on colour, crocodile, print and initials.

Early adopting businesses are delighted as well. They can attract new customers and deepen relationships with existing clientele. But customization can disrupt the assumptions embedded in many marketing strategies. Consider the case of the product returns policy.

Lenient return policies fuelled the rise of e-commerce by helping consumers get comfortable purchasing clothes, eyeglasses and other high-touch products without feeling them first. But the policies have become a little too successful. An estimated 30 to 40 per cent of all online purchases are returned (compared with 10 per cent at brick-and-mortar stores). That’s a significant cost of doing business.

For purveyors of customized products, this presents a quandary: Should customers be allowed to return products they personalized, and, if so, under what conditions?

The intuitive answer is no (a position that Lacoste and many others take). The logic seems bulletproof: Customized products are more expensive to produce than standardized products, and a firm has little hope of reselling an item with someone’s name stitched on it.

But a contrarian would say, What is there to lose in offering returns on customized products? These goods better match consumers’ preferences and therefore are much less likely to be returned. Perhaps there’s value in allowing customized products to be returned under similar conditions as standard products.

A study called “Customization and Returns” takes a closer look at the issue and finds that the intuitive approach may not be the right approach.

How was the study designed?

The researchers designed an analytical model in which a firm sets the price and return policies for its customized and standard products; consumers decide which product to buy based on initial impressions, while factoring in the ability to return the purchase if needed; and both parties act based on their strategic interests. Such models are known as game theory. They describe strategic interactions among multiple parties and are applied to decisions in business, government and non-profit sectors, as well as in personal matters.

What did the study find? 

• A stringent return policy is best for those firms that only offer customized products.
• Firms can use customized products to nudge consumers who otherwise would buy and return a standard product to switch to a customized product with a lower rate of return. By doing so, they can increase profits and reduce overall returns.

What do I need to know?

This study sheds light on an emerging marketing issue that will surely have greater importance in the coming years. The few firms already dabbling in customization are still feeling their way regarding product return policies. The sneakers market is a good example. Nike allows customers to personalize footwear by colour, material and initials and allows returns on those co-created products. New Balance and Adidas offer customization but not the lenient return policy. Puma doesn’t allow customers to personalize orders.

For those firms that only offer customized products, this study shows that a strict and limited return policy is the way to go. Otherwise, these firms would be hit with the higher costs of getting rid of personalized goods that are difficult, if not impossible, to salvage.

But the calculus changes for those firms that offer both standardized and customized products. These firms can use their returns policy strategically to nudge customers toward a more profitable transaction.

The researchers’ model shows that when a firm institutes a lenient returns policy for both standard and customized products, customers are motivated to switch from high-return standard products to low-return customized ones. The latter better match consumer preferences and are less likely to be returned.

“Therefore, despite the added production and returns cost of customization, firms can achieve win-win outcomes with higher profits and lower returns by accepting customized-product returns,” the researchers write.

Firms, however, have work to do to capture these gains, the researchers point out in a followup article. They say manufacturers and retailers should make customized products more salvageable, either by changing product design or finding secondary markets, and reduce the cost of customization, partly through AI-driven solutions. And they should do more to encourage customers to personalize products, either by reducing or eliminating customization fees or designing richer and more user-friendly interfaces.

Study Title: Customization and Returns

Authors: Gokce Esenduran (Krannert School of Management, Purdue University); Paolo Letizia (Haslam College of Business, University of Tennessee); Anton Ovchinnikov (Smith School of Business, Queen’s University)

Published: Management Science, vol. 68, issue 6 (June 2022)