Marketing Letters 7:4 (1996): 307-3 17 01996 Kluwer Academic Publishers, Manufactured in The Netherlands Controlling Product Returns in Direct Marketing JAMES D. HESS University qf Illinois, 350 Commerce West Building, 1206 South Sixth Street, Champaign, IL 61820 WUJIN CHU Seoul National University, School of Management, Shinlim-Dong. Kwanak-Ku, Seoul 151. Korea EITAN GERSTNER University of California. Davis, Graduate School of Management, Davis, CA 95616; University of Hafa, Israel (Received February 6, 1996; Revised April 26, 1996; Accepted June 5, 1996) Abstract Many direct marketers offer price refunds to unsatisfied consumers, but as a result some consumers order prod- ucts with no intention of keeping them. We show that such inappropriate returns can be controlled in a profitable way by imposing nonrefundable charges and that these charges increase with the value of the merchandise ordered. Data collected from clothing mail-order catalogs is consistent with our theory. The shipping and han- dling charges of these catalogs are usually nonrefundable and increase with the value of the merchandise ordered even when the actual shipping and handling costs are constant. 1. Introduction Mail-order shopping offers customers many conveniences. Rather than enduring the myr- iad inconveniences of mall shopping, customers can order products such as clothing, com- pact discs, and computers from catalogs within the comfort of their homes, twenty-four hours a day, all year long. Many customers find such convenience very appealing: nearly 12 billion catalogs were distributed by companies to consumers in 1993, and more than half of the U.S. adult population made at least one product purchase by phone or mail (Consumer Reports, 1994). Compared to retail shoppers, however, catalog shoppers face greater uncertainty about product fit because they cannot examine and try the products prior to purchase. To reduce this risk, many catalog retailers offer price refunds on returned merchandise. There are reports that many consumers take advantage of these liberal policies by returning products for a refund (Fenvessy, 1992; Hess and Mayhew, 1996). Moreover, a few retailers feel that their products (evening dresses, bridesmaid gowns, compact discs, camcorders) are some- times ordered by customers who have no intention of keeping them (Longo, 1995). How can catalog companies control for such inappropriate returns? We present a model to show that a separate nonrefundable charge can be a profitable alternative and that the nonrefundable charge increases with the value of the merchandise ordered. The model is consistent with data collected from clothing mail-order catalogs. The catalogs’ shipping