EXPRESS: The Role of Ease-of-Return Experience on Contingent Free Shipping Policies

Contingent free shipping (CFS) policies, whereby consumers get free shipping if their orders exceed a certain amount, are commonplace. Such a policy aims to nudge customers to place larger orders by adding additional items and/or buying more expensive items ( order-swelling ). A less desirable possible outcome is that customers pad their orders to avoid paying the shipping fee but later return the opportunistic or impulse-purchase items ( return-swelling ). A retailer designing the CFS policy’s terms—threshold and shipping fee—should balance these competing effects. 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 an online fashion retailer that switched across multiple CFS policies over time and offered home pickup of returns in some markets but not in others. Our difference-in-differences empirical strategy builds on these policy switches and the location-based variation in the EOR. We find that the EOR can considerably impact the relative profit performance of the CFS policies and that it moderates both the order-swelling and the 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.