Managing customer returns strategy with the option of selling returned products

Managing customer returns is a crucial issue for the retailing industry. In this paper, we develop a model to investigate a monopolistic retailer's customer returns management strategy. The retailer should determine its returns policy: a money-back guarantee (MBG) or no-refund. If an MBG returns policy is offered, the retailer must also decide whether or not to sell the returned products as open-box products. We derive the optimal pricing strategy for each of the returns strategies and identify the retailer's optimal customer returns management strategy. We show when the retailer should implement each of the returns policies, and when it should sell the returned products as open-box products. We also show that even when the retailer cannot handle customer returns efficiently, it could choose to offer an MBG returns policy and sell returned products as open-box products, if the cost of inspecting returned items is low. Finally, we show that the retailer can simplify the choice of returns management strategy based on identifiable quantities and threshold values. The implications of this study are also discussed.