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Executive Summary
The firm–customer exchange process consists of three key parts: (1) firm-initiated marketing communications, (2) customer buying behavior, and (3) customer product return behavior. Research in marketing has largely focused on how marketing communications affect customer buying behavior and, to some extent, how past buying behavior affects a firm’s decisions to initiate future marketing communications. However, research on the role of product returns in the exchange process is sparse, especially in relation to analyzing individual customer product return behavior. Although it is known that the magnitude of the value of product returns is high ($100 billion per year), how it affects customer buying behavior is not known because of a lack of data availability and a lack of understanding of the role of product returns in the firm–customer exchange process.

Given that product returns are considered a hassle for a firm’s supply chain management and a drain on overall profitability, it is important to study product return behavior. Thus, in this study, the authors use data from a catalog retailer, including data on firm-initiated marketing communications, customer buying behavior, and customer product return behavior, to demonstrate empirically the role of product returns in the exchange process. They do this by determining the exchange process factors that help explain each customer’s product return behavior and the consequences of product returns on each customer’s future purchase behavior and the firm’s decision to allocate marketing resources. They also directly quantify the trade-offs between the costs of product returns in the short run and the potential benefits of increases in future customer purchase behavior as a result of satisfactory product returns. Then, the authors empirically determine that the optimal amount of product returns for the focal firm of this study to maximize profits is 13%, a reduction of only 3% from the firm’s current percentage of product returns from customers. They go on to provide guidelines to marketers for managing customers on the basis of each customer’s purchase and product return behavior to maximize profits into the future. Finally, this study shows that product returns do not need to be a necessary evil of the firm that drains precious resources and lowers firm profits. Instead, information about each customer’s product return behavior can be used as an additional metric for managing customers profitably.

Biography
J. Andrew Petersen is Assistant Professor of Marketing in Kenan-Flagler Business School at the University of North Carolina at Chapel Hill. He received his PhD in Business Administration with a concentration in Marketing from the University of Connecticut. His research interests include managing customer product returns, valuing customers for firms and donors for nonprofit organizations, valuing customer referrals and word of mouth, and optimizing selling strategies. His research has been published in Journal of Marketing, Harvard Business Review, Journal of the Academy of Marketing Science, Journal of Retailing, and Journal of Service Research, among other outlets.

V Kumar is Richard and Susan Lenny Distinguished Chair Professor of Marketing and Executive Director of the Center for Excellence in Brand & Customer Management in the Robinson College of Business at Georgia State University. He has been recognized with more than 15 teaching and research excellence awards, including two lifetime achievement awards for contributions to marketing strategy and business-to-business marketing. He has published more than 100 articles and books, including the recently released Customer Relationship Management: A Databased Approach. His publications in scholarly journals include Harvard Business Review, Journal of Marketing, Journal of Marketing Research, Marketing Science, and Operations Research. His research focuses on multichannel shopping behavior, international diffusion models, customer relationship management, customer lifetime value analysis, sales and market share forecasting, international marketing research and strategy, coupon promotions, and market orientation. He was recently listed in the top five scholars in marketing worldwide and has consulted for many Fortune 500 firms.

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