Online shopping has introduced a level of price volatility that was rare in the era of brick-and-mortar stores. A consumer might purchase a winter coat on Tuesday, only to see the price drop significantly by Friday. For the retailer, these price adjustments are standard tools used to manage inventory and respond to competitors. For the consumer, however, seeing a lower price shortly after a purchase can trigger frustration or regret.
This dynamic creates a financial headache for the retail industry. Returns for online orders are costly, with total returns in the United States reaching an estimated $248 billion in 2023. Retailers must balance the need to drive sales through discounts against the risk that those same pricing strategies might encourage customers to send products back.
A new study published in the Journal of Retailing investigates this tension. The research examines how price reductions influence the likelihood of a product return. The researchers looked at two distinct scenarios. The first is when a customer buys an item on sale. The second is when a customer pays a certain price, but the item is discounted further during the allowable return window.
Defining the Discount Dilemma
Maarten J. Gijsenberg and Tammo H.A. Bijmolt from the University of Groningen, alongside Christian F. Hirche from Budget Thuis B.V., led this investigation. Their work addresses a gap in how the industry understands consumer behavior. While previous research has established that lower prices generally boost initial sales, there is less clarity on how pricing fluctuations affect what happens after the sale.
The researchers focused on two primary concepts: “at-purchase discounts” and “post-purchase discounts.” An at-purchase discount occurs when a customer buys a product for less than its regular price. A post-purchase discount happens when the retailer lowers the price again after the transaction is complete, but while the customer can still return the item.
The team engaged with specific psychological mechanisms to frame their inquiry. They suggested that at-purchase discounts might create a sense of “transaction utility,” or the feeling of getting a good deal. This feeling could make a customer more attached to the product. Conversely, a post-purchase discount might trigger regret. If the price drop is significant enough, it might encourage “opportunistic returns,” where a customer returns the original item to repurchase it at the new, lower price.
Analyzing Millions of Transactions
To test these theories, the research team secured a massive dataset from a major European generalist online retailer. The data spanned a period from the third quarter of 2016 to the second quarter of 2019. It included nearly 84 million purchase records and over 37 million return records.
This extensive dataset allowed the researchers to track individual customer behaviors across more than 300 product categories. The categories ranged from fashion and electronics to furniture and garden supplies. The team linked these transactions to daily pricing logs, allowing them to see exactly what price a customer paid and how that price changed in the days following the purchase.
The methodology involved using advanced statistical models to track the probability of a return over time. These models accounted for the specific timing of price changes. They also controlled for various factors, such as the customer’s history of returns and the specific characteristics of the product, such as whether it was a bulky item like a sofa or a seasonal item like swimwear.
The Impact of Buying on Sale
The analysis revealed distinct patterns regarding at-purchase discounts. The data showed that when customers received a discount at the moment of purchase, they were generally less likely to return the item. This effect appeared to be linear. As the size of the initial discount increased, the probability of a return decreased.
The researchers interpreted this as evidence that getting a deal increases the perceived value of the product. Even if the product is not perfect, the savings provide a buffer against dissatisfaction. The customer feels that the item is worth keeping because the price paid was low relative to its perceived worth.
However, this protective effect had limits based on the customer’s habits. The study found that for customers who frequently returned discounted items in the past, a new discount was less effective at preventing a return. The habit of returning goods appeared to override the psychological satisfaction of getting a bargain.
The Trigger of Post-Purchase Price Drops
The results regarding post-purchase discounts told a different story. The researchers found that when the price dropped after a customer had already bought an item, the likelihood of a return increased. Unlike the at-purchase effect, this relationship was non-linear.
Small price drops after the purchase had little to no impact on return behavior. The effort required to repackage an item and ship it back likely outweighed the potential savings of a few dollars or euros. However, once the post-purchase discount became substantial, the probability of a return spiked.
The data indicated that deep price cuts following a sale serve as a strong trigger for returns. This suggests that customers monitor prices or encounter the lower price through advertising. Once the financial difference becomes large enough to justify the effort, customers act to correct their “mistake” of paying the higher price.
Category Characteristics Matter
The investigation highlighted that not all products are treated equally by consumers. The physical and market characteristics of the product category played a significant role in how sensitive returns were to price changes.
For high-priced categories, at-purchase discounts were highly effective at reducing returns. The stakes are higher with expensive items, so securing a discount provides substantial relief and perceived value. In contrast, for “search goods”—products that can be easily evaluated before buying—discounts had a weaker influence on preventing returns.
The study found that bulky products, such as furniture, and durable goods were particularly sensitive to post-purchase discounts. If a retailer dropped the price of a large item shortly after a sale, customers were much more likely to initiate a return. This occurred despite the high physical effort involved in returning bulky goods.
Conversely, seasonal products and “hedonic” goods—items bought for pleasure rather than utility—showed less sensitivity to post-purchase price drops. Customers who bought these items appeared less likely to go through the hassle of a return just because the price went down later.
The Role of Return History
A unique aspect of this study was its inclusion of customer history. The researchers tracked “habit formation” in return behavior. They calculated how often a specific customer had returned items in the past after receiving a discount.
The findings showed that past behavior is a strong predictor of future actions. Customers with a history of opportunistic returns—returning an item after seeing a price drop—were far more likely to do it again. For these heavy returners, even a moderate post-purchase discount could trigger a return.
This creates a segment of customers who are highly sensitive to pricing dynamics. The study suggests that these individuals have learned that returning products is a viable strategy to manage their spending and maximize value.
Implications for Retail Strategy
The findings offer concrete insights for business managers and pricing strategists. The research demonstrates that while dynamic pricing can maximize revenue, it carries hidden costs in the form of reverse logistics.
The data suggests that retailers should be cautious about deep price cuts immediately following a period of high sales, particularly for bulky or durable items. A steep discount designed to clear inventory might inadvertently trigger a wave of returns from customers who bought the item at full price just days earlier.
For seasonal or hedonic products, retailers appear to have more flexibility. The analysis indicates that aggressive clearance pricing on these items is less likely to cause a backlash of returns from previous buyers.
Balancing Sales and Stability
The researchers also explored the interaction between the two types of discounts. They found that if a customer received a discount when they bought the item, they were less likely to return it later, even if the price dropped further. The initial discount acted as an “immunization” against the regret caused by subsequent price reductions.
This leads to a strategic consideration for retailers regarding the depth and frequency of discounts. Infrequent but moderate discounts (around 20-30%) appeared to be a safer strategy for bulky items and categories with many competing brands. This approach balances the sales boost with the risk of returns.
For other categories, such as high-priced or seasonal goods, deeper discounts (45-55%) might be viable. The strong sales effect in these categories often outweighs the risk of returns, provided the retailer accepts the trade-off.
Directions for Future Inquiry
This study opens several avenues for future research. The authors note that their data comes from a single large retailer. Future studies could investigate whether these patterns hold true across different retail environments or competitive landscapes.
Another area for exploration is the effectiveness of policies designed to mitigate these returns. For instance, some retailers offer price-matching guarantees, where they refund the difference if the price drops. Future research could examine whether such policies effectively stop physical returns or if they simply transfer the cost to a different line item on the balance sheet.
Finally, the researchers suggest looking beyond the immediate return rates to the broader financial impact. This would involve calculating the net profit impact of dynamic pricing strategies, factoring in not just the lost revenue from returns, but the operational costs of processing them. Understanding the full economic picture remains a vital next step for the industry.
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