Return policy: Hassle-free or your money-back guarantee?

This article compares the profitability of two pervasively adopted return policies - money-back guarantee and hassle-free policies. In our model, a seller sells to consumers with heterogeneous valuations and hassle costs. Products are subject to quality risk, and product misfit can only be observed post-purchase. While the hassle-free policy is cost advantageous from the seller's viewpoint, a money-back guarantee allows the seller to fine-tune the consumer hassle on returning the product. Thus, when the two return policies lead to the same consumer behaviors, the hassle-free policy dominates. Conversely, a money-back guarantee can be more profitable even if on average, high-valuation consumers experience a lower hassle cost than the low-valuation ones. The optimal hassle cost can be higher when product quality gets improved; thus, it is not necessarily a perfect proxy or signal of the seller's quality. We further allow the seller to adopt a mixture of these policies, and identify the concrete operating regimes within which these return policies are optimal among more flexible policies.