How to Use Game Theory to Improve eCommerce Returns
March 01, 2023
by Rebecca Fox

Have you ever considered how game theory could be applied to eCommerce returns management? When we think of game theory, we often imagine strategic decision-making in competitive settings, like in a game of chess or poker. 

Returns management presents a classic game theory problem, where stores and customers have conflicting interests. Stores want to minimize returns, while customers want returns to be as easy as possible. 

By applying game theory to eCommerce returns, you can design an effective return policy that benefits both customers and your store. 

Game Theory and eCommerce Returns

Game theory is a mathematical framework used to model strategic interactions between decision-makers. In eCommerce, the decision-makers are the store and the customers. 

Online stores want to minimize returns, while customers want returns to be as easy as possible. This interaction creates a classic game theory problem known as the Prisoner’s Dilemma.

What is the Prisoner’s Dilemma?

The Prisoner’s Dilemma is a classic game theory problem that involves two decision-makers who must make a decision without knowing what the other party will choose.

Each decision-maker is incentivized to choose the option that is in their own self-interest, however, if they both act in their own interests, the outcome is worse overall.

This dilemma comes into play in eCommerce when a store and a customer need to make decisions about product returns. 

The scenario is called the Prisoner’s Dilemma because it is based on a scenario in which two people are arrested for a crime.

The dilemma arises from the fact that neither prisoner knows what the other is going to do. If they both cooperate and remain silent, they can only be sentenced to one year in prison each, however, if one testifies while the other doesn’t, the one who testifies will go free and the other will get five years. If both testify against each other, they will both be sentenced to three years in prison.

If each of the prisoners pursues a strategy of maximum self-interest – that is, each testifies against the other – the collective outcome will be worse than if they corporate and both refuse to testify. You can read more about the prisoner’s dilemma here.

The relationship between an eCommerce store and a customer can be thought of in the same terms. If each party seeks only to maximize the benefit for themselves, neither will achieve an optimal outcome.

For the store, the ideal situation is to create a return policy that minimizes returns, as processing returns can be time-consuming and costly. However, customers prefer a lenient return policy that makes it easy for them to return products they are dissatisfied with.

If the store adopts a strict return policy to discourage returns, they may end up losing customers, while if the store offers a lenient return policy, the customer might take advantage of it and cost the store a lot of money.

This creates a dilemma for both parties, as their individual best strategies lead to an outcome that is less than ideal for both parties as they are unable to communicate and reach an agreement.

Game theory provides a framework for analyzing this situation and finding a solution that is optimal for both parties – the Nash Equilibrium.

What is the Nash Equilibrium?

The Nash Equilibrium is a solution concept in game theory that represents a stable state in which neither party has an incentive to change their strategy. 

In eCommerce, this means finding a return policy that balances the interests of both the store and the customers. 

The ideal return policy is one that encourages customers to make purchases without the fear of making returns while also discouraging abuse of the system by customers.

How to Use Game Theory to Improve eCommerce Returns

Game theory provides a useful framework for understanding the strategic decisions made when it comes to product returns. By applying game theory to eCommerce returns, you can optimize your store’s return policy and return process to achieve a win-win outcome for both parties. 

Ways to use game theory in eCommerce to improve the return process:

Encourage Cooperation

Encourage customer cooperation by creating a generous return policy that provides customers with an easy and hassle-free return process. 

This can include free returns, pre-paid return shipping labels, or easy product exchanges, which can increase customer satisfaction and reduce the likelihood of customers taking advantage of the returns process.

Analyze Customer Behavior

Use returns to better understand customer behavior when it comes to returns, such as the types of products that are most frequently returned and the reasons for returns. 

By analyzing return data, you can create a more targeted return policy that is tailored to your specific customer base.

Be Transparent About Returns

Make your return policy transparent and easy to understand. 

Clearly communicate the return policy, provide customers with a convenient returns process, and keep customers informed about the status of their returns.

Incentivize Positive Return Behavior

Provide incentives for customers who make return decisions that benefit both the store and the customer. 

For example, offer customers discounts or rewards if they keep the product instead of shipping it back or make returns within a specific timeframe. These incentives encourage customers to make return decisions that benefit both the store and the customer.

Finding ways to align both parties’ incentives in a mutually beneficial way can reduce return costs and increase customer loyalty.

Apply Game Theory in eCommerce Returns

Thinking about eCommerce returns from a game theory perspective, it’s clear that the best approach is to provide a return process that is beneficial to both parties.

By finding the Nash Equilibrium between customer needs and business goals, you can create a return process that is convenient and flexible for customers while also being practical and cost-effective for your store. 

Apply game theory in eCommerce to manage returns to create a more positive customer experience and improve your bottom line at the same time. 

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