Optimal Return Service Charging Policy for a Fashion Mass Customization Program

Mass customization (MC) service is a pertinent industrial practice in the fashion industry. To foster trust and enhance demand, some brands now allow dissatisfied customers to return the MC fashion product for a full refund minus a service charge. The service charge is a measure to avoid the abuse of the return right and to subsidize the operations cost (e.g., shipping) and loss from the return. Motivated by this observed industrial practice, this paper analytically examines the optimal return service charge policy. We separate the study into two cases–those of risk‐neutral and those of risk‐averse MC companies, respectively. For each case, we derive the closed‐form expression of the optimal return service charge, and we conduct analytical sensitivity analysis to illustrate how different important parameters in the model affect the optimal return service charge. In addition, by comparing the two cases, we reveal how the MC service provider's level of risk aversion affects the optimal return service charge policy. Finally, we derive the conditions under which it is optimal to offer a zero return service charge (i.e., free return with a full refund). These conditions provide insight on the real‐world practice in which some fashion companies offer free return service to their registered members but not to every customer.