Valuation and management of money-back guarantee options

In this article, we model money-back guarantees (MBGs) as put options. This use of option theory provides retailers with a framework to optimize the price and the return option independently and under various market conditions. This separation of product price and option value enables retailers to offer an unbundled MBG policy, that is, to allow the customer to choose whether to purchase an MBG option with the product or to buy the product without the MBG but at a lower price. The option value of having an MBG is negatively correlated with the likelihood of product fit and with the opportunity to test the product before purchase, and positively correlated with price and contract duration. Simulation of our model reveals that when customers are highly heterogeneous in their product valuation and probability of need-fit, and if return costs are low, an unbundled MBG policy is optimal. When customers have high likelihood of fit or return costs are excessive, no MBG is the best policy. When customers have small variance in product valuation, but vary greatly in likelihood of product fit, the retailer may prefer to offer a bundled MBG contract, extracting consumer surplus by charging a price close to the valuation level.     

Compete in Price or Service?—A Study of Personalized Pricing and Money Back Guarantees

Retailers use both pricing and service strategies to respond to intensified competition. Here we develop a duopoly model to investigate the impact of the increasingly popular personalized pricing strategy (PPS) and the widely used Money Back Guarantee (MBG) customer returns policy. We consider two retailers who differ in customer satisfaction rates. Each retailer chooses a pricing strategy, PPS or uniform pricing, and a product return strategy, MBG or ‘no returns.’ We show that both PPS and MBG are dominant strategies, but their impact on retailers’ prices and profits are different; while PPS intensifies price competition and may lead to a prisoner’s dilemma in which both retailers may lose profit, MBG mitigates price competition and may result in a Pareto improvement in both retailers’ profits. Both PPS and MBG increase the size of the overall market, but not the total duopoly profit. The total customer surplus and social welfare may increase under either strategy. In addition, we obtain some interesting observations as to how our results may change if the product quality/customer satisfaction rate is endogenously chosen in the duopoly. Some of our findings are in contrast to related results reported in the literature.     

Information and its impact on consumers׳ reactions to restrictive return policies

Designing an effective return policy is a difficult task for retailers. A very restrictive return policy can keep logistic costs down and prevent fraudulent returns but it can also have a negative effect on consumer behavior. Two experiments explore the role of assortment-related information in moderating consumers׳ negative reactions to more restrictive product return policies. The results demonstrate that consumers will view an assortment characterized by a more restrictive return policy as attractive to the extent that the assortment supports the information processing strategy triggered by the return policy.     

Consumer rights or unethical behaviors: Exploring the impacts of retailer return policies

While a product return guarantee plays an important role in reducing perceived risk, a liberal product return policy may generate a moral crisis in consumers and induce unethical post-consumption behaviors. Situational questionnaires with two return policies, liberal and rigorous, are used to investigate how such policies influence consumers' moral reasoning and fraudulent return activities. This study finds that a return policy with different attributes results in differing consumer moral recognition, moral judgment, moral intensity, and intentions toward fraudulent return. Among these constructs, evidence of a strong correlation between moral judgment and unethical returning behaviors was found. Social consensus has a greater impact on moral recognition, moral judgment, and fraudulent return intention than on the magnitude of consequences and probability of effect. These findings from consumers' moral perspectives address gaps in the literature in which most studies take the retailer point of view in examining the effects of return policy. Understanding consumers’ moral decision-making is helpful for retailers who seek to avoid consumer abuse of return policies.     

Shopping in the omnichannel supply chain under price competition and product return

In recent years, omnichannel retailing has created value for prospective consumers. The rise of omnichannel retailing has changed consumers' buying habits, and manufacturers are facing stiff competition from retailers. To reduce this competition effect, manufacturers and retailers often work together to reduce showroom display costs. Despite this practice, there is little understanding of how omnichannel retailing impacts supply chain (SC) profit under competitive conditions. We investigate the test-in-store-and-buy-online (TSBO) retailing strategy and its impact on SC profit and price competition between manufacturers. The retailer sells products of both manufacturers through its website but displays products of only one manufacturer in the showroom, which bears the displaying cost. The retailer adopts a return policy for the other manufacturer. Stackelberg game was used to examine how members of the chain interact, and Nash equilibrium was used to find optimal strategies for players under decentralized and integrated channels. The results show that the TSBO strategy in retailing benefits all supply chain players under the integrated channel. A further interesting finding is that omnichannel SC profits are highest when retailers adopt a return policy. When two manufacturers compete and adopt different sales models, the manufacturer who uses the TSBO retail model reaps the most profit. Several other managerial insights are drawn from sensitivity analyses.     

The impact of cross border E-tailer's return policy on consumer's purchase intention

Based on the signaling theory, cue utilization theory and halo effect theory, this paper establishes a theoretical model of the impact of return policy leniency on consumer purchase intention in the context of cross-border e-commerce (CBEC). The model is verified by the experimental data. Moreover, the mediating role of perceived quality and perceived risk and the moderating effects of port of shipment and product traceability code are significant. The results show that in the CBEC scenario, when the online retailers adopt a lenient return policy, the consumers have higher perceived quality and lower perceived risk, which in turn leads to a higher intention to purchase; When a consumer purchases the product which ships from domestic bonded warehouse or a product without a product traceability code present, the effect of the leniency of return policy on perceived quality and perceived risk is stronger.     

Why is Price Dispersion Higher Online than Offline? The Impact of Retailer Type and Shopping Risk on Price Dispersion

When physically similar products, of similar quality, are offered by retailers both online and offline, we often observe that the dispersion in prices of these products online is greater than the price dispersion offline. This observation runs counter to early theories that suggested price dispersion online would be smaller than that offline due to the ease of search and information availability online. This paper investigates and provides an explanation for this puzzling phenomenon by examining the impact of two important drivers of price dispersion: retailer type and consumers’ shopping risk. Retailer type refers to whether a retailer is a pure offline, pure online, or dual channel retailer. Shopping risk is defined as the product of consumers’ perceived risk of shopping and the transaction uncertainty related to shopping at different types of retailers.A game-theoretic approach is adopted to model consumers’ price search and product purchase, as well as price competition within and across retailer types in online and offline markets. Equilibrium pricing strategies are derived for different retailer types competing for different consumer segments with different levels of perceived shopping risk. The impact of retailer type and shopping risk on online versus offline price dispersion are quantified, and conditions when price dispersion is greater online than offline are identified.Results indicate that price dispersion is greater online when the number of pure online retailers is sufficiently large and is increasing in the number of pure online retailers. In addition, a reduction in online shopping risk may actually increase online price dispersion. Results further suggest that even without any online sales, dual channel retailers should maintain their online presence for the purpose of information dissemination, which justifies the importance for pure offline retailer to incorporate webrooming strategies, where consumers can search for prices online but purchase offline.     

Decision-making mechanism of online retailer based on additional online comments of consumers

With improving capability of providing online comments, more and more e-business firms have been developing their online platforms that enable consumers to offer their comments and user experiences. However, there might be conflicting information contained in initial and additional consumer comments, and that information have different value perceptions for potential consumers. Therefore, it is of great significance for online retailers to investigate subsequent rounds of comments and their relationship with potential consumers' purchasing decisions. Enriching the relevant literature, we develop an analytical model to analyze the impact of online retailers' after-sales service on their profits, leading to discussions of the decision-making mechanism of online retailers. The results show that product pricing is influenced by consumers’ perceived utility through after-sales service, and product-demand mismatch and after-sales service quality play important roles in the performance of the online retailer and the after-sales service expand the amount of positive additional comments, and earn the retailer more profits.     

Increasing customer purchase intention through product return policies: The pivotal impacts of retailer brand familiarity and product categories

This study gauges customer perspectives to investigate how return policy generosity (the degree to which a retailer imposes minimal restrictions on returns) influences customer-perceived value and customer purchase intention. It also examines two moderators, retailer brand familiarity (the extent to which the retailer brand is well-known) and product categories (the difference between products with respect to the magnitude of effort required to make a return). An experiment with a 2 × 2 × 2 factorial design was conducted. The results show that return policy generosity increases customer purchase intention by enhancing the perceived value of the policy. Lesser-known retailers benefit more from generous return policies than their well-known competitors, particularly when a product requires significant return effort. Well-known retailers benefit from offering generous return policies only for product categories that involve low levels of return effort. The findings of this study suggest that if a retailer formulates a return policy without considering the moderating effects of retailer brand familiarity and product category, then it will tend to over-invest if the return policy is generous.     

Whether to offer return-freight insurance or open a physical showroom: A strategic analysis of an online retailer’s decisions

Return-freight insurance (RI) and physical showroom (PS) can be a double-edged sword for retailers, as they can help consumers reduce product mismatch and information uncertainty but may lead to higher return rates and operating and construction costs. In this study, we examine four corresponding configurations regarding whether to provide RI (yes-R, no-N) and whether to open a PS (yes-S, no-N): NN, RN, NS, and RS. First, we find that offering RI or opening a PS does not necessarily expand market demand. Whether demand grows is closely related to the RI premium. When the RI premium is low, the RN strategy, which offers only RI, can expand the market, and the NS and RS strategies, where retailers open a PS, can shrink the market. In addition, retailers offering RI charge a higher sales price, while those opening a PS adopt a price reduction strategy. Second, the optimal strategy configuration for retailers depends on four factors: the RI premium, the proportion of consumers, the retailer’s cost of handling returns and the PS construction cost. Retailers consider opening a PS only when both the proportion of high-cost consumers and the PS construction cost are low. An interesting result is that when the RI premium is higher, offering RI still benefits the retailer. Third, we present an intuitive decision support matrix to help retailers recommend the optimal strategy configuration, using the RI premium as a proxy for the product online return rate and the proportion of high-cost consumers as a proxy for the degree of product standardization. Depending on whether products with high (low) return rates are highly personalized or standardized, retailers decide whether to use an NS (RS) or NN (RN) strategy.     

Marketplace,reseller, or web-store channel: The impact of return policy and cross-channel spillover from marketplace to web-store

With the advent of e-commerce, new platform sales have been created in the online retailing industry, and choosing the best platform has become a challenge for manufacturers. For instance, marketplace and web-store are two e-channels for selling goods directly to end customers. In the marketplace, manufacturers sell their products directly to online customers through e-tailers' platforms and share revenue with e-tailers. In the web-store channel, manufacturers sell their products directly to end customers through their platforms and do not need to e-tailers' platforms. However, some manufacturers and e-tailers continue with reseller channel yet. Reseller channel is another conventional channel in which manufacturers distribute their products to e-tailers, then e-tailers choose retail prices and sell them to consumers. Therefore, with these three different channels, the key question is when and under what conditions manufacturers can choose marketplace or reseller channel in addition to their web-store channels to grow their market share. In this paper, we analyze these three different e-channels and the conditions that manufacturers adopt the marketplace or reseller channel. For this purpose, we consider a model with two manufacturers and one e-tailer in which the manufacturers have their web-store channels, and they are willing to adopt another channelـ reseller or marketplace. The manufacturers offer a return policy in their web-store channels as a competitive strategy for attracting more customers. We find that offering return policy in web-store channels has no effect on the choice between the marketplace and reseller channel, but it has an impact on the amount of manufacturers' profits in each channel. Also, we demonstrate that regardless of offering return policy, as the coefficient of cross-channel effect increases, the manufacturers' profits, whether they choose reseller channel or marketplace channel, increase. But, as the coefficient of cross-channel effect increases, the e-tailer's profit increases when both manufacturers choose reseller channel, otherwise decreases. If manufacturers offer a return policy, the e-tailer's profit is highest when both manufacturers choose reseller channel, and if they do not offer a return policy, the e-tailer's profit is highest when both manufacturers choose marketplace channel.     

Consumer heterogeneity and online vs. offline retail spatial competition

This paper develops a game-theoretic spatial model featuring consumer heterogeneity in online vs. offline retailers’ spatial competition. We find that consumers’ browse-and-switch behavior intensifies the competition because both offline and online retailers’ price and profit decline when the behavior occurs, but it is not necessarily a threat to offline retailers especially when the product relates more closely to experience. We consider six equilibrium scenarios for different combinations of consumer behaviors when considering a hybrid retailer. The analysis taking consumer heterogeneity into consideration shows that the hybrid retailer operating both online and offline is not always the winner. Particularly, the business opportunity for the offline retailer lies in consumers’ willingness to pay in store, and whether the retailer launches an online store depends on the type of products and services provided.     

More Than Aesthetic: Visual Boundaries and Perceived Variety

Many online retailers use seemingly innocuous visual boundaries when presenting choice sets to consumers. In contrast to previously studied aspects of information presentation, visual boundaries do not alter underlying information structure. The authors argue that, beyond their aesthetic role, visual boundaries can systematically increase or decrease perceived choice variety but the impact of visual boundaries on variety perceptions depends on consumer cognitive load. Study 1 finds that, by-attribute (vs. alternative) boundaries increase (decrease) perceived variety under high but not low cognitive load. Study 2 further demonstrates that retailer intent moderates the interaction between visual boundaries and cognitive load such that, when cognitive load is high, effects of visual boundaries on perceived variety are strengthened when consumers believe that retailers use boundaries to aid consumer navigation but reversed when they believe retailers use boundaries to persuade consumers to make purchases. Finally, Study 3 rules out attribute order and number of attribute levels as alternative accounts for the effect and enhances generalizability through a different manipulation of cognitive load. This work advances understanding of how simple environmental cues affect consumer behavior, with implications for retail strategy.     

E-tailer׳s return policy,consumer׳s perception of return policy fairness and purchase intention

While e-commerce is growing, returns are proving to be a major problem for e-tailers (i.e. internet retailers). We argue that e-tailers׳ return policies play a strategic influence on consumer behavior. Specifically, we focus on the effect of return depth - full return policy (FRP) vs. partial return policy (PRP) – on consumer׳s perceived fairness of return policy and purchase intention. Using a structural equation model (SEM), we empirically show that an e-tailer׳s return depth has a positive influence on the consumer׳s perceived fairness of the return policy and purchase intention. Further, e-tailer׳ competition and its reputation significantly moderate the relationships between the return policy depth and the perception of the return policy׳s fairness and purchase intention. Finally, we discuss the theoretical and managerial implications of our results.     

Pricing practices: A critical review of their effects on consumer perceptions and behaviour

With the present challenge to compete on price or product assortment, retailers and manufacturers are increasingly focusing on state-of-the-art pricing strategies which have their roots in behavioural economics and psychology. The current review is an empirical investigation on the relative effectiveness of various pricing practices on consumer perceptions and behaviour. Six pricing strategies were reviewed; drip pricing, reference pricing, the use of the word ‘free’, bait pricing, bundling and time-limited offers. The review shows that the former three have received a significant amount of attention and have a robust impact on consumer perceptions and behaviour. There is less research on the latter three; however, the available evidence does suggest that they, too, may be capable of influencing consumers’ choices. Finally, it is also clear that the effects of pricing practices can be moderated by a variety of factors. Overall, the current review indicates that sellers are able to influence perceptions and purchase decisions of consumers based on the manner in which prices are displayed. The implications of these findings for retailers, policy makers and researchers are discussed.     

Return freight strategies and selling formats in e-commerce supply chain: The perspective of consumer fairness concerns and online shopping returns

Returns and consumer fairness concerns put a huge pressure on manufacturers who sell their products online. The optimal selling format and return freight strategy become particularly important for manufacturers in an e-commerce supply chain. Therefore, we build game models for the following scenarios under different selling formats: the seller bearing the return freight costs or the return-freight insurance premiums, consumers buying insurance for themselves, and no one buying insurance. By comparing the optimal solutions of the game models under reselling and agency formats, several conclusions are derived. In the agency format, if the return-freight insurance premium is higher than a particular threshold, then the optimal strategy of the manufacturer is to decrease the selling price to encourage consumers to purchase the insurance, otherwise, the manufacturer should purchase the insurance. As the level of consumer fairness concerns and platform commission rates increase, the manufacturer should gradually move from the agency to reselling format. In the reselling format, if the return-freight insurance premium is lower than a particular threshold, then consumers will purchase insurance and this will make the platform more profitable, and conversely, the platform should bear the return freight costs.     

Per piece or per kilogram? Default-unit effects in retailing

Retailers offer a variety of products either per unit or per weight. Depending on the product category, consumers may find either one of these pricing strategies typical and the default. Especially online retailers are increasingly using unit-based prices, which is the non-default for many produce categories. So far, consequences resulting from non-default pricing strategies are unclear. This study addresses the questions of whether and how pricing strategies affect consumer behavior. In a series of four experiments, we show that default pricing strategies exist in the marketplace and that consumers prefer products that retailers offer using default pricing strategies. We also demonstrate that this behavior is due to uncertainty issues when assessing prices in non-default pricing strategies. Furthermore, we elaborate on the influence of weight expectations and explicitly stated weight information on this default-unit effect. The findings suggest that retailers can mitigate negative effects resulting from non-default pricing strategies by providing weight information.     

“Take it or leave it?”: Evidence on cultural differences affecting return behaviour for Gen Z

Both culture and age have a direct impact on consumers' shopping behaviour. Similarly, this paper explores consumers’ return behaviour in two different cultural contexts, China and Italy, characterized by low/high individualism vs. high/low collectivism. To this end, the research employs a qualitative approach based on semi-structured interviews collected in May and June 2020 for a sample of Generation Z consumers in China and Italy. Results show differences and similarities affecting consumers' willingness to return in the different stages of effective purchase behaviour. For instance, in the pre-purchase stage, Chinese consumers often show a limited interest in return policies since they usually prefer not to return and repurchase otherwhere the product to maximize their cost-benefit trade-off. In contrast, when retailers adopt return policies, Italian consumers are more interested in feeling protected against the risk of wrong purchases. Instead, both samples are very attentive in return and refund efficiency in the post-purchase stage, which are perceived as two discriminating factors in terms of repurchase from the same retailers.This study offers theoretical and managerial insights towards consumers' return behaviour, offering new directions for future studies.     

Seize the Day: How Online Retailers Should Respond to Positive Reviews

Research on online retailer–customer interactions has extensively focused on how to turn negative reviews into marketing wins. By contrast, few prior studies have investigated how retailers should best respond to positive reviews. The current study aims to fill this gap. Drawing on interpersonal relationship research into capitalizing on positive experience, together with reinforcement effect theory and automatic behavioral priming theory, this study explores how retailers should respond to positive reviews to drive consumer repurchase intention. Two laboratory experiments reveal that an active–constructive response in a friendly communication style increases consumer repurchase intention, and consumer positive affect mediates this process. Our findings provide new theoretical insights and useful guidance for retailers on designing effective online communication strategies for consumers.