Offering low price guarantees to improve customer retention

Major retailers in the USA offer money back guarantees (MBGs) under which they return money to dissatisfied customers. Some of these retailers also offer low price guarantees (LPGs) under which they promise to refund price differences if buyers find a lower price after purchase. Some researchers have argued that LPGs should be legally challenged because they limit price competition and contribute to higher prices. This paper shows that adding an LPG to an MBG can help improve economic efficiency as both retailer loss and customer hassle costs from excessive returns are reduced. This reduction serves as a counter argument against those who believe that LPGs should be prohibited.     

Price Adjustment Policy with Partial Refunds

Have you ever purchased an item only to notice a short while later that its price was reduced? Many retailers offer to refund customers the full price difference as long as the discount occurred within a short period of time after the original purchase. Such policy looks attractive to consumers as it shields them from future price fluctuations. But can this policy be advantageous for the retailer?In this paper we investigate the price difference refund policy (commonly referred to as price adjustment) and demonstrate how it can result in a higher profit even if all consumers request and receive a price adjustment.Further, the existing literature and practice both assume that if a price adjustment policy is employed, the consumers should get the full price difference refunded. In this paper we endogenize the refund amount, allowing the retailer to determine the optimal percentage of the price difference to be returned to consumers. We fully characterize the conditions under which it is optimal to offer a partial or greater than full price adjustment to customers as well as the optimal refund percentage. Additionally, we demonstrate that the practice of limiting the price adjustment option to a short period after the purchase incident is not necessarily in the best interest of retailers.     

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.     

Pricing and return strategy of online retailers based on return insurance

With the development of e-commerce, online shopping has become increasingly common, and as a result, consumers inevitably encounter the problem of returns. Therefore, pricing, return policy and return insurance strategy have attracted considerable research attention. In this paper, we construct four models to study pricing, return policy and return insurance strategy. We show that when a product's net residual value is greater than or equal to zero, online retailers should offer a money-back guarantee (MBG) return policy; however, they do not have to offer free return insurance because the latter does not increase their market share and profit, nor does it increase consumer surplus. The optimal strategy of insurance providers is unaffected by whether the policyholder is an online retailer or a consumer and should be neutral, which helps insurance providers gain the trust of policyholders. Consumers should buy products only when online retailers offer an MBG return policy; however, consumers should not do so if the online retailer provides free return insurance.     

What drives competitive webrooming? The roles of channel and retailer aspects

ABSTRACT

Competitive webrooming, the phenomenon in which consumers gather product information online but ultimately purchase the product in an offline store of a competing retailer, has gained traction and become a major threat for retailers. To gain a deeper understanding of its drivers, we surveyed 1081 retail customers about their most recent consumer electronic product purchase to examine the impact of channel-related aspects as well as retailer-related aspects – a dual approach that has not been applied previously. A channel’s anticipated after-sales service and price level are the strongest predictors for webrooming. Moreover, retailer aspects determine whether customers simultaneously switch retailer when webrooming. A retailer’s assurance of delivery, including payment modalities, return policies, and product obtainment, as well as competitive product prices motivate consumers to switch retailer when webrooming. These results suggest that customers have a fundamental need for certainty within and after the buying process, which can be satisfied by both channel and retailer. Additionally, this is the first study to empirically test for interactions between channel and retailer aspects, as they are likely to occur in real shopping situations. We identified two interactions: First, a retailer’s assurance of delivery can compensate for an anticipated lack of a channel’s after-sales service, dampening the impact of the latter on competitive webrooming. Second, retailer’s price attractiveness acts in a similar vein. Hence, to steer customers into channels and/or keep them with the company, retailers should emphasize their price attractiveness as well as assurance of delivery.     

Price matching and product differentiation strategies considering showrooming

Showrooming, a phenomenon in which customers use brick-and-mortar stores to assess products and then purchase them from online retailers (o-retailers) for lower prices, is considered a great threat to traditional retailers (t-retailers). To combat showrooming, many t-retailers have executed price matching which enables customers to pay o-retailers' lower prices for the identical product. To avoid direct competition with t-retailers who execute price matching, many o-retailers have begun to sell differentiated products from t-retailers, which weakens the information advantage to customers from practicing showrooming. Motivated by these observations, we construct a duopoly game, where a t-retailer and an o-retailer sell products in a same category, to study the profitabilities of product differentiation and price matching in the context of showrooming. The results show that in the scenario without price matching, the o-retailer is likely to benefit from product differentiation only when the o-retailer's differentiated product is more popular with customers than the t-retailer's product. However, in the price matching scenario, the o-retailer also has the opportunity to benefit from product differentiation when the o-retailer's differentiated product is less popular with customers than the t-retailer's product, and product differentiation can be a win-win strategy for the two retailers under certain conditions. Considering the o-retailer's product differentiation decision, the t-retailer is only likely to execute price matching if the non-digital attributes of the product category sold by two retailers are not very obvious.     

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.     

Retailers and Consumers: The Pass‐through of Import Price Changes

In this paper, we estimate pass‐through rates of import price changes to retail prices across retailers and consumers for apparel purchases in Germany for the period of 2000–07. We find that high‐price retailers do not pass through changes in the import price. Pass‐through rates for low‐price retailers are 53 per cent within three months. Consequently, pass‐through rates for low‐income households are 58 per cent, significantly larger than those for high‐income households. We then present one possible explanation for these observations in a theoretical model with endogenous vertical product differentiation due to bundling an ex ante homogeneous import goods with services. Following an import price change, retailers who sell a cheaper unbundled product change prices to a greater extent than retailers who sell a higher‐priced bundle of product and service.     

Shopping plans,buying motivations,and return policies: impacts on product returns and purchase likelihoods

Product return behavior and factors that contribute to product returns are an under-researched area, despite significant importance to manufacturers and retailers. The current research attempts to fill the gap by focusing on two factors that shape consumer purchase behavior: (1) whether purchases are planned or unplanned, and (2) whether hedonic or utilitarian motivations drive purchases. The findings show that purchase plans and buying motivations have distinctive and interactive impacts on pre-purchase concerns, self-estimated likelihood of returning purchases, and purchase intentions with or without return policies. When hedonic motivation drives purchases, unplanned (vs. planned) purchases lead to higher return concerns, higher return likelihood, and lower buying intentions. When utilitarian motivation drives purchases, planned and unplanned purchases have comparable return concerns, return likelihood, and buying intentions. This interaction effect on buying intentions dissipates when a lenient return policy is offered.     

Rewarding customers who keep a product: How reinforcement affects customers' product return decision in online retailing

A lenient product return policy represents the status quo of current return management practice in online retailing because it increases customers' order tendency. However, at the same time, many customers tend to return products under this policy, which incurs considerable costs for retailers. The present research introduces a keep reward (i.e., providing incentives to keep a product) as a new promotion strategy to improve the conventional lenient policy. Drawing on operant conditioning, the authors propose and test the reinforcing effect of a keep reward on customers' keep decision, compared to the conventional lenient policy. Results of a qualitative pilot study suggest that a keep reward is generally feasible in online retailing practice, especially in the low‐ to mid‐price segment and with rewards that are linked to future purchases. Two experimental studies verify the positive effect of a keep reward. Study 1 shows that it substantially increases keep intention compared to a conventional lenient policy. Study 2 shows that the effect on keep intention is moderated by customers' online shopping frequency, and this moderating effect is mediated by repurchase intention. In particular, the keep reward is most effective among frequent shoppers because they are more inclined to repurchase and thus, benefit from the reward. In summary, both studies support the keep reward as a valuable add‐on to the conventional lenient policy because order intention remains comparably high, while keep intention is higher. Theoretical implications and recommendations for online retailers on how to implement a keep reward in different industries are discussed.     

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.     

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.     

Rent-to-own agreements: Customer characteristics and contract outcomes

The rent-to-own (RTO) industry, by offering immediate access to household goods for a small periodic fee with no credit check or down payment, has strong appeal to low income and financially distressed consumers. An important policy question is whether an RTO agreement is used as a rental/lease with build-in purchase option or as something more akin to an installment loan. Given the embedded options to return the item or to purchase it early, the actual rent paid by RTO customers is substantially lower than the oft-reported total rent which assumes that agreements go to term. We employ a log-normal censored regression model to analyze the influence of customer demographics as well as the transactional details of the contract on the rent paid by consumers using rent-to-own. Our main conclusions are (1) it is the “working poor” that are likely to pay more rent, (2) there appears to be a clientele effect with customers paying more rent under bi-weekly and monthly, as opposed to weekly, payment schedules, and (3) customers who exhibit delinquency in making contractual payments generally end up paying more rent. Further, our data allows some observations on annual percentage rates by illustrating the business risk present for RTO stores as well as the cross-subsidization of consumers.     

Erratum to: Competitive price-matching guarantees under imperfect store availability

This paper analyzes the role of verification of product availability in the context of competitive price-matching guarantees (PMGs). PMGs involve a retailer matching any lower price offered by competition for an identical item. Until now, researchers focused on the scenario where customers can receive the lower price with a simple proof (e.g., weekly flyers). However, in reality, retailers reserve the right to verify the availability at the competitor location; if the product is not available there, then the price-match request might be declined. We develop a price competition model to investigate the effects of verification of availability on price decisions and profit levels of competing retailers. In our model, demand is driven by the availability levels of retailers as well as the price-search cost and store-switching cost incurred by customers. Price-search cost leads to two customer segments: uninformed ones who have no knowledge about prices, and informed ones who are knowledgeable about prices. On the other hand, store-switching cost determines how many customers search for the product at an alternative location because of high price or unavailability at their preferred retailers. Our analysis reveals, among others, that the outcome of availability verification is linked to three factors: price-search cost, store-switching cost, and the reservation prices of customer segments. Verification of availability allows retailers to price discriminate customers who could not be discriminated otherwise, specifically those belonging to the informed customer segment. Furthermore, it is a significant profit-enhancing mechanism only if there are switching customers in the market. Interestingly, even though customers view the verification of availability as a hassle, it can actually result in them paying lower retail prices by increasing the level of retail price competition.     

Competitive price-matching guarantees under imperfect store availability

This paper analyzes the role of verification of product availability in the context of competitive price-matching guarantees (PMGs). PMGs involve a retailer matching any lower price offered by competition for an identical item. Until now, researchers focused on the scenario where customers can receive the lower price with a simple proof (e.g., weekly flyers). However, in reality, retailers reserve the right to verify the availability at the competitor location; if the product is not available there, then the price-match request might be declined. We develop a price competition model to investigate the effects of verification of availability on price decisions and profit levels of competing retailers. In our model, demand is driven by the availability levels of retailers as well as the price-search cost and store-switching cost incurred by customers. Price-search cost leads to two customer segments: uninformed ones who have no knowledge about prices, and informed ones who are knowledgeable about prices. On the other hand, store-switching cost determines how many customers search for the product at an alternative location because of high price or unavailability at their preferred retailers. Our analysis reveals, among others, that the outcome of availability verification is linked to three factors: price-search cost, store-switching cost, and the reservation prices of customer segments. Verification of availability allows retailers to price discriminate customers who could not be discriminated otherwise, specifically those belonging to the informed customer segment. Furthermore, it is a significant profit-enhancing mechanism only if there are switching customers in the market. Interestingly, even though customers view the verification of availability as a hassle, it can actually result in them paying lower retail prices by increasing the level of retail price competition.     

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.     

Return policy,No joke: An investigation into the impact of a retailer's return policy on consumers' decision making

This study investigates the important role of a retailer's return policy in consumers' decision making. Utilizing signaling theory and the Cue Diagnosticity framework, this study posits that return policy, as a cue from a retailer, interacts with other cues (product, price, and product quality) to reduce perceived purchase risk and increases store image and patronage intention. Employing factorial experiment design, the authors conduct two studies and find support for several hypotheses. Results show that consumers value return policies depending upon the situation. A lenient return policy drives down purchase risk and leads consumers to have positive store images and higher patronage intentions. Both theoretical and managerial implications of the findings are provided.     

Consumer deliberation and quality signaling

Consumers are often uncertain about their product valuation before purchase. They may bear the uncertainty and purchase the product without deliberation. Alternatively, consumers can incur a deliberation cost to find out their true valuation and then make their purchase decision. This paper proposes that consumer deliberation about product valuation can be an endogenous mechanism to enable credible quality signaling. We demonstrate this point in a simple setup in which product quality influences the probability that the product has high valuation. We show that with endogenous deliberation there may exist a unique separating equilibrium in which the high-quality firm induces consumer deliberation by setting a high price whereas the low-quality firm prevents deliberation by charging a low price. Compared to the case of complete information, the price of the high-quality firm can be distorted upward to facilitate consumer deliberation, or distorted downward to avoid the low-quality firm’s imitation. In an extension we show that dissipative advertising can facilitate quality signaling. The high-quality firm can utilize advertising spending to avert imitation from the low-quality firm without distorting price downward, earning a higher profit than that without advertising. However, advertising mitigates the distortion at the expense of consumer surplus and social welfare.     

Do you think that the home delivery is good for retailing?

Order placing and delivery always play a significant role in any business industry. Nowadays, most customers want useful products at their doorstep without visiting any retail store. In this current study, an advanced dual-channel supply chain model is constructed for a single product with two players. Customers can order online or offline from the retail store. In contrast, retailers use only offline mode to take the product from the manufacturer, and retailers charge a different amount for delivery. To optimize profit and satisfy the consumers, retailers only provide a free transportation service when customers order a certain quantity. If customers order less than the desired amount, a transportation charge will be applied to the customers. Contrary to the existing research, demand for the products varies with the selling price online and offline and is also affected by the free home delivery service. Manufacturers use a single-setup multi-delivery (SSMD) transportation strategy to enrich the system's profit. To make the study more applicable, all unit costs are considered fuzzy. Signed-distance defuzzification technique is adopted to defuzzify the fuzzy values. Finally, the total profit of the supply chain is optimized along with the optimized value of the decision-making variable through an uncertain optimization technique. Numerical experiments are carried out along with sensitivity analysis to show the applicability and optimality of this study. Though the crisp data set provided a 0.72% better result compared to the fuzzy data set, but fuzzy data set provided a more realistic result. Numerical results prove that the home delivery service provided 14.59% better profit. Finally, it can be stated that the home delivery policy with some charged amount based on ordered quantity is the best retailing strategy for the dual-channel supply chain.     

Knock‐in American options

A knock‐in American option under a trigger clause is an option contract in which the option holder receives an American option conditional on the underlying stock price breaching a certain trigger level (also called barrier level). We present analytic valuation formulas for knock‐in American options under the Black‐Scholes pricing framework. The price formulas possess different analytic representations, depending on the relation between the trigger stock price level and the critical stock price of the underlying American option. We also performed numerical valuation of several knock‐in American options to illustrate the efficacy of the price formulas. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:179–192, 2004