Online Retailing Operations: Is It Wise to Offer Free Sample Trial and Money-Back Guarantee Together?

Abstract

In retail operations, free-sample-trial (FST) and product return with money-back-guarantee (MBG) both serve as important strategies to reduce consumers’ worries and valuation uncertainty. This paper is the first one which analytically examines when and whether an online retailer should provide both strategies simultaneously, and when one strategy outperforms the other. We consider an online retailer selling to consumers who are uncertain about the product values when making purchasing decisions. The retailer decides whether to offer MBG or FST. We develop analytical models to examine four strategies: Strategy NN (both FST and MBG are not provided), strategy NS (FST is provided and MBG is not offered), strategy MN (FST is not provided and MBG is provided) and strategy MS (both FST and MBG are offered). Comparing among these four strategies, we find that when only FST is offered, the retailer surprisingly should decrease the price if the product cost is low. If the retailer only provides MBG, he will charge a higher price compared with the situation when MBG is not provided. When the size of free sample is very small, strategy NS (MS) is the optimal strategy if the product’s cost is low (high). When the size of free sample is large, strategy MN is the optimal strategy. Then, we extend our model to consider three situations, namely: (a) the retailer offers coupons to consumers to experience the free sample, (b) consumer returns incur a cost, and (c) the size of free sample is endogenous. We find the main conclusion remains robust. Our findings may help explain some real-world practices, such as why some retailers (e.g., Amazon and Walmart) provide consumers with low volume toners to decrease the free sample cost; skincare product retailers such as Lancôme, Estee Lauder and Guerlain implement both MBG and FST. We also interestingly show that a bigger size of free sample may not necessarily benefit consumers.