Selling with Money‐Back Guarantees: The Impact on Prices, Quantities, and Retail Profitability

Abstract

I n this paper, we consider a retailer adopting a "money-back-guaranteed" (MBG) sales policy, which allows customers to return products that do not meet their expectations to the retailer for a full or partial refund. The retailer either salvages returned products or resells them as open-box items at a discount. We develop a model in which the retailer decides on the quantity to procure, the price for new products, the refund amount, as well as the price of returned products when they are sold as open-box. Our model captures important features of MBG sales including demand uncertainty, consumer valuation uncertainty, consumer returns, the sale of returned products as open-box items, and consumer choice between new and returned products and possibility of exchanges when restocking is considered. We show that selling with MBGs increases retail sales and profit. Furthermore, the second-sale opportunity created by restocking returned products enables the retailer to generate additional revenues. Our analysis identifies the ideal conditions under which this practice is most beneficial to the retailer. Offering an MBG without restocking increases the new product price. We show that if the retailer decides to resell the returned items as open-box, the price of the new product further increases, while open-box items are sold at a discount. On the other hand, customers enjoy more generous refunds along with lower restocking fees. The opportunity to resell returned products also generally decreases the initial stocking levels of the retailer. Our extensive numerical study substantiates the analytical results and sharpens our insights into the drivers of performance of MBG policies and their impact on retail decisions.

Pricing policies for a dual-channel retailer with cross-channel returns

“…Before we review the papers under the different settings, it is adequate to examine the researchers findings in regard to the different refund policies. A large body of work on customer returns has examined a refund policy that is exogenously determined as a full refund or a Money Back Guarantee (MBG) (Chang and Yeh 2013;Chen and Bell 2013;Choi et al 2013;Akcay, Boyaci and Zhang 2013;Wang, Tung and Lee 2010;You, Ikuta and Hsieh 2010;Vlachos and Dekker 2003). Other papers have compared a system's performance with no refund policy to a system's performance with a full refund policy (Chen and Grewal 2013;Choi et al 2013;Chen and Bell 2012;Chen and Zhang 2011).…”

“…Moreover, Yu and Goh (2012) stated that retailers should enforce a return policy that takes the nature of products and their condition upon return into consideration. Akcay, Boyaci and Zhang (2013) encouraged retailers to reduce the number of returns they receive by controlling selling prices and enforcing a refund policy with restocking fees. However, Hu and Li (2012) argued that offering a manufacturer buyback price equivalent to the retailer's refund price is the optimal coordinating mechanism.…”

“…According to Akcay, Boyaci and Zhang (2013), Mostard and Teunter (2006), and Vlachos and Dekker (2003) fashion products purchased in person through physical channels can have return rates as high as 35%. In contradistinction, fashion products purchased online can have return rates as high as 75%.…”

“…However, many retailers use this policy in order to increase customer loyalty, provide customer satisfaction, boost sales, and/or comply with country legislations. In the United States and Canada, yearly returns to merchants total between $100 and $10 billion dollars of products, respectively (Akcay, Boyaci and Zhang 2013;Chen and Bell 2009;Su 2009). While defective returns constitute only 5% of all customer returns, a significant amount of returned apparel is of good quality and can be resold several times without a recovery process (Akcay, Boyaci and Zhang 2013;Su 2009).…”

Online and Offline Information for Omnichannel Retailing

“…More recent papers study partial refund policies in conjunction with supply chain contracts (Su, 2009), overbooking (Gallego and Sahin, 2010), demand cannibalization (Akçay et al, 2013), and strategic waiting for discounts (Altug and Aydinliyim, 2015); another paper by Hsiao and Chen (2012) finds that sellers of low-quality products may have to offer a refund that exceeds the selling price. The papers above study how returns/refunds can be used to limit the downside of a bad purchase, but in this paper, one of our goals is to reduce the incidence of bad purchases in the first place.…”