Partial Refunds or Money-Back Guarantees ?

A partial-refund policy is superior to a "full money-back policy when a seller faces a significant amount of opportunistic return behavior-i.e., consumers order a product for short term usage only to return it for a refund later. In a partial-refund policy, the seller charges a rent (the nonrefundable portion of price) to those who return the product; this discourages opportunistism, but also penalizes consumers who only return because merchandise is unsatisfactory. The optimal partial refund policy balances this tradeoff. Profit is higher under the partial refund policy because of a lower number of returns and because a higher price can be charged. Mail-order clothing and personal computer industries demonstrate that catalogers typically offer only partial refunds

HOW TO QUOTE A PRICE -- 0.50 EACH OR 2 FOR 1.00?

Price is usually quoted as number of dollars per quantity unit. Some sellers, however, advertise price using "N for price" formats rather than a per-unit format or a "price illusion" format that states a price for a quantity less than the minimum purchase required. This paper reports exploratory experimental research to determine the likely effect of these practices on buying behavior

Service Escape: Profiting from Customer Cancellations

This paper explores the benefits of letting customers escape from prepurchased service contracts by offering refunds for cancellations. We show that such a policy creates opportunities for in a capacity-constrained service—i.e., collecting cancellation fees from advance buyers who cancel, and then reselling the freed slots. The better the alternative that motivates a cancellation, the more profitable is a refund-for-cancellations policy compared with a no-refund policy that “locks in” customers. In contrast to previous research on money-back guarantees for durable goods, we show that offering refunds for service cancellations can be profitable (1) without charging a higher price compared with a no-refund policy, and (2) even when advance buyers would be willing to abandon the service for no refund. Also, service providers should decrease rather than increase the customer hassle cost of cancellations. Our research also suggests a new profit advantage of advance selling, i.e., capturing some of the consumer-added surplus created when customers find new alternatives (and are therefore willing to pay a fee to terminate the prepurchased contract). Finally, yield-management research typically assumes exogenous “no shows” by advance buyers. We suggest that offering refunds for cancellation reduces the need to reserve capacity for high-paying customers and improves capacity utilization.cancellations, refund, pricing, yield management, advance selling, service marketing, capacity constraints, money-back guarantees

Profitable Pricing When Market Segments Overlap

In this paper, we analyze profitable pricing strategies when market segments overlap. Overlapping markets are segments that are not perfectly sealed, and leakage between them can occur. Different consumers are assumed to incur possibly different transaction costs if they choose to purchase in the low-price market. A monopolist seller knows the distribution of transaction costs across consumers and must choose an optimal pricing strategy. In particular, the monopolist must decide whether to charge a single price or to price differentiate. Conditions are derived under which price differentiation will be the most profitable strategy. When price differentiation is optimal, the equilibrium amount of leakage is determined endogenously. Unlike the standard economics textbook model of price discrimination in which zero leakage is determined exogenously and is usually given as a necessary condition for price discrimination, we show that zero leakage is not necessary for differential pricing to be optimal, and that price differentiation can be optimal even when leakage between markets is substantial. We also show that by imposing restrictions on the low-price market buyers, the seller can control leakage and increase profits. Market-specific managerial applications are illustrated.market segmentation, pricing, differential pricing, price discrimination

Contingent Pricing to Reduce Price Risks

The price for a product may be set too low, causing the seller to leave money on the table, or too high, driving away potential buyers. Contingent pricing can be useful in mitigating these problems. In contingent pricing arrangements, price is contingent on whether the seller succeeds in obtaining a higher price within a specified period. We show that if the probability of obtaining the high price is not too high, sellers profit from using contingent pricing while economic efficiency increases. The optimal contingent pricing structure depends on the buyer's risk attitude—a deep discount is most profitable if buyers are risk prone. A consolation reward is most profitable if buyers are risk averse. To motivate buyers to participate in a contingent pricing arrangement, the seller must provide sufficient incentives. Consequently, buyers also benefit from contingent pricing. In addition, because the buyers with the highest willingness-to-pay get the product, contingent pricing increases the efficiency of resource allocation.pricing, price risks, contingent selling formats, standbys, price discrimination, pricing under uncertainty

Price-Matching Policies: Cut-Throat Competition or Oligopolistic Coordination?

Promises by retailers to match the prices of their competitors give an impression of fierce price competition. On the other hand, these policies may deter rivals from cutting prices because the threat of price-matching makes it more likely that market share will not be gained. This paper empirically tests these two conflicting theories using data collected from grocery stores. in a market where several stores had announced that they would match the prices of the low-price supermarket. The evidence supports the theory that pricematching policies help supermarkets avoid price competition and therefore lead to generally higher prices

Pull Promotions and Channel Coordination

This paper recommends that manufacturers consider a pull price promotion as a coordination device in an independent channel of distribution. Uncoordinated decisions of both manufacturer and retailer to charge high prices can break down the effort to expand the market, resulting in losses to the channel as a whole. We show that manufacturers can enhance channel price coordination by designing pull price discounts that target price-conscious consumers. The increased price coordination improves total channel profits and consumer surplus. Supporting pull with push increases the probability of coordination.channels of distribution, promotions, pricing research