The valuation of money-back guarantees in retailing markets: A real option approach

In this paper, we propose an optimal pricing model for the money-back guarantee (MBG) which is a widely used mechanism to reduce consumers´ perceived risk in retailing markets. In comparison with previous researches, this study especially adopts the concept of stochastic underlying process from conventional real option techniques and explores optimal pricing strategies for MBG from the consumers´ perceived value-based viewpoint. This stochastic process can describe the uncertainties associated with product valuation by consumers. This research addresses how a retailer can make optimal pricing strategy for MBG, and to investigate the effects of some important factors on the MBG value. An alternative model is developed to determine the optimal pricing strategy for MBG under various conditions. The results could provide retailers with several management implications and could be a reference to help retailers make decision optimally for the pricing issues about MBG.