Valuation of money‐back guarantees for retail goods: a test of the real‐option perspective

Abstract

Purpose

The paper aims to develop an alternative valuation model for money‐back guarantees (MBG) using a real‐option approach and examine the validity of the proposed model with an experimental design. This study attempts to address how retailers appropriately price MBG from a consumer value‐based viewpoint.

Design/methodology/approach

The study defines the perceived post‐purchase product value as a stochastic underlying process, and then MBG option value could be theoretically determined by the real‐option pricing approach. For the test of the real‐option perspective on MBG, a 2×2×2 factorial experimental design is conducted to examine the empirical effects.

Findings

With model specification, the study investigated the effects of three key factors, i.e. price level, perceived risk level, and consumers' risk‐aversion, which are characterized by a two‐sided effect on MBG option value. The relationships among those factors also are clarified through theoretical analyses. The empirical results could be explained well by the proposed model.

Originality/value

Faced with increasingly competitive market, retailers typically need more sophisticated pricing strategies. The study can offer retailers a more comprehensive understanding of consumers' perceived value of MBG in various situations and thereby suggest some management implications for the MBG pricing issue.

Citation

Luo, L. (2013), "Valuation of money‐back guarantees for retail goods: a test of the real‐option perspective", Kybernetes, Vol. 42 No. 5, pp. 815-830. https://doi.org/10.1108/K-03-2013-0054