The great majority of the leading retailers in the USA offer full Money back guarantees (MBGs), under which dissatisfied customers can return products for a full refund for any reason.   In a sample of 47 Sacramento stores taken from a list of the 100 Largest Specialty Retailers in the USA (STORES 2004) we found that 87% of the stores offered a full MBG. The remaining 13% offered a partial MBG where the retailer demanded a re-stocking fee, giving customers only a partial refund of the purchase price.  Our research also showed that many of these retailers also offered separate Low Price Guarantees (LPGs) under which they promised to match or beat any low price found after purchase (up to one month after purchase).

Under the MBGs, dissatisfied customers return products for a full refund for any reason, including price dissatisfaction that occurs when customers discover a lower price elsewhere after purchase  Why then do some retailers choose to also offer an LPG on top of their existing MBG? 

This paper investigates when it is profitable and economically efficient to add an LPG to an existing MBG.   MBGs are intended to reduce consumer risk from product dissatisfaction. We argue that retailers should consider adding an LPG to an MBG to correct for an unintended consequence of MBGs that occurs when  consumers use them to return merchandise for a refund and switch stores when they find a lower price elsewhere.  The LPG allows the firm to eliminate such unintended consequences of MBGs by retaining customers that they would otherwise lose when offering only the MBG, and at the same time create a better long term relationship with these customers by correcting the problem of post-purchase dissatisfaction with prices.  That is, the LPG helps reduce price dissatisfaction by offering an easier way (compared to MBGs) for consumers to receive reimbursement when they find a lower advertised price after purchase.  Because of the savings in transaction costs and better service to consumers, the retailers can charge a higher price and increase profits.  

More specifically, we show that when price dispersion exists in the marketplace, adding an LPG to an MBG can enhance profit through the following benefits: (a) increased retention of customers who may defect upon finding a lower price; (b) reduced inventory management costs resulting from fewer product returns; and (c) higher prices to capture the added customer service created by the LPG.  These benefits of lower customer hassle costs and lower retail inventory management costs also lead to improved economic efficiency.  Such potential gains in economic efficiency can be a basis for a counter argument against the view holding that LPGs should be legally challenged because they lead to implicit price coordination and limit price competition.

Our analysis shows that adding an LPG to an MBG increases profits as long as the consumer’s transactions costs of exercising MBGs to eliminate price dissatisfaction are greater than the difference between the low price discovered post-purchase and the retailer’s salvage value, but are smaller than the difference between the MBG price and the low price.  Consistent with empirical observations, this implies that LPGs should be more attractive for retailers that sell large-ticket items, as the resulting price differences among the retailers are likely to exceed the consumer’s transaction costs.   In addition, LPGs become more profitable when the probability of post-purchase dissatisfaction with the price increases (for example, when the probability of discovering a post-purchase advertised lower price is higher because of new entry, or as a result of an increase in low price advertising by competitors), and when the probability of satisfaction with the product itself increases (for example, if the retailer improves the product selection to better match customer needs).  These findings can help guide retailers who consider adding an LPG as a joint policy to their MBG.