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Mark Ferguson,G. Shang, P. Pekgün, and M. Galbreth

Darla Moore School of BusinessUniversity of South Carolina

Estimating the Value of a Money-Back-Guarantee (MBG)

Policy in an Online Retail Context

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Cost: processing returnsBenefit: higher willingness-to-pay

The basic tradeoff for MBGs

no returns, $100 return & refund

How much now?

1. Lots of research on the cost2. Scant research on the benefit

3. Benefits are difficult to quantify

consumer electronics sold online

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How to quantify MBG value?Company Product price

Forward shipping

Return shipping Change

Amazon full refund no refund consumer pay once

Best Buy full refund not clear consumer pay once

Dell 85% to 100% no refund consumer pay never

HP full refund no refund consumer pay never

Lenovo 85% no refund consumer pay never

Sears 85% to 100% no refund consumer pay once

Shure full refund no refund consumer pay never

Sony 85% to 100% no refund consumer pay never

Target full refund no refund retailer pay once

Wal-Mart full refund no refund consumer pay once

1. Three characteristics for a typical MBG2. Little between-product variation in

MBGs3. Little longitudinal variation in MBG

Hard to quantify the value of MBG

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Data from eBay: 3 appealing features1. Match the three common characteristics

Refund for product price, no refund for forward shipping, buyer pays for return shipping

2. Variation in MBG policy for identical products

3. Consumer’s product valuation measured from auction prices

How we quantify the value of MBGs

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Structured web-crawling

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Structured web-crawling

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Structured web-crawling

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Procedure:1. Select product2. Collect product information3. Identify completed auctions of the product4. Collect transaction information5. Collect seller information

Outcome (after data cleaning) 2946 transactions of 86 consumer electronic

products sold on eBay during 1st quarter of 2013

Structured web-crawling

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Product Price Differences: with MBGs versus without MBGs

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Summary of Auctions Captured

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Desired economic interpretation: If a seller switches from no-MBG to MBG, how

much will consumers’ willingness-to-pay increase?

Main technical challenge: Whether to offer MBG is an endogenous

variable. Consequence:

OLS biased IV approach (e.g. 2SLS) biased We use an error correlation based ML estimator

to address endogeneity.

Econometric approach

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Transaction Related:1. Number of bids2. Duration3. Weekend/ time of day/ month4. Order processing time5. Shipping options (stand, economy, exped)

Seller Related:1. eBay store2. Seller tenure

Product Related:1. Average price2. Number of units sold3. Number of reviews

Regression Model Controls

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It depends on forward shipping cost:

It also depends on seller reputation: More positive reviews increase value of MBG More negative reviews decrease value of MBG

Main estimation resultsno returns, $100 return & refund

How much now?

Forward shipping

Value of MBG How much now?

$0 $5.2 $105.2

$10 $4.0 $104

$20 $2.8 $102.8

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Value of MBG as a function of the forward shipping charge

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What should the shipping fee be?

• When returns rate are high, either charge high shipping fee or do not offer a MBG

• For low return rates, the best shipping fee depends on the recovery value of the returned products

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Value of MBG is smaller than 10% of the product value

Forward shipping fee: Treated by consumers as an implicit restocking

fee Erodes the value of MBG very quickly Makes the one-size-fits-all return policy even

less optimal for online retailers Our increase in valuation estimates can be

combined with the cost of returns to construct a MBG optimization model

Key findings

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A seller who offers free forward shipping and has an average reputation could expect 5.16% increase in consumer’s product valuation if it switches from not offering MBG to offering MBG

A forward shipping charge erodes the value of a MBG policy significantly - if 20% of total price paid is attributed to shipping, then the value of a MBG is close to zero

Positive and negative seller reputations have separate and opposing effects on the value of MBGs

Key take-aways

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Thanks for your participation and feedback!

Questions?

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How does endogeneity arise? DV: consumer’s product valuation Endo. Regressor: seller’s decision to offer MBG Some unobserved factors affect both

What are these unobserved factors? Example: return-related seller reviews Affect likelihood to offer MBG Affect product valuation when there is MBG

Both IV and our approach account for these

IV versus our approach

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However, IV also assumes: Return-related reviews will also affect

product valuation when there is no MBG. That is, return experience matters even when

there is no chance to return. Not realistic…

In contrast, our approach does not make this assumption

We model two error correlations: one with no-MBG, the other with MBG they can be different

IV versus our approach

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