Online marketing: When to offer a refund for advanced sales

• Published in: International journal of research in marketing 2019-09, Vol.36 (3), p.471-491
• Main Authors: Wu, Meng, Teunter, Ruud H., Zhu, Stuart X.
• Format: Article
• Language: English
• Subjects: Advance selling; Consumer returns uncertainty; Newsvendor problem; Resalable returns; Strategic consumer
• ISSN: 0167-8116; 1873-8001
• DOI: 10.1016/j.ijresmar.2018.11.003

Advance selling is a marketing strategy commonly used by online retailers to increase sales by exploiting consumer valuation uncertainty. Recently, some online retailers have started to allow refunds on products sold in advance. On the one hand this reduces the net advance sales, but on the other hand it allows a higher advance sales price. This research is the first to explore the overall effect of allowing a refund on profits from advance sales, identifying conditions where advance selling with or without refunds (or no advance selling at all) is best. We analytically compare the profits of three advance selling strategies: none, without refund, and with refund. We show that selling in advance and allowing a refund is optimal for products with a relatively small profit margin and small strategic market size, and that the added profit can be considerable. Our results guide managers in selecting the right advance selling strategy. To facilitate this, we graphically display, based on the two dimensions of regular profit margin and strategic market size, under what conditions the different strategies are optimal.