Offering Low Price Guarantees to Improve Customer Retention

Abstract

Major retailers in the USA offer Money Back Guarantees (MBGs) under which they return money to dissatisfied customers. Some of these retailers also offer Low price Guarantees (LPGs) under which they promise to refund price differences if buyers find a lower price after purchase. Some researchers have argued that LPGs should be legally challenged because they limit price competition and contribute to higher prices. This paper shows that adding an LPG to an MBG can help improve economic efficiency as both retailer loss and customer hassle costs from excessive returns are reduced. This reduction serves as a counter argument against those who believe that LPGs should be prohibited.

Keywords: Low Price Guarantees, Money Back Guarantees, Customer Retention, Customer Satisfaction

JEL Classification: M3, M31, K2, D21