Design for the pricing strategy of return-freight insurance based on online product reviews

Abstract To resolve online shopping disputes with product return, some insurance companies have developed a new type of insurance called return-freight insurance to compensate consumers’ loss of return-freight fees. Traditional insurance-premium determination (such as support vector machines) has not fully merged all e-commerce factors, such as the product-fit uncertainty of online shopping, that could affect both insurance demand and return quantity. Based on these traits, we develop a profit-maximization model in terms of certain market-reaction parameters, especially product-fit uncertainty, and calculate the optimal pricing strategy, including both the insurance premium and the compensation. Using prospect theory, we explain why online product review could influence insurance applicants’ risk-averse behavior in the e-commerce situation. Then we solve for the reasonable premium and compensation given online product reviews from the insurance company’s perspective and obtain a number of managerial guidelines for using marketing and operational-strategy variables to influence those reaction parameters so as to obtain the maximum benefit from the market. Interestingly, when consumers’ sensitivity to product-fit uncertainty is moderate, an increase in product-fit uncertainty moves insurance premium and compensation in the opposite direction.

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