Sellers who plan to capitalize on the lifetime value of customers need to manage the sales potential from customer referrals proactively. To encourage existing customers to generate referrals, a seller can offer exceptional value to current customers through either excellent quality or a very attractive price. Rewards to customers for referring other customers can also encourage referrals. We investigate when referral rewards should be offered to motivate referrals and derive the optimal combination of reward and price that will lead to the most profitable referrals. We define a delighted customer as one who obtains a positive level of surplus above a threshold level and, consequently, recommends the product to another customer. We show that the use of referral rewards depends on how demanding consumers are before they are willing to recommend (i.e., on the delight threshold level). The optimal mix of price and referral reward falls into three regions: (1) When customers are easy to delight, the optimal strategy is to lower the price below that of a seller who ignores the referral effect but not to offer rewards. (2) In an intermediate level of customer delight threshold, a seller should use a reward to complement a low-price strategy. As the delight threshold gets higher in this region, price should be higher and the rewards should be raised. (3) When the delight threshold is even higher, the seller should forsake the referral strategy all together. No rewards should be given, and price reverts back to that of a seller who ignores referrals. These results are consistent with the fact that referral rewards are not offered in all markets. Our analysis highlights the differences between lowering price and offering rewards as tools to motivate referrals. Lowering price is attractive because the seller “kills two birds with one stone”: a lower price increases the probability of an initial purchase and the likelihood of referral. Unfortunately, a low price also creates a “free-riding” problem, because some customers benefit from the low price but do not refer other customers. Free riding becomes more severe with an increasing delight threshold; therefore, motivating referrals through low price is less attractive at high threshold levels. A referral reward helps to alleviate this problem, because of its “pay for performance” incentive (only actual referrals are rewarded.) Unfortunately, rewards can sometimes be given to customers who would have recommended anyway, causing a waste of company resources. The lower the delight threshold level, the bigger the waste and, therefore, motivating referrals through rewards loses attractiveness. Our theory highlights the advantage of using referral rewards in addition to lowering price to motivate referrals. It explains why referral programs are offered sometimes but not always and provides guidelines to managers on how to set the price and reward optimally.Referral Rewards, Customer Referrals, Customer Delight, Word-of-Mouth

In this research we examine the phenomenon of escalation bias in the context of managing new product introductions. In particular, we propose a formal descriptive model that captures the potential effects of confirmatory bias. We do this by having the initial belief structure (i.e., the set of beliefs leading to the first decision) non-normatively affecting the manager's perceptions of new information along with its normative role in the updating of beliefs. This over-weighting of the initial (positive) belief structure can lead the manager to continue (improperly) with a (losing) course of action.

The price for a product may be set too low, causing the seller to leave money on the table, or too high, driving away potential buyers. Contingent pricing can be useful in mitigating these problems. In contingent pricing arrangements, price is contingent on whether the seller succeeds in obtaining a higher price within a specified period. We show that if the probability of obtaining the high price is not too high, sellers profit from using contingent pricing while economic efficiency increases. The optimal contingent pricing structure depends on the buyer's risk attitude—a deep discount is most profitable if buyers are risk prone. A consolation reward is most profitable if buyers are risk averse. To motivate buyers to participate in a contingent pricing arrangement, the seller must provide sufficient incentives. Consequently, buyers also benefit from contingent pricing. In addition, because the buyers with the highest willingness-to-pay get the product, contingent pricing increases the efficiency of resource allocation.pricing, price risks, contingent selling formats, standbys, price discrimination, pricing under uncertainty

In many business sectors such as airlines, hotels, trucking, and media advertising, customers' arrivals and willingness to pay are uncertain. Managers must decide whether to quote a price low enough to guarantee early sales, or to quote a higher price and risk that some units remain unsold. In allocating capacity, they face a trade-off between two types of potential losses; (1) —selling at a low price, and losing a better price later, and (2) —waiting in vain to sell at a high price, and losing the opportunity of an earlier low price offer. Yield loss means that consumers who value the product most do not get to use it, and spoilage loss means that valuable products are wasted because no consumers get to use them. Sellers typically hedge against the risk of spoilage loss by selling some units early at low prices, and against the risk of yield loss by blocking some units in hope of selling them later at a high price. In this paper we show that the use of overselling with opportunistic cancellations can increase expected profits and improve allocation efficiency. Under this strategy, the seller deliberately oversells capacity if high-paying consumers show up, even when capacity is already fully booked. The seller then cancels the sale to some low-paying customers while providing them with appropriate compensation. We derive a new rule to optimally allocate capacity to consumers when overselling is used, and show that overselling helps limit the potential yield and spoilage losses. Yield loss is reduced because the seller can capture more high-paying customers by compensating low-paying customers who give up their right to the product. Spoilage loss is reduced because the compensation decreases the price spread perceived by the seller, and as a result, the seller is less anxious to speculate and “block” units. Overselling with opportunistic cancellations assures that the product will be sold to consumers who value it most. This means that “everybody wins”, and resources are allocated more efficiently than in conventional selling.Overselling, Overbooking, Yield Management, Yield and Spoilage Losses, Capacity Management

This article presents a model of the design and introduction of a product line when the firm is uncertain about consumer valuations for the products. We find that product line introduction strategy depends on this uncertainty. Specifically, under low levels of uncertainty the firm introduces both models during the first period; under higher levels of uncertainty, the firm prefers sequential introduction and delays design of the second product until the second period. Under intermediate levels of uncertainty the firm's first product should be of lower quality than one produced by a myopic firm that does not take product line effects into consideration. We find that when the firm introduces a product sequentially, the strategy might depend on realized demand. For example, if realized demand is high, the firm's second product should be a higher‐end model; if demand turns out to be low, the firm's second product should be a lower‐end model or replace the first product with a lower‐end model.