The Toro Companys' No Risk Program - Research Paper Example

The winter during the year 1982/1983 was mild and thus, the premium rate of 2.1% was low given that there was a high risk that a bigger number of customers were going seek refund (Squires, 1999). In other words, the American Home Insurance Company had erred in the calculation of 2.1% premium. To recover this, the insurance company raised the premium rate to around 8% during the following year. Further, the insurance company seemed to take advantage of the increased sales since the premium rate is calculated as a percentage of total retail sales.

Estimating a fair insurance rate A fair insurance rate can be estimated based on historical performance of an organization. For Toro Company, historical data on the sales of the Snowthrowers can be gathered and then used to determine the optimal rates that a company should be asked to pay (Vanderhoof & Altman, 1998). The sales data distribution for Toro indicated that there were strong sales between the financial years 1978/1979, and 1979/1980. The increase in demand was triggered by severe winter conditions during the period.

The next three winters were mild causing a reduction in sales for Toro. However, the winter for the year 1983/1984 was snowy and thus, the risk arising from low sales was reduced. As such, a fair insurance rate should have been lower than that of the previous three years. However, the American Home Insurance Company raised the premium rate from 2.1% in the year 1982/1983 to around 8% in the year 1983/1984. Customer perspective of the structure of paybacks The paybacks were structured in a manner that triggered immediate and enormous interest and excitement among the consumers.

This led to customer preference for the products of Toro to those of competitors. However, with only two out of 172 government-run weather stations reporting snowfall below 50%, most consumers were shy from seeking refund. The winter for the year 1983/1984 is snowy, reducing chances for customers to seek refunds. Since introduction of the program resulted in removing of the 10% discount program, the new program made snowballs less affordable for customers, leading to reduced interest for paybacks especially if winter conditions are projected to be severe.

Running the discount and payback programs would be more appealing, where a consumer makes a choice between the two programs, (Banasiewicz, 2009). Common decision traps and impact of the No Risk program on customer ‘regret’ The decision traps that Toro Company and the American Home Insurance Company as susceptible to are as follows: Decision traps Toro Company American Home Insurance Company Limiting the Search Trap Failure to Evaluate Trap Ignoring Ethical Questions trap None (50%) Negative (50%) Positive (70%) None (30%) Positive (60%) None (40%) Possible outcomes for the consumer The decision matrix shows that the program is likely to lead to consumer regrets.

Argument to achieve desired objective from the Toro Company’s perspective The desire for Toro Company is to win more customers and increase sales for Snowthrowers in the long-run. To achieve this, it will be essential to do research related to the success of the program, and its short and long-term impact on consumer demand (Hoyer & Macinnis, 2009). Toro will need to evaluate possibilities of consumer regret and use the information to improve decisions. In case the program has already caused consumer regret, it will be essential to take actions that will reduce customers’