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Dynamic Revenue Management Through Cross-Selling in E-Commerce Retailing

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  1. Dynamic Revenue Management Through Cross-Selling in E-Commerce Retailing Sergei Savin Graduate School of Business, Columbia University (Joint work with Sergei Netessine, The Wharton School Wen-Qiang Xiao, Columbia GSB)

  2. Cross-Selling in Retailing • “Brick-and-Mortar” Retailing • Product A and Product B may be sold separately as well as part of package P • Shampoo and conditioner • Christmas gift preparations (wrapping paper, tape, holiday cards, etc.) • Starter kits for kid’s bicycles (bicycle, helmet, knee pads) • Package contents and package price are static

  3. $20.37 $51.87 • Example: buying books on Amazon.com • Online retailing:packages can be composed and priced dynamically

  4. $31.50 $174.95

  5. $174.95 $143.45

  6. Cross-Selling of Books on Amazon.com: Top 100 on 09/17/03 - book on the top100 list, - book outside of top 100 list

  7. Survey be E-tailing group: cross-selling is used by • 62% of top internet retailers • 100% of top internet retailers specializing in computers, books/music, consumer electronics, pet supplies • Travel web sites: dynamic cross-selling of “air+hotel”, “air+car”, “air+hotel+car” packages

  8. Cross-Selling in e-Retailing: Personalized Sales Recommendations • “Personalization” approach to selecting packaging complements • Designed to maximize probability of buying a package

  9. Product Cross-Selling in the Literature • Economics and Marketing (review by V. Rao (1993)) • Static “demand-side” analysis: under what conditions cross-selling is profitable (Adams and Yellen (1976)) • No “supply-side” considerations • Operations • Optimal pricing of product bundles in static environment (Hanson and Martin (1990)) • Stocking decisions for individual products and product bundles (Ernst and Kouvelis (1999)) • Multi-Product Revenue Management (Gallego and Van Ryzin (1997), Cooper and Zhang (2003))

  10. Dynamic Cross-Selling Model • A company sells m items • We consider a cross-selling problem between two successive inventory replenishments • N decision epochs • At the beginning of each decision epoch, the inventory levels of all products are observed and packaging and pricing decisions are made

  11. During each decision epoch at most 1 customer arrives, asking for item i with probability li • Class i customer is offered item ithe (fixed) price pi and a an “item i – item j” (for some j) package at the price pi≤ pij≤ pi + pj. • Class i customer buys only item i with probability Fij(pij) and buys “item i – item j” package with probability 1-Fij(pij) • Objective: at each decision epoch select packages and their prices to maximize expected revenues over remaining horizon

  12. Dynamic Packaging and Pricing Model

  13. What happens if we run out of one or more products? • Emergency Replenishment Model (ERM): missing item i is procured at an additional cost bi • Lost Sales Model (LSM): missing item is “out”

  14. How to Price Static Packages? i=2 i=1 Packaging Primary of Porteus’s book = {Zipkin’s book, Heyman-Sobel’s book}: P(2)={1,3} Packaging Complement of Porteus’s book = Zipkin’s book: C(2)=3 i=3

  15. Decomposition under Emergency Replenishment Model Proposition

  16. ERM Decomposition i=2 i=1 i=3

  17. i=1 i=2 i=3 Proposition

  18. 2 2 2 2 2 2 1 1 1 1 1 1 3 3 3 3 3 3 Optimal Packaging is State-Dependent…

  19. 2 2 2 2 2 2 1 1 1 1 1 1 3 3 3 3 3 3 … and Dynamic

  20. Heuristic Packaging/Pricing Approaches • Optimal Package Pricing • “Infinite Supply” Pricing • is a lower bound on the optimal price, optimal when Ijis high • “Infinite Supply” Packaging “Infinite Supply” Heuristic

  21. Heuristic Packaging/Pricing Approaches • In period n, assume that there is no product packaging in periods n+1 to N • “Two-Stage” Pricing • “Two-Stage” Packaging “Two-Stage” Heuristic

  22. Testing “Infinite Supply” and “Two Stage” Heuristics • Prices of individual products are fixed and equal: • Exponential reservation price functions for packages: • Initial product inventories: • Emergency replenishment prices: • Three products • Various combinations of demand intensities li , i=1,2,3 • About 7000 problem instances

  23. “Infinite Supply” heuristic: • Average performance gap (as compared to optimal) is about 10% • “Two Stage” heuristic: • Average performance gap is 0.12% • Worst performance gap is 0.69%

  24. Impact of Initial Inventory

  25. Impact of Emergency Replenishment Price

  26. Summary • Dynamic Cross-Selling Model • Two types of “boundary” conditions: Emergency Replenishment and Lost Sales • Emergency Replenishment: • Static Packaging: Decomposable Value Function • Dynamic Packaging: “Two Stage” Heuristic • Lost Sales: • Few structural properties

  27. Best Cross-Selling Approaches