Customer Differentiation with Shipping as an Ancillary Service? Free Service, Prioritization, and Strategic Delay

Abstract

A service provider/retailer offers ancillary service (e.g., shipping by an online retailer) to two types of customers, impatient and patient, who may be heterogeneous both in their delay sensitivities and service valuations. She can use prioritization and/or strategic delay to differentiate them by offering two service classes and charging different prices, potentially resulting in a split in which a single customer type selects both the classes. Her objective is to minimize cost while satisfying individual rationality and incentive compatibility conditions. We characterize the optimal solutions under both exogenous and endogenous capacities. We examine the conditions under which the following strategically important features of service delivery are optimal, and relate them to practical scenarios: (i) free service, (ii) single/differentiated service, (iii) split of customers, and (iv) strategic delay. We find that the presence of these features depends on (i) whether the retailer has limited or sufficient capacity and (ii) whether she sells fashion goods or staple products. A typical explanation for offering free service is that it increases demand from customers. We make an operational case for it by showing that even if demand does not change, free service is still optimal under some scenarios.

Equilibrium queueing analysis in a ride-hailing service with sharing option

“…Pangburn & Stavrulaki (2008) juxtapose segmentation and pooling policies for revenue maximizing firms offering different services. Sainathan (2018) considers the strategies of prioritization and strategic delays within the realm of ancillary firms serving different classes of customers (patient and impatient). Some other papers on consumers' self-selection in the service and operations literature include Lederer & Li (1997), Afèche (2013), Afeche & Pavlin (2016) and Maglaras et al (2018).…”

Technical Note—Pricing and Prioritization in a Duopoly with Self-Selecting, Heterogeneous, Time-Sensitive Customers Under Low Utilization

“…Furthermore, they do not model competition. As in this work, Sainathan (2018) also compares differentiated service with single service. However, he considers an SP offering ancillary service in which all the customers have to be satisfied while minimizing the cost of service provision.…”

“…Sainathan (2018) does compare prioritized and single services whilePangburn and Stavrulaki (2008) compare segmented and pooled services. However, as we explain above, their settings are different.…”

“…However, as we explain above, their settings are different. Importantly,Sainathan (2018) analyzes ancillary services in which cost is minimized and single service becomes optimal due to low capacity, while segmented service analyzed inPangburn and Stavrulaki (2008) is different from prioritized service here.…”

Maximizing E-Tailers’ Sales Volume through the Shipping-Fee Discount and Product Recommendation System

“…ComScore [8] found that 42% of online shoppers in Asia added items to their shopping carts in order to qualify for free shipping. So more and more e-commerce platforms have used free shipping to attract online consumers' shopping in order to improve the platforms' performance [9,10]. However, the loss due to free transportation is so huge that the promotion is not profitable.…”