Revenue Management Through Dynamic Cross Selling in E-Commerce Retailing

Abstract

We consider the problem of dynamically cross-selling products (e.g., books) or services (e.g., travel reservations) in the e-commerce setting. In particular, we look at a company that faces a stream of stochastic customer arrivals and may offer each customer a choice between the requested product and a package containing the requested product as well as another product, what we call a "packaging complement. " Given consumer preferences and product inventories, we analyze two issues: (1) how to select packaging complements, and (2) how to price product packages to maximize profits.We formulate the cross-selling problem as a stochastic dynamic program blended with combinatorial optimization. We demonstrate the state-dependent and dynamic nature of the optimal package selection problem and derive the structural properties of the dynamic pricing problem. In particular, we focus on two practical business settings: with (the Emergency Replenishment Model) and without (the Lost-Sales Model) the possibility of inventory replenishment in the case of a product stockout. For the Emergency Replenishment Model, we establish that the problem is separable in the initial inventory of all products, and hence the dimensionality of the dynamic program can be significantly reduced. For both models, we suggest several packaging/pricing heuristics and test their effectiveness numerically. AbstractWe consider the problem of dynamically cross-selling products (e.g., books) or services (e.g., travel reservations) in the e-commerce setting. In particular, we look at a company that faces a stream of stochastic customer arrivals and may offer each customer a choice between the requested product and a package containing the requested product as well as another product, "packaging complement". Given consumer preferences and product inventories, two issues are analyzed: (1) how to select packaging complements and (2) how to price product packages to maximize profits.We formulate the cross-selling problem as a stochastic dynamic program blended with combinatorial optimization. We demonstrate the state-dependent and dynamic nature of the optimal package selection problem and derive structural properties of the dynamic pricing problem. In particular, we focus on two practical business settings: with (the Emergency Replenishment model) and without (the Lost Sales model) the possibility of inventory replenishment in the case of a product stock-out. For the Emergency Replenishment model, we establish that the problem is separable in the initial inventory of all products and hence the dimensionality of the dynamic program can be significantly reduced. For both models several packaging/pricing heuristics are suggested and their effectiveness is tested numerically.

Dynamic Assortment Customization with Limited Inventories

“…Netessine et al (2006) study a retailer with limited inventories that engages in cross-selling by dynamically selecting product packages to offer to each arriving customer (the packages consist of the specific product requested by the customer plus a so-called packaging complement). For each arriving customer, the firm makes a decision regarding the packaging complement and the price.…”

Contingent cross-selling and up-selling relationships with performance and job satisfaction: an MOA-theoretic examination

“…Up-sold products tend to replace or upgrade items previously purchased (Netessine, Savin, and Xiao 2006). While cross-selling and up-selling can enhance customer value perceptions, this outcome is likely a function of the degree to which the customer views the offering consistent with their organization's needs in both cases.…”

Dynamic packaging in e-retailing with stochastic demand over finite horizons: A Q-learning approach

“…Schmeing, Cardoso, and Fernandes (2006) presented a new knowledge-based dynamic packaging model. To the best of our knowledge, Netessine, Savin, and Xiao (2006) is the only paper that investigated the dynamic packaging application in e-retailing industry. In their paper, the practice of dynamic packaging is also termed dynamic cross-selling.…”

“…In their paper, the practice of dynamic packaging is also termed dynamic cross-selling. According to Netessine et al (2006), the dynamic packaging problem is quite complex since it involves solving a large-scale combinatorial optimization superimposed on the stochastic dynamic programming. To obtain a solution in real time, several heuristics proposed by Netessine reduces computation workload through either ignoring the impact of product inventories or simplifying the dynamic packaging problem by assuming that there is no packaging in all the remaining periods of the selling horizon but current period.…”

“…The two stages heuristic is a simple revision of the heuristic proposed by Netessine et al (2006) according to the discrete nature of admissible price discount rate in this paper. In this section, we first simply introduce this heuristic (for details see Netessine et al, 2006).…”