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.

Is Tom Cruise Threatened? An Empirical Study of the Impact of Product Variety on Demand Concentration

“…Further research opportunities also include linking recommendation system metrics, such as product ratings, with operations management and marketing strategies (see Netessine et al 2006 for some initial work in this direction) is also a fruitful direction. Finally, incorporating the empirical findings of the product variety effects on demand concentration and evolving consumer preferences into the analytical models, such as dynamic assortment (Caro and Gallien, 2007) is highly warranted.…”

Bundle pricing of inventories with stochastic demand

“…Netessine et al (2004) study a problem where they consider an e-commerce seller that dynamically forms and prices product or service packages. The problem is modeled as a dynamic program based on two possibilities in case of stock-out: an emergency replenishment of the customer's initial request or lost sales.…”

“…The problem is modeled as a dynamic program based on two possibilities in case of stock-out: an emergency replenishment of the customer's initial request or lost sales. Our model differs from Netessine et al (2004) as we assume posted prices and we explicitly model the consumer choice given that she is given three alternatives upfront: either one of the products or the bundle or none.…”

E-fulfillment and multi-channel distribution – A review

“…They approximate the initial model by a quadratic program, which they solve heuristically. Netessine et al(2005) consider the problem of dynamically cross-selling products or services in an e-commerce setting. Following a revenue-management approach, they develop a stochastic dynamic program for a finite horizon, multi-item inventory system.…”