The Value of Personalized Promotion: An Empirical Investigation on O2O Platform

37 Pages Posted: 24 Sep 2019 Last revised: 5 Dec 2019

See all articles by Baile Lu

Baile Lu

Zhejiang University - School of Management

Yuqian Xu

University of Illinois at Urbana-Champaign - College of Business

Hongyan Dai

Central University of Finance and Economics (CUFE) - Business School

Weihua Zhou

Zhejiang University

Date Written: August 29, 2019

Abstract

Personalized promotion through individual-based pricing and discounts has been widely employed in different industry practices. In this paper, we examine the economic value of personalized promotion with price discounts via a unique field experiment on one leading O2O platform with more than 50 million active users in China. In the design of our field experiments, we implement the personalized promotion algorithm with nine stores on our collaborated O2O platform, and control another two stores that do not have personalized promotion, controlling for the same promotion depth. Employing the difference-in-differences method together with matching, we find that personalized promotion leads to an increase of, on average, 1.6% in the monthly total transaction amount, 3.2% in the number of items purchased per order, and 2.2% in the probability of a 5-star rating, as compared to a regular mass promotion strategy with the same promotion depth. In addition, we find the personalized promotion can save, on average, 1.65 RMB in the promotion cost and generate an additional 1.56 RMB in revenue per consumer per month than a regular mass promotion strategy. We then go one step further to compare the effects of personalized promotion in the short and long run, and find the positive effects on revenue increase first and then decrease over time. On the other hand, the positive effects on consumer satisfaction become significant only after a sufficiently long time period. Finally, we study the heterogeneous effects of personalized promotion among consumers, and find the effects are greater for new consumers and less for frequent and high-value consumers. We also find that consumers with higher recency, frequency, and monetary value are more likely to redeem such personalized promotion.

Keywords: personalized promotion, field experiment, difference-in-differences, matching, revenue management, consumer satisfaction

Suggested Citation

Lu, Baile and Xu, Yuqian and Dai, Hongyan and Zhou, Weihua, The Value of Personalized Promotion: An Empirical Investigation on O2O Platform (August 29, 2019). Available at SSRN: https://ssrn.com/abstract=3445110 or http://dx.doi.org/10.2139/ssrn.3445110

Baile Lu

Zhejiang University - School of Management ( email )

Hangzhou, Zhejiang Province 310058
China

Yuqian Xu (Contact Author)

University of Illinois at Urbana-Champaign - College of Business ( email )

Champaign, IL 61820
United States

Hongyan Dai

Central University of Finance and Economics (CUFE) - Business School ( email )

Beijing
China

Weihua Zhou

Zhejiang University ( email )

38 Zheda Road
Hangzhou, Zhejiang 310058
China

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