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

Posted: 9 Dec 2004

See all articles by Serguei Netessine

Serguei Netessine

The Wharton School, University of Pennsylvania

Sergei Savin

Columbia University - Columbia Business School; University of Pennsylvania - Operations & Information Management Department

Wenqiang Xiao

Columbia University - Decision Risk and Operations

Date Written: November 2004

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, 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.

Keywords: Cross-selling, e-commerce, dynamic pricing, Internet, dynamic programming

JEL Classification: C61, D42

Suggested Citation

Netessine, Serguei and Savin, Sergei and Xiao, Wenqiang, Revenue Management Through Dynamic Cross-Selling in E-Commerce Retailing (November 2004). Available at SSRN: https://ssrn.com/abstract=628505 or http://dx.doi.org/10.2139/ssrn.628505

Serguei Netessine (Contact Author)

The Wharton School, University of Pennsylvania ( email )

3730 Walnut Street
Philadelphia, PA 19104-6367
United States
(215) 573 3571 (Phone)

HOME PAGE: http://www.netessine.com

Sergei Savin

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

University of Pennsylvania - Operations & Information Management Department

Philadelphia, PA 19104
United States

Wenqiang Xiao

Columbia University - Decision Risk and Operations ( email )

3022 Broadway
New York, NY 10027
United States

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