Discount or Speed?: An Analysis of Reward Offer in Exchange for No-Rush Shipping

Abstract

This research investigates how a no-rush shipping reward program, which offers a discount or a reward to a customer who chooses no-rush shipping for her online purchased items, can be utilized by an online seller to reduce shipping and expediting costs. In particular, we consider a setting in which an online seller has to ship two items to a customer. Each item can be shipped either on time or late, depending on its uncertain lead time. If an item is delivered late, the seller will incur a loss in customer goodwill unless the customer opts in to a no-rush shipping reward program and agrees to take a reward in exchange for potentially receiving an item late. To avoid shipping an item late, the seller also has an option to expedite an item at an extra cost. The seller’s optimal decisions regarding whether to offer a no-rush shipping reward program on any items and whether to ship each item separately or together at a normal or expedited speed are characterized. Our findings reveal that the number of items that the seller should offer the no-rush shipping reward program decreases as the required reward to entice customer participation increases. If the no-rush shipping reward program is offered on both items, then consolidating them into a single shipment always emerges as the optimal strategy. However, in cases where the program applies to none or only one item, it would be optimal for the seller to consolidate the shipment if and only if the shipping cost is sufficiently large. Through numerical demonstration, we underscore the noteworthy cost savings attainable via the no-rush shipping reward program, especially when the expected wait time to receive an item is long, the expediting cost is large, but the normal shipping cost is small. This study suggests that implementing a no-rush shipping reward program empowers online sellers with enhanced shipping management flexibility, which in turn effectively reduces operating and shipping costs as well as the environmental impact, while also meeting customers’ expectation.