Big Data and online shopping, new research

A new operational strategy mining Big Data to predict when online shoppers want their food shop delivered could improve service for customers and boost retailers’ profits. Academics from Warwick Business School, Lancaster University Management School and the University of Southampton have devised an approach that helps retailers to decide when to incentivise customers - by, for example, lowering delivery fees - in which area and in which time slots all in real-time.

This was tested using real shopping data from a major e-grocer in the UK over a period of six months and generated a four per cent increase in profits on average in a simulation study, outperforming traditional delivery pricing policies. Arne Strauss, Assistant Professor of Operational Research at Warwick Business School, says: “Traditionally online retailers would collect orders including delivery time requests until a certain cut-off time and plan their delivery schedule accordingly. Therefore, maximising profits is a problem because the final set of orders for a given delivery day are not known until shortly beforehand, yet decisions on the pricing of delivery time ‘slots’ have to be made in advance based on an estimate.”

He adds: “With our new approach we demonstrate that analysing the customer data which is already at retailers’ fingertips and using it to predict the impact of future expected orders in the estimation of delivery costs produces higher profits than only using orders accepted to date in this estimation. Our model can outperform the static two-tier delivery pricing policies that are often found in practice by around four per cent in profit. In an industry that operates on very small margins, this profit potential is significant.”

Dr Strauss believes online retailers are missing a number of tricks to make more money from their delivery service including combining demand management with vehicle routing optimisation software, and maximising the use of customer information to segment and target customers. He also recommends that online retailers try and nudge customers into the most profitable delivery times which could result in a significant increase in profits as demonstrated in the study. “It is important to incentivise customers and steer them to particular delivery times. This could be in the form of ‘points’ or vouchers or even something along the lines of asking the customer to consider the environmental impact. If they are not being given incentives when it comes to requesting their delivery times, then this can have a large impact on route planning and efficiency for the delivery team. Business failures such as Webvan, who went bankrupt in 2001 after trying to offer a same-day delivery service, brought home the message that while small delivery windows appeal to customers, they do cost the retailer money.”

A research paper Choice Based Management and Vehicle Routing in E-fulfilment is available at: http://www2.warwick.ac.uk/fac/soc/wbs/subjects/orms/about/people/strauss/publications/jointdemandmanagementfinalplainr1.pdf

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