Mining Customer Valuations to Optimize Product Bundling Strategy

Abstract

Product bundling is widely adopted for information goods and online services because it can increase profit for companies. For example, cable companies often bundle Internet access and video streaming services together. However, it is challenging to obtain an optimal bundling strategy, not only because it is computationally expensive, but also that customers’ private information (e.g., valuations for products) is needed for the decision, and we need to infer it from accessible datasets. As customers’ purchasing data are getting richer due to the popularity of online shopping, doors are open for us to infer this information. This paper aims to address: (1) How to infer customers’ valuations from the purchasing data? (2) How to determine the optimal product bundle to maximize the profit? We first formulate a profit maximization framework to select the optimal bundle set. We show that finding the optimal bundle set is NPhard. We then identify key factors that impact the profitability of product bundling. These findings give us insights to develop a computationally efficient algorithm to approximate the optimal product bundle with a provable performance guarantee. To obtain the input of the bundling algorithm, we infer the distribution of customers’ valuations from their purchasing data, based on which we run our bundling algorithm and conduct experiments on an Amazon co-purchasing dataset. We extensively evaluate the accuracy of our inference and the bundling algorithm. Our results reveal conditions under which bundling is highly profitable and provide insights to guide the deployment of product bundling.