Evaluating pricing strategies for premium delivery time windows

Abstract

In the challenging environment of attended home deliveries, pricing delivery options can play a crucial role to ensure profitability and service quality of retailers. To differentiate between standard and premium delivery options, many retailers include time windows of various lengths and fees within their offer sets. Even though customers prefer short delivery time windows, longer time windows can help maintaining flexibility and profitability for the retailer. We classify pricing strategies along two dimensions: static versus dynamic price setting and whether an offer set can include one or multiple price points. For static pricing, we implement price configurations that reflect current business practice. For the dynamic pricing, we adapt routing mechanisms that consider the flexibility within the underlying route plan during the booking process and set delivery fees accordingly. To evaluate the pricing strategies under plausibly realistic conditions, we model customer behavior through a nested logit model. This model represents customer choice as sequential decisions between premium and standard time windows. We perform a computational study considering realistic travel and demand data to investigate the effectiveness of static and dynamic time window pricing. Finally, we offer managerial insights and an outlook into applying strategic analysis to decide on price setting strategies.