Compensation policy for delivery delay in online retailing

Financial compensation is an effective marketing tool to deal with delivery delay issues in online retailing. In this paper, we develop an analytical model to study two different compensation policies prevalent in practice: uniform compensation and discriminated compensation. By endogenizing the customers’ choice behavior, we first characterize the optimal retail price and compensation level for these different compensation cases. Then, we conduct a sensitivity analysis of the optimal solutions with respect to driving factors. The results show how the retailer’s delivery quality, as well as the product characteristics, affect the optimal compensation and pricing policies, leading to interesting insights. For example, we show that the retailer optimally adopts a more generous compensation policy when the relative delay time becomes longer under the uniform compensation policy, but a lower retail price with a constrictive compensation policy can be a good choice for the retailer under discriminated compensation case. Through comparison to the benchmark case, we identify the impacts of the delay compensation policies from three aspects: the profit margin effect, total demand effect, and return rate effect. Then, the aggregate effect analysis verifies the profit implications of the compensation policies. The results show that the retailer is worse off due to deploying a compensation policy when both the cost-value rate and delay probability are sufficiently large. Furthermore, we also compare the optimal solutions, customer choice behavior, and retailer performance for these two compensation cases. The analytical and numerical insights can serve as a reference for internet retailers facing delivery delay problems.