Using optimization to improve bundle recommendations and pricing – Georgia Perakis

MIT Sloan Prof. Georgia Perakis

MIT Sloan Professor Georgia Perakis

From The Huffington Post

When you shop online, it is common for retailers to offer additional items in a bundle to try to increase sales. For instance, if you are buying towels, the seller may offer matching washcloths. Or if you are buying an airline ticket, you may be asked if you also want to purchase inflight Wifi and premium seating. If this “bundle” is appealing to you in terms of the items offered and the price, you might be motivated to buy it all. If not, the items or services are left on the table, eventually getting marked down even more.

With the online market projected to grow 57% from 2013 to 2018, retailers have the potential to significantly increase their profits through bundling. This strategy can be beneficial for customers too if they are presented with desirable items they otherwise may have missed — and at better prices. The key is creating an attractive enough bundle to incentivize the buyer to click “add to cart.”

One way to incentivize buyers is to personalize the bundle to their interests and needs. In this digital age, stores have your shopping history so they know what you’ve previously bought and your shopping journey. If you are a new customer, they can ask you questions about preferences, understand intent from other data sources, see what is trending, and look at what people like you have bought. All of this data can be used to offer the right bundle at the right price to make the sale. While this sounds like an obvious answer, it is a new frontier for retailers.

I have been focusing on this area with IBM researcher Pavithra Harsha, other IBM collaborators, and one of my PhD students, Anna Papush, who also conducted an internship with IBM on this work. Our goal was to construct a new demand model that combines the traditional approach of online shopping with personalization as well as an optimization model for offering each type of shopper (existing customers and new customers) a discounted bundle on relevant items that combines the retailer’s goals of profit maximization and inventory balancing.

Read the full post at The Huffington Post.

Georgia Perakis is the William F. Pounds Professor of Management and a Professor of Operations Research and Operations Management at the MIT Sloan School of Management.

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