Online retail operations with "try before you buy"

Abstract

In this research, we study two major problems: 1. TBYB (`Try-Before-You-Buy') retailer's operation decisions, 2. how a customer's valuation uncertainty affects the retailer's profit. A customer has a valuation uncertainty on the product before the purchase. Therefore, a customer who visits the online store is reluctant to purchase the product because he or she is unable to try on and even the customer may return the product if it does not fit as expected. The retailer can take competitiveness by adopting TBYB service, because the service eliminates customer's valuation uncertainty by providing an opportunity of experience before the purchase. However, since the products are delivered to the customers before the purchase, high return rate is inevitable without articulated operation strategy. To solve this problem, we suggest the operational decisions (service quantity and recommendation accuracy) which increase the retailer's profit by developing TBYB service model mathematically. Also, we find the interaction between the two decision variables and the necessary condition of recommendation accuracy to implement TBYB service. Thereafter, the impact of customer's valuation uncertainty on the retailer's profit is analyzed. Counterintuitively, retailer's profit increases in the customer’s valuation uncertainty for the specific condition. Furthermore, we examine an extension of our model that describes the sequential screening situation, and we demonstrate the robustness of our findings.