Sales pricing models based on returns: Bundling vs. add-on

Abstract

With the proliferation of e-commerce, there has been a remarkable surge in the volume of products sold online, accompanied by a corresponding increase in product returns. In order to stimulate consumer demand, retailers have adopted various promotional strategies, among which the bundling and add-on sales have emerged as the most prevalent. Nevertheless, there is currently no clearly dominant promotion model considering consumer return behavior. Consequently, we construct a game-theory model that considers product returns in the settings of an online retailer, an insurance company, and a continuum of consumers. Within our model, consumers are confronted with uncertainty regarding their valuations and only ascertain the true value of a purchased product after acquisition. Moreover, retailers must carefully consider the tradeoff between the bundling and add-on models: bundling sales may sell more products, but return products increase; on the other hand, add-on sales offer the advantage of single item returns but may result in a decrease in overall product sales. Our findings yield several noteworthy conclusions warranting further examination. First, add-on product substandard rate (Proportion of add-on products with substandard quality to all add-on products) has a significant influence on the retailer’s choice of sales model. More specifically, when the add-on product substandard rate is lower, retailers will definitely choose bundling sales. Otherwise, the retailer’s choice of sales model depends on both core product price and degree of discount. Second, in bundling sales, the better the match between core product and add-on product, the higher the retailer’s profit. However, in add-on sales, highly matched add-on product may hurt the retailer’s profit. Finally, add-on sales is a better choice for commercial groups that have both sales companies and insurance companies.