Optimizing shipping pricing on Dell.com on build to order notebooks to US consumers across customer experience, profitability and working capital

Abstract

Current shipping pricing for BTO notebooks on Dell.com is uniform across products and provides customers with three levels of service Express, Expedited, and Standard. In October 2016, Dell launched a program to give customers more information and better choices when they select their shipping method with the goal of improving the customer order experience. The goal of this research was to develop an optimization model that will recommend shipping prices to maximize the value that Dell realizes across three levers: customer experience, profitability, and working capital. The value of customer experience is measured by the cost of customer dissatisfaction associated with different shipping levels including the cost of returns, exchanges, customer contacts, and order disruptions. Key components of logistics profitability are logistics costs and shipping price. Dell does not have current shipping price elasticity data to forecast attach rates to upgraded shipping at different price points. To collect this data, an experiment has been designed to measure the results of three price treatments across three BTO product brands. This experiment is scheduled to launch in summer 2017. The optimization model would have to be updated following the results of this experiment and rerun before implementation of changes to delivery pricing. The third lever of the model, working capital, becomes increasingly important as customers move to the new fastest shipping option, Express, which was first launched in October 2016. This lane provides the fastest delivery times on BTO products in the industry. It also reduces the number of days the product is in Dell inventory leading to an inverse relationship between express shipping attach rate and working capital required. Finally, it allows Dell to bill the customer faster improving their cash conversion cycle. The optimization model indicated that there is the opportunity to increase delivery value by 28% through reduced delivery pricing leading to increased attach rates. This value based approach to delivery pricing can be applied across industries to online retailers looking to create value through their delivery pricing.