Business analytics: online promotion with gift rewards

Abstract

This study analytically examines online promotions with gift rewards based on data from a Chinese tea retailer, Huiliu. Gift rewards benefit Huiliu by improving promotional performance. However, they generate operational problems, especially by increasing the costs of holding gift inventory. To address Huiliu’s concerns about gift rewards, we first conduct an empirical study based on Huiliu’s promotional data to examine the effect of gift rewards on customer purchase behavior. The empirical result suggests that gift rewards induce more repeat customer purchases; however, they do not induce customers to spend more money. This empirical result reveals that the effect of gift rewards on customer purchase behavior leads to Huiliu’s intensifying gift inventory pressure. Based on this empirical finding, we develop a theoretical model that addresses gift inventory management. Because of the difficulty of precisely estimating the distributions of some key random variables (e.g., customer demands), we employ a robust approach to solve this model and provide near-optimal robust solutions. We finally present a case study to illustrate how to improve Huiliu’s gift allocation based on the robust inventory solutions. The numerical results show that the improved gift allocation significantly increases Huiliu’s profits (the average profit increment is 3.58%).