Flexible dynamic time window pricing for attended home deliveries / Charlotte Köhler/Jan Fabian Ehmke/Ann Melissa Campbell/Catherine Cleophas

Abstract

In the challenging environment of attended home deliveries, pricing of different delivery options can play a crucial role to ensure profitability and service quality of retailers. To differentiate between standard and premium delivery options, many retailers include time windows of various lengths and fees within their offer sets. Customers want short delivery time windows, but expect low delivery fees. However, longer time windows can help to maintain flexibility and profitability for the retailer. We present flexible dynamic time window pricing policies that measure the impact of short time windows on the underlying route plan during the booking process and set delivery fees accordingly. Our goal is to nudge customers to choose time windows that do not overly restrict the flexibility of route plans. To this end, we introduce three dynamic pricing policies that consider temporal and/or spatial routing and customer characteristics. We consider customer behavior through a nested logit model, which is able to mimic customer choice for time windows of multiple lengths. We perform a computational study considering realistic travel and demand data to investigate the effectiveness of flexible dynamic time window pricing. Our pricing policies are able to outperform static pricing policies that reflect current business practice.