Probabilistic Selling with Customization? A Theoretical Analysis

Abstract

Customized mystery bag/box products are examples of a new business model of combining probabilistic selling and customization in practice. We develop an analytical framework to study the economic value of customized mystery bag/box products and explore the interrelationship between probabilistic selling and customization. We define probabilistic selling and customization to be complements (substitutes) as that customization increases (decreases) the value of probabilistic selling. We find that probabilistic selling and customization may be either complements or substitutes, which depends on the customization level and the product marginal cost. As long as customization level is low and product marginal cost is high, they are generally complements. The complementarity benefit comes from the fact that customization can enhance probabilistic selling’s price improvement value when the customization level is sufficiently low. In addition, the complementarity benefit reaches the maximum when the product marginal cost is sufficiently large and the customization is at an intermediate level. We further show that probabilistic selling and customization may still be complements when the customization level is endogenously determined with investment cost, when the customization service is strategically chosen by consumers, when the inventory decision is optimized with demand uncertainty, or when customization is achieved by product assortment planning.