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Fresh product e-retailer’s sales strategy choice:

free shipping, package, or combined strategy?

Peng Zhang, Yong He & Henry Xu

To cite this article: Peng Zhang, Yong He & Henry Xu (25 Aug 2023): Fresh product e-retailer’s
sales strategy choice: free shipping, package, or combined strategy?, Journal of the Operational
Research Society, DOI: 10.1080/01605682.2023.2249523

To link to this article: https://doi.org/10.1080/01605682.2023.2249523

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JOURNAL OF THE OPERATIONAL RESEARCH SOCIETY
https://doi.org/10.1080/01605682.2023.2249523

ORIGINAL ARTICLE

Fresh product e-retailer’s sales strategy choice: free shipping, package, or

combined strategy?
Peng Zhanga, Yong Heb and Henry Xuc
a
Yangzhou University, Yangzhou, P. R. China; bSoutheast University, Nanjing, P. R. China; cThe University of Queensland, Brisbane,
Australia

ABSTRACT ARTICLE HISTORY

Cold chain technology and online platform have enabled the rapid development of fresh Received 12 October 2021
food e-commerce. However, most fresh product e-retailers are losing money. This paper Accepted 12 August 2023
aims to answer the questions: Can the free shipping strategy, package strategy, and com-
KEYWORDS
bined package and free shipping strategy (i.e., KF strategy) improve a fresh product e-
Fresh product e-retailer;
retailer’s performance, and which strategy is the most effective? By deriving the optimal free shipping strategy;
decisions of customers and/or the e-retailer under different strategies, we find that the e- package strategy
retailer should adopt the free shipping strategy or the KF strategy if the shipping cost is
higher than the threshold. Furthermore, some managerial insights are obtained. First, com-
pared with the general strategy, the e-retailer needs to further reduce the price when the
shipping cost is lower than the threshold despite bearing the shipping cost under the free
shipping strategy or KF strategy. Second, the free shipping strategy or KF strategy is gener-
ally used to increase the customer’s single order quantity. However, if the shipping cost is
higher than the threshold, the e-retailer should use these two strategies to reduce the single
order quantity. Lastly, if the e-retailer wants to reduce its average logistics cost, the package
strategy is a better choice.

1. Introduction storage and transportation activities (e.g., Agi &

According to the big data of “e-commerce treasure”,
the transaction scale of China’s fresh e-commerce
grew to $69 billion in 2021, an increase of 27.92%
compared with that in 2020. However, most fresh
product e-retailers are losing money (Sina Finance
2022). For example, according to the company’s
financial report, Missfresh and Dingdong (listed
fresh product e-retailers) have accumulated losses of
$11.27 billion and $16.3 billion respectively in the
past 3 years. There are many reasons for the finan-
cial loss of fresh product e-retailers. One of the
major reasons is the high logistics cost (Iyiou.com,
2015). Different from brick-and-mortar retailers
where customers come to the store to make pur-
chases, e-retailers need to take the product from
warehouse shelves or a farm and deliver it to cus-
tomers. In addition, two issues further increase the
logistics cost of e-retailers. To ensure the freshness
of the product during the shipping process, a cold
chain is usually employed, leading to higher storage
and transportation costs. Second, customers tend to
purchase fresh produce in small quantities with high
frequency, similar to the just-in-time practice, which
also increases the total logistics cost. Generally, the
first issue can be addressed by optimizing goods
Soni, 2020; Martinez-Salazar et al., 2015). To
address the second issue, fresh produce e-retailers
often use some sales strategies to encourage their
customers to buy in larger batch sizes.
One of these sales strategies is free shipping
which is widely used in electronic retailing. In
practice, the most frequently-used free shipping is
either value-based or quantity-based, which means
that the shipping fee is not charged if the size or
value of an order exceeds a certain threshold. The
survey suggests that even for the same product,
the thresholds for free shipping set by different
fresh produce e-retailers vary significantly. Some
retailers such as wlkgo.com even set the threshold
to zero, i.e., unconditional free shipping. Hence,
how to determine the optimal threshold of free
shipping is a major challenge for fresh product e-
retailers. Meanwhile, when a fresh product e-
retailer sets the threshold for free shipping, they
also need to consider the quality deterioration of
fresh products.
The package strategy, which means that the
retailer assembles a certain quantity of product into
a package (e.g., a box of oranges in three kilos), is
also very common in the retail industry. Under this
strategy, the customer can only decide whether to

CONTACT Yong He hy@seu.edu.cn Southeast University, Nanjing, P. R. China

Supplemental data for this article can be accessed online at https://doi.org/10.1080/01605682.2023.2249523.
ß Operational Research Society 2023
2 P. ZHANG ET AL.
buy or not but cannot change the product quantity
in a package. Therefore, how to determine the opti-
mal product quantity for a package is an important
yet challenging issue for fresh product e-retailers.
In addition, some fresh product e-retailers com-
bine the package strategy and the free shipping
strategy (KF strategy in short), i.e., if a customer’s
purchase quantity is over a certain amount of
bundled fresh product, s/he is entitled to have free
shipping. Under this strategy, the fresh product e-
retailer still needs to determine the product quantity
for a package.
Based on the above-discussed major challenges
and issues faced by fresh product e-retailers, in this
paper, we focus on the following research questions:
a. How does the fresh product e-retailer determine
the product quantity for a package and the
threshold for free shipping?
b. Can these sales strategies (i.e., free shipping,
package, and KF) reduce the logistics cost and
improve the profit for the fresh product e-
retailer?
c. Which strategy is more conducive to improving
the fresh product e-retailer’s performance?
To address these questions, we first establish a
benchmark and study the general strategy where the
fresh product e-retailer just determines its sales
price without the adoption of any sales strategy.
Under the general strategy, we study the e-retailer’s
optimal price and the customer’s optimal purchase
quantity. Then, we derive the e-retailer’s optimal
decisions under the free shipping, package, and KF
strategies respectively. Lastly, we compare order
quantities, logistics costs, prices, and profits under
these strategies.
Our research yields several valuable results. First,
we gain the e-retailer’s optimal decisions (price, free
shipping threshold, and/or product quantity in a
package) under the free shipping strategy, package
strategy, and KF strategy respectively. Second,
although the e-retailer pays the shipping cost under
the free shipping strategy and the KF strategy, it
should set a lower price than that under the general
strategy if the shipping cost is lower. Third, we find
that all three strategies can benefit the fresh product
e-retailer to improve its profit. Meanwhile, from the
profit perspective, the e-retailer should adopt the
free shipping strategy or the KF strategy if the ship-
ping cost is higher. Otherwise, the KF strategy is the
best choice. Fourth, the e-retailer can obtain a lower
average logistics cost and retail price by adopting
the package strategy. Lastly, when the e-retailer
moves from the general strategy to the free shipping
strategy or KF strategy, it should set a suitable
threshold of free shipping or product quantity in a
package to reduce the customer’s single order quan-
tity if the shipping cost is higher.
This paper makes at least three important contri-
butions. First, in the extant literature, there are a
significant number of studies on optimizing the
storage and transportation of fresh products, which
mainly address issues such as order quantity, shelf
space, replenishment cycle, and transportation
routes. On the other hand, there is also some litera-
ture on sales strategies (mainly free shipping and
package strategies) for e-commerce. However, one
major limitation of these studies is that they do not
consider the quality deterioration of fresh products.
To address the identified gap in the literature, this
paper mainly investigates sales strategies for fresh
product e-retailers. Second, this study not only anal-
yses the free shipping and package strategies indi-
vidually but further examines a combined (i.e., free
shipping plus package) strategy. Lastly, to our know-
ledge, this paper is the first to compare the effective-
ness of these three strategies, which provides
decision support for the fresh product e-retailer to
adopt the best suitable sales strategies under differ-
ent conditions.
The rest of this paper is organized as follows.
Section 2 provides a literature review, which is fol-
lowed by introducing the model and establishing a
benchmark. Section 4 analyses the fresh product e-
retailer’s and the customer’s decisions, based on
which the optimal solutions under these strategies
are compared in Section 5. Finally, Section 6 pro-
vides concluding remarks and suggests future
research directions.
2. Literature review
We classify the relevant literature into two streams:
sales strategies in e-commerce and deterioration of
product quality.
Much research has been done in the first stream
of research, i.e., sales strategies in e-commerce.
Some studies analyse the impact of the free shipping
strategy on customers through empirical research
with a focus on the impact of free shipping on cus-
tomers’ return behavior and trust in e-retailers (e.g.,
Lepthien & Clement, 2019; Tandon et al., 2021).
Other studies investigate the free shipping strategy
from the e-retailer’s perspective, which mainly
focuses on whether and when the e-retailer should
adopt the free shipping strategy. Some scholars find
that the shipping cost, sales price, local market size,
and return rate have a significant impact on the
effectiveness of adopting free shipping. They pro-
pose that when the shipping cost or sales price is
low, the local market size is small, or the return rate

is high, the e-retailer should adopt the free shipping
strategy (Chang et al., 2021; Guo et al., 2017; Shao,
2017; Shehu et al., 2020). In addition, Li and Wang
(2022) further study the impact of free shipping
strategy on upstream manufacturers. They find that
if more retailers use the free shipping strategy, it
will compromise the manufacturer’s product sales.
The package strategy is a type of bundling strat-
egy, i.e., multiple units of the same product in a sin-
gle bundle. The package strategy is usually used to
incentivize customers to increase order quantity.
However, some scholars find that although the
package strategy can increase sales, it may not
necessarily improve profit due to discounts (Chen &
Zhang, 2015; Choi & Chen, 2019). To address dis-
count issues, Kaplan and Menzio (2015) propose
packaging with different quantities at different dis-
count rates which can offer a way to implement
price differentiation. This package and discount
strategy can help improve the company’s profits.
Compared to package strategy, scholars mainly
focus on heterogeneous product bundling (i.e., mul-
tiple units of different products in a single bundle).
The heterogeneous product bundling strategy is also
divided into two types: substitute products bundling
and complementary products bundling. Some schol-
ars study how retailers can use substitute products
bundling strategy to increase their profits (Honhon
& Pan, 2017; Li et al.,2013; Zhou et al., 2020).
Others have extended their research scope from
retailers to the supply chain. They studied the
impact of substitute products bundling strategies on
upstream manufacturers, and find that manufac-
turers may also benefit from this strategy (Cao
et al.,2022; Chen et al., 2020). As for research on
the bundling strategy of complementary products,
most scholars mainly focus on investigating the
optimal bundling price and the impact of this strat-
egy on retailers and supply chains (Alvarez-Albelo,
2020; Chen et al., 2021; Giri et al.,2020;
Halmenschlager & Mantovani, 2017; Shan
et al.,2020). Further along this line, some studies
focus on customized bundling, i.e., the customer
decides the bundling’s quantity and category, and
then the firm decides the bundling’s price (e.g.,
Huang et al., 2022).
A substantial amount of research has been done
on the second stream of research, i.e., the deterior-
ation of product quality. Most scholars mainly focus
on analysing inventory decisions with quality deteri-
oration (e.g., Mantin & Jiang, 2017; Priyan & Mala,
2020). In addition to inventory issues, some scholars
begin to pay attention to price policy, customer sat-
isfaction, quality investment, and information dis-
closure (Feng, 2019; Herbon et al., 2014; Rabbani
et al., 2016; Yang et al., 2022).
JOURNAL OF THE OPERATIONAL RESEARCH SOCIETY 3
So far, the free shipping and package strategy has
been extensively studied for general product sales.
However, inadequate research attention has been
paid to other sales strategies (e.g., price policy,
information disclosure) for fresh products with
quality deterioration. Meanwhile, most studies on
fresh products also pay less attention to the free
shipping and package strategy. To fill this research
gap, this study focuses on the free shipping, pack-
age, and KF strategies for fresh products with qual-
ity deterioration.
3. The model and benchmark
In this paper, we consider a model consisting of a
fresh product e-retailer (e-retailer in short) and its
customers. The e-retailer purchases a single fresh
product at a cost w per unit and sells it to custom-
ers at a unit price p (p > w). When customers order
the fresh product from the e-retailer each time, the
e-retailer needs to take the product from warehouse
shelves or a farm to the customer incurring a cer-
tain amount of logistics cost. The logistics cost con-
sists of two parts. The first part is the shipping cost
t1 which is normally paid by the customer. The
second part is the out-warehouse cost t2 related to
various activities including handling, sorting, pick-
ing, and packing of goods. The out-warehouse cost
is usually paid by the e-retailer.
When the e-retailer distributes a fresh product to
its customers, the fresh product is worth v:
Following the consumption value model in Chiang
et al. (2003), we assume that customers are hetero-
geneous in the valuation of the fresh product, and
the consumption value v is uniformly distributed
within the consumer population from 0 to 1, with a
density of 1. Product quality will decrease with an
increase in consumption time which equals the cus-
tomer’s order quantity in a single period q divided
by the rate of consumption c: Let s denote the aver-
age quality deterioration rate per unit of time. In
real life, most customers are sensitive to shipping
charges. In a survey conducted by Kawamoto
(2008), 72% of those surveyed responded that if an
e-retailer starts charging a shipping cost, they would
turn to another one that offers free shipping. Kim
(2006) compares examples such as the following
equivalent total payments: ‘‘$140.90 for a stroller
and free shipping’’ versus‘‘$120.95 for a stroller plus
$19.95 for shipping’’, and finds that customers usu-
ally prefer the former. Lewis et al. (2006) provide an
empirical study on the impact of the free shipping
strategy on customers’ order size and find that cus-
tomers are sensitive to shipping costs. Meanwhile,
Rofin and Mahanty (2021) assume that the shipping
cost sensitivity is greater than the price sensitivity
4 P. ZHANG ET AL.

Table 1. Notations of parameters.

Decision Variables
pi Selling price for e-retailer’s product, (i 2 fG, F, K, KFg)
qG Customer’s order quantity in a single period under general strategy
qF Order quantity threshold for free shipping
qK , qKF Product quantity in a package under package strategy and KF strategy
Other Notations
w E-retailer’s purchase cost per unit
t1 Shipping cost
t2 Out-warehouse cost, e.g., handling, sorting, picking, and packing of goods
v Value of a fresh product
c Rate of consumption
s Average quality deterioration rate per unit of time
U Average customer utility per unit of time
Qi E-retailer’s total demand, (i 2 fG, F, K, KFg)
d Coefficients of shipping cost elasticity
PiR E-retailer’s profit, (i 2 fG, F, K, KFg)

since the shipping cost is perceived more negatively
by customers. Therefore, based on empirical studies
(Kawamoto, 2008; Kim, 2006; Lewis et al., 2006)
and previous literature (Rofin & Mahanty, 2021), we
also assume that compared to the price of the fresh
product, customers are more sensitive to shipping
cost. Meanwhile, following Yao and Zhang (2012),
Shao (2017), Li et al. (2019), and Li and Wang
(2023), we assume that the price elasticity coefficient
of consumer utility is normalized to 1. Because the
shipping cost sensitivity is greater than the price
the customer determines the order quantity and/or
whether to purchase.
For easy comprehension, the notations used
throughout the paper are listed in Table 1.
To establish a benchmark, we first study the
general strategy. Under the general strategy, the e-
retailer just sets the price, and the customer
determines the order quantity and/or whether to
purchase. We use ðÞG to denote this scenario.
We first derive the e-retailer’s demand function
under the general strategy. A customer will purchase
G

sensitivity, we assume that the coefficient of ship- the fresh product if v  s qc  pGG  dt qG  0:
1

ping cost elasticity d > 1: If d < 1, it means that
compared to shipping cost, customers are more sen-
sitive to price. If this is established, to attract more
customers to purchase, e-retailers will tend to
increase shipping fees and reduce sales prices, i.e.,
change the price mode from “$20 for a product and
free shipping” to “$10 for a product plus $10 for
shipping,” or even “free product and $20 for
shipping.” This is not consistent with the actual
situation and existing literature. Therefore, it is rea-
sonable to assume that the coefficient of shipping
cost elasticity d > 1:
We then get the average customer utility per unit
of time U below:
q dt1
U ¼vs p (1)
c q
On the right-hand side of (1), the second term
denotes the average quality deterioration. From s qc ,
we find that when the rate of consumption is con-
stant, the higher the order quantity, the lower the
average quality. The last term denotes the impact of
the average shipping cost dtq1 on value. From dtq1 ,
we know that the customer’s average shipping cost
is decreasing with increasing order quantity.
The sequence of events is as follows: First, the e-
retailer chooses a sales strategy. Second, the e-
retailer determines the single order quantity of free
shipping or product quantity in a package. Third,
the e-retailer determines the optimal price. Lastly,
q
Customers whose valuation v equals s c þ p þ dt
G G 1
qG
are indifferent to purchase, where va is defined as
the threshold of value v: We assume that customers
are homogeneous in the rate of consumption c:
Therefore, if customers decide to purchase, the total
demand of each customer in a certain period of
time T is Tc, which is a constant. For simplicity, it
is normalized to 1. Based on the above analysis, the
e-retailer’s demand under the general strategy is
shown in Figure 1.
From Figure 1, we can get the e-retailer’s demand
function under the general strategy.
qG dt1
QG ¼ 1  s  pG  G (2)
c q
From (2), we can derive the e-retailer’s profit
function PGR , which is given by

 QG
PGR ¼ pG  w QG  t2 G (3)
q
G
In (3), t2 QqG denotes the total out-warehouse cost.
According to the sequence of events, we first
study the customer’s decision on order quantity.
From (1), we know that the average shipping cost
decreases as order quantity increases. However, the
average quality deterioration aggravates with an
increase in order quantity. Therefore, in practice,
customers will determine their optimal order quan-
tity to maximize the average customer utility per
unit. Based on (1), we know that (1) is concave in
qG : Taking the first order condition with respect to
 JOURNAL OF THE OPERATIONAL RESEARCH SOCIETY 5

Figure 1. E-retailer’s demand under the general strategy.


qG , we can obtain the unique optimum qG given order a quantity greater than a threshold. Therefore,
by in addition to price decisions, the e-retailer also
rffiffiffiffiffiffiffiffi needs to determine the threshold of order quantity.
G cdt 1
q ¼ (4) Subsequently, the customer determines whether to
s have free shipping. We use ðÞF to denote this
We then study how the e-retailer sets the price to scenario.
maximize its profit. Substituting (2) and (4) into We first study the customer’s order quantity.
(3), we have: Under the free shipping strategy, the customer faces
!
rffiffiffiffiffiffiffiffi! rffiffiffiffiffiffiffiffi a choice, i.e., whether to get free shipping or not.
s sdt 1
PGR ¼ pG  w  t2 12  pG Generally, only if the consumer surplus under the
cdt 1 c free shipping strategy is greater than that under the
(5) general strategy, the customer will choose to get free
shipping, i.e., satisfying the following inequality:
All proofs, if not provided in the paper, are in rffiffiffiffiffiffiffiffi
the supplementary material. From (5), we can obtain qF s cdt1 dt1
vs p v F
 pF  qffiffiffiffiffiffi (9)
the following proposition: c c s cdt1
s
Proposition 1. Under the General strategy, the opti- qffiffiffiffiffiffi
 From (9), we know that only if qF  2 cdts 1 , the
mal price pG , the optimal order quantity per unit of
  customer will choose to get free shipping.
time qG and the total demand QG are given by
rffiffiffiffiffiffiffiffi rffiffiffiffiffiffiffiffi! Otherwise, the free shipping strategy is invalid.
 1 sdt 1 s We then derive the e-retailer’s demand function
pG ¼ 1þw2 þ t2 (6)
2 c cdt1 under the free shipping strategy. A customer will
rffiffiffiffiffiffiffiffi purchase the fresh product if v  s qc  pF  0:
F

G cdt 1 F
q ¼ (7) Customers whose valuation vF equals s qc þ pF are
s
rffiffiffiffiffiffiffiffi rffiffiffiffiffiffiffiffi ! indifferent to purchase, where vF is defined as the
G 1 sdt1 s threshold of value v: Based on the above analysis,
Q ¼ 1w2  t2 (8)
2 c cdt1 the e-retailer’s demand under the free shipping
From Proposition 1, we can get the following strategy is shown in Figure 2.
managerial insight. When the shipping cost From Figure 2, we can get the e-retailer’s demand
increases, the e-retailer should decrease its sales function under the free shipping strategy.
rffiffiffiffiffiffiffiffi
price. As a higher shipping cost drives the customer qF cdt1
to order a higher quantity per order resulting in Q ¼ 1  s  p if q  2
F F F
(10)
c s
decreased order frequency, the e-retailer’s out-ware-
From (10), we can derive the e-retailer’s profit
house cost will decrease.
function under the free shipping strategy, denoted
as PFR , which is given by
4. Sales strategy rffiffiffiffiffiffiffiffi

F  F QF cdt 1
In this section, we will investigate the e-retailer and PR ¼ p  w Q  ðt1 þ t2 Þ F if q  2
F F
q s
customer’s decisions under three strategies: free (11)
shipping, package, and KF respectively.
Next, we analyse how the e-retailer determines
the price to maximize its profit. Based on (11), we
4.1. Free shipping strategy
know that (11) is concave in pF : Taking the first
In practice, under the free shipping strategy, if a order condition with respect to pF , we have the
customer wants to get free shipping, s/he must unique optimum pF as given below.
6 P. ZHANG ET AL.

Figure 2. E-retailer’s demand under the free shipping strategy.

!
1 qF t1 þ t2 the price if the shipping cost increases. From (15) and
p ¼
F
1þws þ (12) (18), we find that the customer’s order quantity in a
2 c qF
single period increases with the shipping cost, so the
We then study the order quantity threshold for free average logistics cost t1qþtF 2 does not necessarily increase
shipping. Substituting (12) and (10) into (11), we have: with the shipping cost. This is the main reason for the
!2 rffiffiffiffiffiffiffiffi unchanged or reduced retailer’s price. Second, in busi-
1 q F
t 1 þ t2 cdt1 ness practice, the main purpose of the free shipping
PR ¼
F
1s w F
if q  2
F
4 c q s strategy is to encourage customers to increase single
(13) order quantity. However, from Proposition 2, we find
that when the shipping cost is higher than a threshold,
From (13), we can obtain the following proposition: qffiffiffiffiffiffiffiffiffiffiffiffi
F
the optimal threshold of free shipping q ¼ cðt1 þt 2Þ

Proposition 2. Under the free shipping strategy, the s

qffiffiffiffiffiffi

optimal price pF , the optimal threshold of free ship- does not reach the maximum value of 2 cdts 1 : It
F 
ping q and the total demand QF are given by implies that in the case of higher shipping cost, if the
e-retailer sets a higher threshold of free shipping, its
Case 1: t1  ð4d1Þ
t2
profit may be hurt. From (10) and (13), we find that
although the increased single order-quantity reduces the
 1 average logistics cost, it also reduces the total demand.
pF ¼ ð1 þ wÞ (14)
2 When the shipping cost is high, the latter is dominant.
rffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
 cðt1 þ t2 Þ This is the main reason why a higher threshold of free
qF ¼ (15) shipping is not recommended.
s
rffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi!
 1 sðt1 þ t2 Þ
QF ¼ 1w2 (16) 4.2. Package strategy
2 c
Under the package strategy, the e-retailer needs to
determine the price and the product quantity in a
Case 2: t1 < ð4d1Þ
t2 package. We use ðÞK to denote this scenario.
We first derive the e-retailer’s demand function
rffiffiffiffiffiffiffiffi rffiffiffiffiffiffiffiffi! under the package strategy. A customer will purchase
1 sdt1 t1 þ t2 s K
the fresh product if v  s qc  pK  dt
F qK  0, which is
1
p ¼ 1þw2 þ (17)
2 c 2 cdt 1 the same as the general strategy. Therefore, the e-
rffiffiffiffiffiffiffiffi retailer’s demand function under the package strategy is
 cdt1
qF ¼ 2 (18) also the same as that under the general strategy. Based
s
rffiffiffiffiffiffiffiffi rffiffiffiffiffiffiffiffi! on (2), we get the e-retailer’s demand function under
F 1 sdt 1 t1 þ t2 s the package strategy.
Q ¼ 1w2  (19)
2 c 2 cdt1 qK dt1
QK ¼ 1  s  pK  K (20)
From Proposition 2, we can get two useful managerial c q
insights. First, under the free shipping strategy, the From (20), we can derive the e-retailer’s profit
shipping cost is paid by the e-retailer. Intuitively, the e- function under the package strategy. The e-retailer’s
retailer may raise the retail price to offset the increased profit denoted as PKR is given by
shipping cost. However, from (14) and (17), we find
 QK
that when the shipping cost is higher than a threshold, PKR ¼ pK  w QK  t2 K (21)
q
the e-retailer’s optimal price will not change with the
shipping cost. Conversely, when the shipping cost is Different from the general strategy, as the e-
less than this threshold, the e-retailer will even lower retailer places a certain quantity of product in a
 JOURNAL OF THE OPERATIONAL RESEARCH SOCIETY 7
qffiffiffiffiffiffi
package, the customer does not have a choice of value, i.e., q  2 cdts 1 : However, the customer does
F

order quantity under this strategy. In other words, not have the choice of order quantity under the KF
the order quantity is determined by the retailer strategy. Therefore, based on (10), we get the e-
under the package strategy. According to the retailer’s demand function under the KF strategy.
sequence of events, we next study the decision of
qKF
price. Based on (21), we have that (21) is concave in QKF ¼ 1  s  pKF (27)
c
pK : Taking the first order condition with respect to
pK , we can have the unique optimum pK given by From (27), we can derive the e-retailer’s profit
! function under the KF strategy. The e-retailer’s
1 qK t2  dt1 profit denoted as PKF
p ¼ 1þws þ R is given by
K
(22)
2 c qK

KF  KF QKF
PKF
R ¼ p  w Q  ð t1 þ t 2 Þ (28)
We then examine how the e-retailer determines qKF
the product quantity in a package to maximize its
According to the sequence of events, we then
profit. Substituting (20) and (22) into (21), we have:
!2 investigate the pricing decision. Based on (10) and
1 q K
t 2 þ dt 1
(11), we know that (28) is concave in pKF : Taking
PKR ¼ 1ws  (23) the first order condition with respect to pKF , we can
4 c qK
have the unique optimum pKF given by
From (23), we can obtain the following !
proposition: 1 qKF t1 þ t2
p ¼
KF
1þws þ KF (29)
2 c q
Proposition 3. Under the package strategy, the opti-

mal price pK , the optimal product quantity in a We then study the decision of product quantity
 
package qK and the total demand QK are given by in a package. Substituting (27) and (29) into (28),
rffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi! we have:
 1 s
pK ¼ 1 þ w  2dt1 (24) !2
2 c dt1 þ t2 Þ
ð 1 q KF
t 1 þ t2
rffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi PKF
R ¼ 1s  w  KF (30)
cðdt1 þ t2 Þ 4 c q
K
q ¼ (25)
s
rffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi! From (30), we can obtain the following
 1 sðdt1 þ t2 Þ proposition:
QK ¼ 1w2 (26)
2 c Proposition 4. Under the KF strategy, the optimal
 
From (24), we can verify that dpK
¼ price pKF , the optimal product quantity in a pack-
qffiffiffiffiffiffiffiffiffiffiffiffiffiffi dt1  
age qKF and the total demand QKF are given by
1 þ2t2 Þ
 dðdt
2ðdt1 þt2 Þ
s
cðdt1 þt2 Þ
< 0: Therefore, when the ship-
 1
ping cost increases, the e-retailer should decrease pKF ¼ ð1 þ wÞ (31)
the retail price. r2ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
 cðt1 þ t2 Þ
qKF ¼ (32)
s
4.3. KF strategy rffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi!
 1 sðt1 þ t2 Þ
The KF strategy is a hybrid strategy that combines QKF ¼ 1w2 (33)
2 c
the free shipping strategy and the package strategy.
Under this strategy, customers do not need to pay Comparing Propositions 2 and 4, we find that
for the shipping cost. Meanwhile, like the package when the shipping cost is higher than a threshold,
strategy, customers do not have a choice in order the e-retailer’s decisions under the KF strategy are
quantity as it is determined by the e-retailer. We consistent with those under the free shipping strat-
use ðÞKF to denote this scenario. egy. In other words, for the e-retailer, the KF strategy
Due to free shipping, the average customer utility is equivalent to the free shipping strategy in this case.
KF
per unit of time is U KF ¼ v  s qc  pKF : A cus-
KF
tomer will buy from the e-retailer only if v  s qc 
5. Strategy comparison
pKF  0, which is similar to the free shipping strat-
egy. The difference is that under the free shipping In this section, we focus on the main research ques-
strategy, customers can choose not to accept the tion of this paper: can any of the three strategies
strategy such that they can decide the order quantity (i.e., free shipping, package, and KF) improve a
by themselves. To ensure that the customer chooses fresh product e-retailer’s performance? and if yes,
the free shipping strategy, the order quantity thresh- which strategy is most effective? We first compare
old of free shipping needs to be less than a certain the profits of e-retailer under different strategies.
8 P. ZHANG ET AL.
5.1. Comparison of profits
 
In this subsection, we compare PGR , PFR ,
 strategies, i.e., qK > qF , qKF and qG :
and PKF R : Based on Propositions 1–4, we can get
the following proposition:
Proposition 5.
1. Each of the free shipping, package, and KF strat-
egies is beneficial to the increase of the e-retailer’s
,    q
profit, i.e., PFR PKR and PKF R > PGR :
2. If t1  4d1 t2
, the e-retailer can obtain the max-
imum profit by using the KF strategy or free ship-
 
ping strategy, i.e., PFR ¼ PKFR > PKR
Otherwise, only the KF strategy is the best choice
 
for the e-retailer, i.e., PKFR > PFR and PKR :
ðt1 þt2 Þ2
3. If d < 8t1 ðt2 t1 Þ , the e-retailer’s profit under the
package strategy is higher than that under the
 
free shipping strategy i.e., PKR > PFR :
 
Otherwise, PKR  PFR :
From Proposition 5, we can get the following
managerial insights. First, the e-retailer can adopt
these sales strategies to improve its profit. Second, if
the shipping cost is higher, the e-retailer should
adopt the free shipping strategy or KF strategy. At
present, some large e-retailers are trying to adopt the
O2O strategy, which promotes sales through both
offline stores and distribution centers. For example,
Freshhema.com is a company using such a strategy.
When a customer buys a product online, the retailer
will choose the nearest offline store to distribute the
product to the customers if the offline store has this
product. Under this O2O strategy, the distance of
distribution is greatly reduced, which leads to a sig-
nificant reduction in the shipping cost. Under this
condition, the KF strategy is a better choice. Lastly,
when the e-retailer can provide either the package
strategy or the free shipping strategy, the e-retailer
should adopt the package strategy if the coefficient of
shipping cost elasticity is lower. Otherwise, the free
shipping strategy is a better choice.
To better analyze the profits and gain more man-
agerial insights, we then compare order quantities,
logistic costs, and prices under the different strat-
egies as follows.
5.2. Order quantity and logistic cost comparison
 
In this subsection, we compare the qG , qF , qK ,
 i.e., pF ¼ pKF : Otherwise, pKF < pF :
and qKF : Based on Propositions 1-4, we can get the
following proposition:
Proposition 6.
1. If t1  d1
t2
, the customer’s order quantity in a
single period under the free shipping strategy or
KF strategy is lower than that under the general
  
strategy, i.e., qF and qKF  qG : Otherwise,
  
qF and qKF > qG
2. The customer’s order quantity in a single period
 under the package strategy is higher than other
PKR ,    
From Proposition 6, we can get the following
managerial insights. First, in practice, the higher
logistics cost is the main reason for the loss of e-
retailers (Iyiou.com, 2015). Meanwhile, the average
logistics cost t1 þt 2
decreases with order quantity.
Therefore, if the e-retailer wants to reduce the aver-
age logistics cost, the package strategy is the best
option.
:
Second, intuitively, the free shipping strategy or
the KF strategy is usually used to incentivize cus-

tomers to increase single order quantity. However,
when the e-retailer moves from the general strategy
to the free shipping strategy or KF strategy, it needs
to set a suitable threshold of free shipping or prod-
uct quantity in a package to reduce the customer’s
single order quantity if the shipping cost is higher.
Under the general strategy, higher shipping cost
result in higher single-order quantity. Although a
higher single order quantity can reduce the average
logistics cost, it also increases the quality deterior-
ation of the fresh product. When the single order
quantity is higher, the latter is dominant. This is the
main reason for the reduced threshold of free ship-
ping or product quantity in a package. At present,
most of China’s express delivery companies have
raised their prices for express delivery, resulting in
increased shipping costs. Therefore, if the e-retailer
delivers products through these express delivery
companies, it may need to adjust its free shipping
strategy or KF strategy from increasing single order
quantity to reducing single order quantity.
5.3. Comparison of prices
  
In this subsection, we compare pG , pF , pK , and

pKF : Based on Proposition 1-4, we can get the fol-
lowing proposition:
Proposition 7.
1. If t1 < 2d t2
, the price under the free shipping
strategy or KF strategy is lower than that under
  
the general strategy, i.e., pF and pKF < pG :
  
Otherwise, pF and pKF  pG :
2. If t1  4d1 t2
, the price under the free shipping
 strategy is equal to that under the KF strategy,
   
3. The price under the package strategy is lower
than that under other strategies, i.e.,
   
pK < pF , pKF and pG :
From Proposition 7, we can get the following
managerial insights. First, intuitively, if an e-retailer
offers free shipping to customers, it may raise the
retail price to offset the increased shipping cost.
However, if the shipping cost is lower, when the e-

retailer adopts the free shipping strategy or KF strat-
egy, it should reduce the retail price. From
Proposition 6, we know that if the shipping cost is
lower, the customer’s single order quantity under
the free shipping strategy or KF strategy is higher
than that under the general strategy. Therefore, the
average logistics cost t1 þt
q
2
may decrease under this
condition. This is the main reason for reducing the
retail price. Second, if the shipping cost is lower, the
e-retailer should reduce the price when switching
from the free shipping strategy to the KF strategy.
Lastly, in a competitive business environment, lower
price is an important factor in incentivizing custom-
ers to buy. If the e-retailer wants to set a lower
price, the package strategy is a better choice. Under
the package strategy, the e-retailer does not need to
pay for the shipping cost. Meanwhile, the e-retailer
can incentivise the customer to order in larger
quantities than under other strategies, which is the
rationale behind the lower price.
6. Conclusions
The central question of this paper is: among the free
shipping, package, and KF strategies, which one is
most effective for fresh product e-retailers to
improve their performance? To answer this ques-
tion, we first establish a benchmark and then study
optimal decisions under the free shipping, package,
and KF strategies respectively. Subsequently, we
compare the e-retailer’s profits under different strat-
egies and find that when the shipping cost is higher
than a threshold, the e-retailer should adopt the free
shipping strategy or the KF strategy. Otherwise, the
KF strategy is the best option for the e-retailer.
Furthermore, our study provides several valuable
managerial insights. First, intuitively, if an e-retailer
offers free shipping to customers, it may raise the
retail price to offset the increased shipping cost.
However, when the shipping cost is lower than the
threshold, the e-retailer should reduce the price.
Second, the free shipping strategy and the KF strat-
egy are generally used to increase the single order
quantity. However, when the shipping cost is higher
than the threshold, the e-retailer should use these
two strategies to reduce the customer’s single order
quantity. Third, if the coefficient of shipping cost
elasticity is lower than a threshold, the e-retailer’s
profit under the package strategy is higher than that
under the free shipping strategy. Otherwise, the e-
retailer can gain more profits by using the free ship-
ping strategy. Lastly, compared with other strategies,
the package strategy is most effective to reduce the
average logistics cost.
Multiple opportunities exist for further research
on this presented topic. Firstly, in this paper, we
JOURNAL OF THE OPERATIONAL RESEARCH SOCIETY 9
assume that demand and supply are deterministic.
Logically, the next step is to extend the model and
analysis to an uncertain demand and supply setting.
Secondly, this paper only considers an e-retailer and
its customers. Nowadays, the shipping service is
often provided by the logistics platform, which indi-
cates that the game relationship between e-retailer,
logistics platform, and customers is worthy of fur-
ther study. Lastly, in this study, we consider only
the quality deterioration of fresh products.
Therefore, future research could consider the quan-
tity deterioration of fresh products as well.
Disclosure statement
No potential conflict of interest was reported by the
author(s).
Funding
This work was supported by the National Natural Science
Foundation of China [Nos. 71801170, 72171047, and
71771053], and the Natural Science Foundation of Jiangsu
Province [No. BK20201144].
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