Sponsored search advertising and inventory replenishment: A decision support framework for an online retailer

Sponsored search advertising has steadily emerged as one of the most popular advertising tools in online retail. Customers prefer search results that appear on the top to those that appear lower and are willing to pay more for products/brands that appear higher on the search. Sponsored search has a higher conversion efficiency and impacts demand more endogenously through the ranking on the search page than traditional advertising. Online retailers (e-tailers) invest aggressively in bidding to ensure they are ranked high on the search pages. The dynamic nature of sponsored search entails a higher degree of inventory readiness, and e-tailers must dovetail their sponsored search advertising strategy to drive traffic with the level of inventory to avoid consumer disappointments due to stockouts. Extant research has not delved into this critical aspect of sponsored search advertising. We endeavor to solve this business problem for an e-tailer in a dynamic stochastic setting and provide a multi-threshold decision support framework based on different inventory levels. The policy identifies inventory levels: (i) at which a retailer should not place an order, (ii) her desired level of inventory, and (iii) a ceiling up to which no bids are placed. The e-tailer can use our proposed framework to derive an inventory based sponsored search advertising campaign that ensures synchronization between bids and inventory and increases profits. Our results show that customers’ sensitivity to the website’s search rank and variation in reservation price impact the e-tailer's inventory and sponsored search bidding decisions.