A probabilistic good is not a concrete product in the traditional sense, but rather an offer involving the probability of obtaining any one of a set of multiple distinct products/services. For instance, a retailer who offers two traditional products, red and green sweaters, can additionally offer a lower-priced probabilistic sweater consisting of a 50/50 chance of being either a red or a green sweater. A cruise line, in addition to offering a set of traditional cruises consisting of specific ships, routes, and dates, can also offer a discounted probabilistic cruise to travellers willing to be assigned by the seller to a particular ship, route, and date.
In today’s online markets, an increasing number of probabilistic goods are offered by service providers, manufacturers, and retailers. Yet, probabilistic goods and probabilistic selling are still new concepts unfamiliar to many marketers. Even among those that do offer probabilistic goods, some only use the strategy to dispose of overstocks and thus may not benefit fully from this innovative strategy.
In this presentation, I will present a theory of probabilistic goods and probabilistic selling, as expounded in several recent papers by my co-authors and me. Specifically, I will discuss how probabilistic goods fundamentally differ from traditional goods, why and when a firm can benefit from introducing them, how to design probabilistic goods and set prices, and how to use probabilistic selling to address the challenge of demand uncertainty and enhance inventory management.