Impact of an "Online-to-Store" Channel on Demand Allocation, Online Pricing and Profitability

James Cao, PhD, Assistant Professor
Edwards School of Business
University of Saskatchewan
Saskatoon

Abstract

Many retailers have recognized the importance of using a multi-channel approach to more effectively reach different customer segments. In this paper, we develop an analytical framework to study the impact of an "online-to-store" channel on the demand allocations, pricing decisions and profitability of a retailer who sells products to customers through multiple distribution channels. Providing this new channel helps the retailer tap new customer segments and generate additional demand, but at the same time it may hurt the retailer by cannibalizing existing channels and increasing operating costs. Our model framework allows us to illustrate these fundamental tradeoffs and consequently provides useful insights for understanding the specific product characteristics that are most conducive for increasing profitability. Our analysis suggests that for products that are only available online, providing an online-to-store channel option will generally lead to higher profits. However, if the product is also available in-store, the potential benefits of the online-to-store channel become less clear and the profitability of the retailer would increase only under some very specific operating environments. This implies that the retailer would need to carefully consider the set of products that should be offered through the online-to-store channel.

Nov. 8, 2012

Park Town Hotel, Birch Room

Cocktails 5:30, Dinner 6:00, Presentation 7:00

Tickets $25

For more information contact:

Kent Kostuk 244-3295 k.kostuk@fcl.ca

Winfried Grassmann, 966-4898 grassman@cs.usask.ca