Price and Fulfillment Strategies in Omnichannel Retailing

TL;DR

This paper analyzes pricing and fulfillment strategies for omnichannel retailers with online and physical stores, identifying optimal strategies and how they adapt over time as consumer stock beliefs change.

Contribution

It introduces a model for retailer strategies in omnichannel retailing, highlighting optimal segmentation and fulfillment options, including dynamic adjustments over the selling season.

Findings

Retailers can optimize profit by segmenting consumers and choosing appropriate fulfillment options.

Offering BOPS later in the season maximizes profit as consumer stock confidence declines.

Three main strategies are identified for different consumer segments and conditions.

Abstract

Omnichannel retailing, a new form of distribution system, seamlessly integrates the Internet and physical stores. This study considers the pricing and fulfillment strategies of a retailer that has two sales channels: online and one physical store. The retailer offers consumers three purchasing options: delivery from the fulfillment center, buy online and pick up in-store (BOPS), and purchasing at the store. Consumers choose one of these options to maximize their utility, dividing them into several segments. Given the retailer can induce consumers to the profitable segment by adjusting the online and store prices, our analysis shows that it has three optimal strategies: (1) The retailer excludes consumers far from the physical store from the market and lets the others choose BOPS or purchasing at the store. (2) It lets consumers far from the physical store choose delivery from the fulfillment center and the others choose BOPS or purchasing at the store. (3) It lets all consumers choose delivery from the fulfillment center. Finally, we present simple dynamic simulations that considers how the retailer's optimal strategy changes as consumers' subjective probability of believing the product is in stock decreases. The results show that the retailer should offer BOPS in later periods of the selling season to maximize its profit as the subjective probability decreases.