Which mix of Price, Service Efforts, and Discount Coupons is most Profitable?
Most consumer companies and retail chains are talking the “Omnichannel” language while many actively adopt this retailing strategy. Omnichannel retailing refers to a retail model that combines online and brick-and-mortar channels of sales. It is becoming increasingly popular as it provides customers with a choice of channels and an overall better shopping experience by combining the advantages of multiple channels. Three of the tools used by omnichannel retailers to drive sales are pricing, discount coupons (usually offered online), and service efforts in-store. Since this is a relatively new model, the impact of these tools on profits is still not completely clear. A theoretical study investigated different omnichannel retailing models, including a Buy-Online, Pick-Up In-Store (BOPS) model and a Showroom model, and compared profits under each based on the interactions of these three tools.
The study found that a retailer’s profits increase with customers’ incremental purchases when the incremental purchasing has a higher value. Incremental purchasing is purchasing done in addition to primary purchases. In the BOPS model, customers can indulge in incremental purchases when they come to pick up their purchases. For instance, a customer coming to Shoppers Stop to pick up shirts purchased online might come across ties and shoes in the store and buy those as well. In the Showroom model, an incremental purchase is driven by browsing and in-store experiences such as demonstrations, gifts, contests, and other promotions.
The BOPS model is most valuable for a retailer when consumers are more willing to make incremental purchases. Although it invests the least in service efforts (since it pushes sales online), and the retailer’s price and coupon values are also not large, it still makes the maximum profit. Service, in this case, refers to both informational services such as samples, instructions, brochures, and reviews as well as experiential services like friendly staff behaviour, comfortable ambience, and attractive displays.
The Showroom model is most useful when consumers pay more attention to experiences. It also tends to provide the highest coupon values to customers. Unfortunately, because of these higher costs, it has the lowest profits. Therefore, to maximise profits, a retailer should strategically use its Showroom model alongside other retailing models such as online-only or BOPS.
Additionally, in the BOPS model, retailers can juggle coupon values to provide customers with the greatest value. When customers are more sensitive to coupons from the online-only platform, the retailer can use the same coupons for both online-only and BOPS channels. When customers are less sensitive to online-only coupons, the retailer can use differing values of coupons for different channels to maximise profits.
When incremental purchases are high and the level of service efforts required is low, the BOPS model has the lowest price. In this model, lesser service efforts are needed as critical informational services can be provided online. Conversely, the Showroom model sets the lowest price when the level of service efforts needed is high. This is because, in this model of retailing, a great deal of both informational and experiential service efforts are needed in-store to drive sales.
The findings of this study are significant for those adopting an omnichannel strategy. However, a measure of caution is advised as the study is primarily theoretical. Marketers should use empirical data obtained from transactions in conjunction with the study’s findings to set their price, service efforts, and discount coupons strategies to maximise profits.