Shipping Policies of Omnichannel Retailers: The Effect of Shipping Fees on Demands and Profitability

Cleverdon, Fan (2022) Shipping Policies of Omnichannel Retailers: The Effect of Shipping Fees on Demands and Profitability. Doctoral thesis, Northumbria University.

Preview

Text (Doctoral Thesis) lu.fan_phd_16031402.pdf - Submitted Version Download (4MB) | Preview

Abstract

The omnichannel strategy that integrates online channels and traditional brick-and-mortar stores has been broadly utilised in retailing practices to deliver a seamless shopping experience. Early empirical studies have demonstrated its benefits: for physical stores, it brings footfall and increases the opportunity of cross-sells; for online channels, it allows customers to inspect the merchandise before purchase, thereby reducing the return rate. However, the relevant operating costs and the investment of channel integration can be substantial, yet the discussion on the pricing of omnichannel services is scarce. This thesis aims to provide insights to address the dilemmas omnichannel retailers face in the pre-purchase and post-purchase stages and identify the optimal pricing of omnichannel shipment.

In the ex-ante stage, omnichannel retailers face a dilemma: charging omnichannel service at a low price could attract online traffic, yet financial loss may occur when stores are less profitable and integration costs outweigh cross-sales in-store. Hence, a stylised model is developed to study the shipping policy, especially the shipping fee for omnichannel service, and their impacts on customer demand and overall profitability. Three scenarios are considered: (1) shipment fee is consistent across channels; (2) omnichannel service is charged at a discounted rate or (3) free of charge. The results show that omnichannel positively convert online traffic into footfall instore but does not always grow total demands or boost overall profitability; charging a discounted rate could help retailers shift demands to a more profitable channel. This study identifies the optimal shipping policy that depends on the retailer’s operational efficiency and distribution costs. When the distribution cost is low, the retailer can offer free omnichannel shipment or charge a discounted rate if the cost is medium. Finally, the home delivery fee should be adjusted jointly with the omnichannel shipping fee.

In the ex-post stage, customers need to decide whether and where they return the purchased product. Retailers face a trade-off: allowing cross-channel returns could reduce the shipment cost and potentially increase cross-sales in-store; however, handling returned products in-store means extra labour costs, such as inspecting, re-packing, re-storing. Moreover, stores potentially face financial loss if the returned product is re-sold in-store at a discounted price. Therefore, the features of omnichannel operations are incorporated in the post-purchase stage. A stylised model is built to characterise omnichannel operations and study how return policies impact customer channel choices and the retailer’s profitability. This study differentiates online channels with stores based on customer return behaviours. When customers purchase online, they need to bear the risk of receiving a product that does not match their expectations. Distinctively, store customers can inspect the product before purchase. Customers are assumed not to return a product if they purchase in-store. Hence, this model focuses on four return policies depending on return fees and whether cross-channel is available. The unit selling price is consistent across channels, and the retailer offers a full refund. In this model setting, purchase decision and return channel decisions are endogenous. The results suggest that cross-channel returns are not recommended if online returns are free, whereas retailers with a larger customer base and efficient in-store operations or wide store networks could benefit from omnichannel returns. Last, the optimal omnichannel return policy should be jointly considered with the existing online return policy.

Overall, this thesis extends utility theory in understanding the customer’s cross-channel behaviours and use decision theory to analyse the omnichannel retailer’s service pricing in pre-and postpurchase stages. This analysis helps retailing practitioners to understand the scenario when the retailer should allow omnichannel implementations, such as buy online and collect or return instore, and the condition of optimal shipment pricing.

Actions (login required)

View Item

Downloads