Impact of Customer Traffic and Service Process Outsourcing Levels on e‐Retailer Operational Performance

Many service firms deliver services via a mix of internally developed and delivered (i.e., insourced) and externally developed and delivered (i.e., outsourced) service processes. Service process outsourcing is especially common in e‐retailing. Portions of e‐retail customer ordering processes and delivery processes can be digitized and contracted to third‐party vendors. Via outsourcing, service systems change from dyadic to triadic. Prior research examines consumer perceptions of dyadic (consumer to e‐retailer) outcomes, but little research considers service co‐delivery with outsourcing partners (i.e., triadic systems). Literature also does not focus on joint associations of service process outsourcing and customer traffic with e‐retailer operations. We analyze several years of data on North American e‐retailers. We first examine factors associated with e‐retailer outsourcing levels, for front‐end and back‐end service processes. We observe customer traffic is positively associated with future outsourcing. We then examine how outsourcing moderates associations between contemporaneous customer traffic and e‐retailer operational performance, as measured by numbers of processed orders, website response times, and customer satisfaction. Results suggest outsourcing levels are associated with operational outcomes, yet surprisingly, high outsourcing and high traffic jointly may not benefit e‐retailers.     

Selling with Money‐Back Guarantees: The Impact on Prices,Quantities, and Retail Profitability

In this paper, we consider a retailer adopting a “money‐back‐guaranteed” (MBG) sales policy, which allows customers to return products that do not meet their expectations to the retailer for a full or partial refund. The retailer either salvages returned products or resells them as open‐box items at a discount. We develop a model in which the retailer decides on the quantity to procure, the price for new products, the refund amount, as well as the price of returned products when they are sold as open‐box. Our model captures important features of MBG sales including demand uncertainty, consumer valuation uncertainty, consumer returns, the sale of returned products as open‐box items, and consumer choice between new and returned products and possibility of exchanges when restocking is considered. We show that selling with MBGs increases retail sales and profit. Furthermore, the second‐sale opportunity created by restocking returned products enables the retailer to generate additional revenues. Our analysis identifies the ideal conditions under which this practice is most beneficial to the retailer. Offering an MBG without restocking increases the new product price. We show that if the retailer decides to resell the returned items as open‐box, the price of the new product further increases, while open‐box items are sold at a discount. On the other hand, customers enjoy more generous refunds along with lower restocking fees. The opportunity to resell returned products also generally decreases the initial stocking levels of the retailer. Our extensive numerical study substantiates the analytical results and sharpens our insights into the drivers of performance of MBG policies and their impact on retail decisions.     

Assessing Markups,Service Quality,and Product Attributes in Music CDs' Internet Retailing

We investigate trade‐offs among markups, service quality, and product attributes across customer, Internet retailer, and wholesaler echelons. Research has documented the reality of retail price dispersion, but little is known about how retail markups, in particular, are related to service quality and product attributes. For example, do Internet retailers deliver superior service in return for high markups? Do product characteristics affect the relationship between service and markups for retailers? To examine these issues, we first developed a model of Internet retail profitability that separates revenues and costs related to sales from other profit sources. This framework allowed us to position our work alongside the extant literature about Internet retailing. Moreover, it led us to synthesize service quality dimensions found in Internet retailing studies. We subsequently developed a critical‐event study based on the profit model and the synthesis of service quality dimensions to delineate service aspects that retailers should emphasize to address buyers' utility. Finally, we collected data from Internet purchases across retailers to isolate markup‐service quality trade‐offs along our delineated service aspects. We find that high markups are associated with superior performance across service quality dimensions. Furthermore, this trade‐off becomes more acutely defined when products with variable popularity are transacted.     

In‐Store Experiments to Determine the Impact of Price on Sales

This paper describes an experimentation methodology to measure how demand varies with price and the results of its application at a toy retailer. The same product is assigned different price‐points in different store panels and the resulting sales are used to estimate a demand curve. We use a variant of the k‐median problem to form store panels that control for differences between stores and produce results that are representative of the entire chain. We use the estimated demand curve to find a price that maximizes profit. Our experiment yielded the unexpected result that demand increases with price in some cases. We present likely reasons for this finding from our discussions with retail managers. Our methodology can be used to analyze the effect of several marketing and promotional levers employed in a retail store besides pricing.     

The Strategic Role of Third‐Party Marketplaces in Retailing

Retailers are increasingly adopting a dual‐format model. In addition to acting as traditional merchants (buying and reselling goods), these retailers provide a platform for third‐party (3P) sellers to access and compete for the same customers. We investigate the strategic rationale for a retailer to introduce a 3P marketplace. Our analysis provides insights into the growing prevalence of 3P marketplaces. We show that by committing to having an active 3P marketplace, the retailer creates an “outside option” that improves its bargaining position in negotiations with the manufacturer. This can explain the increasing prevalence of such marketplaces. On the other hand, the manufacturer would prefer to eliminate the retailer's outside option and should seek to limit or prevent sales through 3P marketplaces. This is consistent with actions that several manufacturers have taken to limit such sales. Interestingly, if the manufacturer fails to eliminate sales of competing products through the 3P marketplace, then the best strategy for the manufacturer is to allow the retailer to dictate the terms of their contract. This is because a powerful retailer will rely less on its outside option in generating profit, and therefore it will increase the fees charged to 3P sellers and soften the competition between 3P sellers and the manufacturer. The decrease in competition will lead to an increase in the value of outside option of the manufacturer and improve its profit. Additionally, we find that the presence of a 3P marketplace benefits consumers, but this benefit diminishes as the retailer becomes more powerful.     

Life‐Cycle Channel Coordination Issues in Launching an Innovative Durable Product

We analyze the dynamic strategic interactions between a manufacturer and a retailer in a decentralized distribution channel used to launch an innovative durable product (IDP). The underlying retail demand for the IDP is influenced by word‐of‐mouth from past adopters and follows a Bass‐type diffusion process. The word‐of‐mouth influence creates a trade‐off between immediate and future sales and profits, resulting in a multi‐period dynamic supply chain coordination problem. Our analysis shows that while in some environments, the manufacturer is better off with a far‐sighted retailer, there are also environments in which the manufacturer is better off with a myopic retailer. We characterize equilibrium dynamic pricing strategies and the resulting sales and profit trajectories. We demonstrate that revenue‐sharing contracts can coordinate the IDP's supply chain with both far‐sighted and myopic retailers throughout the entire planning horizon and arbitrarily allocate the channel profit.     

Self‐Service Operations at Retail Stores: The Role of Inter‐Customer Interactions

Inter‐customer interactions are important to the operation of self‐services in retail settings. More specifically, when self‐service terminals are used as part of customers’ checkout processes in retail operations without the explicit involvement of retailers as the direct service providers, inter‐customer interactions become a significant managerial issue. In this article, we examine the impact of inter‐customer interactions at retail self‐service terminals on customers’ service quality perceptions and repeat purchase intentions at retail stores. We conduct a scenario‐based experimental design (N = 674) using a 2 × 2 factorial design in which inter‐customer interactions are divided into “positive” vs. “negative” and occur during the “waiting” or during the actual “transaction” stages of self‐services at a retail store. We use attribution theory to develop the hypotheses. The results demonstrate that, through their interactions, fellow customers can exert influences on a focal customer's quality perceptions and repeat purchasing intentions toward a retail store. Furthermore, these influences were impacted by how customers attribute blame or assign responsibility toward the retail store. Service operations managers should leverage these interactions by designing into self‐service settings the capacities and interfaces that are best suited for customers’ co‐production of their self‐service experiences.     

Efficiency Evaluation in Search Advertising

In this article, we use data envelopment analysis combined with principal component analysis to evaluate the efficiency of online retailers in search advertising. We examine various efficiency model specifications involving several resource and performance‐related variables in search advertising. Our analysis based on 200 retailers suggests different efficiency patterns for multichannel and Web‐only retailers. The results of our efficiency pattern analysis indicate that the performance metrics, impressions, online sales, click‐through rate, and conversion rate together reveal differences in efficiency mainly for multichannel retailers. On the other hand, ad positions in sponsored and organic links reveal differences in efficiency for Web‐only retailers. In terms of overall efficiency, we find that multichannel retailers occupy relatively most of the top positions. These results contribute to organizational level understanding of search advertising practices in online retailing and offer insights into keyword management, resource utilization, and performance metrics in search advertising campaigns.     

An Exploratory Study of the Impact of e‐Service Process on Online Customer Satisfaction

Although extensive academic research has examined the dynamics of interpersonal interactions between service providers and customers, much less research has investigated customer service encounters through technological interfaces such as the Web in electronic commerce transactions. Corporate websites have become an important point of contact with customers for many companies. Service has been described as one of the most important attributes for online business to influence traffic and sales. However, more research is needed to understand how Web‐based technological capabilities of services affect customer satisfaction. In this paper, we propose viewing the interface between online buyers and sellers through the lens of service management to identify possible determinants of online customer satisfaction. A company's website is considered its electronic service delivery system. We look at this electronic service delivery system from its process point of view. Our findings indicate that as the electronic service delivery system process improves, a customer's perception of the website's ease of use increases, leading to increased service value and perceived control over the process, which increases customer satisfaction. The research provides evidence that the technological capabilities embedded in the website processes are an important factor in determining service quality and ultimately online customer satisfaction.     

A Sales Forecast Model for Short‐Life‐Cycle Products: New Releases at Blockbuster

We develop, in this article, a sales model for movie and game products at Blockbuster. The model assumes that there are three sales components: the first is from consumers who have already committed to purchasing (or renting) a product (e.g., based on promotion of, or exposure to, the product prior to its launch); the second comes from consumers who are potential buyers of the product; and the third comes from either a networking effect on closely tied (as in a social group) potential buyers from previous buyers (in the case of movie rental and all retail products) or re‐rents (in the case of game rental). In addition, we explicitly formulate into our model dynamic interactions between these sales components, both within and across sales periods. This important feature is motivated by realism, and it significantly contributes to the accuracy of our model. The model is thoroughly tested against sales data for rental and retail products from Blockbuster. Our empirical results show that the model offers excellent fit to actual sales activity. We also demonstrate that the model is capable of delivering reasonable sales forecasts based solely on environmental data (e.g., theatrical sales, studio, genre, MPAA ratings, etc.) and actual first‐period sales. Accurate sales forecasts can lead to significant cost savings. In particular, it can improve the retail operations at Blockbuster by determining appropriate order quantities of products, which is critical in effective inventory management (i.e., it can reduce the extent of over‐stocking and under‐stocking). While our model is developed specifically for product sales at Blockbuster, we believe that with context‐dependent modifications, our modeling approach could also provide a reasonable basis for the study of sales for other short‐Life‐Cycle products.     

Enabling Opportunism: Revenue Sharing when Sales Revenues are Unobservable

We consider a supply chain with a supplier that sells to a retailer under a revenue‐sharing arrangement. Demand is uncertain and unobservable to the supplier. We assume that the retailer is rational, that is, the retailer behaves opportunistically and underreports sales revenues to the supplier whenever such underreporting is profitable. Assuming the supplier has the ability to audit the retailer and learn about the actual sales revenues, we show that the supplier will never find it optimal to audit to the point that ensures truthful reporting for all demand realizations. By committing to an auditing policy, the supplier can exploit retailer opportunism and derive profits that at times even exceed those that could be obtained when dealing with a retailer that always strictly adheres to the agreed‐upon contract terms. We also show that the retailer's opportunistic behavior can increase total supply chain profits.     

Manufacturer–Retailer Negotiations in the Presence of an Oligopolistic Input Market

When a manufacturer relies solely on its own inputs in making products, the focus of negotiations between the manufacturer and retailer is exclusively on profits in the output (retail) market. In such cases, absent retail competition concerns, standard two‐part tariff negotiations set the per‐unit wholesale price equal to marginal cost, and require fixed transfers from the retailer to the manufacturer. In this article, we recognize that manufacturers often rely on imperfectly competitive markets for at least some inputs. Incorporating this seemingly natural feature has profound implications for manufacturer–retailer negotiations since it shifts their focus from being exclusively on output markets to one that balances strategic concerns in both input and output realms. The article's main result is that the added need to discipline input prices can lead the manufacturer and retailer to write contingent contracts that are cost‐plus and prescribe lump‐sum slotting allowances (i.e., fixed transfer from the manufacturer to the retailer).     

Dynamic Supply Risk Management with Signal‐Based Forecast,Multi‐Sourcing,and Discretionary Selling

We examine the critical role of advance supply signals—such as suppliers’ financial health and production viability—in dynamic supply risk management. The firm operates an inventory system with multiple demand classes and multiple suppliers. The sales are discretionary and the suppliers are susceptible to both systematic and operational risks. We develop a hierarchical Markov model that captures the essential features of advance supply signals, and integrate it with procurement and selling decisions. We characterize the optimal procurement and selling policy, and the strategic relationship between signal‐based forecast, multi‐sourcing, and discretionary selling. We show that higher demand heterogeneity may reduce the value of discretionary selling, and that the mean value‐based forecast may outperform the stationary distribution‐based forecast. This work advances our understanding on when and how to use advance supply signals in dynamic risk management. Future supply risk erodes profitability but enhances the marginal value of current inventory. A signal of future supply shortage raises both base stock and demand rationing levels, thereby boosting the current production and tightening the current sales. Signal‐based dynamic forecast effectively guides the firm's procurement and selling decisions. Its value critically depends on supply volatility and scarcity. Ignoring advance supply signals can result in misleading recommendations and severe losses. Signal‐based dynamic supply forecast should be used when: (a) supply uncertainty is substantial, (b) supply‐demand ratio is moderate, (c) forecast precision is high, and (d) supplier heterogeneity is high.     

Estimating the Impact of Understaffing on Sales and Profitability in Retail Stores

In this study, we use hourly data on store traffic, sales, and labor from 41 stores of a large retail chain to identify the extent of understaffing in retail stores and quantify its impact on sales and profitability. Using an empirical model motivated from queueing theory, we calculate the benchmark staffing level for each store, and establish the presence of systematic understaffing during peak hours. We find that all 41 stores in our sample are systematically understaffed during a 3‐hour peak period. Eliminating understaffing in these stores can result in a significant increase in sales and profitability in these stores. Also, we examine the extent to which forecasting errors and scheduling constraints drive understaffing in retail stores and quantify their relative impacts on store profits for the retailer in our study.     

Browse‐and‐Switch: Retail‐Online Competition under Value Uncertainty

Although online shopping is becoming popular, consumers who are unsure about whether to buy a product may find it advantageous to visit a brick‐and‐mortar retail store to first examine the product before purchasing it. But, after browsing at the store, consumers have the option of switching to an e‐tailer to purchase the item at a cheaper price rather than buying at the store. Recent business press refers to this browse‐and‐switch behavior as “showrooming,” and attributes to it the declining profits of brick‐and‐mortar retailers. To study the effect of the browse‐and‐switch option on retail and online pricing strategies and profits, we analyze a stylized economic model that incorporates uncertainty in consumers' valuation of the product, captures the heterogeneity among consumers in their inclination to purchase online, and permits product returns. We consider various equilibrium scenarios for different combinations of consumer shopping behaviors, characterize the parameter ranges for each scenario, and demonstrate that browse‐and‐switch behavior can indeed occur under equilibrium. Our analysis further shows that the option for consumers to browse‐and‐switch intensifies competition, reducing the profits for both firms.     

Impact of customer loyalty and service operations on customer behaviour and firm performance: empirical evidence from UK retail sector

Abstract

Retail networks are striving to achieve competitive advantage by increasing value through loyalty and efficiency with a focus on service operations. As sales promotions have become an integral part of the retail supply chain planning, customer behavioural aspects based on loyalty and service operations have been challenged greatly. Subsequently, management capabilities, such as planning and timely replenishment, have become complicated tasks for many retail store managers. This study develops a model integrating retail network value and efficiencies with customer behaviour and performance. We validate the model using survey data from prominent U.K. retail store customers. Our data analysis shows that both loyalty and service operation attributes have positive significant impact on customer behaviour, while the service operation mediates the relationship between loyalty and customer behaviour. This result gives a new outlook to build managerial capability based on customer loyalty and service operations. Our results specifically show that the service operation attributes will indirectly influence the customers’ buying behaviour even in the presence of loyalty attribute such as promotion schemes. This result sends a strong signal to retail supply chain managers to offer customised promotions considering local community rather than having uniform sales promotion nationwide.     

Retailer's Response to Alternate Manufacturer's Incentives Under a Single‐Period,Price‐Dependent,Stochastic‐Demand Framework*

This article considers the joint development of the optimal pricing and ordering policies of a profit‐maximizing retailer, faced with (i) a manufacturer trade incentive in the form of a price discount for itself or a rebate directly to the end customer; (ii) a stochastic consumer demand dependent upon the magnitude of the selling price and of the trade incentive, that is contrasted with a riskless demand, which is the expected value of the stochastic demand; and (iii) a single‐period newsvendor‐type framework. Additional analysis includes the development of equal profit policies in either form of trade incentive, an assessment of the conditions under which a one‐dollar discount is more profitable than a one‐dollar rebate, and an evaluation of the impact upon the retailer‐expected profits of changes in either incentive or in the degree of demand uncertainty. A numerical example highlights the main features of the model. The analytical and numerical results clearly show that, as compared to the results for the riskless demand, dealing with uncertainty through a stochastic demand leads to (i) (lower) higher retail prices if additive (multiplicative) error, (ii) lower (higher) pass throughs if additive (multiplicative) error, (iii) higher claw backs in both error structures wherever applicable, and (iv) higher rebates to achieve equivalent profits in both error structures.     

Managing Internet Product Returns: A Focus on Effective Service Operations

Product returns present one of the biggest operational challenges in the world of Internet retailing due to the sheer volume and cost of processing returns. But returns also represent an often‐missed opportunity to manage customer relationships and build customer loyalty to the retailer. Based upon data from a survey of 464 customers of five different Internet retailers, this article explores how firms' returns management systems affect loyalty intentions. We draw upon extant literature in the fields of Internet retailing, service quality, supply chain management, and customer satisfaction/loyalty to develop a model and a set of hypotheses relating ten latent variables in the service returns offering area. Our resulting structural equation model provides evidence of the impact of the returns management system upon customer loyalty intentions. The model also identifies effects on loyalty intentions arising from customers' satisfaction with, and perceptions of, the value of the returns service offered. These findings will help inform managers' choices regarding investment in the returns management system as an element of service quality improvement and a potential means of improved profitability. In addition, this study's empirical exploration and testing of a returns management model in the Internet retailing environment is a contribution to the currently underrepresented body of academic literature linking marketing and supply chain management in the context of end consumers.     

An Information‐Processing Approach for Evaluating In‐Store Retail Operational Design Strategies

We develop a model to evaluate retail store operational design strategies using an information‐processing perspective of organizational design. We propose that three model constructs pertaining to in‐store shopper task uncertainty—the product mix complexity, the service production complexity, and the product mix changeover—create shopper encounter information requirements (IR). These requirements can be met using specific retail service operational design choices for managing shopper encounters, namely, designing layouts for self‐service (SS) and providing employees with task empowerment (TE). The model is then operationalized using a two‐stage approach to develop new multi‐item, measurement scales. The psychometric properties and predictive validity of the scales and model are then confirmed by using structural equation modeling with survey data from 175 merchandise retail store managers. We find that our model can be generically applied across the retail industry to understand how shopper encounter IR motivate retailer store design choices and can be used to determine whether to design stores for SS or to provide store employees with TE. We then evaluate the efficacy of the studied store design choices on customer delivery satisfaction, and offer some suggestions for future research.     

Mechanisms for Increasing Sourcing from Capacity‐Constrained Local Suppliers

The fresh produce supply chain is characterized by large (mainstream) farms that are located far from consumers, and capacity‐constrained (local) farms that are located close to the consumer. In this setting, we study: (i) how leadtime and capacity asymmetry between mainstream and local farms affect a retail grocer's order policy for fresh produce, and (ii) how various operational mechanisms can increase the amount sourced from local farms. We show that this supply chain structure is disadvantageous for local suppliers (farms) because it induces the retailer to treat the local supply as a de facto responsive supply without paying a premium for the responsiveness. This disadvantage is exacerbated when the retailer's objective is to achieve a high service level. We study three mechanisms that can improve conditions for local farms: working with an intermediary, backhauling, and a retail order policy, purchase guarantee, that explicitly supports local farms. The intermediary and backhauling mechanisms help the local farm by making local supply more attractive to the retailer, inducing her to order more locally sourced produce. The intermediary reduces the retailer's overstock and stockout costs whereas backhauling increases the average margin. The purchase guarantee order policy helps local farms at the expense of retail profit. However, we show that purchase guarantee and backhauling are complementary mechanisms that together can benefit the retailer and local farms.