Omnichannel Retailing as a Balancing Act between In-Store and Home Fulfillment

Problem Definition: Omnichannel retailers can fulfill online orders by allowing consumers to have their orders delivered from the retailers’ stores to the consumers’ homes (home fulfillment) or collect the orders at the stores (in-store fulfillment). Because the latter option does not involve costly last-mile deliveries to consumers’ homes, retailers have sought to make it more attractive by waiving the associated in-store fulfillment fees indiscriminately to consumers. We analyze the economic value of this strategy and compare it with that of a strategy we develop based on the use of targeted incentives to induce individual consumers to switch to in-store fulfillment after initially choosing home fulfillment for their orders. Academic/Practical Relevance: We contribute an analysis of the economic value of price incentives involving home and in-store fulfillment options in omnichannel retailing. In so doing, we isolate determinants of consumer preferences between these options and show how retailers can use such preferences to develop pricing strategies to improve the economic value of their fulfillment services. Methodology: We use field data to evaluate the pricing strategies based on econometric models as well as machine-learning and routing algorithms. Results: While the removal of in-store fulfillment fees increases revenues from additional demand, these gains are much lower than the losses caused by (1) the revenue lost from the fees no longer collected and (2) the additional operating costs at the stores necessary to fulfill a higher volume of orders. Conversely, the costs from using targeted incentives are lower (almost 3 times) than the savings in last-mile delivery costs. Managerial Implications: To promote in-store fulfillment as an alternative to home fulfillment, retailers must go beyond incentive strategies that reward consumers indiscriminately, regardless of the value they attach to these fulfillment services. We show how retailers can develop dynamic pricing solutions to generate value in these services.