Online and offline assortment strategy for vertically differentiated products

Abstract

A growing number of retailers are becoming brick-and-click retailers as they pursue a dual-channel strategy that uses both conventional retail stores and the Internet to sell products. In a brick-and-click retail environment, assortment planning in one channel has a significant impact on the demand in both channels, and consequently, influences retailers’ bottom-line performance. We developed a stylized model to address a dual-channel retailer's assortment decision for vertically differentiated products and to investigate how the product and price offerings in online and offline channels jointly affect consumer demand. We incorporated the shelf-space constraint of the brick-and-mortar store and a disutility of online purchase into the assortment optimization model. Analytically, we derived results on the structure of the optimal assortment. We demonstrated that it was more profitable for the retailer to sell through both offline and online channels. Counterintuitively, we showed that in the optimal assortment, it was not necessary to designate a high-quality product to the offline store and a low-quality product to the online channel. We also identified two effective ways to improve profit: expansion of the offline channel and reduction of online disutility.