Optimal advance selling strategy with information provision for omni-channel retailers

Abstract

Demand information and consumer valuation uncertainty of new products have significant impacts on both consumers’ purchasing behavior and retail operations. To address the information transparency for new products launching, this study examines the profitability of omni-channel pre-ordering (i.e., compared to traditional online pre-ordering), a new advance selling strategy for retailers whereby consumers can solve product value uncertainty first and then decide whether to purchase in advance. Our analysis finds that advance selling is not always an appropriate choice for the retailer, but is contingent on related costs (e.g., losses from the costs of returns for retailers and consumers and the hassle cost of solving uncertain value for consumers). Specifically, only when the retailer’s return cost is relatively low and the hassle cost of solving uncertain value is relatively high should the retailer adopt the traditional online pre-ordering strategy. However, when the hassle cost of solving uncertain value is relatively low, the omni-channel pre-ordering strategy is more profitable for the retailer. By contrast, advance selling should not be offered when the retailer’s return cost and the hassle cost of solving uncertain value are both high. Next, we derive the optimal advance selling price and ordering quantity for the regular season for different strategies. Our results reveal that the optimal price varies along with the costs involved in the consumer’s purchasing choice. Finally, we find that the retailer is more likely to order a smaller quantity when the traditional online pre-ordering option is used.