Pricing Strategies with Buy-Online-and-Pickup-in-Store

Abstract

Buy online and pick up in store (BOPS) is recently adopted by many retailers to attract customers to the store. We study the impact of this strategy on prices and profits of retailers. We build a model based on a Hotelling line where a retailer manages both the store and online channel in the presence of customers' strategic shopping behavior. We use customers' expectation utility to classify their choices. After BOPS is implemented, customers may choose to buy online directly, buy in the store directly or buy online pickup in store. For customers is uncertain whether the product is a good match, a part of customers who buy online directly will return it. When customers return the product, there is a loss to the retailer. We prove that BOPS can help the retailer gain higher profits under certain conditions. Then a revenue-sharing mechanism is proposed to allocate profits of the decentralized channels with BOPS. Besides, the loss of product returns may be reduced after the coordination is achieved. In a word, BOPS is a good way for retailers to draw customers to the store and make more profits. Even in a decentralized retail system where store and online channels are managed separately, a revenue-sharing mechanism can be designed to share the revenue across channels to mitigate channel conflicts and increase the profit of the whole supply chain.