The Paradox of Choice: The False Premise of Omnichannel Services and How to Realize It

Abstract

The notion of omnichannel, an integration of brick-and-mortar stores with online channels, has been thriving in recent years and is reforming the traditional service industry. Many service chains, such as Starbucks and McDonald's, established omnichannel capability by allowing customers to order online in advance before visiting stores for pick-up. The premise of omnichannel services is that when customers take advantage of the low-cost-of-waiting online channel, both their utility and the provider's revenue will increase. Although simply adding an online ordering option to the conventional walk-in model stimulates revenue, it also inflicts interference on the walk-in channel. We show that online ordering inadvertently reduces customers' individual utility and social welfare when both channels are used in equilibrium. Moreover, the less it costs to order and wait online, the more the social welfare is reduced. We then evaluate two industry state-of-the-art operational remedies: regulating the use of the online channel and establishing channel-dedicated capacities. While both remedies may improve the throughput over the walk-in-only service or even the first-come-first-served omnichannel service, they are unlikely to achieve this without jeopardizing the social welfare. We thus propose prioritizing walk-in customers and show that such prioritization can deliver this premise, i.e., simultaneously benefiting the service provider and customers in comparison with the conventional walk-in-only service when both channels are used in equilibrium.