How to Win in an Omnichannel World
Retail customers are now “omnichannel” in their outlook and behavior — they use both online and offline retail channels readily. To thrive in this new environment, retailers of all types should reexamine their strategies for delivering information and products to customers.
Paula Cuneo, a teacher in Ashland, Massachusetts, ordered 10 pairs of corduroy pants in a range of sizes and colors from Gap Inc.’s website, and later returned seven of them, according to a 2013 Wall Street Journal article.1 Ms. Cuneo is, perhaps unwittingly, an exemplar of a key challenge in today’s omnichannel retail environment — an environment where customers shop through a variety of online and offline channels. The challenge omnichannel retailers face is this: How can retailers provide consumers with information (about what products best suit them) without incurring downside on product fulfillment (delivery of products)?
The omnichannel environment presents new challenges and opportunities for both information and product fulfillment. This is equally true for “traditional” retailers like the Gap, which began business with physical stores, and “new” retailers like New York-based eyeglasses brand Warby Parker, which started out by selling online. While all retailers need to effectively and efficiently manage fulfillment and information provision, there are important nuances to how this happens — depending on where and how the retailer got started and what kinds of improvement create the most leverage.
This article delivers a customer-focused framework showing how to win in the omni-channel environment through critical innovations in information delivery and product fulfillment. The framework emerged from our research with both traditional and nontraditional retailers. To thrive in the new environment, retailers of all stripes and origins need to deploy information and fulfillment strategies that reduce friction in every phase of the buying process. This means simultaneously providing, in a cost-effective and narrative-enhancing way, information that removes initial uncertainties and barriers to purchase — as well as fulfillment options that allow retailers to get their products to customers in the most convenient and cost-effective way.
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Our research relies on detailed customer-behavior data (such as visits, purchases and returns) from omnichannel retailers. We then used these data to perform statistical tests of the impact of management interventions (such as website enhancements and showroom openings) on overall demand and fulfillment efficiency. (See “About the Research.”) We explain why the best way to navigate the omnichannel environment is to: (1) take a customer perspective and (2) view the activities of the company through the lens of the two core functions of information and fulfillment.
1. S. Banjo, “Rampant Returns Plague E-Retailers,” Wall Street Journal, Dec. 22, 2013.
2. As Andy Dunn, founder and CEO of men’s clothing brand Bonobos, has written, “At the end of the day, you’re not building an e-commerce company, you’re building a brand that has e-commerce as its core distribution channel. The difference is subtle but momentous.” See A. Dunn, “E-Commerce Is a Bear,” May 20, 2013, http://medium.com.
3. “eCommerce Disruption: A Global Theme — Transforming Traditional Retail,” white paper, Morgan Stanley Research, New York, January 6, 2013.
4. “Alibaba: The World’s Greatest Bazaar,” Economist, March 23, 2013.
5. The important distinction between digital and nondigital attributes was introduced to the academic literature in R. Lal and M. Sarvary, “When and How Is the Internet Likely to Decrease Price Competition?,” Marketing Science 18, no. 4 (November 1999): 485-503.
6. See, for example, A.M. Degeratu, A. Rangaswamy and J. Wu, “Consumer Choice Behavior in Online and Traditional Supermarkets: The Effects of Brand Name, Price and Other Search Attributes,” International Journal of Research in Marketing 17, no. 1 (March 2000): 55-78; and J.Y. Lee and D.R. Bell, “Neighborhood Social Capital and Social Learning for Experience Attributes of Products,” Marketing Science 32, no. 6 (November-December 2013): 960-976.
7. This practice has drawn the ire of retailers. See, for example, D. Coleman, “Showrooming Is the New Shoplifting,” May 24, 2013, www.retailers.com.
8. Showrooming, by some industry estimates, is thought to cost U.S. retailers more than $200 billion. See “Showrooming: A $217 Billion Problem,” May 2013, www.360pi.com.
9. The Internet retailer as a purveyor of “infinite” product variety was probably first popularized in C. Anderson, “The Long Tail: Why the Future of Business Is Selling Less of More” (New York: Hyperion, 2006). Academic research has also shown that Internet shoppers are more likely to buy niche products; see E. Brynjolfsson, Y.J. Hu and M.S. Rahman, “Battle of the Retail Channels: How Product Selection and Geography Drive Cross-Channel Competition,” Management Science 55, no. 11 (November 2009): 1755-1765.
10. For the former, see M. Fisher and R. Vaidyanathan, “Which Products Should You Stock?” Harvard Business Review 90, no. 11 (November 2012): 108-118. Aggregating inventory decisions for n independent locations (or, more generally, demand streams) results in lower relative uncertainty and lower inventory costs, as demonstrated in G.D. Eppen, “Note: Effects of Centralization on Expected Costs in a Multi-Location Newsboy Problem,” Management Science 25, no. 5 (May 1979): 498-501.
11. The cost of holding inventory at a distribution center is lower than the cost of holding inventory at a store. Excluding shipping costs, it is usually substantially less expensive to operate a system with centralized fulfillment than a system that holds inventory in each store.
12. For example, business researchers Antonio Moreno and Christian Terwiesch show that as automotive companies increase the number of products they carry, the supply-demand mismatches increase, and negative effects of uncertainty become more important. When automotive manufacturers extend their product lines, they have to carry more inventories and offer higher discounts. See A. Moreno and C. Terwiesch, “The Effects of Product Line Breadth: Evidence from the Automotive Industry,” April 7, 2013, http://papers.ssrn.com.
13. More recently, some companies have incorporated similar programs in which the product bought online does not need to physically be in the store at the moment of purchase. It is shipped to the store after the customer completes the purchase. We call such programs “buy online, ship to store” (BOSS).
14. S. Gallino and A. Moreno, “Integration of Online and Offline Channels in Retail: The Impact of Sharing Reliable Inventory Availability Information,” Management Science 60, no. 6 (June 2014): 1434-1451.
15. This innovation earned WarbyParker.com the moniker “the Netflix of eyewear.” See D. Wong, “GQ Calls It the Netflix of Eyewear,” Nov. 29, 2010, www.huffingtonpost.com.
16. In experiments, the proper “matching” of treatment and control cities is very important, and in typical cases it is accomplished by random assignment of essentially identical experimental units or subjects to either the treatment or the control condition. Clearly, however, Warby Parker management does not open showrooms in random locations but in locations where they expect to see the greatest benefit. Any assessment of showroom impact needs to factor this endogeneity into the analysis. We account for it using propensity scoring. See F. Caro and C. Tang, “The 1st POMS Applied Research Challenge 2014 Awards,” Production and Operations Management, in press.
17. We also conjecture that when a company can effectively deliver customer experiences that lead to early purchases through an offline channel, for example by providing outstanding service in a store, an inventory-only showroom or even a pop-up store, this can allow the company to subsequently retain and service these customers via the online channel — essentially acquiring the customer through either quadrant 1 or quadrant 3 and retaining and maintaining the customer through quadrant 4. We thank Lawrence Lenihan for this observation. Authors’ communication with Lawrence Lenihan, cofounder and managing director, FirstMark Capital, March 27, 2014.
18. Other successful online-first retail players are going into this retail format, including dress and accessory rental company Rent the Runway. See A. Jacobs, “Ready to Strut in Ready-to-Rent,” New York Times, January 22, 2014; and E. Brooke, “Rent The Runway Branches Further Offline, With A Showroom at Henri Bendel,” TechCrunch, October 17, 2013 (see http://techcrunch.com/2013/10/17/rent-the-runway-branches-further-offline-with-a-permanent-showroom-at-henri-bendel/).
19. For details and routes, see “Warby Parker Class Trip,” n.d., www.warbyparkerclasstrip.com.
20. See www.thestorefront.com; and J.D. Stein, “No Space Too Small, No Lease Too Short,” New York Times, December 20, 2013.
21. See, for example, J. Choi, D.R. Bell and L.M. Lodish, “Traditional and IS-Enabled Customer Acquisition on the Internet,” Management Science 58, no. 4 (April 2012): 754-769.
22. See M. Halkias, “E-commerce Retailers Open Physical Locations in Dallas to Augment Online Stores,” Dallas News, June 4, 2014.
23. For more details, see S. Jacobs, “Bonobos, an Ecommerce Darling, Finds an Edge in Brick and Mortar,” May 30, 2014, http://streetfightmag.com.
24. This was popularized in R. Putnam, “Bowling Alone: The Collapse and Revival of American Community” (New York: Simon and Schuster, 2000).
25. Documentation that comes with the SCCBS describes it as the “first attempt at widespread systematic measurement of social capital in the United States,” and it has been used extensively in economics. See M.B. Aguilera, “The Impact of Social Capital on Labor Force Participation: Evidence From the 2000 Social Capital Community Benchmark Survey,” Social Science Quarterly 83, no. 3 (September 2002): 853-874; and C.A.L. Hilber, “New Housing Supply and the Dilution of Social Capital,” Journal of Urban Economics 67, no. 3 (May 2010): 419-437.
26. While not tested directly, the converse is implied by our research as well — that if customer experiences are negative, then online sales will slow down more rapidly in locations with more offline social capital.
27. For details, see Lee and Bell, “Neighborhood Social Capital and Social Learning,” 973.
28. Dunn, “E-Commerce Is a Bear.”
29. Banjo, “Rampant Returns Plague E-Retailers”; and “E-Commerce Returns Are Up,” Fox Business video, 03:21, December 23, 2013, http://video.foxbusiness.com.
30. Metail, headquartered in London, allows female shoppers to create a 3-D model of themselves and evaluate how products would fit them prior to making an online purchase. Other companies providing similar tools to apparel and footwear retailers include PhiSix Fashion Labs, which eBay acquired in February 2014, and Pittsburgh-based Shoefitr.
31. E. Byrnjolfsson, Y. Hu and M. Raman, “Competing in the Age of Omnichannel Retailing,” MIT Sloan Management Review 54, no. 4 (summer 2013): 23-29.
i. For more details, see D.R. Bell, J. Choi and L. Lodish, “What Matters Most in Internet Retailing,” MIT Sloan Management Review 54, no. 1 (fall 2012): 27-33.