The Value of Launching Omni-Channel Services

Implementing free in-store pickup services has become increasingly widespread in the retail industry as part of an omni-channel strategy. Retailers considering a new service need to evaluate the value gained and resulting changes to customer behavior to understand if implementation should move forward. Operations literature on omni-channel retailing is growing, has generally been empirically focused, and has recently been emphasized since the COVID-19 pandemic has made services such as ship-to-store or curbside pickup necessary for retailers to continue to operate. We add to this body of work by analytically modeling the omni-channel setting, providing prescriptive optimal decisions and comparative statics across a wide range of market parameters. We analytically model a profit-maximizing retailer faced with a heterogeneous customer base and derive optimal pricing and shipping fee decisions. We further analyze how demand segments and the resulting profit change under different market conditions to understand the impact of free ship-to-store service on customer shopping behavior. We find that introducing additional ship-to-store service is always at least as pro table as offering traditional fee-based home-delivery service only. By its nature, adopting free ship-to-store service attracts customers to local stores for the pickup process, which in turn increases store foot traffic. We show that the retailer’s price and shipping fee decisions depend on the additional sales arising from the increased store foot traffic. Furthermore, we show that the impact of additional profit arising from the increased in-store traffic on the optimal price depends on the hassle cost difference between the home-delivery and ship-to-store services.