Impact of an “online-to-store” channel on demand allocation, pricing and profitability

• We develop an analytical model to study the impact of an online-to-store channel.
• This channel can help tap new customers but it also cannibalizes existing channels.
• This new channel always leads to a higher product retail price.
• We derive conditions under which such a channel is beneficial for the retailer.

The growth of e-commerce in the past decade has opened the door to a new and exciting opportunity for retailers to better target different segments of the customer population. In this paper, we develop an analytical framework to study the impact of an “online-to-store” channel on the demand allocations and profitability of a retailer who sells products to customers through multiple distribution channels. This new channel can help the retailer tap new customer segments and generate additional demand, but may also hurt the retailer by cannibalizing existing channels and increasing operating costs. The analytical model allows us to evaluate these fundamental tradeoffs and provide useful managerial insights regarding the specific product and market characteristics that are most conducive for increasing profitability. Our analysis provides some simple conditions under which adding an online-to-store channel would lead to higher profits for products that are only available online. If the product is also available in-store, the analysis becomes more complex. In this case, we performed numerical experiments to generate insights on when the OS channel should be used. Our results imply that the retailer needs to carefully select the set of products to be offered through the online-to-store channel.