Physical stores versus physical showrooms: Channel structures of online retailers

Abstract

To meet consumers’ expectations for experiential shopping, an increasing number of online retailers are expanding offline channels, with physical showrooms and physical showrooms emerging as the two most popular offline channel modes. Both channels can match consumers’ demand for on-site experiences. However, the two modes differ in terms of service cost, demand promotion efficiency, and channel differentiation generation. The article considers three channel structures: single online channel, online channel with physical store, and online channel with physical showroom, as well as two scenarios: non-competitive and competitive. This study examines whether online retailers should integrate offline channels and which offline channel mode they should use by comparing the profit changes of themselves and rivals when three channel structures are adopted in two scenarios. It is found that: (i) If there is a significant difference between the online and physical store channels, providing physical stores help online retailer raise profits. If the physical showroom is highly effective at promoting demand, omnichannel retailers will dominate the entire online market, and expanding physical showrooms is always profitable; (ii) Whether in a competitive or non-competitive environment, online retailers should weigh channel differentiation and the efficiency of the offline channel modes in promoting demand to select the best channel mode; (iii) Due to channel differentiation, online retailers’ creation of physical stores, as well as increasing competition among physical stores, will have no impact on rival retailers. However, providing physical showrooms will result in lower sales volume and revenue for rival retailers.