Channel merchandising strategies considering customer behavior and supplier encroachment

Abstract

This study investigates a two-echelon supply chain comprising a retailer, who considers whether to sell products as online-exclusive (products available only online) versus hybrid (products available both online and offline), and a supplier, who considers whether to encroach the online market. Given that there are more product varieties online than offline and competitive online marketplace, it remains unclear how retailers identify products that should be offered as hybrid versus online-exclusive. Comparing to online exclusive selling strategy, two key features of the hybrid selling strategy are captured: the demand expansion and profit margin effects. The demand expansion effect refers to the phenomenon where a retailer, transitioning from an online-exclusive approach to a hybrid approach, can expand market size by appealing to consumers who exclusively prefer offline purchases. Besides, the profit margin effect relates to how customer migration impacts retailer profits due to the disparity in unit product profit margins between online and offline channels. We reveal that the products with significant demand expansion effect should be offered as hybrid, and the hybrid selling strategy is efficient in preventing supply encroachment. However, even if the profit margin and demand expansion effect are positive, the products may be better to offer as online-exclusive. This is because, under the hybrid selling strategy, the supplier would charge a high wholesale price to squeeze the retailer’s profit. Consequently, the hybrid selling strategy in this circumstance intensifies the double marginalization effect, prompting the retailer not to opt for the hybrid selling strategy as a means to prevent supplier encroachment. Finally, the cross-selling effect, in which the customers buy some other products, strengthens the profit margin effect, and the results remain robust. Therefore, our study provides management insights that high-volume products may also be offered as online-exclusive, which challenges previous findings based on the long-tail phenomenon.