Optimal Joint Assortment for an Omni-Channel Retailer

Abstract

With growing popularity of e-commerce, nearly every prominent retailer is aiming to turn omni-channel. One crucial decision in this pursuit is the identification of the joint assortment. Despite the importance of this decision, few studies have addressed this issue. In this study, we contribute by examining joint assortment and product prices for a retailer that sells products through both brick-and-mortar and online channels using the locational choice model. We consider two classes of customers such that customers in one class prefer the brick-and-mortar channel and customers in the other class prefer the online channel. Our analysis indicates that the optimal assortment should be thought of as a portfolio of two types of products: customized and omni-channel. Customized products are priced in such a way that they are targeted toward customers who prefer to shop from the channel the products are sold through. In contrast, omni-channel products are priced attractively so that all customers consider buying them. The relative mix of these products depends on how flexible customers are in shopping from the channel they do not prefer and the size of each class. Additionally, we investigate whether the conventional wisdom of selling niche products through the online channel is always optimal. We find that this suggestion may be suboptimal when the online channel has greater cost of including a product in the assortment and fewer preferring customers compared with the brick-and mortar channel. We also develop insights on price selection. As more and more retailers are converting from single-channel to omni-channel, they need to reexamine their assortment strategy across existing and new channels. The models, results, and insights presented in this paper would help them in designing a joint assortment policy across channels.