It is no secret that retailers today are facing a serious threat from ecommerce retailers, especially ecommerce retailers that operate online only. The most notable competitor is Amazon who just keeps becoming more formidable. In fact, in 2020, Amazon saw a 37% revenue increase, reaching over $386 billion.
How are brick-and-mortar retailers competing? Many of them, especially those who remain the most successful, are pairing their physical stores with online stores and putting an omnichannel strategy to work.
How to Use Omnichannel Retailing to Your Business’s Benefit
In a typical omnichannel retailing strategy, the business aims to encourage shoppers to utilize both channels in the hopes that it will increase their overall buying activity. This can take many forms.
For instance, some retailers place QR codes on their in-store product labels. These codes link customers to the item on the online store where they can check for additional sizes, colors, and availability options.
Another popular strategy is to send customers promotions that only apply to in-store or online shopping. For instance, retailers may send an in-store coupon to online shoppers and vice versa to encourage channel cross-over.
This technique is common among many major retailers, but few of them truly investigate how well that strategy is working. They might only look at the overall ROI and usage rates of their promotions if they look at any data at all. They don’t look at customers’ many variables that affect the promotions’ success.
How Home-to-Store Distance Affects Promotion Profits
A research team led by Xueming Luo out of Temple University decided to investigate one particularly impactful variable: the distance between a customer’s home and the nearest store.
To find out, Luo’s team partnered with a Chinese department store. They randomly pulled subjects from the store’s loyalty program and conducted their study with a total of over 33,000 customers: about 8,700 who shopped exclusively online and about 25,000 who shopped exclusively in stores. They omitted the omnichannel shoppers who were in their random selection because their goal was to convert single-channel customers to omnichannel usage.
From there, the team sent coupons to these 33,000 subjects. Some coupons were valid online only, others were valid in stores only, and others were valid in both channels. A control group received no coupons.
Over the next week, researchers studied the buying habits of these customers. They categorized customers not only by their channel of choice and the coupon they received but by their proximity to a store. Specifically, they compared customers who lived within five kilometers of a store to those who lived further away.
Among customers who lived near a store, the researchers found that the coupons made no difference in their shopping habits. Because the stores were so near to them and the transportation costs to access the stores were so low, these customers didn’t need any added incentive to make the trip.
Among customers who lived further from stores, though, the promotions did make a difference. When distant customers who were online-only shoppers received the online coupon, it generated double the profits. When that same group received the multi-channel coupon, profits rose by 800%. By contrast, when distant in-store-only customers received online coupons, the profits actually decreased by 51%.
To simplify, this means that when the store incentivized online-only customers to visit a store, their profits increased. When they incentivized in-store-only customers to shop online, their profits dropped.
Why Would Profits Drop When In-Store Shoppers Move Online?
Most retailers expect that encouraging omnichannel shopping experiences will always improve profits. After all, if customers are shopping in both channels, they’ll be buying twice as much, right? As this study shows us, that isn’t necessarily the case when in-store customers transition to online shopping, and there are several reasons for this.
First, retailers miss out on impulse purchases. Customers who shop in the store might have one or two specific items they need, but they are likely to spot other items they like in the meantime because they are literally surrounded by merchandise.
In an online environment, however, a customer with one product in mind can go directly to that category’s page. Unless the retailer has a very strong product recommendation feature, which can be complex to create, they are likely to miss out on add-on. Even with strong recommendations, customers are more likely to impulsively buy tactile items that they can see, touch, and experience, and this only happens in a store.
Second, we must consider price comparing. It is far easier to compare prices which shopping online than in a store. After all, when a customer is in a store, the item is directly in front of them, and finding it at a better price could involve a trip to an entirely different store. Online, both retailers’ products will be shipped to the customer either way. It takes little to no effort for them to look elsewhere, which could drive them to competing retailers.
The Takeaway for an Omnichannel Retailing Strategy
According to Luo, retailers should use omnichannel technology to encourage online shoppers to come to the stores, rather than encouraging any and all cross-over.
This is a fascinating discovery because many in the retail community are advocating for retailers to close more of their physical stores with the assumption that their customers will remain loyal and shift online. For many retailers, though, those sales aren’t shifting online as much as they would like.
As Luo points out, the opposite is happening too. Some traditionally online-only retailers are opening physical stores. Amazon has been experimenting with this concept for years, and retailers like Warby Parker and Bonobos are taking this route, too.
Using Your Omnichannel Strategy to Your Benefit
For retailers in an increasingly competitive market, the key is to “work smarter, not harder.” Using Luo’s insights to open up your online customers to in-store shopping can make a powerful difference in your profits. To learn more about omnichannel options, explore our product today.
*This article is based on research previously published in the Harvard Business Review.