Dynamic assortment in the presence of brand heterogeneity

In this paper, we study the dynamic assortment planning problem in the presence of heterogeneous brands. Over a limited selling season, the retailer sells heterogeneous products from one store brand and one national brand. We use the nested multinomial logit (NMNL) framework to model consumer choice process, in which consumers choose first which brand to buy and then a product within that brand. We formulate this problem using the finite-horizon dynamic programming approach. Using available sales transaction data, we estimate the consumer choice behavior and empirically demonstrate existence of brand heterogeneity. Further, our results suggest that ignoring brand heterogeneity will make the retailer’s expected revenues significantly overestimated, and the potential revenue overestimation depends on initial inventories and prices of products of two brands. We finally show that the retailer will benefit from dynamic assortment optimization with the estimated consumer choice model.     

How retailer money-back guarantees influence consumer preferences for retailer versus national brands

Retailers often use money-back guarantees to reduce consumer perceived risk about brand quality and to increase their market share. The effect of such guarantees on perceived product quality and ultimately preference and product choice depends on their perceived value and credibility, related to other extrinsic clues, such as price and brand. An analysis of an experimental design with a national sample of consumers shows that compared with a simple money-back guarantee, a double money-back guarantee does not further increase the relative preference for a retailer brand over a national brand. Furthermore, the size of the effect of a money-back guarantee is small, moderated by the effects of other information on product quality, such as the size of the price differential between retailer and national brands. Finally, the effect of a money-back guarantee differs, depending on the customer–retailer relationship: A retailer with high credibility can influence regular customers less by guarantees.     

Perceptions of assortment variety: The effects of congruency between consumers’ internal and retailers’ external organization

This research shows that consumers’ perceptions of variety and satisfaction are dependent upon how the assortment is organized, both internally by the consumer and externally by the retailer. The results of three laboratory studies indicate that for familiar categories, congruency between a consumer's internal categorization structure and the external store layout leads to higher perceptions of variety and higher satisfaction with product choices, while for unfamiliar product categories, congruency between shopping goals and external structure leads to lower perceptions of variety but increased satisfaction with the store's assortment. However, if retailers institute external category filters congruent with consumers’ internal shopping goals that allow them to bypass products, consumers have both lower variety perceptions and satisfaction with the assortment offering.     

Why would a big retailer refuse to collaborate on manufacturer SPIFF programs?

Big retailers that carry a large assortment of products rely on knowledgeable salespeople to provide purchase advice to customers and match customers with suitable products. Interestingly, big retailers vary in their policies regarding whether to allow their salespeople to receive manufacturer SPIFF (Sales Person Incentive Funding Formula) payments, which motivate salespeople advising at no cost of the retailer. In this study, we investigate a big retailer’s incentive to block manufacturer SPIFF programs, which has the consequence of demotivating salespeople from advising customers, from the perspective of vertical channel interactions. We scrutinize a big retailer’s decision to maximize its profit through managing its channel interactions with upstream manufacturers offering horizontally differentiated products, customers uncertain about true fits with competing products, and its salesperson who can match customers with suitable products through offering purchase advice. Our analysis shows that motivating the salesperson to advise customers is profitable for the retailer only if the such advising has moderate effectiveness in matching consumers and suitable products, and only in this case would the retailer collaborate on manufacturer SPIFF programs. Otherwise, salesperson advising hurts retailer profit and the big retailer benefits from blocking manufacturer SPIFF programs. Our study reveals the interesting theoretical insight that the incentives of a big retailer and upstream manufacturers to motivate sales advising reside in their incentives to battle for a more favorable channel status.     

Creation of consumer loyalty and trust in the retailer through store brands: The moderating effect of choice of store brand name

Within the current economic context, store brands play an important role in differentiation strategies based on assortment and positioning in terms of distributor prices. To begin with, this study identifies three determining aspects of retail loyalty and trust: satisfaction with price levels, the perceived image of the assortment and loyalty to the store brands (SB). Secondly, this study proposes a theoretical relational model among the aforementioned aspects. Finally, this study analyzes the moderating role that the strategy of choosing SB name (umbrella brand label vs. brands different from the label brand) plays in the relationship between loyalty to SB and loyalty to and trust in the retailer. By including this moderating variable, we seek to contribute to current academic research and to provide insights into the importance that SB strategy (label vs. own name) has for the effect of loyalty to SB on the relative results of the retail company. Our research results show that making the umbrella SB name the same as the label brand name increases the positive effect of customer loyalty to SB on loyalty to the retailer, but not the effect of trust on this loyalty compared to chains that use SB names different from those of the label. These results have important implications for management.     

Store Brand Quality and Retailer’s Product Line Design

This study analyzes a retailer’s store brand quality decision in vertically differentiated product categories. We analyze a game theoretic model composed of one or two national brand manufacturers and a retailer, who strategically chooses the quality level(s) of its store brand(s) relative to the well-established national brand position(s) to maximize its category profit. Our analysis reveals that the nature of a retailer’s store brand quality positioning is quite different from the manufacturer’s national brand positioning decision, and that the best position for a store brand is not “as close to a national brand as possible” as previous studies suggest. Instead, the optimal quality position of each store brand is remarkably sensitive to the distribution of consumers’ willingness-to-pay. In particular, the relative proportions of quality sensitive consumers and price sensitive consumers determine the balance of three key strategic forces — the market expansion force, the retail margin force, and the consumer profitability force, leading to different optimal product line designs for store brands across different category environments. Interestingly, against multiple incumbent national brands, the retailer’s optimal product line design includes a store brand positioned at the highest quality level in the category only if most consumers are moderately quality conscious. We also analyze the implications of national brands’ brand equity for retailers’ store brand strategy.     

Forging meaningful consumer-brand relationships through creative merchandise offerings and innovative merchandising strategies

This research highlights the importance of retailer-consumer identity congruence – the match between the retail brand identity and the consumers’ identity. Retailers can leverage identity congruence to forge meaningful consumer-brand relationships which will result in enhanced engagement, brand loyalty, and willingness to pay. The paper discusses how creative merchandise offerings and innovative merchandising strategies contribute to the creation of a unique retail brand identity and facilitate communication of this identity to consumers. Based on interviews with retail practitioners, we formulate five ways in which retailers can establish and communicate their brand identity through creative merchandise offerings (by focusing on unique and original merchandise, leveraging local merchandise to reflect the area, making their merchandise akin to art, offering sustainable merchandise, and a high fashion product assortment). In addition, we focus on five innovative merchandising strategies which help the retailer connect the brand to the customer (creating themes, reflecting the brand story, being playful, signaling exclusivity, and virtual merchandising). We then discuss how retailers can utilize social and technological tools to amplify the retailer identity to consumers, thus increasing the likelihood that a consumer will view their identity congruent with the retail brand.     

Partner Empowerment and Relationship Failure in Franchising

Franchisors must empower franchisees to take decisions on a package of peripheral elements in response to pressure for local adaptations and for entrepreneurial autonomy. However, little is known about which specific elements should be decentralized and to what extent adaptation of such elements affects disputes between franchisor and franchisees. This study explores these issues by analyzing which decision rights should be franchisees’ responsibility to reduce early terminations instigated by the franchisor. The results show that delegating decision rights on local advertising and personnel reduces early terminations while delegation of pricing tends to increase them, regardless of the size of the system. Interestingly, successful delegation in other decision‐areas is contingent on the brand‐name value. More specifically, only larger chains seem to benefit from delegating assortment and decoration decisions.     

Managing a Global Retail Brand in Different Markets: Meta-Analyses of Customer Responses to Service Encounters

This study investigates how retailers can leverage their brand to shape customers’ satisfaction with service encounters. It develops and tests hypotheses about how brand, store, and consumer factors moderate customer responses to experience clues during retail service encounters. Six meta-regression analyses synthesize and compare results from 842 satisfaction equations describing customers’ encounters with a global retailer operating 400 stores in 32 countries. The results show how customers weigh their perceptions of service encounters differently depending on brand, store, and consumer factors. In markets where customers believe the retailer has high holistic brand quality, they place less weight on experience clues within the store. In markets where customers believe the retailer’s service brand promise, they place more weight on in-store experience clues. In markets where the retailer promises utilitarian value, customers weigh functional experience clues more heavily. In markets with an online purchasing channel, the effect of experience clues common to offline and online store environments is magnified, and unique clues are diminished. In addition, customers heavily weigh experience clues that fit their goals. In general, retail success factors include high brand quality (which makes customers more forgiving), a service brand promise that is mirrored in the store image (which makes customers attend to the experience clues aligned with them), and the careful monitoring and managing of retail touchpoints (to customize experience clues to each market). In this way, retailers can use customer-based strategies to effectively design and manage their global retail brand in different markets.     

Ketchup with your fries? Utilizing complementary product displays to transfer attention to a focal product

Does placing a display of complementary condiments (e.g., ketchup, mustard, buns,etc.) next to a display of hamburgers make shoppers more likely to attend to the hamburgers? Prior work has established that in-store marketing strategies play an important role in drawing attention to products in a retail setting. Building on this research, the present study develops a framework to better understand how shoppers in a natural retail environment attend to displays of complementary products, and how this attention transfers to a focal product. The results suggest that assortment complexity of a display positively affects initial attention capture.. Further, initial attention capture leads shoppers to spend longer evaluating the complementary products in the display, which, in turn, increases evaluation and choice of the focal product. As such, our framework indicates that complementary product displays can be effective at increasing attention to and choice of an associated focal product.     

Impact of different types of in-store displays on consumer purchase behavior

Research on consumer in-store shopping behavior does not account for the existence of different types of display locations (e.g. storefront, store rear, secondary, front end cap, rear end cap, and shelf displays). This article focuses on accounting for and understanding the impact of various displays on consumer purchase behavior based on the Stimulus-Organism-Response (SOR) theory. Specifically, we study how displays closer to and farther from the main location of the focal category influence consumer purchase behavior. Furthermore, within the different types of displays we investigate the impact of specific types of displays on consumer's category purchase and brand choice and the moderating role of price and discounts. A hierarchical Bayesian model is estimated using scanner panel data for a large U.S. grocery chain that contains unique information on the number of product facings at multiple display locations within a store. We find that displays closer to the focal category have a larger impact, with front end cap displays having the largest impact on category purchase and shelf displays having the largest impact on brand choice. We also demonstrate the synergistic impact of price and discounts in enhancing the impact of displays on consumer purchase behavior and brand choice. Equipped with these findings we propose a display allocation optimization that results in an average increase in revenue of about 11.15% and a strategy to distribute displays across all locations in the store rather than letting one location dominate.     

Perceived assortment and consideration of customized products

Customization in the marketplace has become much more commonplace as information technology and flexible manufacturing systems continue to evolve. Consumer research into customization decisions has subsequently examined the implications of customization as compared to traditional assortment product offerings, finding that customization yields both positive implications for consumer preference matching as well as higher evaluations of retailers, chosen products, and even the process itself. The present research examines the implications that customization of products has on consumers’ decision processes, and on their perceptions of assortment and how they consider products. Two experimental studies suggest that customization decisions may negatively affect consumers’ perceptions of assortment, while also reducing the number of alternatives they consider, and that this in turn may have implications for their evaluation of, and willingness-to-pay for, customized products.     

Bridge,Focus, Attack,or Stimulate: Retail Category Management Strategies with a Store Brand

We investigate a monopolist retailer's category management strategy where the main strategic decisions are how to horizontally position a store brand relative to the incumbent national brands and how to price the store and national brands for retail category profit maximization. We analyze a market composed of two consumer segments with differing tastes and heterogeneity with respect to willingness to pay and a product category consisting of two competing national brands and one store brand. We find that contrary to the existing literature, it is not always optimal for a retailer to position its store brand against the leading national brand; instead there are many situations where it is best to position the store brand close to the weaker national brand or to position it in the “middle” so it appeals to both national brands' target segments. In the process we identify four distinct category management strategies that a retailer can use with a store brand. In three of these the optimal store brand price is the brand's monopoly price, while in the remaining one strategy the price is lower. We also suggest an easy to implement means for a retailer to determine which strategy is best to use, depending on the particular competitive environment present before the introduction of the store brand and the relative quality of the store brand. We find that the store brand entry is most beneficial to the retailer when the national brands are moderately differentiated. Finally we show that introducing a store brand not only allows the retailer to garner a higher share of the channel profits through higher retail margins, but also often provides the retailer the benefit of increases in national brand unit sales as well as incremental sales from the store brand. JEL Classification: M310     

Do shoppers choose the same brand on the next trip when facing the same context? An empirical investigation in FMCG retailing

The most basic manifestation of brand loyalty is repurchasing – making the same choice on the next category occasion. This study tests to which extent the stability of contextual cues across purchase occasions affects repurchasing. We investigate these effects by analyzing a total of 1.6 million brand choice pairs (i.e., two consecutive choices) of 20,587 German and 23,036 British shoppers in three FMCG categories. We find that stable contextual cues (same retailer, basket size or weekday as on previous occasions) further repurchasing whereas unstable contextual cues (different retailer, basket size or weekday as on previous occasions, a promotion chosen on one of the occasions or a different assortment size) hinder repurchasing. Furthermore, our results stress the importance of inertia and the power of private labels to foster repurchasing. This study provides generalizable insights regarding trip-to-trip stability in shoppers’ choices, proposes a metric to benchmark brand performance across multiple retail outlets, and pinpoints opportunities for manufacturer-retailer cooperation in order to nurture repurchasing.     

The Effect of Probabilistic Selling on the Optimal Product Mix

Determination of the merchandize assortment is an important decision for retailers since the composition and depth of the product mix greatly impact both unit sales and costs. This paper considers how Probabilistic Selling (PS), an emerging marketing strategy, impacts the type and number of products a retailer should carry. We find that adopting PS can alter the optimal number of products (i.e., encourage the retailer to offer more or fewer products), depending on demand- and supply-side factors. Furthermore, introducing probabilistic goods sometimes increases the optimal degree of product differentiation and sometimes reduces it. Specifically, less differentiated products are warranted if there are either few or many consumers with extreme tastes, but more differentiation is needed otherwise. Our analysis reveals that PS can serve either as a substitute to new product introduction (because it enables a retailer to serve a diverse market at a lower cost) or as a complement to new product introduction (since, under PS, a new product enables a retailer to offer additional probabilistic goods that utilize this new product as one of its components). In sum, our results indicate that a retailer must adjust its merchandize assortment appropriately in order to fully benefit from probabilistic selling.     

The dark side of up-selling promotions: Evidence from an analysis of cross-brand purchase behavior☆

This research investigates how up- and down-selling promotions affect customers’ cross-brand purchasing and churn behavior at a multi-brand retailer. We employ a hidden Markov model that accounts for the dynamics of customers’ latent brand preferences and attrition and captures the resulting purchase behavior in response to promotional offers. Using data on coupon promotions and purchase transactions from an online retailer, we find that coupons for a higher-end brand increase customers’ likelihood of purchasing the brand. While this suggests that the retailer can increase its short-term revenues by sending coupons for the higher-end brand to customers of the lower-end brand, we find that customers up-sold via coupons are more likely to switch back to the lower-end brand, in comparison to other customers of the higher-end brand, limiting the positive effect of up-selling promotions in the long term. Moreover, lower-end brand customers’ promotion-induced brand switching leads to their increased attrition from the retailer, which negatively affects long-term purchase behavior and revenues. In contrast, when triggered by down-selling coupons, customers’ brand switching does not impact their attrition. Based on these findings, we demonstrate how our model-based approach can assist marketers’ multi-brand couponing decisions.     

Presenting comparative price promotions vertically or horizontally: Does it matter?

This research examines whether spatial differences in presentation of comparative price promotions (vertical vs. horizontal) affect consumers' assessment of price discounts. Results show that when comparative price promotions are presented horizontally, consumers take longer to compute the monetary discount and are less accurate than when such prices are presented vertically. This suggests that cognitive constraints exhibit a larger detrimental effect on performing computations when prices are presented horizontally than vertically. In addition, a constraint on visual resources impacts vertical presentations more while a constraint on verbal resources influences price computations that are presented horizontally.     

The effect of retail assortment size on perceptions,choice, and sales: Review and research directions

We perform a meta-analytic review of the effect of retail assortment size on consumer perceptions, choice, and retail sales/share using a database comprising of 177 studies obtained from 95 academic papers published during 1970–2021. We define assortment size broadly as the total number of distinct alternatives (options) available to the consumer when he/she makes a choice in a product category. This number of alternatives manifest in the form of a number of brands, number of stock-keeping-units (SKUs), or simply number of items such as different colors or packaging. An increase in assortment size can lead to beneficial effects such as assortment preference, perceived choice satisfaction, confidence, freedom, purchase incidence, sales, and profits, as well as negative consequences such as information overload, increased cognitive effort, choice uncertainty, choice difficulty, and hence choice avoidance. Numerous researchers have reported the effect of assortment size on one or more of these factors. We summarize these effects using a metric called assortment size (net) benefit elasticity by positively valuing the beneficial effects and negatively valuing the harmful effects. Assortment size benefit elasticity is defined as the percent change in net benefit for a 1% change in assortment size. Our meta-analysis reveals that the mean assortment size benefit elasticity across 1936 valid elasticity observations is .082, and this effect is moderated by many study design and environmental factors. We also explore nonlinearity in assortment size effect and whether the effect is different for online vs. offline purchasing. Based on these findings, we list 30 characteristics conducive for assortment addition/deletion and specify several directions for future research.     

Expanding to direct channel: Market coverages as entry barrier

A direct marketer can be either a manufacturer selling directly to the final consumers or a retailer that sells an assortment of products from multiple manufacturers. From a manufacturer's point of view, expanding to an online direct channel seems very attractive because intermediaries can be bypassed in reaching final consumers, while the Internet has substantially lowered the entry barrier. With the rapid diffusion of electronic commerce, numerous manufacturers have been considering a direct online channel as an alternative or a supplement to existing retailer channels. However, we observe in the real market that not many manufacturers are fully engaged in online retailing. One major factor frequently mentioned is the conflict with existing dealers who will not be pleased with a manufacturer's attempt to cannibalize their sales. This paper attempts to provide another explanation by comparing theoretical market coverage of manufacturers in a direct channel and a channel with intermediaries. We show that the direct channel can support fewer firms than the traditional retailer channel does, which becomes an effective entry barrier to latecomers. In equilibrium, the products are positively but finitely differentiated in their qualities, and the top two quality tiers would capture more than 75% of the direct channel's market potential (i.e., the “finiteness property”). Thus latecomers would find it difficult to gain a substantial market share against the existing pioneers in the competitive direct market unless they can find other meaningful ways to differentiate horizontally. The sales data of the online retail industry supports our finding.     

Two-Stage Determinants of the Organic Food Retailing Landscape: The Case of Manhattan,New York

Retail sales of organic food products have been increasing faster than any other category of food and have penetrated mainstream retail grocery outlets. The majority of the literature on organic markets explores the socioeconomic characteristics of consumers, linking these traits to the probability of buying organic food, and it suggests that access to organic food is an important but overlooked factor in such studies. More recently, research focusing on food retailer marketing strategies for organic food finds that traditional strategies such as price promotions are largely unsuccessful with increasing sales for the organic food consumer. This article focuses on the retailer decision to offer organic food for sale. We model the decision as a two-stage process, where the retailer’s first decision is whether to sell organic food, and the second decision determines how many different organic products to offer for sale. In doing so, by using data collected in stores, we assess the organic food retail landscape in Manhattan, NY. We find that the decision to offer organic food for sale depends on the neighborhood socioeconomic characteristics, and the amount of organic food offered for sale depends on the size of the store.