Estimating Substitution and Basket Effects in Retail Stores: Implications for Assortment Planning

Many retailers are reducing store footprint and downsizing their assortments accordingly to improve store productivity. Some of the revenue for items removed from the assortment may be recouped by substitution, but also some of the revenue for items kept in the assortment may be lost due to basket abandonment. For a practical setting where baskets may contain any subset of items from thousands of products, estimating both substitution and basket effects is a challenge. To address this, we develop a demand model that combines a multinomial logit (MNL) model to estimate substitution within a subcategory and a purchase-incidence model to estimate basket retention. Using transaction and product availability data from 12 stores of an office supplies retail chain that were dramatically downsized from large- to small-format stores, we show that (i) storewide basket effects are substantial (our model with basket effects predicts out-of-sample transactions with mean absolute percent error (MAPE) of only 7% compared with 22% for a model with only substitution effects), (ii) poor service level can significantly exacerbate lost profit due to abandoned baskets at these stores, and (iii) consideration of the basket effect in assortment selection for the small stores can significantly improve basket retention and increase profits (by up to 16%) at these stores. This paper was accepted by Vishal Gaur, operations management.

An algorithm to fit conditional tail expectation regression models for vehicle excess speed in driving data

Marketers are faced with the daunting challenge of identifying insights anddelivering the right combination of online and offline tactics to engageconsumers at various stages along the consumer journey. In this paper, weinvestigate the effects of retargeting in a multichannel environment. Using athree-stage modeling approach, we find retargeting is an effective advertisingactivity to influence purchase incidence, but only when combined with otherspecific marketing activities. While catalogs and emails have positivesynergies with retargeting, website visits and retargeting have a negativesynergy on a consumer’s decision to make a purchase. One possibleexplanation to the negative synergistic effect is that consumers may findretargeting obtrusive when browsing online, whereas it may serve as awelcome reminder when, combined with emails or catalogs. Rather thannudging consumers along the consumer journey some combinations ofadvertising activities may actually deter customers from engaging with a firm.

Free Shipping Promotions and Product Returns

Free shipping promotions have become popular among online retailers. However, little is known about their influence on consumers’ purchases, return behavior, and, ultimately, firm profit. The authors propose that free shipping promotions encourage customers to make riskier purchases, leading to more product returns. They estimate the impact of these promotions on purchase incidence, high-risk and low-risk spend, and return share. The results show that free shipping promotions increase expenditure for high-risk products, expanding their share of the consumer’s market basket and thus increasing the overall return rate. This is validated in a field experiment. A field test and an online lab experiment analyze the mechanism linking free shipping and returns. The results suggest that the free shipping effect occurs through consumers’ perceptions that free shipping serves as a risk premium compensating them for potential returns and through positive affect generated by the promotion. A simulation shows that for the focal firm, free shipping promotions increase net sales volume, but higher product returns and lost shipping revenue render these promotions unprofitable.

Dynamic Impact of Unprofitable Cross-buying on Purchase Incidence and Purchase Amount

This study investigates how unprofitable cross-buying, defined as the tendency to buy different product categories during price promotion, affects consumer decisions of whether and how much to buy in the short- and long-term periods. We utilize a type II Tobit model of purchase incidence and purchase amount and apply the model to purchase history data of an online shopping mall’s customers to capture the dynamic impacts of unprofitable cross-buying. The results reveal that unprofitable cross-buying behavior leads to lower purchase probability and purchase amount in the short-term. On the contrary, in the long-term, unprofitable cross-buying behavior appears to have positive impacts on both behavioral outcomes. Additionally, we also discovered the significant effects of customer characteristics and time variables on the extent to which customers engage in this behavior. Theoretical and managerial implications of these findings are discussed.

Online Shopping Malls: Behavioral Impacts of Short- and Long-term Store Loyalty

This study addresses how customers develop loyalty toward focal stores within an online shopping mall, and how this construct affects behavioral mall loyalty in both the short- and long-term. We employ a type II Tobit model to dynamically capture the short- and long-term impacts of store loyalty on purchase incidence and purchase amount. We further embed this model within a model of store loyalty formation to elucidate its driving factors. Applying the models to purchase history data of new customers in an online shopping mall, we observe that store loyalty has an immediate negative effect on purchase incidence; however, given a purchase, this variable increases the purchase amount in the long-term. Additionally, the formation of store loyalty appears to be significantly affected by gender, age, cumulative purchase amount, cumulative purchase frequency, and time trend. We discuss the implications of these findings for mall owners in an effort to increase revenue contribution of their tenants.