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FORSCHUNGSERGEBNISSE DER
                          W I R T S C H A F T S U N I V E R S I TÄT W I E N

Gottfried Gruber

Multichannel
Management

                              Gottfried Gruber - 9783631753873
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FORSCHUNGSERGEBNISSE DER
W I R T S C H A F T S U N I V E R S I TÄT W I E N

Gottfried Gruber

Multichannel Management
A company operating various sales channels, e.g. the Internet and a traditional
shop, inevitably faces a tricky coordination problem. As prevalent approaches
often do not lead to a satisfying solution, the author suggests a normative model
to offer directions for the optimal channel coordination. The model is based on
stochastic purchase and switching probabilities, given certain conditions like prices
and supportive marketing activities (like delivery time or shop environment). A
company can fit its consumer base to the model and simulate various effects on
its earnings by altering prices or marketing activities. The model is a market-based
playground to develop new holistic strategies for a multichannel company without
affecting the market.

Gottfried Gruber studied economics and computer science (Wirtschaftsinformatik)
at the Vienna University of Technology from 1998–2003. Until 2006 he successfully
completed the Center for Central European Financial Markets Program as well as a
portfolio management program. From 2006 until 2009 he earned a doctor’s degree
at the Vienna University of Economics and Business. During his studies he was
employed at software companies, telecommunication companies, and banks.

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Multichannel Management

                   Gottfried Gruber - 9783631753873
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Forschungsergebnisse der
          Wirtschaftsuniversitat Wien

                             Band 36

                              •
                     PETER LANG
Frankfurt am Main · Berlin • Bern · Bruxelles• New York· Oxford · Wien
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Gottfried Gruber

Multichannel Management
 A Normative Model Towards Optimality

             4
          PETER LANG
   lnternationaler Verlag der Wissenschaften
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Abstract

The thesis deals with pricing strategies for multichannel retailers, especially traditional stores
which additionally manage an online shop. The problem of integrating two sales channels and ap-
plying a well-suited pricing strategy is still an emergent question. This work develops a stochastic
model to represent consumer behavior on pricing. On the one hand the model contains two prob-
ability functions which render consumers' reservation prices for each individual channel. On the
other hand the stochastic model is based on numerous distributions which represent switching
probabilities from and to each separate channel. The various distribution functions will be esti-
mated from the results of a survey. To highlight differences of pricing strategies due to several
product categories a cross comparisons of books, clothes and digital cameras will be presented.
The results show that there are differences in multichannel pricing of the various products. These
inequalities stern from consumers' perceptions of the sales channels. For each product a separate
sales channel is preferred by consumers. Therefore, one channel exhibits some advantage versus
the alternative channels. This advantage is reflected in different pricing strategies. Further appro-
priate marketing strategies could help a firm to counter discounting by its competitors. So firms
should keep an eye on the reservation price structure of its consumers as well as their demanded
marketing activities.

                                              Gottfried Gruber - 9783631753873
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Gottfried Gruber - 9783631753873
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Zusammenfassung

Diese Arbeit beschiiftigt sich mit der Preispolitik im Mehrkanalvertrieb, im Speziellen wer-
den traditionelle Ladengeschiifte die auch einen Onlineshop betreiben untersucht. Die Inte-
gration mehrerer Vertriebskaniile und die Realisierung einer entsprechenden Preisstrategie stellt
noch immer eine kritische Frage dar. In dieser Arbeit wird ein stochastisches Modell en-
twickelt, dass das Einkaufsverhalten der Konsumenten darstellt. Das Model! besteht aus zwei
Wahrscheinlichkeitsfunktionen, die die Reservationspreise der Konsumenten in jedem Vertrieb-
skanal repriisentieren. Ferner basiert das Modell auf mehreren Wahrscheinlichkeitsfunktionen,
die die Wechselwahrscheinlichkeiten zwischen den verschiedenen Kaniilen darstellen. Die un-
terschiedlichen Wahrscheinlichkeiten werden mithilfe einer Umfrage geschiitzt. Differenzen in
der Preispolitik werden anhand von Biichern, Kleidung und Digitalkameras erschlossen.
Die Unterschiede in der Preispolitik starnmen von unterschiedlichen Wahrnehmungen der Ver-
triebskaniile durch die Konsumenten. Fiir jedes Produkt wird ein anderer Kanai von den Kon-
sumenten bevorzugt. Diese Vorliebe ermoglicht unterschiedliche Preisstrategien. Des Weit-
eren kann durch eine angepasste Marketingstrategie besser auf Preisattacken von Mitbewer-
bern reagiert werden. Daher sollten Unternehrnen sowohl die Reservationspreise ihrer Kunden
beobachten als auch deren geforderten Marketinghandlungen anbieten.

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Acknowledgements

Firstly, I like to take this opportunity to thank the people who provided scientific support to make
this work possible.
I would like to express profound gratitude to my advisors Prof. Hans Robert Hansen and Prof.
Kurt Hornik for their invaluable support, encouragement, supervision and useful suggestions
throughout this research work.
I am grateful for the cooperation of two companies by allowing me to publish my survey on
their web presence. I really appreciate the kindness of Mag. Anja Sickinger (thalia.at) and Mag.
Evelyn Thumb (geizhals.al) for their support in advertising my survey. Moreover, I would like to
acknowledge all of my respondents who answered my survey.
My sincere thanks go to many friends and colleagues from the Institute for Management Infor-
mation Systems, Vienna University of Business Administration, for scientific discussion, advice
and continuous support always so greatly appreciated.
Finally, I want to thank my family for their love and support. My parents raised me to believe
that I could achieve anything I set my mind to.

Gottfried Gruber, Fall 2008

                                       Its not that I am so smart.
                              Its just that I stay with problems longer.

                                          (Albert Einstein)

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Contents

1   Introduction                                                                19

2 Literature Review                                                             23
    2.1   Price Levels .                                                        24
    2.2   Price Elasticity                                                      25
    2.3   Price Dispersion .                                                    26
    2.4   Search Costs . . .                                                    27
    2.5   Transactions Costs                                                    27
    2.6   Pricing Strategies .                                                  28
    2.7   Task Definitions . .                                                  31
          2.7.1 Physical Surroundings                                           32
          2.7.2 Social Surroundings                                             33
          2.7.3 Temporal Aspects .                                              33
          2.7.4 Task Definitions                                                34
          2.7.5 Antecedent States .                                             34
    2.8   Reservation Prices .                                                  35

3   Research Scope                                                              37
    3.1 Discussion of Conditions                                                38
    3.2 Discussion of Strategic Decisions                                       39
    3.3 Market Model . . . . . . .                                              40

4   Conceptual Consumer Model                                                   43
    4.1 Demographics .                                                          44
    4.2 Product ....                                                            44
    4.3 Shopping Goal                                                           46
    4.4 Latent Demand                                                           47
    4.5 Formation of Reservation Prices                                         49
    4.6 The Product-Shopping Goal Link.                                         50

s   Basic Model                                                                 51
    5.1 Reservation Prices .                                                    52
    5.2 Intra-Firm Switching                                                    55
    5.3 Inter-Firm Switching                                                    58
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12                                                                       CONTENTS

     5.4   Assembling the Model                                                      59
     5.5   Expected Value                                                            63
     5.6   Price Elasticity .                                                        68

6 Basic Model - Refined                                                              73
  6.1 Influence of Marketing                                                         73
       6.1.1 Strategic Scope .                                                       75
       6.1.2 Product Policy .                                                        77
       6.1.3 Communication Policy                                                    81
       6.1.4 Distribution Policy                                                     83

7 Simulation Model                                                                   85
  7.1 The Firm Side .                                                                86
  7 .2 The Consumer Side                                                             87
  7 .3 Scenarios . . . . .                                                           87
  7.4 The Beta Distribution                                                          88
  7 .5 Estimating Beta Distributions with Maximum Likelihood .                       89

8 Methodology                                                                        91
  8.1 Survey . . . . . . . .                                                         91
  8.2 Sample Constitution .                                                          92

9    Results Books                                                                   95
     9.1 Marketing Strategies                                                        97
     9.2 Elasticity . . . . . .                                                     100
     9.3 Mean and Variance .                                                        102
     9.4 Consumer Drift Dynamics                                                    103
     9.5 Pricing . . . . . . . . . . .                                              107

10 Results Clothes                                                                  111
   10.1 Marketing Strategies                                                        113
   10.2 Elasticity . . . . . .                                                      117
   10.3 Mean and Variance .                                                         118
   10.4 Consumer Drift Dynamics                                                     118
   10.5 Pricing . . . . . . . .                                                     122

11 Results Digital Cameras                                                          125
   11.1 Marketing Strategies                                                        128
   11.2 Elasticity . . . . . .                                                      130
   11.3 Mean and Variance .                                                         132
   11.4 Consumer Drift Dynamics                                                     132
   11.5 Pricing . . . . . . . . . . .                                               136

12 Cross-Comparison                                                                 139
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CONTENTS                                                                         13

13 Conclusion and Limitations                                                   143
   13.1 Conclusion                                                              143
   13 .2 Limitations . . . . . . .                                              144

A Detailed Tables                                                               159
  A.I Books . . .                                                               159
  A.2 Clothes ..                                                                171
  A.3 Digital Cameras .                                                         183

B Questionnaire                                                                 195
   8.1   Internet Usage .                                                       195
   8.2   Shopping Behaviour                                                     195
   8.3   Personality Traits .                                                   197
   8.4   Purchase Behavior                                                      197
   8.5   Demographic ...                                                        203

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List of Figures

 2.1    Influences on the Basic Model                                             24
 2.2    S-O-R Model (Belk 1975) ..                                                31
 2.3    Parameters of Task Definitions                                            32

 3.1    Elements of the E-Commerce Business Model (Hansen 1998) .                37
 3.2    Market Model . . . . . . . . .                                           40

 4.1    Conceptual Consumer Model .                                              43

 5.1    Probability Density Function of Offline Reservation Prices               54
 5.2    Probability Density Function of the Switching Probability from the On-
        line Channel to the Offline Channel ...................                  57
 5.3    Switching Probabilities of the Online Channel Consumer Base of Firm I    59

 6.1    Additional Dimensions of the Refined Model (Hansen 2005)                 75

 8.1    Age Structure . . . .                                                    92
 8.2    Educational Structure                                                    93

 9.1    Frequency of Relative Price Statements                                   96
 9.2    Importance of Marketing Attributes Offline                               98
 9.3    Importance of Marketing Attributes Online                                99
 9.4    Price Elasticity versus the Offline Price of Firm 1                      IOI
 9.5    Consumer Drift Dynamics .......                                          104

 10.1   Frequency of Relative Price Statements                                   112
 10.2   Importance of Marketing Attributes Offline                               114
 10.3   Importance of Marketing Attributes Online                                115
 10.4   Price Elasticity versus the Offline Price of Firm 1                      117
 10.5   Consumer Drift Dynamics ..........                                       120

 11.1   Frequency of Relative Price Price Statements                             126
 11.2   Importance of Marketing Attributes Offline                               128
 11.3   Importance of Marketing Attributes Online                                129
 11.4   Price Elasticity versus the Offline Price of Firm 1                      131
 11.5   Consumer Drift Dynamics . . . . . . . . . . . .                          134
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List of Tables

 7. l    Simulation Scenarios . . . . . . . . .                                        88

 9. l    Parameters for the Beta Distributions .                                       97
 9.2     Optimal Marketing Investments                                                JOO
 9 .3    Structure of the Reservation Prices                                          102
 9.4     Initial Offset Values .                                                      104
 9.5     Results Summary . . . . . . . . .                                            108

 l 0.1   Parameter for the Beta Distribution .                                        I 13
 10.2    Optimal Marketing Spending . . .                                             I 16
 10.3    Structure of the Reservation Prices                                          118
 l 0.4   Initial Offset Values .                                                      119
 10.5    Results Summary . . . . . . . . .                                            123

 11.1    Parameter for the Beta Distribution .                                        127
 11.2    Optimal Marketing Spending . . .                                             130
 11.3    Structure of the Reservation Prices                                          132
 11.4    Initial Offset Values .                                                      133
 11.5    Results Summary . . . . . . . . .                                            137

 A.I     Elasticity Scenario a (Poi = 0.5,pn2 = 0.7,po2 = 0.6)                        159
 A.2     Elasticity Scenario /3 (Poi = 0.4,pn2 = 0.2,po2 = 0.3)                       160
 A.3     Consumer Decomposition Scenario a (Poi= 0.5,pn2 = 0.7,po2 = 0.6)             161
 A.4     Consumer Decomposition Scenario /3 (Poi = 0.4,pn2 = 0.2,po2 = 0.3)           162
 A.5     Scenario l (pn2 = 0.10001, po2 = Po2 , Sn2 = l, So2 = 0)                     163
 A.6     Scenario 2 (pn 2 = p13i, po2 = 0.1000 I, SB2 = l, So2 = 0)                   164
 A.7     Scenario 3 (pn2 = 0.10001,po2 = po2 ,Sn2 = 0,So2 = l)                        165
 A.8     Scenario 4 (pn2 = ps2,po2 = 0.10001,Sn2 = 0,So 2 = 1)                        166
 A.9     Consumer Drift Scenario 1 (pn 2 = 0.10001,po2 = po2,Sn2 = l,So2 = 0)         167
 A.IO    Consumer Drift Scenario 2 (pn2 = PBi ,po2 = 0.10001,Sn2 = l, So2 = 0)        168
 A.11    Consumer Drift Scenario 3 (pn2 = 0.1000 I, po2 = Po 2 , Sn2 = 0, So2 = l)    169
 A.12    Consumer Drift Scenario 4 (PB2 = PB2,P02 = 0.10001,SBi = 0,S02 = l)          170
 A.13    Elasticity Scenario a (Poi = 0.5, PBi = 0. 7, po2 = 0.6) . . . . . . . . .   171
 A.14    Elasticity Scenario /3 (Poi= 0.4,pn2 = 0.2,po2 = 0.3) . . . . . . . . .      172
 A.15    Consumer Decomposition Scenario a (po 1 = 0.5,p82 = 0.7,po2 = 0.6)           173
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18                                                                    LIST OF TABLES

     A.16   Consumer Decomposition Scenario /3 (po, = 0.4,pn2 = 0.2,po2 = 0.3)         174
     A.17   Scenario 1 (pn 2 = 0. 10001 ,Po2 = po2,;n2 = 1, ;02 = 0)                   175
     A.18   Scenario 2 (pn2 = p'"n2,po2 = 0.10001,;B2 = l,;02 = 0)                     176
     A.19   Scenario 3 (PB2 = 0.10001,Poi = P02,;B2 = o,;02 = 1)                       177
     A.20   Scenario 4 (PB2 = PB2,P02 = 0.10001,;B2 = o,;02 = 1)                       178
     A.21   Consumer Drift Scenario 1 (PBi = 0.10001,po2 = po2,;B2 = l,;02 = 0)        179
     A.22   Consumer Drift Scenario 2 (PBi = PB2,po2 = 0.10001,;B2 = l,;02 = 0)        180
     A.23   Consumer Drift Scenario 3 (PBi = 0.10001,po2 = pa2,;B2 = 0,;02 = 1)        181
     A.24   Consumer Drift Scenario4 (PBi = PB2,po2 = 0.10001,;B2 = 0,;02 = 1)         182
     A.25   Elasticity Scenario a (po, = 0.5,PBi = 0.1,po2 = 0.6) . . . . . . . . .    183
     A.26   Elasticity Scenario /3 (po, = 0.4,PBi = 0.2,po2 = 0.3) . . . . . . . . .   184
     A.27   Consumer Decomposition Scenario a (po, = 0.5,pn2 = 0.1,po2 = 0.6)          185
     A.28   Consumer Decomposition Scenario /3 (po, = 0.4,PBi = 0.2,po2 = 0.3)         186
     A.29   Scenario 1 (PBi = 0.1000l,po2 = po2,;B2 = l ,;02 = 0)                      187
     A.30   Scenario 2 (pn 2 = PB2,po2 = 0.10001,;B2 = l,;02 = 0)                      188
     A.31   Scenario 3 (PBi = 0.l0001,po2 = Po2,;B2 = 0,;02 = 1)                       189
     A.32   Scenario 4 (PB 2 = Pih, Po2 = 0.10001, ;n2 = 0, ;02 = 1)                   190
     A.33   Consumer Drift Scenario 1 (pn 2 = 0.10001,po2 = po2,;B2 = l,;02 = 0)       191
     A.34   Consumer Drift Scenario 2 (pB2 = PB2,po2 = 0.10001,;B2 = l,;02 = 0)        192
     A.35   Consumer Drift Scenario 3 (PBi = 0.10001,po2 = po2,;B2 = 0, ;02 = 1)       193
     A.36   Consumer Drift Scenario 4 (PBi = PB2,po2 = 0.10001,;B2 = 0,;02 = 1)        194

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