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How Physical Stores Enhance Customer Value

How Physical Stores Enhance Customer Value

Jonathan Z. Zhang, Chun-Wei Chang and Scott A. Neslin

While some traditional offline retailers are struggling and are closing stores (e.g., Macy’s, Walgreens), online retailers are opening them (e.g., Amazon, Warby Parker). This conflicting trend raises the question, what is the physical store’s role in today’s multichannel environment? 

In a new study published in the Journal of Marketing, our research team posits that products differ in the inspection depth – “deep” or “shallow” – customers require to purchase them. We propose that physical stores provide the physical engagement customers need to purchase deep products. 

Drawing from the theory of experiential learning, we posit this role is to enhance customer value by providing the physical engagement needed to purchase deep products – products that require ample inspection in order for the customer to make an informed decision. 

To test our thesis, we conducted three studies using different methods and samples. First, we used transaction data from a national multichannel outdoor-product retailer. Then, we followed up with two lab experiments that demonstrated the same effect. 

Our large-scale transactional data involving 50,000 customers show that by using a “deep products in-store” promotional strategy to migrate new customers from a “low-value state” to a “high-value state,” average spending per trip increases by 40%, long-term sales increases by 20%, and profitability increases by 22%. 
 
Our experiments show that: 

  • By onboarding new customers to purchase a “deep product in-store” as their first purchase from a new retailer, their re-patronage intention for this retailer increases by 12% compared to all other product/channel combinations. 

  • By directing new customers to purchase a “deep product in-store” as their first purchase from a new retailer, we find that 1) they are more likely to buy deep products in the future online, indicating that they generalize trust across channels; and 2) they are also more likely to buy adjacent categories online, indicating that they generalize trust across categories. 

The last decade has witnessed a marked increase in the opening of physical stores by online retailers, despite myriad changes in the retailing environment. This attests that our findings are not ephemeral. The general lesson of our research is for retailers to create a concrete, tangible, and multi-sensory experience for customers buying products that require this physical engagement. This sets the stage for favorable experiential learning and increased customer value. They can do this in numerous ways: 

First, when retailers find that a customer is buying deep products online but their spending is decreasing in value, they can provide a promotion for deep products in-store. Our marketing simulations show this can increase customer value. 

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Second, retailers need to enhance physical engagement for deep products through merchandising and training sales personnel to walk customers through the engagement – e.g., by helping customers try and use deep products in-store. 

Third, retailers cannot infer product inspection depth solely from predefined product categories because there is much variation in inspection depth within a particular category. Rather, management should infer inspection depth using our proposed measures, or expert, independent judges. 

Fourth, we recommend retailers use a deep/offline onboarding strategy for new customers. That is, they should use acquisition channels that encourage the first purchase to be deep/offline. 

Properly managing customers’ onboarding experience and using the right channel and right product promotional strategy in a customer’s relationship can enhance long-term customer loyalty and increase sales and profitability. 

Our general lesson also speaks to recent developments in retailing. We discuss related issues such as using stores versus showrooms; fielding full or limited staff; selling private label goods; designing loyalty and buy online, pickup in-store (BOPIS) programs; and leveraging technology to create physical engagement in online settings.

Read the full article

From: Jonathan Zhang, Chunwei Chang, and Scott Neslin, “How Physical Stores Enhance Customer Value: The Importance of Product Inspection Depth,” Journal of Marketing.

Go to the Journal of Marketing

Jonathan Z. Zhang is Assistant Professor of Marketing, Colorado State University, USA.

Chun-Wei Chang is Research Scientist, Amazon Inc, USA.

Scott A. Neslin is Albert Wesley Frey Professor of Marketing, Dartmouth College, USA.