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Working Paper

Building with Bricks and Mortar: The Revenue Impact of Opening Physical Stores in a Multichannel Environment

Koen Pauwels and Scott A. Neslin, 2008 [08-101]

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A crucial decision firms face today is which channels they should make available to customers for sales transactions. Here, Koen Pauwels and Scott Neslin assess the revenue impact of adding bricks-and-mortar stores to a firm’s already existing repertoire of catalog and Internet channels. They seek to advance knowledge on the impact of channel addition in four ways: first, by examining specifically how the addition affects the frequency and size of purchases, returns, exchanges, and customer acquisition; second, by turning attention on the store channel as opposed to the currently more widely studied Internet channel; third, by investigating the role a firm’s marketing efforts play in producing this impact; and fourth, by using a multivariate baseline approach to quantify the impact.

The study uses data from a retailer of durables and apparel that hitherto has sold predominantly through catalogs and, increasingly, through the Internet. The authors observe the orders, returns, exchanges, and catalogs and e-mails received for customers living within 50 miles of at least one of the three newly opened stores, for the period from January 1997 through November 2002, a total of 309 weeks. Their analysis reveals that returns and exchanges shifted to the store channel and increased, with the increase in extra sales that occur when customers come in to make exchanges offsetting the loss from increased returns.

The net impact of adding the store channel was to increase revenues by 20%, with the majority of this increase being attributable to higher purchase frequency. As hypothesized, catalog sales were cannibalized and the Internet channel was unaffected. From a customer management perspective, adding the new channel benefited the retailer through increased customer retention, manifested in more frequent customer–firm contacts. These findings yield a deeper understanding of the revenue relation between channels, of how new channels affect the customer’s relationship with the firm, and of the cross-channel effects of marketing actions.

About the authors
Koen Pauwels is an Associate Professor and Scott A. Neslin is the Albert Wesley Frey Professor of Marketing, both at the Tuck School of Business Administration at Dartmouth College.

Included in the following collections:
MSI Reports 2008
Executive Director's Letter 08-001

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