Building with Bricks and Mortar: The Revenue Impact of Opening Physical Stores in Multichannel Environment,” Working paper

A crucial decision firms face today is which channels they should make available to customers for transactions. We assess the revenue impact of adding bricks-and-mortar stores to a firm’s already existing repertoire of catalog and Internet channels. We decompose the revenue impact into customer acquisition, frequency of orders, returns, and exchanges, and size of orders, returns, and exchanges. We use a multivariate baseline method to assess the impact of adding the physical store channel on these revenue components. As hypothesized, cannibalization occurs for catalog sales, not for Internet sales, and for purchase frequency, not for order size. Moreover, returns and exchanges shift to the new channel. However, the “availability effect ” (precipitating an overall increase in purchase frequency) more than compensates for cannibalization: the net effect of adding the store channel is to increase revenues by 20%. Our findings yield a deeper understanding of the revenue relation between channels, and of the dynamic cross-channel effects of marketing actions