Coordinating Multi-Channel Pricing of Seasonal Goods

1. Introduction

The rapid development in internet technologies has provided a powerful avenue for traditional “bricks-and-mortar” retailers to expand their businesses online. The proliferation in the e-business sector is a trend that the traditional retailers cannot ignore. Internet spending is on the rise. According to a report by Forrester Research Inc. (2010), online retail in the US is poised for double digit growth over the next five years. US online retail is projected to grow at 10 percent compound annual growth rate (CAGR) over the next five years to reach nearly $249 billion by 2014. To leverage the benefits of this added business opportunity big names in traditional retailing like Walmart, Target, Bloomingdales have all started their online operations. The greatest advantage in this scenario lies with those retailers who can establish multi-channel coordination between off-line and online business.

Multi-channel selling has pros and cons associated with it. On the positive side, it has broadened the business spectrum for these retailers but it has also complicated the pricing decisions which now require taking into account, simultaneously, demand developments in both the channels. Here we delve into multi-channel business operations and derive pricing policies for a retailer who is selling a seasonal item over the internet as well as in an off-line store. For simplicity we consider only one off-line store and study the problem. Our objective here is to get critical economic insights into multi-channel sales of seasonal items. In this paper we study the pricing problem of seasonal items, which has been a challenge for retailers, in a multi-channel sales scenario. We study how they can optimally apply strategic channel adoption and pricing decisions to maximize profits.

The problem of pricing seasonal fashion items is a difficult task. These items go out of style relatively fast. Through the selling season, these items lose value among customers as they have short usage time associated with them. Setting the time path of prices for these products is critical for the retailers. Retailers who carry seasonal merchandise, such as summer wear or winter garments or fall fashion collection often have to drastically lower the prices. The difference between the regular-price and the actual-sales dollars is often several hundred million dollars for major retailers (Smith & Archabal, 1998). The dilemma faced by the retailer is whether to start with high prices and then give deep markdowns at the end of the season or price the item uniformly through the season. So, in view of the previous considerations, pricing of seasonal goods, through the selling horizon, is of utmost importance to the retailer.

Primary reason a retailer needs to markdown slow selling seasonal items is to open up shelf space for new arrivals and ‘in-demand’ items. In an off-line store shelf space is limited. For the online channel the constraint of limited shelf space is relaxed. The marginal cost of displaying an additional item is negligible in the online channel as compared to the off-line store. Also inventory holding costs are higher for the off-line store as most of them are located in shopping malls and business areas whereas the inventory for the online channel can be stored in a central location with significantly less overhead costs. The cost of changing the prices is also less for the online channel. As pointed out by Bernie Feiwus, senior vice-president of Penny Direct (J.C. Penny):

However, the online channel too has its own limitations. Online retailing is still in a developmental stage. Consumer behavior towards retailing goods is more inclined towards traditional off-line stores that can provide them with the benefit of trying-on the product and experiencing it before buying. Virtual retailing cannot provide this feature. However demand is influenced by the prices charged in the two channels and as customer population becomes more and more price sensitive, strategic pricing decisions can facilitate the retailers in acquiring the maximum profit.