Brick-and-mortar or brick-and-click? The influence of online customer reviews on a retailer’s channel strategy

Abstract

Adding an online channel generates more information about consumers’ preferences for particular products (e.g., through online customer reviews), and this information can be used to forecast demand more precisely. In this article, we investigate the influence of online customer reviews on a retailer’s decision to add to its physical store channel an online channel with a supply chain consisting of that of a brick-and-mortar retailer and a third-party logistics provider. We find the retailer’s optimal channel strategy (store only or online plus store) will be jointly affected by the additional cost of establishing an online channel, the increase in market size that is attained by adding the online channel, as well as the additional value of information revealed by online customer reviews. Interestingly, under both differentiated and uniform pricing strategies, when the fixed cost is moderate, the retailer benefits from adding an online channel if the additional value of information and the increase in market size exceed some thresholds; otherwise, doing so cannot increase the retailer’s profit. However, when online customer reviews exert two effects on updating demand uncertainty, negative (positive) customer reviews will reduce (increase) the value of information, and the retailer will be inhibited from adding (induced to add) an online channel. Moreover, a larger degree of risk aversion on the part of the retailer will inhibit the retailer from adding an online channel.

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