The cost of a broken promise: Understanding and mitigating the impact of failure in online retail

Abstract

Retailers have long struggled with failure, i.e., the inability to supply the items that customers demand, when they demand them. In online grocery retail there is often a delay from the time an order arrives until it is picked in the store, which increases the risk of not fulfilling the customer order. Consequently, customers commonly receive orders where products have been substituted, where products are only partially fulfilled, or where products have been removed from the order all together. Upon these failures, the customer may change its future purchase behavior by purchasing less frequently, or making purchases of lower value. Using data from the online operation of a large grocery retailer, we evaluate the impact of failure on future purchases. We find that while failure has a minimal impact on churn, it severely impacts both the time until the customer makes the next purchase and the basket value of that purchase. For each failed item, customers wait a quarter of a day longer for their next purchase, and this purchase has a basket value that is 0.7\% smaller. We show that this impact depends on the product and customer characteristics. We also explore the role of the retailer responses to mitigate the effect of failure. We find that partial fulfillment and substitutions help the retailer control lost sales at the moment of purchase, but also negatively impacts the customer’s future purchase behavior. Based on these insights, we evaluate alternative policies to manage inventory and show that by selectively improving the service level for certain products and/or customers, retailers can substantially improve their revenue figures with minimal increase in inventory cost.

Keywords: Out-of-stocks; Online Retail; Empirical Analysis; Home Delivery