The Value of Rapid Delivery in Online Retailing

Abstract

For online retailers who sell physical goods, every transaction has two main components: the physical product and the services by which the retailer facilitates the transaction. Delivery speed is arguably the most important service component for online retailers, and for this reason, many retailers are taking steps to improve delivery speed. Despite this emphasis on delivery speed, we are aware of no empirical studies that demonstrate the economic value of faster delivery for an online retailer. We use a quasi-natural experiment -- the opening of a new online distribution center (DC), which shortened the delivery time for a group of western U.S. customers of a leading U.S. apparel retailer -- to estimate the impact of faster delivery on revenue. We show that revenue from the impacted customers increased approximately 4 percent on average after the new DC opened, with the revenue increase varying inversely with distance from the new DC. Our analysis shows that the revenue increase mainly comes from customers placing orders more frequently and buying more expensive items after the new DC opened. Our results show that the second DC added to profit because the margin on additional sales plus a reduction in shipping costs for western customers exceeded the fixed cost of having a second DC.

Keywords: retail operations, online fulfillment, business analytics, online retail, empirical operations management