Research Spotlight

When ‘Showrooming’ hurts: Strategies for protecting retailers’ profits

Professor Amit Mehra’s paper co-authored with Professors Subodha Kumar and Jagmohan Raju on “Showrooming and the Competition between Store and Online Retailers” was among the top five papers nominated for the best paper award based on reviewer feedback in the workshop on Information Technology and Systems at Orlando, December, 2012. Professor Mehra presents a summary of his paper.

Customers often scan stores for identifying products before purchasing it online. For example, customers may use the popular US store Target to evaluate a product but then purchase the same at Amazon's online store if Amazon sells the selected product at lower prices. This trend, referred to as “showrooming” seems to be on the rise. A recent report at emarketer summarises that electronics, apparel, toys and books are the main categories where about half the customers engage in showrooming behaviour. This free riding behaviour by customers adversely affects profits of brick and mortar retailers (BM) such as Target.

Hence, our primary focus in this paper is on exploring strategies that can be employed by a BM retailer to protect its profits when customers engage in showrooming. The suggested solutions are different ways-and-means to contain showrooming. One possibility is for the BM store to match the prices set by the online store. This eliminates the price advantage to customers practicing showrooming. Another possibility is to create situations such that the product identified by customers as their best fit after evaluating at the BM store cannot be found easily at the online store, thus dissuading them from engaging in showrooming. The BM store may do this by managing a distinct assortment of products that cannot be found at the online retailer. Such a strategy may be particularly applicable if BM retailers utilise their local knowledge to focus on product assortments that cater to local tastes. BM retailers can also create exclusive supply contracts; Target is discussing such a possibility with its suppliers. Another option is to make product comparisons difficult across the website of the BM and the online retailers. For example, Best-Buy and Costco created their own bar codes of products to make it harder to compare products by scanning bar codes using smartphones and using this data to check for product availability in the online store through mobile apps. Finally, BM retailers may charge customers who visit their premises, but do not make a purchase. This imposes a penalty on showrooming customers and would serve to dissuade the practice. There is some evidence that specialty ski retailers are already utilising this approach. Many retailers such as Costco already issue paid subscription cards that customers must get validated before entering the store premises. Another option is that stores can also charge a parking fee for visiting the premises. The obvious disadvantage of these approaches is that customers who visit the BM store to buy products are also penalised and this may dissuade them from visiting the BM stores. However, this problem can be easily solved by giving discounts or reward points, or reimbursing the parking fee when customers make a purchase. While all these strategies can be effective in reducing showrooming by various degrees, they also alter the incentives of online retailers who may react to these strategies by changing their prices. Hence, one has to evaluate whether these strategies can improve BM store profits taking into account the reaction of the online retailer.

We conduct such an analysis using game-theory. To summarise our paper, we analyse three strategies that may improve profits for the BM store retailer: (a) price matching, (b) making product matching harder across the two retailers, and (c) charging customers for showrooming. We show that only the last two strategies may, under certain situations, improve a BM retailer’s profits.