Logistics and Pricing Interface During the Coronavirus Crisis

Fast, cheap and on-demand delivery has been a common requirement in e-commerce until the COVID-19 disrupted the normal way of life and business. In this post, we will talk about the processes of order fulfilment and pricing during the coronavirus crisis and how retailers can react to the new disruptions. 

Photo by Alphaspirit

First things first, regardless of coronavirus crisis operating both online and offline channels is critical for retailers. The researchers show that the integration of both offline and online channels is among the best practices in retailing management(Felipe Caro et al., 2019). And for those retailers who are still offline, the coronavirus crisis is a loud wake-up call to go digital without delays as the businesses need revenue right now. 

Now with the social isolation measures, the demand of offline customers shifted online. In Europe, the online traffic of supermarket sited soared by 164.4% in March in comparison to previous months of this year (ContentSquare, March 26, 2020)]. The surge in the delivery requests can be seen in image 1 which illustrates the search queries for home delivery. However, today the lead time for a delivery request is more than 1-2 weeks, which indicates that the delivery services are out of capacity.  

Image 1. Relative popularity of searches for delivery from a large grocery shop in the Netherlands. Used query: “Albert Heijn Delivery", time interval: last 3 years, source: https://trends.google.com/

We can see that the demand is high, and customers are struggling in getting products while the delivery capacity is limited as the distribution system has not been prepared for such a crisis. Below we discuss two mutually supportive approaches to tackle this problem of delivery capacity/demand tensionThe first one is the increase of the delivery capacity by the integration of multiple delivery channels. The second is the balance of the demand by employing smart pricing mechanisms. 

Delivery

The flexibility of logistics capabilities may be the solution for operations during the crisis and after. For this retailer may employ the combination of delivery channels, such as home delivery, delivery to pick up points, automated boxes, car trunk, etc. Clearly the remote delivery, for example, delivery to pick up points is much more flexible than the home delivery. To double the capacity of pickup point, the retailer needs to double the number of pickup shoppers, while the same increase in home delivery capacity requires doubling of the vehicle fleet, which is intractable for most of the retailers. Therefore, using remote delivery to pick up points may be a flexible way to satisfy volatile demand before, during and after crises, such as the corona crisis. 

Enabling delivery via integrated channels requires specific measures: 

  • The merge of the information from all channels: the product sold out offline also sold out online 
  • Redesign of vehicle routes (vehicle may need to visit just one pickup point to serve many customers, however, it needs to be done efficiently) 
  • Design of pickup point operations (how the orders may be collected safely both by pickup shopper and by customers) 
  • Pricing of delivery channels (delivery to pickup point may be preferable for the retailer, then home delivery) 
  • Consideration of different needs of customers, for example, elderly people in need of home delivery, while younger adults agree with walking to the pickup point if there is no other alternative 
  • Establishing flexible cloud-type of servers, to support the work of mobile applications and website 

Pricing

Being able to fulfil the generated demand is not only dependent on the available logistic capabilities, but also on the demand management in a desirable way using pricing strategies. In this regard, some tips to make the pricing decisions compatible with delivery capacity are provided for the omnichannel retailers: 

  • Flexible pricing in the form of dynamic and regional pricing is an efficient way to distribute the demand in a way that retailers can meet the demand using the available logistics capabilities and improve the profit by creating new opportunities. For example: 
    • Providing attractive offers during the off-peak hours frees up the capacity for the peak time. This differentiation could take place based on locations as well by offering promotions to shift the customers to less busy delivery points. 
    • Although almost all the regions are affected by a coronavirus, the severity of the infection is not the same everywhere. Motivating the customers in the area with less restrictive measures to purchase the products from stores by providing effective promotions makes the retailers able to dedicate the delivery capacity to the more affected regions.  
    • In the case of sufficient logistics capability in some regions and time spots, trying to look for new opportunities and improve the market share by offering great deals may compensate for the lost sales in other regions currently and make profitable relationships with customers in long run. Moreover, people in different regions may have different behaviours and preferences which should be considered while offering promotions and pricing.  
  • Setting different prices for different services can help to cope with the limited delivery capacity. For example, charging for expedited deliveries shifts some customers to go for fast deliveries only when it is necessaryMoreover, such segmentation based on the provided values and price sensitivities leads to opportunities for improving the profit and offsetting the losses in other cases. Additionally, offering advantages like bonus coupons, free products, and discounts makes the long lead times less unpleasant. 
  • Note that in the case of offering promotions, reducing the prices is not recommended, since it will be difficult to come back to the previous prices when the crisis is over, due to changing the customer expectations. Price reduction could also erode the brand image. Moreover, if the retailer is going to provide offers in the desirable channel, various prices across different channels may make problems because of transparency and the omnichannel pricing strategy (which is defined as the same price in all channels). Therefore, it is suggested to differentiate using the other types of promotions rather than price cut such as loyalty card, subscription, an extra amount for free which leads to future growth as well.    
  • If reducing the price of products is the only way to offer promotions in some cases to be profitable and perform consistent with logistics capabilities, it is recommended to do so for low-value products. The high-value products can be sold through the other kind of promotions which make them visible and attractive across channels without discount. Additionally, if the discounts are provided, it should be clarified that this is only during the current tough time and not always to retain the worth in customers’ minds. Another option is to provide special offers at lower prices than the regular products to demonstrate understanding the customers during the tough situation while keeping the brand value. 
  • Setting minimum order quantities or establishing incentives such as free delivery or discounts for those who purchase certain amount, could be useful to reduce the frequency of visiting the customers and prevent them to order separately which makes the usage of logistic capabilities efficient and decreases the processing costs. 
  • Increasing demand for home deliveries may cause retailers to think about increasing the prices to gain more profit. Although this strategy may seem to work during the crisis, it will lead to losing customers when the situation gets normal.  
  • Besides considering the demand fulfilment in the current situation, the retailer should be aware of competitions and the available opportunities in this period to attract long term and valuable customers. It is important to monitor the competitors’ reactions and being ready to respond correctly during and after the crisis. Note that customer behaviour may change significantly after the coronavirus crisis and historical data about their way of shopping will become obsolete. Therefore, retailers should monitor the customers’ behaviours carefully and learn about upcoming trends as much as possible to be able to price the products and services efficiently after the pandemic. 

This post was written by Somaye Torkaman and  Albina Galiullina, early-stage researchers within the PERFORM project.

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