Optimal Strategies of the Online-to-Offline Instant Delivery Service of Grocery Retailers

Abstract

The advantages of an O2O instant delivery service over the traditional retail model for grocery retailers in the local market lie in the ability to increase sales by expanding consumer channels. This study aims to explore how merchants can optimize their pricing and delivery service decisions, including order delivery fees, range, and starting price, to maximize profit with the adoption of instant delivery services. Using the Stackelberg game model, the research examines the retailers’ optimal decision-making within the classical Hotelling linear city model while considering a more realistic cost differentiation between online and offline services. The analysis incorporates variations in the number of consumer purchases and geographic locations. The study finds that increasing product prices while maintaining zero delivery fees consistently outperforms charging delivery fees while keeping prices constant in terms of their impact on retailers. Additionally, rarely-discussed aspects like starting delivery price and delivery range are also considered. Comparing parameter variations between the traditional retail model and the O2O instant delivery model leads to three primary conclusions. Firstly, the cost disparity between online and offline services significantly affects the optimal price and profit for the retailer. Secondly, when the cost of online service is slightly higher, setting a starting delivery price can enhance retailers’ profits compared to not having a starting price. Finally, the study outlines three strategies for implementing the O2O instant delivery model and suggests that defining a reasonable delivery range can help merchants reduce costs, improve delivery efficiency, and ultimately increase profits.