Demand-Enhancing Services for Tangible Products in a Distribution System With Online and Off-Line Channels

Abstract

Services such as delivery, warranty, and product returns that are bundled with various tangible products play a critical role in their market performance. As manufacturers strive to streamline operations and deliver consistent services across channels, this article analytically examines whether those who sell their products directly online and off-line through retailers should direct control, delegate to retailers, or outsource to third parties the delivery of these services. Our main findings are as follows. Manufacturers should not outsource demand-enhancing services to third parties if they do not ensure relatively low operating costs, as they reduce the level of service provided to customers. Assuming no channel partner has a cost advantage in service delivery, manufacturers should directly control the provision of services that are used identically by online and off-line customers. Manufacturers may not be able to directly and cost effectively offer services that are used differently by online and off-line customers. In such a context, depending on the relative sizes of off-line and online market bases, retailers may be considered either as single providers of the service for both online and off-line customers or jointly with manufacturers as providers for off-line customers only. We discuss the implications of these findings.