Offline-Online Retail Collaboration via Pickup Partnership

What the paper says

We study a growing retail strategy called pickup partnership, where online retailers partner with physical stores to offer in-store pickup services. In practice, two main policies are used in these partnerships: (i) a fixed fee policy, where the retailer pays the offline partner a set fee per pickup order, and (ii) a coupon policy, where customers receive a coupon for use at the offline partner’s store with each pickup order. Our goal is to evaluate these policies and determine which is most beneficial for online retailers. We develop a stylized model that captures the essential dynamics of pickup partnerships. We find that although the coupon policy allows the online retailer to gain greater market coverage compared with the fixed fee policy, it does not always lead to higher profits for the online retailer. The coupon policy is preferred when in-store fulfillment and pickup handling costs are low and direct-delivery costs are high, whereas the fixed fee policy is favored when these costs are moderate. We also find that both policies entail inefficiencies when the incentives of the two parties are not aligned. To alleviate such inefficiencies, we propose a new policy designed to better align incentives and improve partnership efficiency. This paper offers the first theoretical analysis of the in-store pickup partnership model and provides practical guidance for online retailers seeking to implement it. Our proposed policy aims to enhance the effectiveness and profitability of these partnerships beyond current industry practices. Supplemental Material: The online appendix is available at https://doi.org/10.1287/serv.2025.0118 .