Online Grocery Shoppers Are Willing to Pay Double the Fee to Improve Delivery Time Precision by One Hour
It's much more expensive for online retailers to compete on speed alone, and it may cause them to overlook opportunities to acquire and retain online customers, according to new research.
CAMBRIDGE, Mass., Aug. 23, 2021 /PRNewswire/ -- The long-held assumption that speed is the most important online delivery factor for e-commerce customers is upended by new research released in an article today by MIT Sloan Management Review. During the early COVID-19 lockdowns, committing to a speedy delivery seemed particularly important. Now, as many consumers emerge from the pandemic, they care more about being able to select a specific delivery day and a precise delivery time when it's convenient for them to take in their groceries.
A new analysis finds that a grocery customer is willing to wait 10.8 hours longer for a delivery if the delivery window is one hour shorter, and will wait an additional 7.5 hours longer if the delivery can be received on a preferred day of the week, all else being equal. The data also shows that customers tend to prefer to receive orders at the end of the week rather than on weekends.
Customer loyalty and basket sizes are also factors in grocery shoppers' delivery preferences. Customers who have different levels of loyalty to the retailer have different delivery preferences. For example, repeat customers are willing to pay more for the same delivery attributes compared with other shoppers. Moreover, customers with very large baskets are willing to pay double the delivery fee to improve delivery-window precision by one hour.
"Precision instead of speed is key," said Pedro Amorim, assistant professor of industrial engineering at the University of Porto. "Executing a strategy dedicated to speed alone can be expensive, particularly for grocery retailers, whose margins are notoriously thin. There is a less costly option worth considering: analyzing operational data about delivery patterns."
4 Recommendations Online Retailers Can Take to Design Their Omnichannel Strategy
Instead of competing solely on delivery speed, retailers can assess the preferences of their customers and their willingness to pay for different multiple delivery attributes, such as speed, precision, and flexibility. The MIT Sloan Management Review article, "Online Shoppers Don't Always Care About Faster Delivery," provides four recommendations for those who are in charge of designing their business's omnichannel strategy:
- Invest in data and analytics infrastructure. This includes tools that collect and manage data on customer behavior, such as how they navigate through a site. It is also essential to track purchases across both online and offline channels. That, in turn, often requires changes in data management to give cross-functional teams access to data from both channels.
- Collect and analyze customer-specific time-slot selection data. Retailers just beginning this effort can focus on basic descriptive analytics that highlight what attributes customers prefer, on average, given the options chosen by customers at the moment of checkout. More advanced teams can deploy discrete choice models to understand willingness-to-pay characteristics across customer segments and various order types.
- Understand what delivery attributes drive loyalty and repeat purchases. This requires the retailer to have some capability in predictive analytics. Questions of interest include whether different customer segments prefer one delivery attribute over another.
- Work across teams to roll out new delivery strategies. To capitalize on their newfound understanding of customer preferences, operations and marketing teams must collaborate closely. Operations can design the fulfillment strategy that best meets customers' needs. Marketing can promote the improved service and communicate how it differs from competitors' delivery options.
"Analytically minded retailers can craft delivery time slots that are unique to each customer based on revealed preferences," says Nicole DeHoratius, adjunct professor of operations management at the University of Chicago Booth School of Business. "I strongly encourage retailers to rethink their operations to optimize not only on speed but also the most appropriate combination of speed, precision, and flexibility."
The article "Online Shoppers Don't Always Care About Faster Delivery" is based on an analysis of the preferences of online customers of a grocery chain across hundreds of thousands of purchasing instances (152,195, to be exact). For each instance, the customer order and the available home-delivery time slots that were shown to the customer and the time slot the customer selected was known. These findings are applicable to other retailers offering attended home delivery services, such as sellers of furniture, home goods, appliances, and other durable goods.
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About the Authors
Pedro Amorim is an assistant professor of industrial engineering at the University of Porto. His specialty area is supply chain planning with an emphasis on food products. He is also the cofounder of LTPlabs, a consultancy that applies advanced analytical methods to help companies make better complex decisions.
Nicole DeHoratius is an adjunct professor of operations management at the University of Chicago Booth School of Business. Since 2001, she has taught operations management, service operations, and supply chain management to executives in programs and companies around the globe. For exemplifying the characteristics students most value in their professors, Nicole earned the 2015 and 2016 Rotman School of Management Teaching Award.
About MIT Sloan Management Review
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