These days, customers are used to the convenience of buying what they need online. Many traditional brick-and-mortar retailers have responded by expanding their online presence and even offering new services, like buy-online-pick-up-in-store, to keep pace with shopper preference. But some retailers are moving in the opposite direction: They begin online and expand into the offline world, interacting with customers through stores or showrooms.
Antonio Moreno, an assistant professor of managerial economics and decision sciences at the Kellogg School of Management, was interested in these retailers’ crossed paths: “Why are online companies moving offline at the same time offline companies are moving online?”
When he looked into one online retailer’s experience, Moreno and his coauthors found evidence that opening showrooms where customers can engage with a product before ordering it boosted demand and revenue. Showrooms also encouraged shoppers to align themselves with the channel that served them better—be it showroom or online—thus optimizing the customer experience and reducing costs for the company.
Inventory vs. Information
With colleagues David Bell, a professor of marketing at the University of Pennsylvania, and Santiago Gallino, an assistant professor of operations management at Dartmouth, Moreno studied prescription eyewear retailer Warby Parker. Launched online in 2010, the company has been successfully selling its own designs via its unique home try-on program, where customers request up to five pairs of frames to be sent to their home for free in order to choose their favorite before purchasing.
Online brands like Warby Parker have an advantage over traditional brick-and-mortar stores because they can centrally manage their inventory rather than keeping various locations stocked with product. “Online, it doesn't matter where the demand is coming from. If you have inventory in your distribution center, you’re going to be able to serve it,” Moreno says. But brick-and-mortar stores can offer customers firsthand information about products, which is particularly important for products where fit, feel, or other information that’s hard to convey online play a role in purchase decisions. Put simply, he says, “It lets customers see a product before they buy.”
So some online companies, including Warby Parker, are introducing display-only showrooms that tap into the informational advantages of brick-and-mortar stores while maintaining the operational advantage of centralized fulfillment. At Warby Parker showrooms, customers can try on glasses, order them, and have them shipped to their home, complete with prescription lenses.
How important have Warby Parker’s showrooms been for the company? The retailer had been experimenting with showrooms around the country since its founding, and provided Moreno and his coauthors with data on its sales and returns from when it started, in February 2010 through March 2013. Using this data, as well as locational information about the showrooms, they compared buying behavior in zip codes within 30 miles of a showroom to zip codes further away. By looking at the change in buying behavior in the influence area of a newly introduced showroom relative to zip codes further away (rather than simply comparing the same zip codes before and after a showroom opened) the researchers could weed out the effects of factors like new eyewear collections or seasonal shopping.
But the places where Warby Parker opened showrooms weren’t randomly distributed: Their focus on certain types of locations, like urban areas, means that comparing those zip codes to others might yield inaccurate results. So Moreno and his coauthors collected demographic information, as well as information about the market outlook for fashion and eyewear, by zip code. “We tried to compare zip codes that looked very similar according to those numbers: Say, there’s a zip code in Seattle that’s similar to one in Boston, but people in Seattle can’t go to a showroom and people in Boston can,” he says. Accordingly, zip codes similar to those where a Warby Parker showroom had opened weighed more heavily than places that were very different.
The Best of Both Worlds
When Warby Parker opened a showroom, it had a significant positive effect on sales, the researchers found: Total sales in nearby areas increased by about 10 percent. But only some of those were sales that started in the showroom. Web sales also went up, likely because the showrooms increased brand awareness. “The showroom is like advertising for the company,” Moreno says. Sales through home try-on, on the other hand, decreased. This suggested that when a showroom opened, customers were moving between channels to use one they preferred—including customers who might previously have used the home try-on option visiting the showroom instead.
What might motivate customers to switch from one channel to another? “We had an idea that people who are more uncertain about fit”—in this case, the look and feel of the glasses—“are more attracted to the showroom because it gives them more opportunities for sampling products,” Moreno says. To test that idea, they built a mathematical model of, essentially, customer pickiness. The model predicted that three things would happen as a consequence of pickier customers heading to the showroom in lieu of ordering online or attempting home try-on. First, there would be an increased conversion rate for home try-on. Second, they’d see fewer repeat unsuccessful home try-on orders by the same customer. And third, they’d see a lower rate of returns for online orders.
All three predictions proved correct. Home try-on orders decreased even more than home try-on sales, meaning the conversion rate—the percentage of orders that became successful sales—increased. What’s more, there were fewer unsuccessful home try-on repeat orders after a showroom opened, and fewer returns.
That suggests that the showroom benefits companies by giving them the upsides of both brick-and-mortar and online operations, and helps customers who are better able to get the information they need before making a purchasing decision. “Not only do we attain the [operational] efficiencies, we also achieve better matching between customers and channels,” says Moreno, “And, the costs are lower, because the customers who’d be very costly to serve via online channels now shift to the showroom.” The returns and repeated try-ons, which are a big expense to the firm, are less likely when a showroom opens.
This strategy has given Warby Parker a significant boost, and may do the same for other companies, such as Bonobos, a men’s clothing store that is following a similar strategy. But it won’t be equally helpful to all firms. It’s likely to be especially helpful for companies that make and market their own brand. “You cannot go to another store to get the feel for those products,” Moreno says. “A company like Amazon has no need to do this. They’re a multibrand retailer, and they can essentially use Best Buy as a showroom.” It’s also likely to benefit online companies in retail categories where many people like to see and touch the merchandise before buying—clothing, for instance, rather than books. The showroom model may also be particularly effective in categories where you won’t get your merchandise right away, even at a conventional store—as with prescription glasses, which must be customized to the wearer’s needs.
Artwork by Yevgenia Nayberg