Physical Distribution Service Performance and Internet Retailer Margins: The Drop-Shipping Context

Elliot Rabinovich, Arizona State University
Timothy Laseter, University of Virginia
Manus Rungtusanatham, University of Minnesota

We investigate the relationship between Internet retailer margins and retailer promises regarding product distribution service. We focus particularly on a drop-ship context, to provide a purer separation of these activities and the related costs. We examine a sample of retail transactions with customers and find that product margins and the margins on shipping and handling are inversely proportional. We also find a direct relationship between promised product distribution service performance and shipping and handling margins even after key product characteristics known to influence the cost side of the margin equation are controlled for. These results confirm an intuitively logical view of the relationships among pricing and promised product distribution service performance. The study also offers insights for practitioners regarding the opportunity to enhance performance in this domain and demonstrates the benefit and power of employing objective measures drawn from the vast array of information captured via online transactions.

 

Journal of Operations Management, 2008, Volume 26, No. 6, pp. 767-780