Read the working paper
INSEAD Working Paper 2015/06/TOM
This paper identifies the best revenue models for firms aspiring to capture the untapped trillion-dollar opportunity in online retail of fresh groceries. We compare the financial and environmental performance of two revenue models: the per-order model, where customers pay for each delivery; and subscription, where customers pay a subscription fee and receive free deliveries. We build a stylized model that incorporates customers with ongoing uncertain grocery needs who choose between shopping offline or online and an online retailer that makes deliveries through a proprietary distribution network. In contrast with practitioners’ widely-held views, we find that subscription incentivizes a customer order pattern that reduces total grocery sales on account of lower food waste. Subscription also has higher delivery costs, but these disadvantages are countered by delivery scale economies, lower grocery acquisition costs and potentially higher adoption of the online channel. From an environmental perspective, the per-order model has higher food waste related emissions, while subscription leads to higher travel. Ceteris paribus, the per-order model is both financially and environmentally preferable for retailers with higher margin and higher consumption product assortments, sold in sparsely populated markets spread over large elongated areas with high delivery costs. Based on geographic and demographic data, we find that for typical products subscription yields higher profits in small, dense, circular markets (Paris, Beijing) whereas per-order performs better in elongated or sparse and large markets (Manhattan, Los Angeles). Subscription is always environmentally superior because lower emissions from food waste dominate higher travel-related emissions.