BUAD 307





04--Relative costs in selling online, in retail settings, and combined mode

PowerPoint Narration

In comparing the cost of selling online with of selling through the traditional retail structure, it appears to absolute margins and the extent to which the assembly and shipping process are automated are two of the most significant factors.  In looking at the structure of costs, we find the following:

                One of the key issues from this table is the cost of non-checkout sales personnel.  Analysts have suggested that Best Buy has relatively high costs in part because of the high rents they must pay for many of their retail locations and in part because of the high cost of the “blue shirt” sales people.  To the extent that selling online is a way to reduce this labor cost, there might, in principle, be a strong argument for cost savings.  However, it should be noted that Wal-Mart and certain other self-service brick-and-mortar retail chains have considerably lower cost here:  The customers usually select their own items, put these in their carts, take them to the cash register, and then bring the purchases home.  If a retailer needs to have sales people bring out items for a back storage facility, that may, indeed, be inefficient.  However, if the sales people help answer customer questions, the question arises as to whether an online site can answer such questions in a way that is equally convenient to customers.  A great deal of information can be put in a product description, and other information can be made available in areas such as FAQ sections, but some customers may have more difficulty finding this information.

Because the random variations in demand for different retail stores largely cancel out each other when orders are handled from a much larger facility handling online orders for a particular region, there is less need to carry extra or “safety” stock.  The opportunity cost of sales foregone because of stockouts will also be smaller.


Main Midterm Review Page