PHYSICS 102 Lecture Notes - Lecture 7: Marginal Revenue, Context-Dependent Memory, Orange Juice
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Summary – Che, Chen, Chen – Investigating Effects of Out-of-Stock on Consumer
Stockkeeping Unit Choice
- Article studies effect of OOS on consumer stockkeeping unit (SKU) preference and pricing sensitivity
Most important findings
- Average OOS rate in a grocery category is 7.9% → costs retailers a 4% loss in category sales
(2.64% in category revenue)
- Consumers’ price sensitivity tends to be underestimated when OOS is not accounted for in a
discrete choice model (consistent finding in all product categories)
- For consumers who have shorter interpurchase time, their preference for a SKU is attenuated
(=gedämpft) when it is frequently OOS (=intertemporal effect)
- For consumers who purchase from a small number of SKUs, their preference for a SKU is
o Reinforced when facing OOS of other similar SKUs (=contextual effect (also next))
o Attenuated when facing OOS of other similar and also frequently purchased SKUs
Introduction
- Labor constraint is a major factor that leads to OOS → measuring marginal revenue impact
of OOS of different SKUs, retailers could decide which SKU’s to eliminate first to minimize
revenue loss
- In certain categories, retailers could focus on promoting the products that are similar in
attributes to the OOS items because consumers are likely to switch to these items and sales
increase is likely to reduce the category revenue loss due to OOS
- Intertemporal effect of OOS: (over time)
o Consumers’ positive/ negative reaction toward a product’s OOS may affect the
subsequent choice of that product when it becomes available again
o Intertemporal effect of OOS is negative for consumers with short interpurchase time
(maybe because they have the OOS in short-term memory)
- Contextual effect of OOS: (within category)
o Familiarity: A household’s/ consumer’s preference for an SKU increases when the OOS
SKUs are similar in attribute to the focal SKU (=main)
o Interaction between familiarity and purchase shares: Effect decreases when the OOS
items are also bought frequently by the household (=interacting)
o Both the main and the interacting effect are enhanced by consumer’s purchase
concentration of SKUs
- It is likely that when product attributes are similar, the OOS of products with which a
consumer is more familiar could have a greater negative contextual effect than those of less
familiarity
- Eliminating all OOS incidents leads to an average increase of 2.64% in category sales, but
impact of OOS on category sales differ across categories
o E.g. for category in which contextual effect of OOS is positive, eliminating all recurring
OOS may lower category sales
- Retailers can benefit more from eliminating OOS of SKUs with highest marginal revenue impact
