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Fixed and Variable Costs of Shopping June 10, 2007

Posted by jyu in Qualifying.
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Bell, Ho, and Tang (1998)

–Develop and test the store choice model based on the premise that each shopper is more likely to visit the store with the lowest total shopping costs.

–The total shopping cost is composed of fixed and variable costs.

–The fixed cost is independent of, whereas the variable cost depends on, the shopping list (i.e., the products and their respective quantities to be purchased).

–The fixed cost includes the travel distance and a shopper’s iherent preference for the store (store loyalty)

–The variable costs is a weighted sum of the quantities of items on the shopping list multiplied by their expected prices at the store.

Key Results:

(1) The quantification of the basket size threshold for each segment for every pair of competing stores.  Provide insights into consumer behavior that are based on the analysis of total shopping costs and can be use to diagnose the relative competitiveness of a store

(2) LBS prefer stores with a higher fixed cost and lower variable cost, because the fixed cost is divided across more items

(3) Two positioning strategies for store traffic gains: (a) Focus strategy: Always serve small (large) basket sizes in all market segments by having the smallest (largest) fixed and the highest (smallest) variable cost of shopping. (b) Diversified strategy: to serve a mix of basket sizes, serving large basket sizes in some segments and small basket sizes in others. (more robust to changes in consumer purchasing habits)

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