Competing across Different Channels for Personalized Service

Previously, personalized service was provided by traditional channel. Now, they are available online by using web channel. Some unique features of a web channel make it different from a traditional channel. Previous research has studied the competition between a web channel and a traditional channel from various angles. In this paper, we develop a model to examine the impact of switching costs and customer heterogeneity on the competition between an online fitness service provider and a brick-and-mortar fitness club which are all forward looking. Fitness service is used for illustration purpose. Our model can be generalized to all types of the personalized service. Contrary to previous research, switching costs in our model are asymmetric between two firms. We present a two-period game based on the well-established Hotelling model of the market. In order to maximize their profits, both the online fitness service provider and the fitness club offer different prices to their own customers and customers who switch from its rival. The results show that, in the case that firms are forward looking but customers are myopic, no matter it is the online firm or the traditional firm, if it has marginal cost advantage, then the impact of switching cost can be neglected, and the firm with marginal cost advantage should always take the “pay to switch” strategy in order to maximize its total profit. Otherwise, if marginal cost advantage does not exist, firms have to choose their pricing strategy based on their marginal costs and switching costs. In the case that both the firms and customers are forward looking, the switching costs do play a role in the firm’s decision making. The optimal pricing strategies vary depending on both the switching costs and marginal costs.