Service strategies and channel coordination in the age of E-commerce

•Profitable service strategies in the context of Online-to-Offline competition.•Combining revenue-sharing and service strategies for Online-to-Offline competition.•The importance of full control of offline service management for the retailer.•Role of service effectiveness, fair revenue-sharing, and online channel preference. The use of service strategies to lessen the competition between the manufacturer’s online store and the physical retailer is lacking seminal research studies in nowadays’ e-commerce age. To fill this gap, we investigate various service strategies and valuable coordination mechanisms in alleviating online to offline (O2O) competition. Our main results demonstrate that the retailer would not accept free monetary support from the manufacturer and would not accept sharing the cost of the offline service with the manufacturer. Instead, he always prefers to pay fully for his offline service. In addition, it is not beneficial for the manufacturer to invest in online service given that it worsens the competition between the manufacturer’s online store and the physical retailer. Compared to revenue sharing, a strategy widely used in business practices, it is beneficial for the retailer to pay fully for the cost of the offline service instead of participating in the revenue sharing. Thus, we combine the cooperation mechanism (revenue sharing) and the differentiation strategy (offline service paid by the retailer) to form a new mechanism that has a competitive advantage to coordinate the O2O competition. However, this new mechanism may not always be better than using only the service differentiation strategy. The choice of the optimal strategy to coordinate the O2O competition depends on key factors namely the service effectiveness, the shared portion of the retailer’s revenue, and the online channel preference.