Customization strategies between online and offline retailers

•Single-channel firm’s customization strategy is only related to its own cost efficiency.•“Greater variety-lower price” exists when customization cost is relatively small.•Limited variety outperforms infinite variety when firm has a cost advantage.•E-tailer’s profit increases with customization cost when it provides both customized and standard products.•Customization strategy plays a role of directing consumers for an omni-channel e-tailer. In this paper, we investigate the optimal customization strategies and product variety decisions for firms in different channels (online or offline). Based on an e-tailer’s and the retailers’ strategies of whether to adopt customization, we analyze four different scenarios and highlight the impact of customization on firms’ pricing decisions, profits, and consumer welfare. Furthermore, we relax the assumptions on firms’ product line design, production flexibility, as well as channel structure, and identify several managerial insights. First, with a uniform pricing scheme, the only factor that affects single-channel e-tailer/retailers’ variety decision is their cost efficiency, irrespective of other firms’ strategies. In equilibrium, the e-tailer and retailers will adopt customization and launch the customization scopes in the middle of the product line to capture as much demand as possible. Interestingly, because of the trade-off between profit margin and market share, greater variety may correspond to a lower price when the customization cost is relatively small. Moreover, we show that customization is not the only way for firms to achieve strategic excellence. Offering a limited variety of standard products, a firm still can stand out from its mass customization competitors by continuously lowering the marginal cost. Also, we claim that customization strategy may play a strategic role in directing consumer “traffic”. Therefore, adding an extra standard product line may result in e-tailer’s profit increase with customization cost when firms have symmetric cost. For similar reasons, an omni-channel e-tailer should optimally offer customized products in the online channel and standard products in offline stores.