1 CS5038 The Electronic Society Lecture 2: A Quick Overview of Electronic Retailing Lecture Outline B2C Retailing: types and ways to succeed Consumer Categories Consumer Decision Criteria Online Purchasing Aids E-Tailing Business Models Click and Mortar Strategy E-tailing Problems The middleman problem: e.g. travel industry

2 Business-to-Consumer (B2C) Retailing Ability to create direct relationships with consumer without intermediaries like distributors, wholesalers, or dealers “Brick-and-mortar” = Traditional offline retailer “Click-and-mortar” = offline + online presence B2C Market success is derived from:  Offering quality merchandise at good prices  Excellent customer service  Convenience Goods that sell well online  Brand recognition and guarantees  Digitized products – music, video, software  Frequently purchased, inexpensive items  Well-known items with standard specifications  no need to inspect

3 Click and Mortar Strategy Channel Conflict  Conflict = any situation where channel members are antagonistic due to real or perceived differences in incentives, rewards, policies or support  Levi’s stopped online direct sales – distributors complained Levi  Parallel channels of distribution and marketing strategies  e.g. car dealer network + online direct sales Successful Strategies  Empower the customer - 24/7 service and information  Store locators; Product information; Inventory levels  Speak with one voice - integrate back-end systems  Customer gets the same information through telephone or webpage  Leverage the channels – best of both  Order electronically; Physical sales return

4 Consumer Categories De Kare-Silver 47% want to shop electronically 19% Social Shoppers: enjoy shopping 14% Experimenters: ready to try new things 17% Convenience: responsive to things which save time or make life easier 16% Value shoppers: will purchase where they see value 14% Ethical: will purchase provided it is honest and ‘pc’ 20% Habit die-hards: stuck in their ways Shopping avoider Hunter gatherers  enjoy comparison/ search New technologists  because it's cool

5 Purchasing decision-making model 6 major phases  Need identification  Develop Consideration Set  Information search and evaluation of alternatives  Choice Decision  Configuration/Personalisation  Upgrade/Replacement Need to help the Consumer at each stage of this process Return to this in next lecture from market research viewpoint

6 Consumer Decision Criteria 1.Value proposition  customer service, better prices, higher quality 2.Personal service  treat the customer as a unique individual 3.Convenience  self-contained site that serves all customer needs 4.Other criteria  service after the sale, online help, return policy Advertisers try to Influence consumer decision  Product—portfolio of items available  Price of the products  Promotion of products (ads & giveaways)  Packaging and delivery

7 Online Purchasing Aids Shopping portals  Comprehensive portals - many different sellers & comparisons  Shop.lycos.com  Niche oriented - specialised line of products (dogtoys.com) Shopbots and agents  Tools scout the Web for specific search criteria - Mysimon.com Business ratings sites  Sites that rate e-tailers - Bizrate.com, Gomez.com Trust verification sites  Evaluate and verify trustworthiness of e-tailers - TRUSTe Escrow services  3 rd party to assure quality and proper exchange Communities of consumers  Epinions.com—searchable recommendations on products  PriceGrabber.com—comparison shopping

8 E-Tailing Business Models (by revenue) 1.Subscription models  Charge monthly or annual subscription fee for service 2.Transaction fee models  Service fee based on the level of transaction offered 3.Advertising-supported models  Charge fee to advertisers instead of customers 4.Sponsorship models  Companies sponsor the business through donations (usually supplemental income) Alternative Classification (by service)  Direct marketing – sell directly to consumers  Pure-play e-tailers – do not maintain physical channel  Traditional retailers with Web sites – channel conflict  On-Demand Delivery Services (ODDS)  Firms that have a fleet to deliver direct to consumers

9 Prentice Hall, 2002 Portals, trust sites (2 slides ago) Dell

10 E-tailing Failures and Lessons Learned  Profitability - Each marginal sale must lead to marginal profits  “if it doesn’t make cents it doesn’t make sense”  Some pure play e-tailers lose money on every sale to grow to profitable size and scale  Branding - drive to establish brand can lead to excessive spending  Strategy based on assumption that they will get quick customer recognition  Performance  Web sites need to function in a fast, user-friendly manner  Static design or dynamic sites - rich databases of useful information encourage customers to return  Incorrect Revenue Model – many were relying on advertising  Lack of funding – takes time to acquire sufficient customer base, investors were not willing to wait / take the risk  First-mover may make mistakes, second-mover can learn

11 Middleman Problem (a case study in the travel industry) Retailers are “middleman” between manufacturer/provider and customer Traditionally make money by mark-up  Buy product from supplier for £10, sell it to customer for £15  Difference (£5) is profit margin

12 Middleman problem Competition drives profit margin down  If you have a £5 markup, customers will go to competitor with £4 markup Suppliers may sell direct to customer  If supplier sells product to customer for £12, he and customer benefit  disintermediation Hard to make money by mark-up

13 Example: Flights Pre-Internet, airlines sold flights to consumers via travel agents.  Travel agent charged £100, gave airline £80 and kept £20 as markup  If customer bought directly from airline, would be charged £100 (same as from travel agent)

14 Example: Flights In Internet age, airlines sell flights directly to customer  Airline sells flight to both customer and travel agent for £80.  If travel agent sells flight to customer for £80, he won’t make any money  If travel agent charges £100, customer will buy direct from airline for £80

15 Example: Flights How can travel agent make money in Internet age?  Especially a small one, not Expedia

16 Business Models Sell flight at cost, extras at high markup  Eg, insurance, delivery Sell advertising space on website  Sell customer data Niche market  Specialise in travel to Poland  Flights, hotel, airport transfer, tours  Specialise in selling flights to universities

17 Business Models Branding  Build up a good reputation, so customers trust you to offer OK deals, good delivery  If you’re trustworthy and “cheap enough”, it isn’t worth hassle of looking at competitors  Satisfice  Means trusted shop can charge a bit more  Marketing helps branding  Customers visiting site helps  Even if no purchase, just looking

18 Business Must Change Successful Internet travel agents differ from successful pre-Internet travel agent  Old: small shop selling generic flights to local customers with high mark-up  Joe’s travel agency  New: focus on product niche, high-markup extras, advertising revenue, brand  Expedia, escape2poland.co.uk

19 Internet Business Model Internet requires new business model Management issue, not technology  But must be resolved in order for e-commerce to really take off Poor business models one cause of dot-com boom/bust  Pouring in money before business model issue resolved is a mistake!

20 Organisational Change Internet (and most new tech) cannot be fully exploited unless society changes Change is painful for companies  Many bankrupt small travel agents  Many bankrupt dot-com investors

21 Organisational Change Change is painful for individuals  Loss of skills: Joe has worked for 30 years selling generic hols to Spain, does this well  Must ditch this, learn new skills  Dislike model: Joe dislikes “encouraging” customers to buy overpriced insurance  Loss of income: average income of travel agents may go down, even if they adapt

22 Summary Consumer Categories – value shoppers, convenience shoppers Consumer Decision Criteria – value, service, convenience Online Purchasing Aids – portals, shopbots, trust sites E-Tailing Business Models Click and Mortar Strategy E-tailing Problems – channel conflict, wrong revenue model Case study from Travel Industry Need for organisational change