1 CS5038 The Electronic Society 2. A Quick Overview of Electronic Retailing 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

3 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

4 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

5 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

6 Click and Mortar Strategy Channel: route to customer (through delares/vendors/re- sellers/dealers and distributors, or directly (own shop or web-site))

7 Click and Mortar Strategy Channel: route to customer (through vendors/re- sellers/dealers and distributors, or directly (own shop or web-site)) Channel Conflict Any situation where channel members are antagonistic due to real or perceived differences in incentives, rewards, policies or support Levis stopped online direct sales, because distributors complained Levi Selling off old stock directly to make room for fresh models may undercut dealers.

8 Click and Mortar Strategy Channel: route to customer (through delares/vendors/re- sellers/dealers and distributors, or directly (own shop or web-site)) Channel Conflict Any situation where channel members are antagonistic due to real or perceived differences in incentives, rewards, policies or support Levis stopped online direct sales, because distributors complained Levi Selling off old stock directly to make room for fresh models may undercut dealers. Have to coordinate parallel channels of distribution and marketing strategies e.g., car dealer network + online direct sales

9 Click and Mortar Strategy (B) Successful Strategies Empower the customer – 24/7 service and information Store locators; Product information; Inventory levels

10 Click and Mortar Strategy (B) 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

11 Click and Mortar Strategy (B) 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

12 Consumer Categories Michael 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

13 Diffusion of Innovation The Bohlen, Beal, Rogers Picture

14 The Long Tail J.K. Rowling Demand, in units J.R. Hartley A few big hits (green). A lot of stuff that sells poorly (yellow). But a lot of the potential sales are yellow. Books, by sales Cut-off for viable stock

15 Purchasing decision-making model 6 major phases

16 Purchasing decision-making model 6 major phases Need identification

17 Purchasing decision-making model 6 major phases Need identification Develop Consideration Set

18 Purchasing decision-making model 6 major phases Need identification Develop Consideration Set Information search and evaluation of alternatives

19 Purchasing decision-making model 6 major phases Need identification Develop Consideration Set Information search and evaluation of alternatives Choice Decision

20 Purchasing decision-making model 6 major phases Need identification Develop Consideration Set Information search and evaluation of alternatives Choice Decision Configuration/Personalization

21 Purchasing decision-making model 6 major phases Need identification Develop Consideration Set Information search and evaluation of alternatives Choice Decision Configuration/Personalization Upgrade/Replacement

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

23 Consumers Decision Criteria 1.Value proposition customer service, better prices, higher quality

24 Consumers Decision Criteria 1.Value proposition customer service, better prices, higher quality 2.Personal service treat the customer as a unique individual

25 Consumers 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

26 Consumers 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

27 Consumers 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 Productsportfolio of items available Price of the products Promotion of products (ads & giveaways) Packaging and delivery

28 Online Purchasing Aids Shopping portals Comprehensive portals - many different sellers & comparisons Shop.lycos.com Niche oriented - specialised line of products (dogtoys.com)

29 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

30 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

31 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

32 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

33 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.comsearchable recommendations on products PriceGrabber.comcomparison shopping

34 E-Tailing Business Models (by revenue) 1.Subscription models Charge monthly or annual subscription fee for service

35 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

36 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

37 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)

38 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

39 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

40 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

41 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 – 2 channels On-Demand Delivery Services (ODDS) Firms that have a fleet to deliver direct to consumers

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

43 E-tailing Failures and Lessons Learned Profitability – Each marginal sale must lead to marginal profits if it doesnt make cents it doesnt make sense Some pure play e-tailers lose money on every sale to grow to profitable size and scale.

44 E-tailing Failures and Lessons Learned Profitability – Each marginal sale must lead to marginal profits if it doesnt make cents it doesnt 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

45 E-tailing Failures and Lessons Learned Profitability – Each marginal sale must lead to marginal profits if it doesnt make cents it doesnt 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

46 E-tailing Failures and Lessons Learned Profitability – Each marginal sale must lead to marginal profits if it doesnt make cents it doesnt 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 Security (well return to this in some depth)

47 E-tailing Failures and Lessons Learned Profitability – Each marginal sale must lead to marginal profits if it doesnt make cents it doesnt 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 Security (well return to this in some depth) Static design or dynamic sites – rich databases of useful information encourage customers to return

48 E-tailing Failures and Lessons Learned Profitability – Each marginal sale must lead to marginal profits if it doesnt make cents it doesnt 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 Security (well return to this in some depth) Static design or dynamic sites – rich databases of useful information encourage customers to return Incorrect Revenue Model – many were relying on advertising. Google?

49 E-tailing Failures and Lessons Learned Profitability – Each marginal sale must lead to marginal profits if it doesnt make cents it doesnt 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 Security (well return to this in some depth) Static design or dynamic sites – rich databases of useful information encourage customers to return Incorrect Revenue Model – many were relying on advertising. Google? Lack of funding – takes time to acquire sufficient customer base, investors were not willing to wait / take the risk

50 E-tailing Failures and Lessons Learned Profitability – Each marginal sale must lead to marginal profits if it doesnt make cents it doesnt 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 Security (well return to this in some depth) Static design or dynamic sites – rich databases of useful information encourage customers to return Incorrect Revenue Model – many were relying on advertising. Google? 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

51 Middleman Problem (a case study in the travel industry) Retailers are middleman between 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

52 Middleman problem Competition keeps profit margin down If you have a £5 mark-up, customers will go to competitor with £4 mark-up 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 in EC

53 Example: Flights Pre-Internet, airlines sold flights to consumers via travel agents. Travel agent charged £100, gave airline £80 and kept £20 as mark-up If customer bought directly from airline, would be charged £100 (same as from travel agent) How did agents add value?

54 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 wont make any money If travel agent charges £100, customer will buy direct from airline for £80

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

56 Business Models Sell flight at cost price, with extras at high markup E.g., insurance, delivery Sell advertising space on website Sell customer data Niche market Specialize in travel to, say, Poland Flights, hotel, airport transfer, tours Specialize in selling flights to universities In these cases, how is value added?

57 Business Models (B) Branding Build up a good reputation, so customers trust you to offer OK deals, good delivery If youre trustworthy and cheap enough, it isnt worth hassle of looking at competitors Satisficing Means trusted shop can charge a bit more

58 Business Models (B) Branding Build up a good reputation, so customers trust you to offer OK deals, good delivery If youre trustworthy and cheap enough, it isnt worth hassle of looking at competitors Satisficing Means trusted shop can charge a bit more Marketing helps branding

59 Business Models (B) Branding Build up a good reputation, so customers trust you to offer OK deals, good delivery If youre trustworthy and cheap enough, it isnt worth hassle of looking at competitors Satisficing Means trusted shop can charge a bit more Marketing helps branding Customers visiting site helps Even if no purchase, just looking

60 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 Joes travel agency Wheres the added value for the custommer?

61 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 Joes travel agency Wheres the added value for the custommer? New: focus on product niche, high mark-up extras, advertising revenue, brand Expedia, escape2poland.co.uk Wheres the added value for the customer?

62 Internet Business Model Internet requires new business model(s) Management issue (mostly), 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!

63 Organizational 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

64 Organizational 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

65 Summary Consumer Categories – value shoppers, convenience shoppers Consumer Decision Criteria – value, service, convenience Online Purchasing Aids – portals, shop-bots, 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 organizational change