Internet Services and Profitability

Comparison of electronic and traditional services

Purpose of Web-sites  Retail channel (Amazon.com)  Supplemental channel (Barnes & Noble)  Technical support (Dell Computer)  Embellish existing service (HBS Press)  Process orders (Delta Airline)  Convey information (Kelly Blue Book)  Communicate with membership (POMS.org)  Play games (Treeloot.com) 5-3

Internet Service Components  Customer’s Perspective I ) Navigation or Ease of Access II) Information &/or Service Exchanged &/or Received III) Physical Service Received - Customer support (via , on-line chat, telephone, professionals customizing a service, etc.) - Logistics (packaging and shipping, payment and other tangible elements)

Profitability To be highly profitable, internet service companies must ideally have the following:  Highly scalable service & high sales volume  Superior network effect  Customer must be willing to pay for service (i.e., positive &/or high contribution margin)  Perception of acceptability (e.g., jewelry sales, internet dating)  Trust and superior human resources  Require little ‘touch and feel’ factor

Scalability  Ability of a firm to sell an additional unit with minimal (or approximately zero) variable cost Determine the degree of scalability of each internet service component. I) Navigation and Ease of Access II) Information Service Exchange III) Physical Service Customer Support Logistics

Factors Affecting Scalability  Increasing Self-Service Content (e.g., Google- information, E-bay – customers post/market their own items and ship their own products)  Customer Support Simplify and automate whenever possible (e.g., over 80% of customers’ questions posed in Cisco System’s website are responded automatically; service judged to be excellent)  Logistics Minimal ‘touch-and-feel’ requirement Detailed information of the item is important – minimized returns Non-perishable inventory and easy to package

Economics of Scalability Dimensions High Scalability Low E-commerce continuum Selling information (E-service) Selling value- added service Selling services with goods Selling goods (E-commerce) Information vs. Goods Content Information dominates Information with some service Goods with support services Goods dominate Degree of Customer Content Self-serviceCall center backupCall center supportCall center order processing Standardization vs. Customization Mass distribution Some personalization Limited customization Fill individual orders Shipping and Handling Costs Digital assetMailingShippingShipping, order fulfillment, and warehousing After-sales serviceNoneAnswer questionsRemote maintenance Returns possible Example ServiceUsed car pricesOnline travel agent Computer supportOnline retailer Example FirmKbb.comBiztravel.comEverdream.comAmazon.com

Network Effect Network effect is where the value of the service is significantly increased by the number of participants and/or customers in system (e.g., E-Bay, Monster.Com). To capture the network effect:  Early mover advantage  Collaboration with other service providers  Pricing  Advertisement  Sufficient financial resources

Willingness of Customer to Pay  Value to the customer  Availability and actions of competitors  Differentiated service (e.g., network effects and/or customers cannot get similar service elsewhere for free)  Superior service quality  Reasonable pricing (E-Bay and I-Tunes)  Ease of purchase and payment Note: Someone must pay for service (customer or advertiser)

Factors Affecting Value  Lower cost over brick-and-mortar companies  Information/Education Can be provided in layers – minimal to extensive (e.g., BlueNile.com on diamond selection. Also reduce cost– less customer support needed.) Also reduce cost– less customer support needed.)  Wider selection of services  Customer support availability and conflict resolution  Buying Experience (e.g., BlueNile.com – non-intimidating buying experience. Also, women buying cars over the internet. Ease of navigation and purchase. Convenient and timely delivery)

Perception of Acceptability  Culture  Education to manage perception  Word-of mouth  Advertisement

Trust and Human Resource  Trust Provide service guarantee Reputation Organizational longevity Information provided by customer is secure and confidential  Human Resource Recruitment and retention (e.g. Google – cafeteria food, work environment, time and place flexibility, infra-structural support, and financial incentives)

Success Factors in Internet Services  Customer Awareness  Easy to use and good customer support  Scalable  Network effect  Superior value to alternatives  Perception of acceptability  Trust  Reasonable pricing and easy to pay