ONLINE PURCHASE DECISION AND ITS IMPLICATION ONE-TAILING STRATEGIES

Melody Y. Kiang, California State University at Long Beach

Kevin H. Shang, University of California, Irvine

ABSTRACT

A classification scheme is proposed to categorize products/services selling on the Internet based on

characteristics such as tangibility and price from the buyer's perspective. For products/services belonging to
different groups, the marketing manager needs to devise different e-tailing strategies in order to maximize channel
functions thus increase perceived product values with limited resources.

INTRODUCTION

The Internet has provided a rare opportunity for firms by moving beyond the physical limits of their
traditional channels and creating a world-wide virtual community of competition. A recent survey projects a 3-fold
boom in the number of Internet users from today's 300 million to more than a billion by 2003, and new technologies
coming online, such as wireless-application-protocol-enabled phones and digital TV [Waters 2000]. Despite the
overwhelmed statistics regarding Internet development, both successful and unsuccessful cases of Internet marketing
have been reported. We contend that the purchasing behaviors of on-line shoppers play an important role in the
success of e-marketing. If we can identify the factors that influence the consumer's buying decision, e-tailers can
design their marketing strategy accordingly to maximize customer satisfaction hence increase total sales.
The objective of this paper is to provide a framework to identify key drivers that influence consumer buying
behavior on different product/service categories. We use the purchase decision-making model that characterizes five
stages of the consumer buying process [Engel et al., 1994; Howard & Sheth 1969]. We identify factors that
influence the perceived value of Internet shopping and thereby affect online shoppers' purchasing decisions. The
higher the perceived value is, the more likely consumers will be motivated to make a purchase online. This is
followed by an analysis of characteristics of Internet and its three channel functions: communication, transaction, and
distribution functions. Our contention is, by properly design marketing strategies that enhance the three channel
functions, it can increase the perceived value of a product. We extend current literature on channel functions and
discover possible factors that could maximize the three channel functions. We categorize these factors based on
fundamental objectives that consumers intend to achieve when making a purchase online.
The rest of this paper is organized as follows: Section 2 presents the basic five-stage model of buying
process of consumers. Section 3 discusses the characteristics of the Internet and its three channel functions. How
these three channel functions affect the decision making of online shoppers during different stages of buying process
is then analyzed. Section 4 reviews and summarizes the main factors that may enhance the different channel
functions. To better understand the type of products/services selling on the Internet, Section 5 examines the different
product characteristics retailing on Internet. Finally, we propose a classification scheme for products/services selling
on Internet and present it in Section 6. The classification scheme can help marketing manager to position and
identity appropriate e-tailing strategy to maximize chimnel functions. The paper is concluded in Section 7.

PURCHASE DECISION PROCESSES

Consumer purchase decision process varies by the type of product being considered. Complex and
expensive products are likely to involve more buyer deliberation. Generally speaking, we can divide the consumer
buying decision process into five stages [Engel et al., 1994; Howard & Sheth 1969]: problem recognition,
information search, alternatives evaluation, final purchase decision, and post-purchase behavior.
The buying process starts when a consumer recognizes a need. This is followed by the search of
information about products/services to satisfy their needs. After consumers gather enough information on products,
they evaluate the alternatives. Consumers consider mainly attributes that they feel critical to their decisions. During
the final stage, a multi-attribute decision-making process is involved as the consumers form their purchase intention.

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 UNDERSTANDING E-TAILING THROUGH THE THREE CHANNEL FUNCTIONS

In order to construct a comprehensive analysis of the impact of Internet on marketing, we first examine the
characteristics of e-tailing as a new marketing channel using the three channel intermediary functions:
communication, transaction, and distribution.
Communication Function: Exchange information between sellers and buyers. The Internet is an extremely effective
medium for accessing, organizing, and communicating information. Peterson et al. [1997] have identified several
unique characteristics of Internet regarding communication: (1) the ability to store vast amounts of information that
can be searched and disseminated in a cost-effective manner which is accessible by virtually everyone on the Net, (2)
interactivity and the ability to provide information on demand, and (3) provide perceptual experiences that are
superior to a printed catalog. The Internet can provide timely information to customers because of its ability for
instant communication and its availability 24 hours a day, 7 days a week.
Transaction Function: Generate sales activities. The Internet offers small businesses many potential benefits to help
them compete more effectively against larger companies with improved visibility. For example, small companies
that play in niche markets (i.e., sell specialized or unique products or services) in which buyers and sellers are small
and geographically dispersed, can use Internet to reach a much bigger customer base [Long 1997]. One successful
case is the Virtual Vineyards, a wine and specialty-food shop that exists only on the Internet (www.virtualvin.com).
For e-marketing in general, Internet provides a very efficient way to conduct transactions between sellers and buyers.
Distribution Function: Physical exchange of products/services. The ability to serve as both a transaction medium
and a physical distribution medium for certain goods is a unique feature of Internet marketing. Such advantages can
be best realized by companies provide the following type of products/services:
(1) On line ticketing and reservation services- for transportation, entertainment, etc.
(2) Digital products- software, music, news, reports, and consulting services.
(3) Insurance, banking, tax, and other financial service industries.
(4) Tele-medicine - online diagnosis, online medicine ordering.
Using Internet as the distribution channel can reduce not only the delivery cost substantially, but also ensures
instant delivery of products/services.
In this research, we extend the meaning of the distribution channel function to include all activities occurred
after an order is placed via Internet. Thus, the distribution channel function includes the delivery time, the time spent
before a product is received, and product quality. This extension of the distribution function is necessary for our
further analysis of exploring the relationships between distribution channel function and decision-making process.
To summarize, e-tailer's efforts on these three channel functions can add "value" at various stages of the decision
process. The higher the aggregated value is, the more likely the customer will be motivated to make purchase online.

FACTORSTHATENHANCECHANNELFUNCTIONS

We reviewed and summarized the literature in e-commerce to determine factors that may enhance the three
channel functions. Table 1 shows the 30 factors that were identified from extant research in e-commerce. They were
further grouped according to the three channel functions. For example, a well-designed Web site can enhance the
perceived value of products for the communication channel function. On the other hand, the Web security issue is
relevant to the transaction channel function. Also, some factors can increase the perceived value through multiple
channel functions. No matter which channel functions we group these factors into, the goal is to increase the
perceived value of a product. In other words, there exists some fundamental objectives implied by these 30 factors
such that customer can perceive higher value on the products through properly enhancing those factors.
Keeney [1998, 1992] proposed a framework to identify those fundamental objectives. Simply speaking, for
each decision-making situation, we always try to maximize the value of the outcome. At the same time, the value of
an outcome can be measured from the level of fulfillment of the fundamental objectives. Hence, we can construct an
objective network for each decision-making situation. This objective network includes means and fundamental
objectives. If we repeatedly tracing fundamental objectives from specific means objectives, we should obtain at least
one fundamental objective. Keeney therefore applied this concept and suggested that the value of Internet commerce
could be established on some fundamental objectives.
In this study, we apply this conceptual model to identify the fundamental objectives that concerns
consumers. The difference between our model and Keeney's is that we identified the mean objectives through a
thorough review of the extant e-commerce literature while Keeney derived his mean objectives through interviews of
more than one hundred individuals. Our method is to ask strategic questions to arrive at these fundamental

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