E-Tailing: Principles of Internet Marketing MARK 468

E-tailing
Principles of Internet Marketing

MARK 468
1
Session Format
 Statistics
 E-tailing Model
 Economic Issues
 Conclusion
2
Statistics
 Household with PC: 53%
 Households connected to internet: 34%
 Households buying items online: 17%
 Percent of total dollars spent online: 15%
 Average U.S. online shopper spent $1205
 Percent of total dollars spent online projected
in 2002: 36%
Reference: Ernst & Young Online Global Retailing
http://www.ey.com
3
Statistics (Cont.)
 # of purchases made : 13
 # of sites purchased from: 11
 % of shoppers who have purchased through
auction site: 51%
 % of purchases made online which would not
have been made elsewhere: 43%
 % of online purchases made unplanned: 16%
http://www.ey.com
4
Statistics (Cont.)
 % of online shopping trips resulting in
online purchase: 51%
 % of online shopping trips resulting in
store purchase: 25%

http://www.ey.com
5
Statistics (Cont.)
 1999 online e-tailing revenues totaled $33.1
billion, or 1.4% of overall retail revenue
 Expected to grow 85% to $61.1 billion in
2000
 In 1999, online, offline demographics became
more similar
 Three strongest categories remain travel,
computer hardware and software, and
brokerage services
http://www.ey.com
6
Statistics (Cont.)
 50 largest online retailers command 67% of
the market
 However, the top ten sites declined from 43%
in 1998 to 38% in 1999
 Nontraditional business models such as
auctions, buying groups, and manufacturers
and distributors selling directly to the
consumer, accounted for more than 35% of
1999 online product revenue
http://www.ey.com
7
Statistics (Cont.)
 Customer acquisition costs increased by 15%
in 1999 to $38 per customer from $33 in
1998
 This increase driven by pure-play retailers,
whose acquisition cost per customer jumped
to $82, while multichannel acquisition cost
decreased to $12
 Order conversion rate increased from 2.8% in
1998 to 3.2% in 1999
http://www.ey.com 8
Statistics (Cont.)
 Pure-play marketing spend as a percentage of
total revenues was ten times that of
multichannel retailers
 Pure plays shifted emphasis away from
generating awareness into retention
 Multichannel retailers increased focus on
brand awareness
 Order fulfillment process ripe for
improvement – catalog based players do best
http://www.ey.com
9
Statistics (Cont.)
 88% of online consumers abandoned
carts during last Christmas shopping
season
 62% of retail sites failed to turn profit

http://www.ey.com
10
E-tailing Model
 E-tailing model is a direct sales model using
the internet as one or more channels of
distribution
 Distinguished from content or service
advertising revenue model
 Usually not associated with transactions,
auctions, or exchanges in either B2C or B2B
market
 Pioneered by Amazon.com
11
E-tailing Model (Cont.)
 Successful e-tail model requires same market
analysis as offline models including
assessment of:
 Market size
 Market segments
 Market needs
 Competitors & Positioning
 Unique Selling Propositions
 Communication Strategy, Given
 Analysis of Buyer Behavior and
 How Choices Are Made
12
 Online, consumers have a variety of
tools to facilitate choice, including:
 Product evaluation sites
 Store evaluation sites
 Price evaluation sites
 Coupons, incentive, reward sites
13
 E-tailing also characterized by unique
buying “motivators” and “inhibitors”:
 Prime buying motivators:
 Saving money
 More convenience
 More choice
 More fun than traditional shopping
See Ernst & Young, GVU Surveys References On Web Site
14
 Prime buying inhibitors:

 Inability to buy because of no computer access
 Fear of sending credit card information over the
net
 Inability to navigate site
 Inability to judge quality
 Fear of loss of privacy
 Easier to purchase locally
See Ernst & Young, GVU Surveys References On Web Site
15
 E-tailers should address inhibitors directly:
 Increase trust and privacy protection through
policies, 3rd party affiliation (Truste, Better
Business Bureau, Online Privacy Alliance)
 Offer incentives to buy to overcome security
concerns (e.g. web discount) and publicize 3rd
party security measures (RSA, Verisign)
 Reward buyers to reinforce behavior and
encourage future purchases (e.g reward points)
 Make your web site easy to navigate even for web
“newbies”
16
 Web site navigation reflects how the prospect
interacts with the site in distinct stages
 Stage 1: Attraction – visitor is attracted to site
 Stage 2: Interaction – visitor views pages of
interest, forms attitudes
 Stage 4: Transaction – visitor buys
 Stage 5: Satisfaction – visitor receives product and
is happy, leading to further attraction
17
 Satisfaction depends largely on front and
back office operations much of which operate
behind the scenes
 Order receipt, order verification, order
assembly, order packing, order shipping
 Payment receipt, payment processing
 Claims receipt, claims processing
 Customer service, conflict resolution
 Customer records, data mining, offer
targeting
18
 E-Commerce enabling web sites is simple
 1. Shopping Carts – for relatively small number of
products
 Design web site in FrontPage, Dreamweaver,or
NetObjects Fusion
 Add Product Images, Multimedia
 Add Links To Shopping Cart
 Some shopping carts require you to use specific ISPs,
others let you choose
 Advantage: complete freedom in web design
 Disadvantage: have to manually update, revise links
which may be time consuming
 Disadvantage: may lack more advanced features
19
(Cont.)
 2. E-Commerce Software Packages – for larger
web sites
 Build e-commerce web site from the ground up
 Wizards make this process quite simple
 Select templates, colors styles
 Upload product database, Presto! You’re done!
 Some programs require you to use specific ISPs, others
let you choose
 Advantage: rapid creation, and advanced features
 Disadvantage: cookie cutter look, customization takes
time
20
(Cont.)
 3. Browser Based Solutions
 Build your store with a browser (example Yahoo! Store,
Amazon.com zShops, or free offerings by Homestead,
vStore, Golinq)
 Advantage: no knowledge required whatsoever
 Disadvantage: cookie cutter look, very little flexibility,
store branding and promotion very problematic (e.g.
difficult to implement banner ads, affiliate marketing, or
third party programs)
21
 Once store is built, you need to process
payments
 Virtually all stores use SSL, secured socket layer
technology so that credit card numbers cannot be stolen
during transaction
 SET (secure electronic transaction) is more secure and
relies on electronic wallet technology using VISA –
encrypts payment information all the way to the
payment processor (even merchant can’t read card
number) limited acceptance because it is more costly
22
 Payment Methods:
 Dominate means of payment online remains credit card
 No widely accepted digital cash
 E-Charge promotes payment on phone or ISP bill
 Mon-e promotes electronic debit through purchase of
web money cards
 Visa and Citibank also promoting “web ready” credit
cards and electronic wallets
 Not widely accepted thus far
 Problem: merchants must sign on
23
 Payment Processing
 You cannot use existing non-internet merchant
account
 New internet merchant account needed
 Banks and brokers provide these accounts
 Or, third parties like ccnow will process credit
cards for you (for a fee)
 Watch out for fraud! If you have a typical MOTO
(mail order telephone order) merchant account,
YOU will be left with the loss if fraudulent credit
cards used – not the bank!
24
E-tailing Model (Cont).
 Payment Processing (Cont.)
 Real time authorization and automatic deposit
require account with online payment processor
such as AuthorizeNet or Cybercash
 However, you cannot deposit funds until product
is shipped
 Customer must be informed immediately and
given options if shipment cannot be done with 30
days
25
 Shipping & Fulfillment
 Shipping, fulfillment and logistics difficult for many
firms inexperienced in this area of business
 Consumers may demand overnight delivery; this
requires national distribution coverage
 Costs, inventory control issues must also be
considered
 Growth area in e-tailing is outsourcing of entire
logistics functions to third parties
 Netship, ifulfill, ups, fedex, electroneconomy
26
E-tailing Model (Cont)
 Customer Service
 Consumers expect replies to email within
24 hours
 Consumers expect live telephone support
 Consumers expect prompt service claims
 More consumers demand real time support
online while surfing
 Some of these tasks can also be
outsourced (e.g. LivePerson.com)
27
E-tailing Model (Cont)
 Pretend you’re a consumer
 How will you interact with site
 How will you buy
 How will order be processed
 How will order be fulfilled
 How will order be shipped
 How will payment be processed
 How will customer service be implemented
 Repeat this process for relevant scenarios
28
E-tailing: Economics
 Demand Side: Consumer Issues
 Supply Side: Traditional Retailer Issues
 Channel Conflict
29
Consumers and E-tailing
 e-tailing will need to match or exceed the
utility provided by traditional formats to
succeed
 Shopping benefits provided by retail formats
influence type of merchandise that can be
sold in different retail formats
 Retailers and retail formats also differ in the
type of information they convey effectively to
consumers
Reference: Alba et. Al Interactive Home Shopping, Journal of Marketing
30
Dimensions Affecting Relative Attractiveness to
Consumers of Alternative Retail Formats
Dimension Supermarket Department Category Catalog Current Future
Store Specialist Internet E-tailer
Retailer
Providing alternatives for
consideration
Number of Categories Medium Medium Low Low Low Low or High
Alternatives per Category Medium Low Medium Medium Low High
Screening Alternatives to
Form Consideration Set
Selecting Consideration Medium High Medium Low Low High
Set
Providing Information for
Selecting from
Consideration Set
Quantity Medium Medium Medium Medium Medium High
Quality High High High Medium Low Low or High
Comparing Alternatives Medium Medium High Low Low Depends on

supplier
Reference: Alba et. Al Interactive Home Shopping, Journal of Marketing 31

Dimensions Affecting Relative Attractiveness to
Consumers of Alternative Retail Formats
Dimension Supermarket Department Category Catalog Current Future
Store Specialist Internet E-tailer
Retailer
Ordering & Fulfillment:

Transaction Costs
Delivery Time Immediate Immediate Immediate Days Days Days
Supplier Delivery Cost Low Low Low High High High
Customer Transaction High High High Low High Low

Cost
Supplier Facility Costs High High High Low Low Low
Locations for Placing Few Few Few Everywhere Many Many

Orders
Other Benefits
Entertainment Low High Medium Low Low Medium
Social Interaction Medium High Medium Low Low Low
Personal Security Low Low Low High High High

(Cont.)
 Full price paid by buyer is equal to market
price plus search costs
 Search costs approach zero on web
 If there are N alternative brands and
consumers examine only a subset n< N, then
utility of chosen alternative increases with n
 In traditional markets, diminishing returns to
search reached quite rapidly
 With web, diminishing returns reached slowly
33
(Cont.)
 Web superior when management and
dissemination of information quantity
main issue
 However, when information quality an
issue web may or not be superior
 Depends on whether product is a
search, experience, or credence good
34
(Cont.)
 Search goods: those whose quality and
value to the consumer can be easily
assessed prior to purchase
 Experience goods: quality difficult to
assess prior to purchase and usage
 Credence good: quality cannot be
known even after repeated use
35
(Cont.)
 Search goods generally do better on web
(stocks, computers, tickets)
 However, digital experience goods also sell
well when trial allowed (e.g. software)
 Consumer experience goods (e.g. wine) may
also sell well when communities allowed to
disseminate opinions, or product review sites
used
 Consumers may also combine offline product
examination with online search and purchase
36
Retailers & E-tailing
 Retailers must develop new skills in:
 Distribution efficiency (shipping small units to
individual consumers)
 Selling assortments of complementary merchandise
to lower shipping costs and therefore net price
 Collecting and using information to better market
one-on-one
 Presenting product information in catalog style
 Offering unique, targeted merchandise

37
E-tail Success Capabilities
Possessed by Firms
Skills for Developing Catalog Traditional Category Merchandise
Advantage Retailers Stores Specialists Manufacturers
Distribution Efficiency High Medium to High Medium Low

to Homes
Provision of High High Low Medium

Complementary
Assortments
Collection and Use of High Medium to High Low Low
Customer Information
Presentation of High Medium to High Low Medium

Merchandise
Information
Ability to Offer Unique Medium Medium Low High
Merchandise

Retailers & E-tailing
 Most threatened by the web is the offline
category specialist that relies primarily on
price
 Lead threatened are traditional catalog
retailers
 Successful e-tailing requires merchandising
savvy of retailers with direct marketing,m
targeting and logistics capability of direct
marketers
39
Channel Conflict
 Loss of control over distribution, prices, or
terms of sale because of emergence of
parallel or competing internet channel
 Both direct and indirect channels may face
channel conflict because of the internet
 Conflict may be internal and related to
channels the company employs, or external
and related to conflicts involving third parties
Reference: Arthur D. Little: Online And Onland: Channel Conflicts And How To Avoid Them
40
Internal Channel Conflict
 1. Cross-channel cannibalization
 The creation of a new channel triggers a
redistribution of sales volume in favor of new
one
 When firm is channel rather than customer
focused, channel managers will fight for
volume, possibly working against one another
 Example: Merrill Lynch feared significant
income reductions by moving to internet and
held out for as long as possible
41
 2. Underutilization of real estate
 Most retail channels comprise physical assets,
such as stores, branch offices, etc.
 Moving online may cause underutilization of
these assets and lower profitability
 Example: Barclay’s Bank U.K. was forced to
close nearly 700 branches because of
popularity of internet banking
42
 3. Pricing
 Online prices tend to be lower because of
greater price transparency, lower cost
structures of some pure play web firms and
current market share focus
 May be difficult if not impossible to maintain
multiple channel pricing structure
 Example: Schwab set flat rate of $29.95 for online
trade and attempted to keep offline commission at
$60; “click and mortars” face price arbitrage; get
service offline, but buy online
43
 4. Channel Desynchronization
 Consumers do not differentiate among
channels but firms do
 Firms may be unable to coordinate service
and warranty requirements across channels
 Incorporation of separate offline entities for
tax nexus reasons, exacerbates this
 Example: in many cases you may not be able to
return your online purchase to the offline store
(Barnes & Noble)
44
External Channel Conflict
 1. Alienating Traditional Retailers
 By going direct, you may alienate traditional
channel members
 Channel members may withdraw support or
sabotage offline marketing efforts or turn to
competitors
 Example: Compaq tried to sell direct and maintain
relationship with offline retailers by not selling to
online retailers.
45
 2. Losing Channel Control
 Establishment of sales regions attempts to
exert control over margins and distribution
 Manufacturers or intermediaries who establish
web sites may usurp existing channels and
lose control over distribution and pricing
 Example: Levi Strauss went online and attempted to
prevent retailers from also selling its jeans online;
this attempt failed
46
 3. Moving Value Upstream
 Manufacturers may use the web to perform
value added services that used to be
performed by channel members, thereby
reducing value added fees that distributors
can charge
 Example: Car manufacturers are providing a variety
of search, information, and even ordering capabilities
that used to be done by dealers – dealers are
becoming little more than temporary parking lots for
cars
47
Designing Channel to Minimize
Conflicts
 Use a completely different brand name
online
 Use different product/service bundle
online versus offline
 Redefine distributor/manufacturer
relationship
48
Summary
 Successful e-tailing requires adherence to
marketing principles
 Combines skills of offline retail, direct catalog
marketing
 Unique aspects of consumer behavior
 Statistics show high growth
 Economics compelling
 Channel conflict will continue until offline,
online models merge to form unique mix of
advantages
49

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E-tailing

Principles of Internet Marketing

Reference: Ernst & Young Online Global Retailing

Reference: Ernst & Young Online Global Retailing

See Ernst & Young, GVU Surveys References On Web Site

 Prime buying inhibitors:

See Ernst & Young, GVU Surveys References On Web Site

Alternatives per Category Medium Low Medium Medium Low High

Quality High High High Medium Low Low or High

Comparing Alternatives Medium Medium High Low Low Depends on

Reference: Alba et. Al Interactive Home Shopping, Journal of Marketing 31

Ordering & Fulfillment:

Supplier Delivery Cost Low Low Low High High High

Customer Transaction High High High Low High Low

Locations for Placing Few Few Few Everywhere Many Many

Entertainment Low High Medium Low Low Medium

Social Interaction Medium High Medium Low Low Low

Personal Security Low Low Low High High High

Reference: Alba et. Al Interactive Home Shopping, Journal of Marketing 32

Reference: Alba et. Al Interactive Home Shopping, Journal of Marketing

Distribution Efficiency High Medium to High Medium Low

Provision of High High Low Medium

Presentation of High Medium to High Low Medium

Reference: Alba et. Al Interactive Home Shopping, Journal of Marketing 38

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