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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
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E-Tailing Business Models
Click and Mortar Strategy
E-tailing Problems
The middleman problem: e.g. travel industry
1
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
2
Dell
3
Portals, trust sites (2 slides ago)
Prentice Hall, 2002
Click and Mortar Strategy
Channel: route to customer (through delares/vendors/resellers/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
Levi’s stopped online direct sales, because
distributors complained
Selling off old stock directly to make room for fresh
models may undercut dealers.
Have to coordinate parallel channels of distribution, and
coordinate marketing strategies
e.g., car dealer network + online direct sales
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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 – use best channel for each part
of business process
E.g. order electronically; physical sales return.
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Customers are not
all the same!
Consumer types
» Individual consumers
» Organizational buyers
Goal of shopping
» Pragmatic: buy something useful, cheaply
» Hedonistic: have fun
Personality
» Impulsive buyers — purchase quickly
» Patient buyers — make some comparisons first
» Analytical buyers — do substantial research before buying
Computing Science, University of Aberdeen
6
Consumer Categories
19% Social Shoppers:
enjoy shopping
20% Habit die-hards:
stuck in their ways
14% Ethical:
will purchase
provided
it is honest and ‘pc’
14% Experimenters:
ready to try new things
47% want to
shop
electronically
16% Value shoppers:
will purchase where
they see value
Michael De
Kare-Silver
Warning: these statistics are probably out of date!
17% Convenience:
responsive to things
which save time
or make life easier
Shopping avoider
Hunter gatherers
enjoy comparison/ search
New technologists
because it's cool
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Diffusion of Innovation
A widely-accepted picture of technology adoption
Rogers, Everett M. (1962). Diffusion of Innovations, Glencoe: Free Press.
8
Demand, in
units
The Long (Fat) Tail
1000000+
Trad. channel
cut-off for
viable stock
E-commerce.
cut-off for
viable stock
13
J.K. Rowling
J.R. Hartley
A few big hits (green). A lot of stuff that sells poorly
(yellow). But a lot of the potential sales (in the area
under the curve) are yellow.
Titles, ordered by
sales, decreasing
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Consumer
Behaviour
Prentice Hall, 2002
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
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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
Products—portfolio of items available
Price of the products
Promotion of products (ads & giveaways)
Packaging and delivery.
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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
3rd party to assure quality and proper exchange
Communities of consumers
Epinions.com—searchable recommendations on products
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PriceGrabber.com—comparison shopping
One-to-One Marketing
• Build a long term association
• Meeting customers cognitive needs
Customer may have novice, intermediate or expert skill
• E-loyalty—customer’s loyalty to an e-tailer
costs Amazon $15 to acquire a new customer
costs Amazon $2 to $4 to keep an existing customer
• Trust in EC
Deterrence-based —threat of punishment
Knowledge-based —reputation
Identification-based —empathy and common values
Referrals – Viral Marketing
• Personalisation…
Personalization
• E-Commerce sites can treat customers differently
Offer recommendations, special deals
Personalise web site
Adjust prices
• In theory, “personalised shop” one of the great
benefits of e-commerce
• Can also take advantage of more of long tail
Don’t need to keep stock in same way as traditional shop
Can do things like Print On Demand
Personalisation - Marketing Model
“Treat different customers differently”
Prentice Hall, 2002
Personalisation
“Process of matching content, services, or
products to individuals’ preferences”
Build profiles – N.B. Privacy Issues
Solicit information from users
Use cookies to observe online behavior
Use data or Web mining
Recommendation
Build profiles
What has X bought?
What has X looked at?
Demographics: age, gender, etc
Recommendation
Rules: If X buys Harry Potter 6, recommend HP 7
Data Mining: Other people who bought Harry
Potter also bought Lord of the Rings
Collaborative: X’s overall buying profile is similar
to Y, so recommend whatever Y bought
Data Mining
searching for valuable information in extremely large databases
Automated prediction of trends and behaviors
Example: from data on past promotional mailings, find out
targets most likely to respond in future
Automated discovery of previously unknown patterns
Example: find seemingly unrelated products often purchased
together
Example: Find anomalous data representing data entry errors
Mining tools:
Neural computing
Intelligent agents
Association analysis - statistical rules
Web Mining - Mining meaningful patterns from Web resources
Web content mining – searching Web documents
Web usage mining – searching Web access logs
Recommendations
If done well, perceived very positively
Real benefit, not just marketing spam
Credit-card companies have done this well
Have the most purchasing data?
Data privacy issues
Can Visa sell data about you to Amazon?
Spyware to track all of your web browsing?
Personalise Web Sites
• Let customers create their own “shop front” focusing
on their interest
• Adjust appearance (eg, for visually disabled, or strict,
religious consumers)
• Do-able, not huge success
Personalised Pricing
Companies would love to be able to charge people
different amounts for the same product
Airline seats, cars, etc
Full price for people who are keen, in a rush, don’t
care about money
Discount for choosy/finicky
Personalised Pricing (B)
• Amazon, etc have tried this, but customers hated it.
• So has gone “underground” for now.
• Technology permits this, but society’s expectations
does not allow it
Advertising
E-Shops (and other sites) can make
money via advertising
» Google makes billions from its “sponsored
links”
» Amazon has adverts as well
Computing Science, University of Aberdeen
24
Web Advertising
Conventional advertising focuses on
visual appeal
Less successful on web
» Flashy animated banner adverts are a
nuisance and distraction
Computing Science, University of Aberdeen
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Targeted adverts
Web allows relevant adverts to be
associated with a web page
» Google sponsored links based on search
» Amazon could display different adverts for
sci-fi and romance novel
Very effective if done well
» So Web sites can charge more for targeted
adverts
Computing Science, University of Aberdeen
26
Web adverts
Initially treated like TV adverts, put huge
effort into flashy multimedia banner ads
Now focusing on simple targeted
adverts instead
Advertising models cannot be blindly
moved from TV to web
» need new models!
Computing Science, University of Aberdeen
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Consumer Satisfaction
Prentice Hall, 2002
Customer Focus Summary
• Sometimes technology really helps
Recommender systems, targeted adverts
• Sometimes technology works, but society doesn’t like
it
Differential pricing
• Trust – sine qua non
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)
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Firms that have a fleet to deliver direct to consumers
E-tailing Failures and Lessons Learned
Profitability – Each additional sale must lead to additional 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
Security (we’ll return to this later)
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
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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
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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 e-Commerce.
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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?
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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
How can travel agent make money in Internet age?
Especially a small one, not Expedia
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Business Models
Sell extras, upgrades:
Sell flight at cost price, but extras at high markup
E.g., insurance, delivery
Use loss leaders and technology lock-in, e.g.
http://www.bbc.co.uk/news/technology-19907546 .
Make sales elsewhere
Sell advertising space on website
Sell customer data.
Address niche market
Specialize in travel to, say, Poland
Flights, hotel, airport transfer, tours
Specialize in selling flights to universities
Failures from poor understanding of niche, e.g.
``Pink it, Shrink it’’ http://www.bbc.co.uk/news/business-1988472036
In these cases, how is value added?
Business Models (B)
Branding
Build up a good reputation, so customers trust you
to offer OK deals, good delivery
If you’re trustworthy and “cheap enough”, it is
not worth the 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
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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
Where’s the added value for the custommer?
New: focus on product niche, high mark-up extras,
advertising revenue, brand
Expedia, escape2poland.co.uk
Where’s the added value for the customer?
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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!
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E-Commerce Bus. Mod. Summary
Initially tried to make e-shops similar to high street
shops. But
Need different business model
Trust issues much more important
Need appropriate legal framework
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
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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
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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
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E-Commerce in the News
• OFT details widespread ongoing problems with
compliance with UK Distance Selling Regulations
• ``More than a third of the UK's top online retailers
could be breaking consumer laws, the Office of
Fair Trading (OFT) has said.’’
• http://www.bbc.co.uk/news/business-19910561
• http://www.oft.gov.uk/shared_oft/research/OFT145
2_Websweep_report_2012.pdf
• Facebook pays £238 000 in (corporation) tax in the
UK despite advertising revenue of £175 000 000
(estimated).
• Only reports £20 000 000 revenue in the UK.
• http://www.bbc.co.uk/newsbeat/19910456
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