Opportunities for Action in Consumer Markets. Myths and Realities of On-Line Retailing

Transcription

1 Opportunities for Action in Consumer Markets Myths and Realities of On-Line Retailing

2 Myths and Realities of On-Line Retailing Business success is grounded in the ability to understand where the economy is heading, which products will sell, and how markets will evolve. But forecasting the future of electronic commerce is especially daunting because the offerings change daily and the market is growing exponentially. Opportunities abound, but no one knows for sure which ones will prove profitable. Given that uncertainty, companies developing strategy for the Internet should aspire to be generally correct and not specifically wrong. That means anticipating, in big-picture terms, where the emerging opportunities will lie but not locking into an inflexible business model or strategic direction. For example, whereas several established media companies made specifically wrong bets on building Internet portals, Yahoo became a leader by guessing correctly that the Internet would be difficult for users to navigate and by changing direction frequently as opportunities arose. A big challenge in such an environment is to resist the false assumptions that can lead a company astray. Not surprisingly, many myths about electronic commerce have already gained credence. Here are five that are being debunked by the experiences of online retailers. Myth 1: Because the impact of technology and the pace of technological change are unpredictable, companies should wait before doing business on the Internet. In fact, the pace of technological change is the most predictable part of electronic commerce. Moore s

3 Law, which tells us that computing power doubles every 18 months, has proved true for the past 15 years and will probably remain true for at least another 10. The question, then, is not if but when those economics will penetrate a company s value chain and how they can create an opportunity. Myth 2: Only certain products can be marketed and sold on the Internet. On-line retailing has moved beyond the belief that only standardized products, such as books and CDs, can be sold on the Internet. The reality is that on-line retailers are using a wide variety of business models to sell almost any product or service. The key to successful on-line retailing is the retailer s ability to leverage the information power and reach of the Internet to create an end-to-end experience that is enjoyable and offers value. Some on-line retailers sell and deliver products directly to customers, as on-line booksellers and computer companies do. Some help consumers navigate the product selection process. Consider Microsoft s CarPoint, which has leveraged the information power of the Internet to help consumers choose a car by allowing them to compare features and examine performance data, quality statistics, and other information. CarPoint then refers those people to local auto dealers to complete the sale. Consumers have embraced this new approach: more than 25 percent of U.S. automobile buyers now use an on-line service to research a purchase. Myth 3: E-commerce will be a zero-sum game. Rather than create new markets, so the theory goes, e-commerce will simply shift sales from traditional

4 retail channels to the on-line channel. It is true that the 24-hour-a-day availability of on-line shopping allows time-pressed consumers to make purchases they had deferred. However, on-line retailing can actually increase overall demand for products. The biggest physical bookstore might have 170,000 titles, but on-line bookstores have 3 million. Furthermore, the leading on-line bookstores, such as BarnesandNoble.com and Amazon.com, have become adept at using customers previous purchases to make recommendations that result in additional sales. Book consumption has increased in North America because of on-line selling. People aren t necessarily reading more books, but they certainly are buying more. Myth 4: All goods and services offered on-line will become commodities. Some fear that the Internet will drive down prices and force all retailers product lines to look the same. To be sure, electronic shopping will give consumers unprecedented power to dictate a product s features and price, but it will also be an opportunity for sellers to walk customers upmarket to higher-margin products. Rather than push products, the Internet will allow consumers to pull the products they want. Producers should watch very closely as consumers begin to design their own products and climb the price ladder. Dell, for example, has found that computer buyers are inclined to purchase more expensive computers and add more options when they can configure their order directly over the Internet. By understanding the psychology of on-line shopping, marketers can move their customers out of the commodities mentality into a personalized, big-ticket shopping experience.

5 Myth 5: On-line commerce and off-line commerce are separate worlds. In fact, some of the most successful on-line retailers blend their on-line and off-line channels. Contrary to popular belief, 59 percent of all on-line retailing revenues in 1998 were generated by retailers who already had an off-line presence. U.S. discount brokerage Charles Schwab, for instance, has opened 250 branches. The primary purpose of these physical locations is to acquire customers, who are then served by Schwab s telephone and on-line services. And one of the first on-line retailers, FLOWERS, is continuing to build flower shops. Why? Because a physical store gives a brand more visibility and attracts people who would not find the company on the Internet. Companies are also integrating their on-line and offline channels for advertising and promotions. Canadian Tire, a hard goods retailer, has found that requests for its weekly on-line flier have far exceeded the company s expectations. This form of electronic permission-based direct marketing is driving incremental sales at the company s physical stores. * * * As e-commerce continues to gain ground, the best strategies will aim to fill a latent consumer need whether it is the need for more convenience, a more customized product, or more options. The massive selection offered by on-line bookstores is meeting the need for choice, convenience, and availability. The on-line car-buying services are satisfying the need for objective information without the pressure-filled atmosphere of a show room.

6 The most successful on-line sellers also look for anomalies and capitalize on them. Sometimes the best opportunities lie hidden in something consumers are doing that, at first glance, makes no sense. One on-line retailer, for example, noticed a few senior citizens buying rap CDs. Follow-up with those customers revealed an opportunity for a direct marketing program aimed at helping grandparents buy pop music for their grandchildren. Finally, successful on-line retailers are able to move quickly by not hardwiring their business models until they understand the real economic leverage points. Amazon.com began by building its business on Ingram s traditional book-wholesaling infrastructure. But now it is building its own warehouse and logistics system. In the fast-paced world of e-commerce, retailers must have a deep understanding of consumers and be able to create a rich and rewarding virtual shopping experience. Successful companies will use that knowledge to define and, more important, rapidly refine their on-line business models so that they remain generally correct and never slip into the trap of being specifically wrong. David Pecaut David Pecaut is a senior vice president in the Toronto office of The Boston Consulting Group and head of the firm s global Electronic Commerce practice. The Boston Consulting Group, Inc. 1999

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