Chapter 7-9

This chapter completes the trio of chapters examining the marketing mix, by looking at those main elements outside of the product or service itself. It starts by looking at the factor which most economists, and not a few marketing theorists, focus on; that of price. The aim of this section, therefore, is to put such pricing theory in perspective - essentially as one (albeit important) element of the marketing mix - and then to suggest how it might be handled in practice. The answer one of only a few in marketing where there should only be a back and white decision to be made - is far from what these theorists might expect!

The second section moves on to another of the original 4Ps, that of Promotion. It mainly looks at this, however, in the pragmatic context of the consumer expectations against actual performance which is especially important in the case of e-commerce. Finally, starting with the economies of scale argument which underpins much of pricing theory, it examines the competitive forces likely to emerge in e-commerce.

Pricing Theory
Pricing Roulette in Practice
Price Premium
Historical Pricing
Competitive Pricing
New Product Prices
Advertising Believability
Complaint Handling
Dissatisfaction
Economies of Scale
The Power Diamond
Using Competitive History
Leaders and followers
Competitor Responses

fig.(22) In the travel agency market, lastminute.com specialises in lowest price deals

7.2 PRICING

The pricing model adopted by e-commerce vendors seems, so far, to emphasise commodity prices. In other words, cut-prices dominate the markets. In view of the one-to-one nature of e-commerce this is a surprising, indeed perverse, effect. Instead it should be argued that, by matching the precise product to the exact customer, there should be an overwhelming argument for premium prices. Thus, the price wars that have emerged are a self-inflicted wound.

Thus, as an antidote to the hype which has traditionally surrounded it, let us look somewhat sceptically at some of the history of pricing theory.

Its exaggerated importance may be seen to most obviously descend from the classical tradition set by the economic disciplines. Central to the writings of neo-classical economists are the 'laws of supply and demand', which describe one theory of how prices are set.

Here, the price is set when the market 'clears': a technical term for a very simple principle - this happens when the price as attractive to buyers as it is to sellers, and all the 'goods' offered for sale are actually sold.

But the typical demand 'curve' of most products or services is much steeper than traditionally assumed. In essence the demand is relatively inelastic (with respect to price). At the same time the supply 'curve' is very elastic above the entry price (the price at which the market becomes attractive to new entrants). The problem is that even a model which has been modified to take account of this still will describe price activity in only one context - that where only price counts, and 'commodity' prices obtain. As we will see below, this is not normally the case.

On the other hand, when the operators within a market do decide that their products or services should be treated as commodities, and be priced accordingly, then something like the traditional picture holds. Fortunately, this applies to only a small minority of markets, and - as we have seen above - most e-commerce markets (with their matching of individual requirements) should not fall into this category.

7.3 PRICING ROULETTE

1Thus the first, and most important, decision for any manager in pricing his or her Product/Service Package is the simple one - "is it in a market which is based on commodity prices?". If the products or services are treated as commodities, and if prices reflect this, then you must do the same in order to survive, even in the short term.

Conversely if, as is usually the case, the market is not commodity based, you must adopt price maximisation rules. Pricing is either commodity-based or not: for once, there is no half-way house! This applies equally to e-commerce markets, where - with firm price lists on public view - the evidence needed to answer this question may be much easier to find.

Much the same as you play Russian Roulette with a revolver, suppliers often play Pricing Roulette with the market. The odds are a little bit better - our research indicates that only a tenth of markets indulge in commodity pricing. The end effect may be much the same, however, if your spin of the chamber lands you on a commodity based market - it is often tantamount to commercial suicide!

If the products or services are treated as commodities, and if prices reflect this, then you must do the same in order to survive, even in the short term. You have no pricing choice. At present this is especially true in e-commerce markets - where the customer is only a click or so away from the price being set by your competitors! You must then hope that the situation changes at some time in the future, when you can make a reasonable profit, but in the short term you can only reduce costs to staunch the bleeding.

Fortunately, as mentioned above, 90% of the markets are not commodity based, and should not even be so in e-commerce. If you come into this category you can heave a sigh of relief that you have survived the test and get on with the real marketing described in the rest of this book. If, as is usually the case in a stable market (which, unfortunately, not all e-commerce is yet), the market is not commodity based, you should adopt price maximisation rules.

This is one of the very few situations in marketing where there are no grey areas, no spectrum of options. Beware though! One of the great temptations in marketing, to which many (not least too many naïve e-commerce vendors) succumb, is to think that a significantly lower price will improve your position. The odds show (9:1, as we saw above) that this is likely to be a mistake - and may switch the whole market to commodity-pricing (so that everyone loses, especially the initiator). The good news is that there is, fortunately, little evidence that the most debilitating sort of price wars have yet broken out in e-commerce. There is, though, plenty of evidence of margins being hit by vendors selling below the optimum price.

This is not to say that a drive for reduced costs, which is typically initiated by commodity-pricing, should be abandoned. There must always be an awareness that commodity-pricing may one day emerge into your market, even if this would be near suicidal for all involved. The organisation has (while making its investments in the future), therefore, to develop a cost structure which will enable it to survive even this eventuality - and in the meantime it will reap even higher levels of profit.

■ Now for the easiest question in this whole book, is the pricing the market(s) in which your organisation operates commodity or premium based?

■ Has your organisation asked itself this question, and has it got the answer right?

The most profitable result should be that, in the great majority of markets including in particular those of e-commerce, suppliers can, happily for them, count on achieving more than the base commodity price.

The difference is known as the 'price premium' which simply states that you can achieve a premium price, above the commodity price level:

This is a simple concept, but a useful one - not least because it acts as an antidote against the very strong temptation to indulge in price-cutting. This diagram also indicates that, in most traditional markets (though not necessarily to the same extent in e-commerce markets), the brand leaders are progressively placed to achieve such premiums (though they may choose to trade this off against higher volumes of sales).

The premium may be justified by a variety of factors; including those of image, quality, differentiation positioning etc. The exact reason for the premium is not important, it will vary from situation to situation. What is crucial is that you recognise it as a possibility, and work to maximise it.

If you avoid the pitfall of commodity-pricing, along with that of the many 'guaranteed' techniques of pricing offered by academics and consultants, most pricing - in conventional markets at least - then turns out to be relatively simple. This is because most products or services are either existing 'products' with a known track record, or are new products entering markets where there already are similar products with known track records. This, therefore, signposts the two main alternative methods, both of which tend to be scorned by academics, but which (despite the shortcomings I will discuss below) are eminently sensible:

1. Historical Pricing - For good reasons, what the price has been in the past is, for most traditional products or services, the best starting point for what it should be in the future. Accordingly, this is probably the most prevalent form of pricing in conventional markets. On the other hand, for the obvious reason that there is rarely any significant history of pricing actions, this approach is only available in a few new sectors of 'pure' e-commerce; though it still should apply in those which are extensions of existing markets - such as the travel agency market targeted by Lastminute.com.

The first caveat is, in any case, that you must still be aware of how the price needs to change to reflect the consumer's changing needs and different competitive conditions - but most managers who are in touch with their customers and markets should already be well aware of such trends.

The second caveat is that it assumes the historical price was correct, and exactly matched the perceived value; the value which the consumer believes (perceives) the product or service holds (and hence what he or she is willing to pay for it). This is, though, just what the positioning process - described earlier - sets out to achieve. Pricing is just one of the variables involved in the positioning, but the process should be no less powerful for that (and, indeed, linking it to the other parameters should increase the validity of the decision). Depending upon the exact circumstances, it may even be possible to suggest that the higher levels of service (not least the wider ranges offered) might justify an even higher price in some e-commerce sectors.

2. Competitive Pricing - The one additional aspect which may modify historical pricing, and may sometimes replace it (and always will in the case of new products) is what competitors are doing. The positioning exercise, of course, takes full account of the relative position with respect to competitors - so, once again, this should be a natural part of the pricing process. For the obvious reason that this is often the only pricing information available in most 'pure' e-commerce markets, and as they are still tending to behave as if they are 'new products', this is as yet the main approach adopted in practice.

On the other hand, the other main approach, Cost-Plus Pricing, adding a fixed percentage (to show a 'profit') to costs, should not usually be considered. Costs should be minimised, but prices should be maximised, based upon what the customer is willing to pay - which is typically not directly linked to cost.

The one exception, where cost-plus pricing may be justified is that where a large number of items have to be priced - such as by Amazon - and logistics of making a large number of individual decisions becomes a significant factor. Here a guide price may have to be determined (on the basis of historical/competitive/perceived value pricing) for a group of products, and then extended to the individual products as a percentage uplift on their cost.

■ Which approach does your organisation use (either deliberately or by default): Historical Competitive Cost-Plus Other?

7.4 NEW PRODUCTS PRICING

The time when an organisation is most free to determine the price of its products or services is when they are launched. On the other hand, once the price has been set, so has a precedent. In the case of any future changes the consumers will not have only the competitive prices as a comparison, but they will also have the previous prices as a very direct reference point! This makes it very difficult to make substantial changes to the prices of existing products or services. Consumer reactions may be severe if they think they are being taken advantage of. This is, of course, the predicament which now faces many of the e-commerce start-ups - though not the clicks and mortar entrants, whose prices will generally have been set in their existing, conventional markets.

Even in the case of the start-ups, the new product may be entering an existing market - one probably led by conventional 'delivery systems'. If this is the case then price will be just one of the positioning variables. On this basis, the price should be carefully calculated to position the brand exactly where it will make the most impact; and profit. At a less sophisticated level, perhaps, the producer of a new brand will decide which of the existing price ranges, cheap or expensive, the product or service should address. A supplier entering a traditional market can simply go to the local supermarket, or speciality store, and see what prices are already accepted. For e-commerce it is even simpler - just search the web, without leaving your desk! In industrial markets it may be more difficult to obtain competitive prices, even where published price lists are available; since these are often only the starting point for negotiations which result in heavy discounts - IBM's dealers, for example, were often willing to offer up to a 35% discount against list price. This was the case even for a product which was in short supply; which is an indication of the problems which can be faced in a suicidally competitive market - as e-commerce often still is!

In the case of a totally new product or service, which may apply to some of the new e-commerce start-ups (though to far fewer than the hype might suggest), the pricing exercise will be that much more difficult; for there will no precedents to indicate how the consumer might behave, and this is an area where market research is notoriously inaccurate. In the end it will have to be a judgment decision; as to what 'perceived value' the consumer will put on the offering.

In this position, there are two main approaches possible for a new product, and to a lesser extent for an existing one:

1. Skimming - One approach is to set the initial price high, to 'skim' as much profit as possible - even in the early stages of the 'product life cycle'. In theory, at least, this is an option open to all products or services; and indeed is an option which can apply throughout the life of the 'product' - assuming that the producer adopts a policy of limited competition, 'niche' marketing for example. It is particularly applicable to new products which, at least for some time, have a monopoly of the market; because the competitors have not yet emerged.

This is a pattern often seen in the introduction of new technology; video recorders and single lens reflex cameras for example- though as yet not in the case of much of e-commerce!

The initial price is kept high, to make the maximum profit from the initially limited demand; and probably equally limited supplies. It is then reduced, possibly in stages to gradually expand demand, until it reaches a competitive level just before the competitors enter the market. This is a fine judgment, though; and it is interesting to note that in the case of the video recorders and cameras mentioned above it was the late-comers, with competitive prices, which actually swept the board!

The rationale behind the 'skimming' policy (sometimes called 'rapid payback') is normally quite simply that of maximizing profit. But there may occasionally be another motive - that of maximizing the image of 'quality'. In which case the policy of high pricing, to demonstrate quality, would also continue throughout the life of the product or service. This is a policy which holds in consumer markets such as the upper end of the perfume trade; where Chanel Number 5 probably would not increase its sales dramatically if the price was reduced! But it can just as easily apply in industrial markets. It is the foolish consultant who asks for a low price, because the client will probably think that the quality is comparably low. It was said, even several decades ago, that McKinsey was so successful because they would not enter a company for less than $100,000; which meant that the company had to take them, and their quality, seriously.

As indicated above, the danger of a skimming policy is that a high price encourages other manufacturers to enter the market because they see that sales revenue can quickly cover the expense of developing a rival product. Where launch costs can be relatively low in most e-commerce markets, this is a danger which cannot be ignored. Even if your prices are not exorbitant you may still need, therefore, to plan for a steady reduction in price as competitors appear and you recover some of your launch costs.

2. Penetration policy - On the other hand a manufacturer could choose the opposite tactic by adopting a penetration pricing policy; and, indeed, this was the very successful policy, in the 1970s and 1980s, behind the move of the Japanese corporations into a number of existing markets - including those of the later stages of the introduction of video recorders and single lens reflex cameras. Here the price is set deliberately low, with a number of objectives in mind. The initial low price might make it less attractive for would-be competitors to imitate innovations particularly where the technology is expensive. It encourages more customers to buy the product soon after its introduction - which hastens the growth of demand and earlier economies of scale. The main value of this policy is that it helps seize a relatively large market share and increase turnover whilst (on the basis of economies of scale) reducing unit costs; so that the price domination can be maintained and extended. Its major disadvantage lies in losing the opportunity for higher profit margins. With 'competition' being the most prevalent strategy in the 1990s, however, penetration pricing has almost become the norm for a wide range of markets. It certainly seems to be the case for a high proportion of those in e-commerce! More important, perhaps, with relatively low launch costs it is likely to remain the model for future launches as well!

■ Does your organisation choose 'skimming' policy for its new products?
If so, what risks does this run - in terms of competitive entry?
■ Does your organisation choose 'penetration pricing' for its new products?

Overall, the most productive approach to pricing is not a separate technique, but is to see it as the natural outcome of the positioning process.

7.8 PROMOTION

Moving on, to the next of the traditional 4Ps, there is a range of alternative (and often complementary) vehicles available in conventional markets for promoting the product or service, and I will look at these first - to set the scene.

As a very direct approach, there is face-to-face sales. At the other extreme, there is the much more indirect one, when it is too expensive to confront the customer personally, of advertising; or the even more indirect one of public relations. Finally, there is the very immediate one of sales (point of sale) promotion - which, if the reports are to be believed, now accounts for the largest part of the spend on promotion as a whole. To put these in a more memorable context than just the rather amorphous 'promotional mix' (even though that does convey exactly what is involved) I like to look at the 'promotion lozenge'. It is shaped like a diamond, but I prefer to call it a lozenge because it can easily be moulded to fit the specific situation!

This lozenge is not as arbitrary as it may seem. It actually is organised along two dimensions. Hopefully, the vertical one is obvious. It is the move from indirect (advertising) to direct (sales) contact with the customer.

Perhaps less obvious, but in many respects more important, is the horizontal dimension. This shows the flow over time, from the start with the establishment of a general interest via public relations (PR) through investment in image building with advertising and much of the selling process, to the very immediate impact of sales promotional devices at the point of sale. It also demonstrates the gradation from the long term investment in PR and advertising/sales to the very short term effect of promotion.

The demands posed by your product/service package determine the actual shape of the lozenge; the reason for choosing a soft, malleable lozenge rather than a hard diamond. If you need the face-to-face (sales) contact to explain a complex package, and the price of this is sufficiently high to cover the high costs this implies, then the lozenge becomes almost an inverted triangle:

The advertising element is almost missing, though even in the almost pure sales environment there will remain some element of indirect contact - often in the form of direct mail, to generate prospects for the face to face contact. The 'point of sale' here is a time (not a place), and the promotional element is usually only seen in the form of discounting the price. Despite my earlier comments though, sales professionals would argue that this does need to have a very sharp cutting edge.

Almost the exact reverse occurs for fast moving consumer goods where the low unit price means that face-to-face selling is simply not an economic proposition:

Here 'sales' drops' out of the picture, but not totally - for someone has to persuade distribution chains to carry the product/service package to the 'point of sale' (which here is a place not a time). On the other hand, most of the effort must by necessity be invested in the indirect communications. Once again, though, the promotion (here used at the point of sale) is very short term - again usually in the form of some price reduction (either directly or indirectly).

You can play many different games with the lozenge, but I will finish with conventional markets by showing one which is distorted to show - quite realistically - advertising (for, say, a consumer durable or a car) preceding face-to-face sales activity (in a retail outlet):

We now move to the punch-line, which shows the power of e-commerce. As indicated in the version below, e-commerce covers the whole lozenge. Indeed, it can at any time be located anywhere in the lozenge - and then immediately move to anywhere else within it, as needed by the promotional tactics! This degree of flexibility can be immensely powerful, if used properly. But, once more, it has been largely ignored by most of the e-commerce players!

■ The quick exercise here is to draw the equivalent lozenge for your own e-commerce offerings.

7.9 ADVERTISING BELIEVABILITY

Even so, there is in general one dimension of advertising which is too often forgotten - that of the believability of the various promotional messages.

The inputs to the believability equation are many, and - as can be seen from the diagram - in traditional markets often lie outside of the advertising itself, so that the whole process is complex and difficult to manage. These outside factors often place quite constricting limitations on what may reasonably be said within the advertisement itself. On the other hand, because e-commerce is at the same time so comprehensive in what it can offer (and, especially, flexibly communicate), and so tightly integrated with the product/service being offered, it can be much better managed. Even so the rule that satisfaction equals perception minus expectation must be observed. If you expect a certain level of service and perceive the service received to be higher, you will be a satisfied customer. If you perceive this same level where you had expected a higher one, you will be disappointed and therefore a dissatisfied customer.

Laws of Service

David Maister[i] formulated two "Laws of Service". The first of these is expressed by the formula hinted at above "Satisfaction equals perception minus expectation". If you expect a certain level of service and perceive the service received to be higher, you will be a satisfied customer. If you perceive this same level where you had expected a higher one, you will be disappointed and therefore a dissatisfied customer."

The important point is that and both what is perceived and what is expected are psychological phenomena - not reality - and it is the relative level of service - related to expectations - which is important, not the absolute one.

Most important of all is that the equation does not just cover pre-purchase belief. The most important element is how that belief (expectations) is in practice satisfied by the actual offering - a highly believable message may cause serious problems when the product/service package fails to live up to it. The point is that both what is perceived and what is expected are psychological phenomena - not reality[ii]; and it is the relative level which is important, not the absolute one.

Because so much information is available to the purchaser on a website, as a opposed to being swayed by the few words of a conventional mass-media advertisement, this may be less of a problem in e-commerce; since the buyer should already be ware of the true situation!

■ A very quick question, are you promising more than you can deliver - and, in the subsequent dissatisfaction, risking losing the trust of your customers?
■ Or are you promising less than you can deliver, and risking them never buying your offering?

7.10 CUSTOMER COMPLAINTS

At the other end of the purchasing process, complaints are often treated as a nuisance. Indeed, many e-commerce organisations are so determined to avoid them that they exclude any means by which customers can make complaints! Yet they have considerable value for a number of reasons:

a) Although there will always be a small proportion of 'frivolous complaints', a complaint usually highlights something which has gone wrong with a part of the overall marketing operation; usually the high quality, which should be a fundamental requirement for most organisation, has not been achieved. Whatever the reason, the sensible marketer will want to know exactly what has gone wrong - so that remedial actions may be taken. A strength of e-commerce is that its interactive nature enables the necessary conversations with the complainant to take place easily, and in good time, and the flexible nature of the 'product' allows for remedies to be quickly applied.

b) The way a complaint is handled is often seen by customers, and their many contacts, as an acid-test of the true quality of support. What is more, it is also a powerful reminder to the organisation's own staff of just how important is quality.

c) Not least, customers who complain are usually loyal customers (those who are not loyal tend just to switch to another supplier), and will continue to be loyal (and valuable) customers - just so long as their complaint is handled well.

In the case of e-commerce the transparent nature of the processes themselves provide reassurance. Even so:

1. The first requirement is that complaints should be positively encouraged. That is not the same as saying that the reasons for complaints should be encouraged. But, assuming that despite your best efforts the problems has occurred, you should put nothing in the way of any customer who wants to complain; and, indeed, positively encourage such complaints - since the main problem lies with the many more customers who do not complain (and instead change to another supplier) rather then the few who abuse the complaints system. This may be difficult to achieve in conventional markets, where the face to face contact often relies on the member of staff causing the complaint to log it! It should be much easier for e-commerce, where a specific structure can be put in place - which is guaranteed to work.

2. The second requirement is that all complaints should be carefully handled by painstakingly controlled, and monitored, procedures. Complaints must be handled well, and must be seen to be well handled; by the complainant, and by the organisation's own staff. Again, the structure of an e-commerce system should easily ensure that the best audit trails are maintained, and regularly monitored.

3. The third, and most important requirement, is that the complaint should then be fully investigated, and the cause remedied. Complaints are only symptoms. The disease needs to be cured! There may be an understandable temptation to overlook complaints until they reach a 'significant level' - but holding off until the complaints reach this 'pain level' usually means that they have already become damaging to the organisations' image. It is far better to assume that 'one complaint is too many'!

The reality in most organisations is very different. Not least, despite the ease with which complaints may be handled, e-commerce companies are perhaps the worst offenders - possibly because the customer is remote, and has no means of embarrassing the manager responsible! Too often the number of complaints are minimised not by remedying the reasons for them but by evading the complainants! The assumption is usually made, wrongly so, that complainants are trouble-makers; and have to be handled in a confrontational manner!

The reality is that most dissatisfied customers do not complain (a US survey[iii] showed that 97% didn't!), but they do tell their friends (the same survey showed that 13% complained to more than 20 other people!). In e-commerce markets it is easy to avoid an unsatisfactory vendor - there are many others to choose from, just a click or so away - and then you can tell the whole world (or large parts of it) about your unhappy experience! Clearly, if it was not already obvious, any organisation should be highly motivated to make certain its customers are satisfied. Yet, in practice, remarkably few do so!

■ A useful exercise, if you can get permission for it, is to make a dummy complaint to your own organisation; and see what happens! But you may have difficulty in gaining permission, or may be told to warn the people involved first, for almost nothing worries most organisations more than the possibility of finding out that its complaints processes don't work!

Satisfaction Surveys

Following this train of thought, it is essential that an organisation monitors the satisfaction level of its customers. This may be, all else failing, at the global level; as measured by market research. Preferably, though, it should be at the level of the individuals or groups - especially where this is easy to achieve in the case of e-commerce, by simply asking customers, after they have used the service, how satisfied they are.

IBM, at the peak of its success, every year conducted a survey of all its direct customers. The results were not just analysed to produce overall satisfaction indices, though that was done (and senior management viewed any deterioration with alarm), but they were also provided to field management so that they could rectify any individual problem situations - where the customer was dissatisfied with any aspect of the IBM service and the IBM representative (presumably in 97% of the occasions if the above results - of the numbers who do not complain - hold true in this field) did not realise this to be the case! Much the same can be done with individual e-commerce customers - something which is much more difficult in conventional marketing.

There are a number of advantages to conducting satisfaction surveys (particularly where any individual problems highlighted can be subsequently dealt with) for e-commerce as much as in traditional markets:

2. If they cover all customers, they allow the 97% of non-complainers to communicate their feelings; and vent their anger

3. They positively show, even the satisfied customers, that their supplier is interested in the customer, and their complaints - which is at least half way to satisfying those complainants

4. They help persuade the supplier's staff to take customer service more seriously.

The only difference with e-commerce is that the process should be much easier to undertake!

The importance of very high standards of customer service is evidenced by two examples. The marketing philosophy of McDonalds, the world's largest food service organisation, is encapsulated in its motto "Q.S.C.& V." (Quality, Service, Cleanliness & Value). The standards, enforced somewhat quixotically (but memorably) on its franchisees and managers at the 'Hamburger University' in Elk Grove Village (Illinois), require that the customer receive a 'good tasting' hamburger in no more than five minutes, from a friendly host or hostess; in a spotlessly clean restaurant. The second example, Disneyland, also insists on spotless cleanliness, and on the customer being 'The Guest'. It is salutary to observe how few of the competitors in either of these fields manage the simple task of keeping their premises clean, let alone being able to think of their customers as 'guests'; where the terms used in the fairground trade (with which Disney competes, albeit at a very different level) usually see the customer as some form of victim ('pigeon', 'mark', 'punter' etc) - to be fleeced before the fair moves on! E-commerce pioneers, with the important exception of Amazon, unfortunately seem to be following the latter path!

■ Think a while. How satisfied do you really think your customers might be? Also ask a friend, for a less biased view!

Chapter 8. SERVICES IN E-COMMERCE

8.1 OVERVIEW AND OBJECTIVES

We now move on to briefly look at some of the other features of e-commerce which are significantly different to what has happened in traditional markets. For, as Daniel Amor[iv] simply says, "Content is King. The most important thing on your web-page is content; never let users leave your web-page without giving them information." Indeed, that information may be the product itself. Thus, National Geographic invested in the purchase of Wildflower Productions ( a specialist in printing maps on demand) in order to offer personalized recreation maps via the Internet. This short chapter therefore sets out to introduce you to the main ways of providing these services.

At the same time you will want to make your site(s) easy to use. The content has little value if it cannot be accessed - and the customer will quickly click to another site where it can more easily be found. Accordingly, this chapter looks at various devices, and services, which can be used to aid navigation and to build trust with your customers.

Syndication
Applications Service Providers (ASPs)
Portals
Tailoring
Collaborative Filtering
Databases
Navigation & Spiders
Guarantors
Content Brokers

8.2 MATERIAL CONTENT

You will want your web-site to offer the greatest amount of information to your customers. But you will probably also want to gain the maximum exposure, on other web-sites as well as your own, for the material you produce. Of course, you can always do both yourself, but one of the niceties of the web is that you can share - both ways - simply by hot-linking to other sites; including by making your offering available on as many portals as will take it. The most productive aspect of this is that, unlike physical industrial goods, information can - especially in this way - be used and reused, sold and resold, many times without incurring significant extra cost or losing value. Indeed, the new challenge to traditional economic theory is that knowledge actually becomes more valuable the more it is used!

8.3 SYNDICATION

Fortunately, some new business models are becoming available; to match the new moves which are leading to the breakdown of barriers between organisations. Even before e-commerce became so visible, at the end of 20th-century, reducing barriers meant that organisations were less inclined to do everything in house. In particular they were much happier to share their business with partners in the number of fields. In a specific context of syndication it even means that they are willing to allow those partners in a distribution chain to badge their products. This has long been the case in terms of television programmes, especially in the United States. The leading television shows have been distributed on a range of channels and syndicated through them. Equally it has been true, again especially in the United States, of syndicated columns in the popular press. It is starting to be the case with e-commerce. For example, Amazon will happily provide you with all their services under your own label . From Amazon's point of view, as well as selling direct to individuals it can in effect create many thousands of further bookshops to whom it gives a percentage commission - but whose business then adds to its throughput.

Such syndication leads to three different roles in the distribution channel. These are the originators, who in this way widen the range of markets they can address whilst still maintaining control of their standardized 'product', distributors, who deliver it to the consumers, and - as a new addition - syndicators, those organisations which specialize in packaging the material and integrating it with that from other originators.

Other sorts of arrangements can apply to affiliates who, in essence, claim discount for passing business through to the original vendor. Even my own university, the Open University, has in this way made several million pounds from passing customers through to commercial affiliates.

■ Who might you be able to (profitably) syndicate some of your e-commerce offerings to?

8.3 Applications Service Providers (ASPs)

Using another - specialist - organisation to handle your e-commerce business, or part of it, can be an effective, and easy, way to enter e-commerce. Thus, at the other end of the spectrum from affiliates we have Applications Service Providers, who take over the running of e-commerce applications for businesses - leasing applications, such as word processing, databases and enterprise resource planning, to their clients via the Internet. They may take over parts of it, by providing suitable software for example to run the search engines. Indeed the actual software search engines used by those sites which advertise themselves as directory providers (such as Yahoo!) are often now supplied by third parties, and sometimes by the same one as their competitors!

Taking the process further, in the case of many smaller organisations, these Applications Service Providers may well take over the whole running of the web site and the order fulfilment procedures. It is arguable that in this way they can initially cut costs by between 30 and 70%, with the added benefit that the vendor doesn't have to spend significant amounts of time and attention on maintaining the site - even though it is still to be kept at the leading-edge of technology. On the other hand, the running costs can eventually be 20-30 per cent higher, and your business may come to depend upon those ASPs! So the best advice is to use such ASPs in setting up your initial e-commerce applications, but not to allow them to get a stranglehold on your e-business. Ultimately you are likely to want to go it alone!

■ If so, what are you doing to ensure that you can still become independent at a later stage?

8.4 Portals

Taking this approach to its logical extreme, some organisations are now billing themselves as portals. A portal is simply a (web) site which offers itself as a starting (entry) point for Internet users wanting to connect to the internet; or at least is an 'anchor site' which is visited regularly by them. But they are also starting to claim that they can offer the whole range of services, to a wide range of customers, under one entry point - in particular under one brand. In essence they want to become the customer's one-stop shop for everything. For example Yahoo! has adopted such an approach and even eBay is aspiring to it.

In this way, such sites aim to provide the widest range of possible services; either from within their own resources or, increasingly, by hot-linking to other service providers. The original portals, such as AOL - which has now merged with Time-Warner, to enhance its media based offerings, and Compuserve, which now runs its business offerings - have since been joined by literally hundreds of other portals; all trying to get on the bandwagon. The most important of these new additions are, at one extreme, those now offering to provide 'free' links to the Internet, such as Freeserve; though the financial realities are gradually forcing even these to introduce charges for their members. At the other, the directories, such as Yahoo!, which now also offer the full range of services. Other specialists are those, such as GeoCities, now part of Yahoo!, which offer a range of neighbourhoods where you can find people with similar interest to your own.

Most of these portals now syndicate services from other providers, or hot-link to them. Indeed, their main advantage is that - at virtually no extra operating costs - they integrate these separate offerings under one simple-to-use umbrella. In general, however, there are two main types of portal: 'horizontal portals', like AOL and Freeserve, which aim to offer almost everything for a wide range of customers (as 'one-stop-shops'), and 'vertical portals', which are more tightly focused on a specific audience - as is Amazon's.

As yet there is a long way to go before these putative portals actually achieve their objectives, but in longer term it is possible that they may be a very valuable investment. Thus, while it is not clear what their radical new products may be, their real asset value may well come from their ownership of affinity groups. In other words the more members, or at least the more loyal members you have, the more valuable the package you have to offer. In this respect you can almost put a value on each member. At the height of the e-commerce boom at the beginning of the century, AOL members, for example, seem to have been valued at around 15,000 dollars each. The financial numbers have since become much more realistic but the principle is still the same. The value is, in some mysterious way, locked into the numbers of members you have. Except that it isn't really mysterious. The sales of whatever you have, in terms of products or services, will indeed be proportional to the numbers of loyal members. As yet, though, the portal owners are trying to make their money from banner advertising sold to vendors promoting their products, services and web sites. Again, to generate sufficient income, this needs a large number of visitors.

■ How many loyal 'members', for your e-commerce services do you have?…………..

■ Using a possible value of $2,000 for each loyal member, what asset value does this imply? $…………..

8.5 HOW DO YOU MAKE IT EASY TO USE?

The first point to make about any e-service you provide is that it must be responsive. This sounds obvious, but Chris Voss[v] at least found that, in practice, it was often far from instantaneous:

Assuming there is a timely responses, one thing that any Internet site must though achieve, if it is to be successful, is ease of use.

It's not like normal retail, for example, where even in the supermarket you have human beings to help - albeit it is only in the form of cashiers or greeters. On the Web you are all alone. Alone and lost, there is no one to ask. One of the first Internet failures, Boo.com, was supposed to have failed precisely because - as a retailer of fashion goods - it was complex in use.

In particular, it was very slow to use - it took anything up to half an hour to order an item. In using the Internet people want to be able to click immediately on any item they need, anything that takes more than 30 seconds to download risks being abandoned.

But, in addition to providing the fastest possible response, web site design has to ensure that you can't get lost and then it has to provide ways of rescuing you when you do get lost. Not least it ultimately should allow access to a human being who can provide you with advice (something that many web sites do not even consider).

3. developing ways of navigating that make sense to users and providing logical routes to the data.

■ How does your own site(s) rate in terms of users being able to easily navigate their way around it: easy navigation poor navigation

8.6 TAILORING

In essence this means that individual users provide a profile of themselves, and this is used - possibly by some form of artificial intelligence - to shape the question and answers sessions that they are exposed to in buying the service or product. In other words, many of the 'admin' questions will already have been answered. Best of all though not yet readily available, it will know how you like to use the Web itself. Thus, though promised by Yahoo! but not yet fully delivered, you should be able to tailor the web site - as you see it - to the way that you want to use it. Thus, it could be that you would prefer to search by menus, by index or by words. The ideal web site would offer you choice of which route to follow. The value of this has yet to be demonstrated in practice; where, according to Sandeep et al[vii], "…fewer than 15 per cent of visitors to Yahoo! Have chosen to set up a 'My Yahoo' page for themselves." However, if you actually look at this facility on Yahoo!, you will find that as yet it is both difficult to set up and unproductive in use; so perhaps it is a bad example, and more worthwhile ones will succeed.

fig.(6) Amazon recommends books to meet the profile obtained by tracking your purchases

Collaborative Filtering

Alternatively, in matching your offer to user wants, you can make use of a similar technique, pioneered by 'Firefly' (now owned by Microsoft). Consumers' opinions (given on a questionnaire) and choices are compared with those of other users. Based upon statistical 'matches' the choices of such similar customers are used to predict suitable choices of movies, or records or whatever, and these are then offered to the customer - as 'automatic customisation'. On the other hand, manual customisation may be simply achieved by asking customers to identify the content they wish to use by check boxes or pull-down menus. This is an approach used by news services.

Tailoring and Databases

The technical resources needed for this sort of processing relate to the associated database handling operations. This is a complex subject, especially as some of the databases may be very large indeed. Taken one element at a time it may seem simple to match you with the product, but with many millions of elements and very varied customer profiles the requirement may demand the most sophisticated pieces of software which are now being developed. As a result, the topic is beyond the scope of this book! The best advice is simply to take the best advice - find database experts, who you trust, to do the work for you.

Even so, one of the major benefits of the Internet as a whole is that you can allow much wider access for your customers to crucial data that you hold yourself. Thus for, example, FedEx allow their customers to track exactly where the parcels they have sent are in the FedEx system. Other competitors now offer much the same. This takes a significant load off the administration, but more important it gives customers the feeling that they are in control of what's happening, and that is a major competitive advantage.

■ Do you maintain customer profiles?
■ Do you tailor elements on your site to take advantage of such profiles?

8.7 NAVIGATORS AND SPIDERS

But, before we leave the subject of web sites, it is worth noting that it is not just your customers who may be looking for your web site. Crawlers (sometimes known as spiders) are also sent around by the main search engine sites. These catalogue your web site and make them available, through the search engines, to anyone who asks these suitable questions. To provide this guidance, most of the major search engines (including AltaVista, Excite, HotBot, Infoseek, Lycos) use the 'spiders' (also known as robots, e-bots or wanderers) which travel the web automatically visiting websites, studying them and then reporting back to their owners. Yahoo! adds human intervention, to look at submissions (and to create a hierarchy) when developing its index. A number of sites (including AOL and Lycos) now use the Inktomi engine (covering 500 million pages) - though in mid-2000 Yahoo switched from it to Google (averaging more than 1 billion pages) - to drive their search facilities; since Google, having entered the market late decided that its superior technical capabilities were best used by selling them on - in a classic example of the new forms of syndication which are possible on the internet.

The key to obtaining the best coverage by these directories is making your web site crawler friendly as well as user-friendly. Fortunately this is, in some respects, easier. Not least you should make your first paragraph as explicit as possible, and as comprehensive as possible, because web-crawlers usually do not go much beyond the start of a web site before they decide how it can be catalogued or classified under their various headings. Even more important, and usually totally unseen, the metatags which live in the HTML code at the top of page must be again as succinct and as comprehensive as possible. These are the things that, in particular, that crawlers look for. I had the experience, in the early days after launching my first web site, of wondering why no one could seem to find it - only to discover that my IT staff had put as the only metatag the single word "index". This is one of the words the web-crawlers are explicitly told to ignore. Hence my web site as a whole was ignored!

8.8 New services

In the context of one-to-one networking, a whole range of other organisations will also be needed to provide the various new services that these demand:

Guarantors

I have already mentioned 'trust' several times. In terms of physical products this is built upon the experience of the user, over the lifetime of that product. Even before they are bought, prospective purchasers can touch them to see how they 'feel' (and quality is often, irrationally, judged by weight!). As you will no doubt already have learned, similar levels of trust are more difficult to build for services; where you cannot touch the product. Even so, over time, successive service encounters gradually build similar levels of trust; though these are very susceptible to even one unsatisfactory service encounter. Something similar is likely to apply to those Internet businesses which can build on multiple contacts with their customers; Amazon, for instance, is very aware of this - hence, not least, its 'no questions' returns policy.

But one major attraction of the Internet is its ability to deliver individual-to-individual contacts between literally millions of users. It is unlikely that trust here can be built upon multiple contacts; and, in any case, an unsatisfactory first contact - even a fraud as Ebay management (with its caveat-emptor policy) admit already permeate their auction services - could be damaging to the customer. So, in order to enable commercial transactions to take place in the wider e-commerce environment, some intermediaries will need to be created who underpin that trust.

The banks are already looking to provide means of certificating transactions, so that the money which changes hands is protected. That, in fact, is probably the easiest part of the process, the remaining part of the transaction - establishing whether the product and in particular the service is of good quality - may be much harder to achieve. Where there are literally millions of vendors around the world it will be very difficult to track these, and where fraud is already very evident, people may well think twice before buying from unknown, unseen vendors. One attempt at handling this, through guilds of suppliers (being set up by NatWest bank, under the title of IQport) unfortunately foundered - but in essence the idea was that these guarantors would be licensed by central authority (in the original case, the commercial organisation, the NatWest bank).

■ Do you, deliberately or by default, use outside organisations to underwrite your offerings?

Content brokers

Another set of organisations are starting to offer various pieces of the content which web-sites use to attract customers. For example, Virgin.net offer the product (and especially services) of more than 100 entertainment oriented organisations within the Virgin empire. It will offer them to you, to badge as being owned by your site, so that the your purchasers have access to that content. Clearly, where you are aiming to be a one-stop-shop (as a portal), you will be very interested in bringing on board the maximum number of content providers - and may use wholesalers of content, the content brokers, as part of this. Equally, though, you may in turn sell on that content: becoming in the process a content broker yourself. The relationships at this stage of the game get very muddy indeed, and it will often not be easy to say whether an organisation is a portal, an information vendor, a content broker, a membership club or whatever.

■ Do you buy in content from outside providers?
■ Do you sell content to other organisations?

Chapter 9. THE E-RETAIL MODEL

9.1 OVERVIEW AND OBJECTIVES

This, following, part of the book is significantly longer than the economics of e-retail (or e-tail, as it is sometimes now called) justifies. On the other hand, the reason for this is quite simply that it is a particularly good model for looking at e-commerce in general. In essence this comes about because, using it, we can remove the complexities introduced by the intangible services element. For e-retail, we really can talk about 'product' as if it is only a physical product. This doesn't mean, of course, that such as always case. Indeed, these days it is only likely to be the case - even in consumer markets - a part of the time. But it does mean we can see more clearly what are the distribution (channel) implications of e-commerce.

To investigate how traditional theory and techniques might apply - and what changes might be needed - in the context of retailing.

To put consumer e-marketing in the context of direct marketing, both from the historical perspective and that of likely future developments.

To use the lessons from this specific (e-retail) sector as a model for - e-commerce in general, and B2C (Business-To-Consumer) in particular.

Fulfilment
Disintermediation
Price Comparisons
One-stop-Shops
Clicks & Mortar
Organisational Cultures
e-Retail Product Decisions
Range, Place, Promotion, Merchandising
Databases
Direct Marketing
Electronic Catalogues
Mailings
Clubs
Personal Profiles
Direct Advertising
Lists
Direct Offers

9.2 E-RETAIL

One of the advantages of exploring e-Retail is that there is the very long history of direct marketing, if not of e-commerce, in this field.

Thus the first evidence of the new techniques involved came - as you might expect - with a new breakthrough technology. On the other hand, the new breakthrough technology was the creation of the United States mail service. Thus, in 1887, Sears Roebuck started its catalogue operations - which are still model for modern e-commerce ventures such as Amazon.

Over the years this sector has grown. In fact, the range of other operators - that depend upon catalogues is still steadily growing; from small companies selling fishing gear or lingerie through to the equivalent of the department stores selling everything. Though the original Sears Roebuck catalogue was very comprehensive (going as far as including buggies, the deluxe cars of the period), the most modern printed catalogues are works of art - hundreds of pages long with beautifully posed colour photographs. Indeed, it is arguable that their equivalent on the Web is rather less impressive - because of the limitations of downloading such high-quality pictures.

9.3 FULFILMENT

In terms of physical product, also, not much has changed. Amazon still uses very similar delivery process. The order may be placed slightly differently, though for some time catalogue operators have been taking orders over the telephone - and this process was not too different to that used for those now arriving over the Internet. Thereafter, these orders are picked in a warehouse, or supplied by the vendor, and delivered to the end-user by mail - or more likely these days by FedEx or one of the other operators in this field.

There initially was a great belief in 'virtual marketing', whereby Amazon thought it had discovered the economic miracle of not holding any stocks and passing all work on to its vendors. It very quickly found that, while its vendors' were quite capable shipping pallets of material to Amazon, they could not handle parcels - which needed to be sent to individual customers. So Amazon had to scramble and spent literally billions of dollars on setting up its own warehousing distribution system more suited to the needs of e-commerce. This caused a major financial hiccup for Amazon itself. The challenge is having a delivery system which handles small parcels well - to individuals - as indeed did the original Sears Roebuck operation through the US mail. It can't rely upon volume delivery of palette loads to supermarkets, which until recently the modern distribution system had come to revolve around.

■ How does your own organisation handle, or propose to handle, the fulfilment logistics of its e-commerce operations?

9.4 DISINTERMEDIATION

Much has been said about the changes that are being made on the overall distribution chain, and a considerable amount of jargon is thrown around as well. One of these pieces of jargon is 'disintermediation'. All this means is that, because of the possibility of direct contact with the customer, several stages in the distribution chain can be cut out.

Thus, Amazon (which is so often given as the example of e-commerce these days), has cut out the bookshops and sells direct to the end-user. As I have already indicated, this was nothing new, since catalogue operators have been doing it for decades. But - as these catalogue operations showed - you may merely be transferring some costs (of space on a high street) to another area (of delivering the catalogue to consumer, and having the order fulfilment process which can match this).

But the advent of e-commerce has allowed this sort of operation to move into new areas. In particular, Dell has used direct marketing - to end users in organisations around the world - to revolutionise the personal computer market. By focusing on individual customers (often managers and professionals,) at their desks - Dell has manage to reduce the costs involved (which is probably the first justification for such an operation), but it also has improved the speed of response (and in the process reduced Dell's stock holding), and also the choice - since customers can order PCs to be built to their exact specification. This example nicely illustrates many of the one-to-one strengths of such direct marketing, e-commerce, operations.

■ How have your distribution channels been changed by e-commerce? ■ What strategy have you adopted to allow for, and indeed capitalise on, these changes?

9.5 PRICE COMPARISONS

In the first stages, at least, the great benefit for the customer was supposed to come from the ability of consumers to cross-compare prices. This, in many respects, goes against the concept of one-to-one marketing - which ought to be about matching to individual requirements. On the other hand, it is certainly true that it is much easier to compare prices, and with various intelligent agents roaming the net you no longer even have to do this yourself. So in certain markets the result has been that commodity pricing has been brought into play - though the reality is much less dramatic than the hype allows for. The result is that a number of operators, including those in the retail arena, have seen very thin margins - and often losses. On the other hand, this is no different to many other price war situations in traditional markets.

fig.(58) on the other hand, as you will see from the wording on this website, one C2B offering found the going to be tough

9.5 ONE-STOP SHOPPING

But at the other end of the spectrum the claim is often made that Internet shopping can be all about convenience - the customer can find, on one site even (where that is the claim of some of the new portals), everything he or she might want. They never need put a foot outside their own front door. This is indeed a convenience for some consumers, and a few supermarkets - for instance - have set up operations allowing people to place orders from their desk at work, which can then be picked up in the car park as they leave in the evening. This is certainly a new addition to convenience shopping, but it may not be a major benefit for most consumers. Thus, 24-hour conventional shopping might be just as advantageous, especially as the superstores involved have to keep their facilities and staff through the night - as they restock the shelves. Accordingly, they might be able to do some extra business for little extra cost.

■ At which end of the spectrum do your e-commerce operations lie - commodity prices?

9.6 CLICKS AND MORTAR

Another of the controversies which is more easily seen in terms of e-retail is that of existing businesses versus new start-ups. The existing businesses moving into the field, particularly in e-retail (where the term seems to have started), are referred to as 'clicks and mortar'. The idea is that they have the clicks, of the e-commerce side, and the mortar, from their traditional businesses on high street.

The initial feeling, or at least the hype, was that the start-up businesses would walk all over these existing retailers. They didn't have the high overheads set by the large investments in space and buildings that the existing retailers had. Indeed, some of the existing retailers, such as Sainsbury, have actually gone as far as to set up separate e-retail operations to service this market - so that they can gain all the supposed benefits of the more efficient logistics. In reality, this doesn't appear to have been the case, apart from Amazon which gained a significant first mover advantage, since the existing infrastructure has proved sufficiently flexible in many cases. Thus, for example, Tesco has used its existing physical infrastructure to meet the demands of its e-commerce business, and this gave it a head start over its competitors - and seems actually to have reduced costs not increased them. Sainsbury has now also added this approach to its more specialised - warehouse based - operations. On the other hand, there had to be some innovations, Tesco for example still had to find a suitable means of delivering to the customer's house - and this is no mean achievement when these days - with both partners working - the customer is rarely there!

fig.(39) Tesco uses its local stores to source its offerings, but still needs a specialised delivery service

It was claimed that e-commerce would undermine the superstores. Previously, the move to out-of-town superstores, with 50 to 100,000 square feet of space available, the logistics (particularly where the out-of-town space is much cheaper) had favoured these superstores - as did the car as the favourite means of visiting them. But it was thought, or at least hoped, that the massive power of the superstores would be broken by e-commerce. That clearly hasn't happened, not least because these superstores have had the financial muscle available to move into the new markets. On the other hand, I suspect it is too early for them to rest on their laurels. The operating requirements - and even the culture - of e-commerce will almost certainly change the retailing experience for many people. And, in such a changing environment, it is always the existing brand leaders that are put under the greatest stress - but equally have the greatest financial muscle to deal with the changes.

Culture

Indeed, the main problem the existing retailers, and other businesses, will face is quite simply that of being locked in to their existing culture. If you have many years of history behind you, selling on the high street for example, you will have considerable difficulty learning the new skills - and there are many new skills needed - for trading across the Internet. You may also find considerable resistance coming from your staffs who have, over the years, built up significant attitudes about what constitutes the service. Often these reflect what enhances the position of members of staff rather than what is really good for the customer. So there is a great deal of inertia in existing businesses, which is very difficult to break down. There may even be conflicts of interest. If you have, as many organisations have, partners in the existing distribution chains then they may object to you - in effect - opening up a major new distribution chain through e-commerce. Levi's, the jeans manufacturer, for example found this to be the case when they tried to sell jeans by the Internet - members of their existing distribution chain virtually went on strike.

9.7 E-RETAIL ORGANISATION

I won't go into any significant detail about the comparison between the characteristics of different types of retail operation, e-commerce or not, except to highlight the significant changes which may be likely to take place at the lower levels of organisational life. The multinationals will probably slog it out as normal. They have the resources to take on board e-commerce as part of business as usual. The great beneficiaries, though, may be at the other end of the chain, the small - independent - suppliers. It is arguable that they can take their existing offerings, which may now be very local, and offer them to the world as a whole - for very little extra investment. In fact one of the most dubious elements of the hype about Internet start-ups was the talk of hundreds of millions of dollars being needed for such launches. Indeed, for some very odd reasons, that was what one stage the financial markets said they were worth. Even then, underneath the surface, though they were spending money like water, their actual start-up costs were low by modern standards. Thus, at least one survey has shown that most of the organisations which knew what they were spending on their Internet operations thought that their investment was less than $50,000. By far the greatest majority simply didn't know what it was - which is understandable where $50,000 is small beer to most organisations. In other words, start-up on the Internet is virtually cost free!

What is more the same survey showed that, despite all hype about Internet skills being very scarce, the same organisations thought they had very few problems caused by any lack of skills. In practice, the skills seem to be very simple to develop. Indeed that was the whole principle of the web, it was intended to be usable very easily.

On the other hand, it has to be recognised that an even greater majority of these organisations have not made a very professional job of their Internet start-up operations. And maybe that does reflect a lack of skill - not of technical skills but of relevant business skills! I trust that this book will help rectify at least part of that skills shortage!

9.8 E-RETAIL PRODUCT DECISIONS

Once more, extending the model, of e-Retail, as a guide to likely developments in other sectors, in many respects the product decisions for e-retail are very similar to those for conventional retail. In particular, with the exception of the specialised knowledge services, what is being offered to the end-user will not be too different. On the other hand there are some factors which do change quite considerably:

As indicated above, the actual physical product or service probably won't change that much. But what may change is the degree of branding needed, since people will no longer be able to pick the product up and weigh it in the hand, or cast an eye over the staff who are about to deliver the service. Hence there will have to be significant investment in building trust in a product which users must buy totally unseen.

Range

On the other hand, the breadth of the range, of products and services, available is where, at least in theory, the major benefit of the e-commerce may lie. In such theory you can offer enormous ranges, and even Wal-Mart in the US offers two or three times as many items on its web site as it does in its largest superstore. What is more this range can be extended almost indefinitely by linking to other vendors. So you don't even have to stock the product. On the other hand, as we have seen for Amazon, that may pose problems where those other suppliers aren't set up to handle the logistics of selling to individual consumers. But, even so, it is an interesting challenge - and one, incidentally, which poses problems in helping your customers navigate through such a vast number of products. Once more, if they can't find it they can't buy it!

Place

The traditional cry of the retailers, at least before the out-of-town stores took over, was 'location location location'. Their volume of trade depended mainly upon where they were located on high street. In many situations just a few hundred yards difference along the high street meant the difference between being the leading store and disaster. Clearly this is not the case with e-commerce. You can be sited literally anywhere in the world and still be as accessible through the Internet. But, in a rather perverse way, similar rules apply - where 'place' here is the website. It's all about making certain your web site is well placed, by building links with (and alliances with) the main search engines and portals for example. It is also about the equivalent of having the best storefront, with web site design becoming especially important.

Promotion

Even so it is becoming increasingly difficult to attract people to your website. They can't stroll along the high street looking in windows. Even using search engines may throw up hundreds of thousands of different storefronts. So promotion becomes even more important. Paradoxically this is still by traditional means. Advertising agencies made a fortune out of the e-commerce start-ups at the beginning of the decade, not least in selling of - all things - posters on the sides of buses! One leading agency simply said that the e-commerce boom had been the best wheeze ever for transferring funds from banks (who were funding the start-ups) to advertising agencies! But you have to get your name known, which is one reason why the existing clicks and mortar retailers are much better placed - their name is already known. It is also why so much emphasis was placed by the new start-ups on their web site addresses, so that the customers could actually find them, Unfortunately, in the process, not a few of them forgot to mention what their offering was. As a potential customer, you might have known the name of the website, but you often hadn't got the vaguest idea what it offered!

Merchandising

One the most important departments in traditional retail, especially department stores (which equate perhaps most closely to the new e-commerce operations), was that of merchandising. In essence this was all about making it easy for your customer to find products in the store, to find them attractive, and indeed to be attracted to them. You don't have the customer actually walking through the web site - but you do have the electronic equivalent, and once more web site design - making life easy for them, making the goods attractive and in particular attracting them - is all-important.

9.9 DATABASES

An almost essential part of one-to-one marketing is the establishment of a database. Usually - for the medium to large organisation - it has to be a very sophisticated database (simply because of its size). I don't intend to go into all the technical details of databases in this book, as I said earlier, my advice is to get yourself the best experts to handle that. It's a very sophisticated subject, and one that you must get right - otherwise your database of members or customers will not merely be of little use to you but may well alienate those contacts when you try to "mail" them with the wrong offer.

On the other hand, it is worth noting the that there are several levels of sophistication, or stages of development, which can be seen in the use of databases:

1. sales database - this is merely a list of customers, to be used by the sales department as part of its sales campaigns. It can range from the customer address details, to be used perhaps in mailings, through to quite sophisticated reports of contacts with customers, their likes and dislikes, their order and sales ledger details etc. In fact, even these extensions begin to introduce complexities - in as much as, typically, there will be several databases involved even here. For instance, they will require the merging of the raw customer details, on the customer file, with financial transaction data held on the company's sales ledger.

2. range of databases - in the second phase the company has a range of databases for different uses, organised by sales territories, by types of product, by different distribution operations etc. Merging these together, or at least merging access to them which is more likely, requires quite sophisticated database handling - not least to remove duplications and errors.

3. customer focused databases - but the following stage reverses that focus. Thus, instead of merging a number of company oriented (and often product based) databases, there is just one central customer focused database which contains all rest.

4. true integration - in this case the company has gone for what is often called the data warehouse, with one database design covering all its activities and allowing information to be pulled from every part of the business - to be accessed by everyone across the business.

5. extranet - now, with the Internet (and particularly with EDI), it is even possible to share databases - especially those relating to purchasing - across a range of organisations. This level of sophistication may well be beyond all but the very large organisations, but they can use it to great effect in terms of improving their efficiency.

Manipulation of data

The core theory of direct marketing, be it through e-commerce or some other medium, is remarkably simple - it is merely a matter of matching the requisite marketing approach to the individual. This is a philosophy which should be even more effective in the case of e-marketing. As we have seen, though, the problem is handling the vast amounts of data. Some solutions to this may be:

· Expert systems - the longer term solution may be to teach computers to make the necessary decisions. This is currently being explored by some of the developers, such as Computer associates, who produce the software for very large databases.

· Simplified approaches - in the shorter term it may be easier just to handle the decisions at an aggregate level, going back to what clustering does for market research results. You apply the decisions to groups of people who look the same. In other words you use a form of segmentation.

· Simple decisions - or alternatively you can quite simply match the overall purchasing profile of a customer and make promotional offers based on this, which is as far as the superstores seem to have gone with their own loyalty cards.

9.10 DIRECT MARKETING

This is the model which probably gives us the greatest insight into how one-to-one marketing through the Internet can be used. Not least it offers some of the best examples of successful practice in e-retail for today's markets. On the other hand, so far the best examples are not necessarily about e-commerce, but about direct mail operations - such GUS in the UK

Thus, the most general examples of such direct marketing are the mail-order catalogues we have already talked about, put out by organisations such as Littlewoods and Grattan in the UK and previously - as early as 1887 - by Sears Roebuck in the US. These are in effect department stores by mail. The core cost justification is that they don't have to take large amounts of very expensive floor-space on the high street. On the other hand, they may still have substantial overheads in terms of getting their catalogues to customers and fulfilling orders through the mail.

If we want to look at the ideal, in terms of selling, it must still be the one-to-one, face-to-face, meeting between the customer and an expert salesperson. This allows the fullest possible interaction, to establish exactly what the customer needs are; though such excellent sales personnel are rare indeed! This is, however, only viable when the value of the sale can justify the cost of that face-to-face interaction, which may run to several hundred pounds for one call if all the overheads are included. This means that some form of intermediary has to be used, usually a retailer in the case of consumer sales or a distributor in the case of business-to-business.

Using electronic links, such as the Internet and web, in effect creates a new form of intermediary. As we have seen, because it may replace an existing range of intermediaries this has recently been called disintermediation.

Electronic catalogues

Of course the big difference between printed catalogues and those over the Internet or the Web is how they are accessed. In the printed catalogues you flick through them, sometimes using the index at the back, until you find what you want. In the electronic approach in general, you can only go through some form of menu or index. This makes browsing much more difficult, but on the other hand makes access to specific products easier - as long as a good index or word search facility is available. The key factor, as always, is how well designed the systems are.

Mailings

The starting point for direct marketing previously has been direct mail. In the old days, and in fact until quite recently, this was the letter delivered by the mailman. This was, generally speaking, remarkably efficient and, as the sophistication of databases grew, so the letter could be highly personalised - and accordingly it became ever more effective. In this context, the use of email (the level of usage of which is not very high as yet outside of industrial markets) adds very little - it is just a different form of letter.

Whichever form is used, it does offer precise targeting and personalisation; which is very important in building a simulated face-to-face relationship with the consumer. The research indicates that simply by putting your customer's name at the beginning of a letter you can increase response to any form of mail by a factor of two or three, and by personalising it further you can increase by an order of magnitude

Clubs

The greatest benefit of direct mail, over advertising, is likely to be that of continuity. Thus, you can build campaigns over a period of time, and in particular you can build your next letter on the basis of the response to the last one - this is tailoring at its most effective. In this way the supplier runs a continuity programme, of which the club is the best example. This extends the customer contact beyond the initial transaction, and in the process it progressively develops the relationship, steadily learning more about the customer so that future marketing may be more precise.

fig.(56) The Reader's Digest website is fairly conventional in approach, since its forte is direct (mail) marketing

Personal data profiles

I have already said that normal market research, surveying groups of consumers, does not work as easily over the Internet. On the other hand, by making use of the one-to-one relationship which can be established this way, there is no need for such group research - since the information which can be gathered (on the basis of day-to-day contact perhaps) is about each individual customer. This material, because it is very specific, is much more powerful - just a long as you can make productive use of. Again this is where databases are crucial, and dealing with the complexities of databases once more becomes the central skill which needs to be developed.

Data collection

Thus, the greatest value comes from knowing about the individual customer, something mass marketers can never do. With e-commerce you really can follow the purchasing behaviour of each individual, better target them, and as a result you can tailor your product or service to exactly meet their needs. This can provide an incredibly powerful advantage, if you make use of it. On the other hand, in collecting this information, you have to be very sensitive about the questions you ask of the individual. Accordingly, you have to balance the knowledge you want against how they may react to some of the more sensitive questions.

Some personal data can, however, be collected by existing methods, such as EPOS and EFTPOS. This information on conventional buying habits can be collected as part of a visit to a local superstore. There are also organisations which amalgamate other people's databases to build pictures of individual customers - and these can be bought commercially.

But, at the end of the day, by far the most important database you can have is the one which you create in-house - even though many organisations neglect this. It can be an extremely valuable resource, sometimes the most valuable of all. I talked not to long ago with the corporate planning group of one of the global banks, who were posing themselves the question as to whether they were in the business of money or in that of database organisation; where, as they had come to recognize, the main value of the company was in its knowledge of its customers.

■ Which of these direct marketing approaches does your organisation use, and which does it find effective in practice?

9.11 DIRECT ADVERTISING

Having looked at how direct marketing can be used to sell and distribute products direct to the customer, direct advertising (using mail or e-mail), as opposed to mass media advertising, is just one part of the overall picture. But it can make an especially important contribution to tightly targeted precision marketing campaigns, especially those in industrial sector. It is one way, for example, of generating large numbers of prospects which can then be followed up by face-to-face calls.

Normal postal mail response rates may be around 1 to 2%, or even lower. As yet no equivalent figures are produced for email - but there's no reason to expect them to be any higher. Indeed, because of people's fear of opening strange emails (and especially their attachments, which may contain viruses), the figure may be much lower. Even though I have professionally-maintained anti-virus protection, at a very high level, I will not open an email these days unless it know exactly where it's from.

Advantages of direct e-mail

· Specific targeting - clearly by far the most important advantage is that of being able to target individual customers.

· Personalisation - closely tied to this is the ability to personalise the message you send to the customer. This is the nearest you can get to having a salesperson call on customers in a mass market.

· Optimisation - because you can progressively converse with an individual, you can gradually learn what marketing approaches are most effective with that individual - or perhaps with a similar group of individuals.

· Accumulation - and your information about the customer accumulates over time, as you gain more and more responses from them.

· Flexibility - and then, finally, the campaigns may be mounted very quickly, or changed almost at a moments notice.

· Cost - in conventional mail campaigns it is inevitable that the cost per thousand of traditional (postal) direct mail will be higher than for the mass media. On the other hand, as many of the costs (from electronic processing through to the actual cost of sending the email), may be much lower for electronic direct mail, the cost penalty may not be so high. Indeed, the significantly lower costs (against postal delivery) may eventually be the main reason for the development of this form of direct marketing.

· Poor quality lists - even in direct postal mail, where there was a long history of building lists of target individuals, the quality of these lists was often suspect - not least they required a lot of cleaning to get rid of duplication. Where such lists don't even exist on e-mail, this may be a major drawback - postponing developments for some time to come!

· Relative lack of development - direct mail practices have long been the Cinderella of mass marketing techniques. The only lessons were those that had been learned from practical experience - though in fact they may have been no worse for that. More important, very few lessons indeed have (yet) been learned about email.

9.12 THE MAIL LIST

Whatever the form you choose, however, the first starting point must be a list of people that you are going to contact. This is very difficult to obtain for email, and once more the suggestion is that your own customer list, and list of the other contacts (such as enquirers) that you have made, is probably the best starting point. It is almost certainly the cleanest starting point. Hence it clearly is important that you invest in your own database. If nothing else, this should mean that anyone contacting your organisation, for whatever reason, should be put on that database. Most organisations' databases only contain the details of people who have fought their way through the various stages of the purchasing process to become customers. All the other prospects, who have identified themselves by inquiring about the product, are typically discarded. Not least, this means that you have very little idea what the success rate is in converting these prospects to customer - but in the context of direct mail it also means that these valuable prospect are not even kept in your sights!

A particularly effective form of mailing list, usually generated from a web site, can be created if you simply ask the people visiting the site if they wish to be put on your mailing list. You may have to give them some incentive, usually it is making available news items, but once you have got their attention - and their permission (covered earlier as 'permission marketing') - they provide a particularly valuable form of mailing list.

9. 13 THE DIRECT OFFER

Unlike most general media advertising, where a whole range of factors can be brought into play even in a 30 second commercial, the direct mail (especially the direct email) offer has to be very simple - very clear.

I've already made this point about web sites. Electronic communications require that you simplify everything to their basics. This is especially true of an email campaign. Remember that you have to get to the prospect with the first-line of an email, the one that will show the subject of the e-mail on the recipient's 'mail waiting' list, otherwise there is a very good chance they won't even open it. You have to recognise it may arrive in their mailbox at the same time as a dozen other junk emails. Accordingly, it has to attract the recipient's attention away from those before you can even get them to look at it!

THE 'LETTER'

The greatest amount of mythology in traditional direct mail revolved around what was the most effective form of letter. There were some fascinating variations. Thus, some people insisted that the short letter was essential, and others that thought a long letter was more effective.

My own experience is that, once again, it's horses for courses and the content of the letter has to be set by the information you need to convey. Thus, if you really do have a very simple message, keep it to two or three lines, which is all that is needed. On the other hand, if you have a substantial technical announcement then you must make it as long as necessary. As long as the information is useful and interesting to the target audience they will read it.

Having said all that, this choice only really applies to postal letters. The dynamics are such that all emails must be short. Remember you can always put a Web return address, to which the recipient can hyperlink, so that you can expand further if you do manage to wet their appetite.

Thereafter, by far the best advice is keep it simple! The other, returning to the first theme above, is that that line at the top of the letter, the one that they will see on their e-mail system, is worth all the rest of the email put together.

In postal mail there is also a whole industry devoted to designing inserts! Something similar may develop with emails when more of them use web software to 'design' the content. If you have ever opened some of the club mailings, for example from Reader's Digest, you may have had difficulty appreciating what on earth the real message was about. In such mailings, there may be so many free offers, hidden under instructions to 'tick this box', 'stick that stamp' etc. It is arguable that - for most normal consumers - such confusion adds nothing to the mailing. But presumably the Reader's Digest management knows what motivates their own particular audience. Maybe that sad audience does need a little bit extra excitement in their lives!

In terms of emails, there is only one bit of advice, and that is simple. Don't use any attachments whatsoever! With so many viruses and worms floating around, it is asking too much of people to expect them open your attachment before they get the main part of the message. Instead, send them off to a web site, by a hyperlink, where - assuming their software is effective - they don't have to worry about corrupting their whole system.

In the good old days the key element, which 'closed' the sale, was the reply-paid card - so that all they had to do was fill it in and send it back. Even then the response rates were much higher if these were already personalised (with the recipients individual name and address); so that literally all they had to do was tick a box and put it in the mail. Of course the equivalent on e-mail is much easier. All the recipients may have to do is just send a reply - maybe by doing nothing more than hitting the reply button. You then know everything you need to know about them, at least to start a conversation with them.

■ A useful exercise at this stage is to look at some of your own recent mailings, if possible in comparison with some from your competitors (or, failing that, from those published as winners of industry-wide awards).

9.14 RESPONSE RATE MEASUREMENT

The great advantage of direct mail is that you can judge the effectiveness of each mailing. This means that you can try out all sorts of different approaches, and very easily see which one works best. The classic approach to this task, incidentally, in mass media is to get the customer to write back to department XXX - the department number tells you which particular advertisement they are responding to, and hence the effectiveness of that particular journal and/or your message in it. Similarly you can get the same information built into your e-mail, so when respondents reply you can get as much information as you want. The end result is that you can learn from every campaign that you use - something which marketing management in general are not very good at!

[i] D H Maister, The psychology of waiting lines, Managing Services: Marketing, Operations and Human Resources (Prentice-Hall, 1988)

[ii] Maister, David H (1988) The Psychology of Waiting Lines in Managing Services: Marketing, Operations and Human Resources - Prentice-Hall

[iii] K Albrecht and R Zemke, Service America (Dow-Jones Irwin, 1985)

[iv] Amor, Daniel, The e-Business (R)Evolution: living and working in an interconnected world, NJ, Prentice Hall PTR (for Hewlett Packard)

[v] Voss, Chris (2000), Developing an eService Strategy, Business Strategy Review, 11 (1), pp 21-33

[vi] Voss, Chris (2000), Developing an eService Strategy, Business Strategy Review, 11 (1), pp 21-33

[vii] Sandeep, Dayal, Helene Landesberg & Michael Zeisser, Building Digital Brands, The McKinsey Quarterly, 2000 No. 2

Chapter 7. PRICING OR PROMOTION?

9.2 E-RETAIL