MARKETING MATERIAL
9074 Wiley3 E-Marketing
Pricing Pricing Roulette Price Premium Historical_Pricing Competitive_Pricing
New Products Pricing Skimming Penetration Policy Promotion Advertising Believability
Laws of Service Customer Complaints Satisfaction Surveys Services in Ecommerce
Material Content Syndication ASPs Portals Ease of Use Tailoring
Collaborative Filtering Navigators & Spiders New Services Content Brokers
E-Retail Model Fulfilment Disintermediation Price Comparisons One-Stop Shopping
Clicks & Mortar E-retail Organization Product Databases Manipulation of Data
Direct Marketing Personal Data Profiles Direct Advertising Mail List Response Rate
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
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.
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 naοve 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?
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.
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.
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.
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?
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!
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:
1. Like complaints, they indicate where problems lie; for rectification
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!
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.
KEY CONCEPTS
Syndication
Applications Service Providers (ASPs)
Portals
Tailoring
Collaborative Filtering
Databases
Navigation & Spiders
Guarantors
Content Brokers
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!
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?
■ Who might you be able to (profitably) syndicate e-commerce offerings from?
fig.(61) The BBC website has links to a wide range of learning resources
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!
■ Do you use ASPs?
■ Do you use ASPs to completely manage your site(s)?
■ If
so, what are you doing to ensure that you can still become independent at a
later stage?
fig.(73) Macromedia is a leader in the provision of website software
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 'members', for your e-commerce services do you have? ..
■ 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? $ ..
fig.(34) Yahoo! is trying to exploit its ongoing club relationship
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).
Chris Voss[vi], again, suggests some ways to ease navigation, including:
1. restricting the amount of information on the screen presented to users
2. grouping users so that they can go direct the part of the site they need
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
almost impossible to use?
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
Even so, as a vendor, you should be aware that some users will still object to even offering this amount of intrusion into their privacy. But, of course, you can give them the alternative of not accepting this approach and having to insert their personal details each time. Again it's horses for courses. If you are very clever as a web site owner, you can link people's purchases to those of other purchasers with a similar profile - in particular with a similar purchase profile. Amazon in effect regularly updates each customer's profile by seeing what similar purchasers are now doing. The great advantage of this is that it is based on the latest information, those purchasers are now buying the new books that are coming out - and Amazon can immediately link others to that pattern. Based on their ordering, it will suggest which of the new books might be suitable for similar customers.
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.
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?
■ How do you do this?
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!
■ Do you make special provisions to allow for spiders?
fig.(19) Lycos is one leading navigator
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:
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).
■ How do you 'guarantee' your 'offering(s)'?
■ Do you, deliberately or by default, use outside organisations to underwrite your offerings?
■ If so, what is their role and how is this managed by you?
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?
■ What is your strategy for such content transfers?
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.
The aims and objectives of this particular chapter are therefore:
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.
KEY CONCEPTS
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
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.
fig.(31) Even Harrods now has to have its website
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?
■ How does/will it address the 'small parcels' (to the home?) problem?
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?
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
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?
■ or one-stop-shopping?
■ or specialised/luxury goods/services?
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.
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.
■ Can your organisation use both clicks and mortar?
■ How to do manage the potential clash between the two cultures?