307 Midterm: Electronic Commerce

The Case of the Dell Computer The Value of Customization

Dell prides itself on selling online and claims that this method is an effective way to reduce costs. The evidence for this assertion is missed. •Customizing computers for each customer probably does NOT save money. One claim is that by making a custom order computer with only the components that the customer wants, money can be saved. This assertion holds little merit. It is probably cheaper to provide a limited number of computers that offer each consumer a little bit MORE than what he or she would have wanted in a customized unit. Customization is more useful if a customer needs a computer with specifications that cannot readily be found among pre-fabricated ones. •Prices for "upgrades" to default models tend to be very high—e.g., additional RAM often costs more than twice as much as the "street" price for the components. "Base" models usually have low prices, but the final prices paid tend to be high. •Although the percentage margins on computers tends to be low due to competition (e.g., 10-25%), absolute margins can be significant—e.g., 10% of $1,500=$150. That margin can pay for a lot of work. •It would probably be cheaper to ship directly to an efficient retailer—e.g., Wal-Mart may take in hundreds of computers and a number of other materials at one time. These items are put out on floors using fork lifts and other efficient transportation methods. The customer does much of the work. •However, because computer parts may lose as much as 1.5% in value per week. Thus, reducing distribution lag time by five weeks may "rescue" 7.5%. •If Dell claims to have an inventory turnover time of 48 hours, someone else—probably a supplier—has to carry the needed "buffer" inventory to accommodate fluctuations in demand. Parts coming in will have been assembled into computers within forty-eight hours. Note, however, that since Dell depends on being able to buy exactly what they need at any time, which cannot be precisely predicted ahead of time, this forces the holding of inventory into the distribution channel, and suppliers must pass on this cost to Dell, so it is really more a matter of changing where inventory is kept. Value of Customization: •For the vast majority of customers, customization really does not add value. Since computer parts are relatively cheap, it is generally possible to provide, say, choices of some half dozen computers. A computer that offers a bit more than what the customer wanted will probably be cheaper to make than a customized one. There is not much to be gained from eliminating inexpensive parts that the customer does not need. •For customers who seek a very specific combination of parts—Dell may offer a benefit in allowing that specific combination. The benefit here is not so much cost saving as the ability to get exactly what you want. In other words, the computer will be relatively expensive, but it may match the customer's exact wishes.

Considerations in Evaluating E-Commerce Potential 1

1. Value-to-bulk ratio (high value, low weight items can be more readily handled/shipped) - Bulk involves anything making it difficult and/or costly to ship (Large volume, Heavy, Oddly shaped object, Perishable, Fragile, Hazardous) Ex. Bigger product (heavier - more expensive shipping) but not worth that much (metal cart) Ex. Inefficient packaging (huge box with stuffing for small item) Ex. Pay more to buy convenient items on Amazon (toilet paper)

Considerations in Evaluating E-Commerce Potential 2

2. Absolute (dollar) margins: Even if the percentage margin on a high price item is low (e.g., 15%), the absolute margin can cover considerable expenses (e.g., 0.15x$1,000=$150 --> still useful for operational costs) Margin: the difference between what you paid to produce vs. what you sell Look at dollar margin vs. percentage margin for perspective Note that we are usually taught in business school to think of margins in percentage terms. This works well in some settings, but NOT in the case of shipping low value items directly to end customers!

Considerations in Evaluating E-Commerce Potential 3

Ability of consumer to evaluate quality and fit through online description: Standard branded items from a trusted source can be more easily evaluated than items that need to be examined up close •Does the customer have to see the product to determine fit and/or quality? •Clothing sizes do not tell the whole story—"fit" differs among brands •Texture and other difficult to describe qualities are important for certain "experiential" products •Customers are less likely to need to see a standard product—e.g., an iPhone X—sold by a reputable online dealer •Lesser known brands may require more inspection, but online reviews can help reduce uncertainty Some products may either be repeat purchases of standard products or items that can be readily evaluated without seeing the product in person. For example, if you want an new iPhone exactly like the one a friend has, you will get the same thing from any reputable retailer such as Costco.com, Amazon.com, BestBuy.com, ATT.com, or Walmart.com. In other cases, an individual may want to examine the texture or other aspects in person (clothing sold online has very high return rates) Note that to facilitate rapid rendering, most photos used online tend to be in limited resolution. Different computers may also show colors somewhat differently (variation in colors)

Sources of profitability for Amazon

Amazon.com—likely the most efficient and well run major online merchant—makes very little on selling tangible merchandise (e.g., print books, office supplies) sent to customers due to high expenses. Profits tend to come from: •Sales of electronic content (e.g., books, movies, music) •Extensive web site hosting (including Netflix!) and other server services •eBay like "brokering" of used merchandise shipped from the seller to the buyer (no labor for Amazon) •Services provided to smaller online retailers (e.g., sales tax assessment and disbursement) Some of these have been made possible in large part due to the investments in technology that Amazon has made to make its original business of selling tangible merchandise online profitable.

Steps in Collaborative Filtering

Amazon: Several products will be displayed with a message something like "People who bought ____ also bought." Individual customer level: -Joe buys a large number of books with poetry of Shakespeare and related authors. The computer compares Joe to others who have bought many of the same books and determines that many of these "similar" customers have bought Shakespearian Sonnets: Profound Poetry, a book that Joe has not yet bought, and recommends this book to Joe. -Customers who buy several books by Jonathan Kellerman will be recommended books by Stephen White, another psychologist whose books feature a psychologist who consults for the police, too. Item level: -Individuals who look at Everett Rogers' book The Diffusion of Innovation will be recommended Basic and Clinical Pharmacology. Although the topics are different, the spread of new products (the item) and practices appears to be of interest to pharmacists. Note that collaborative filtering can be done both at the individual level—identifying, based on everything that a particular customer has bought in the past, items of interest to that customer and at the item level, where it can be predicted what may appeal to a large proportion of individuals buying one specific item.

Considerations in Evaluating E-Commerce Potential 9

Assortment of variations needed (e.g., clothing colors and sizes) •Some product categories will require a large assortment of combinations -E.g., clothing: Color (5) * Sizes (7) = 35 variations •These products are inherently expensive to make and distribute -Large amount of space may be needed for display in costly retail areas -Exact demand for each combination may be difficult to predict for a specific brick-and-mortar location—in a centralized warehouse, many of the store level fluctuations cancel themselves out. When two variables are "crossed"—such as when a piece of clothing needs to be available in several different sizes, each of which, in turn, has to be available in several different colors, the total number of combinations can escalate dramatically. This introduces two problems: 1. If the product has to be available in a self-service store so that the customer can access it, rather than having to ask a clerk to retrieve it, each size-color combination may need its own slot --> can be problematic both in terms of making the store larger and thus more "intimidating" and more difficult to manage, and in terms of cost when stores are located where real estate is expensive. 2. With more item combinations available, it becomes progressively more difficult to predict the exact demand for each combination at each location. --> many stores will end up significant understocking of some combinations and/or overstocking of others. --> Understocking may result and loss of sales and/or customer dissatisfaction. --> Overstocking means that merchandise will have to be shipped back at some point and be redistributed among other store locations (especially problematic if seasonal clothing is involved since there is limited time for redistribution) --> Since fashions often change from year to year, leftover merchandise will often have to be sold at steeply discounted clearance prices.

Benefits/Costs of E-commerce

Benefits: •A smaller number of locations is needed •Distribution centers can be located in areas with lower real estate and labor costs •The use of one or a modest number of warehouses causes the causes over- and under-estimates of demand at different locations to partially cancel out (i.e., sales in some cities served by the same distribution center are higher than expected while sales to other cities in the region are lower than expected) •In the distribution center, products can be packed and shipped at a constant rate—what matters is what is ready to go when shipments have to be sent—while stores may need to adjust staffing depending on the time of the day •Collaborative filtering allows for identifying more items of potential interest to the customer, thus potentially increasing the average sale •The amount of time between the manufacturing of the product and reaching the customer can be reduced Costs: •All the work done by the customer in the retail setting must be done by employees or outside contractors (e.g., collecting all items in the purchase, bringing items to the cashier for checkout, and transporting the items home) •Several delivery attempts may need to be reach the customer at home •Many common products—including liquid laundry detergent—are considered "hazardous" goods and cost more to ship •The costs of handling each returned item are higher •Rates of returned items are likely to be higher since customers did not have an opportunity to examine the merchandise closely •Additional costs of packaging For the vast majority of products, the inefficiencies will greatly outweigh the efficiencies Tradeoff: Yes, when you sell online, you may not need as many store locations—which will save money—but you will face other costs (e.g., labor to compile and deliver orders) which may more than cancel out the savings from having fewer store outlets. The actual cost effectiveness of online selling depends on the specific product, customer practices, and firm characteristics.

Internet of Things - Benefits/Issues

Benefits: •Remote control—e.g., stolen car or car driven by other criminal can be disabled; heater can be turned on before the resident returns home •Limiting control to authorized persons (e.g., temperature or lighting at a location can be done only through a device with proper validation) •Communication between devices and service providers (e.g., diagnostics to assess repair needs; replenishment of consumables) •Device as menu system (functions in a small appliance—e.g., a light bulb—can be controlled from a device so that it is not necessary to build in such a system into the appliance itself) Connecting appliances, devices, and other products through the Internet can provide considerable convenience as illustrated above. Issues: •Use of bandwidth (massive amounts of data can be generated by a single appliance or device!) •Privacy -Substantive (release of audio, video, or personal records) -Theoretical (use of data for analysis with no personal attribution) •Security (hacking potential) •Dependence/impact of loss of connection •Cost savings -Energy -Maintenance This is a rapidly evolving field. Although there is a potential for considerable savings in energy and labor, there are potential reasons for concern about privacy, the amount of bandwidth needed, and security.

Collaborative Filtering Two Levels

Comparing purchases by a customer to others who have made "similar" purchases to identify additional products of potential interest Largely a matter of "brute force" computer analysis to identify additional items that a customer may want to buy - Note that this process is entirely data driven. The computer only looks at similarity of purchases. The computer does not understand what it is about these purchases per se that make them attractive. Often a more effective way to identify additional items of interest if it is difficult to conceptually compare items to identify others like them -E.g., favorite songs: What drives the preference? Sound, lyrics, singer characteristics? -E.g., books: Which authors are "similar?" "Win-win" deal: Merchant has the opportunity to sell more items; the customer finds value that he or she would otherwise have been less likely to find Two levels: -Product level: Items bought together at higher rates than chance?? -Individual level: Comparison of an individual to "similar" others who have bought many of the same things Ex. Online vendors such as Amazon.com can rely on "brute force" computations in identifying overlaps of customer purchases. - If even 10% of customers who have bought novels by Jonathan Kellerman have also bought books by Stephen White, this is likely to show up as a strong link, triggering a recommendation to individuals who have bought several books by one of the authors. NOTE: This is a simplified chart. The actual algorithms used are somewhat more complex but work off this general idea. Such actual algorithms, for example, will assess how similar two customers are to each other and weigh accordingly. Other factors—such as how products may have been rated by different people and how recently purchases were made—may also be reflected. These details are not needed for the exam.

Considerations in Evaluating E-Commerce Potential 4

Convenience to the customer and willingness to pay for this convenience: Some consumers may be willing to pay more for door-to-door delivery. It is usually more expensive to buy groceries online. Customers may be willing to pay a premium to avoid having to pick up an item (UberEats) - Specialty items with limited distribution that would require Travel for distance Uncomfortable travel (highly congested area) - Items that require frequent replenishment and/or critical time delivery (groceries) -Items that are difficult to transport --> In practice, it is difficult to get customers to pay for shipping and handling due to intense competition Note that willingness for delivery in the very near future—as opposed to something delivered over the next few days—may be greater.

Considerations in Evaluating E-Commerce Potential 5

Customer sensitivity to delayed delivery. Attempts to reduce delivery delays Hybrid formats - order online, pick up in store Amazon PrimeNow - delivery in 1-2 hours (extra charge) Amazon Pantry - groceries delivered to home by Amazon rather than UPS Partnerships with local retailers to stock and possibly deliver merch Next day deliveries by retail chains from their existing distribution centers In some cases, customers may be able to anticipate their needs well in advance and may be able to order online in time for an item to arrive. For example, if your calendar reminds you well in advance of the birthday of a relative, you can order online. This can be especially convenient if you would have had to ship the product to someone not living in your household anyway. In other cases, when a need was not anticipated and addressed in advance, waiting may be less attractive. For example, someone who does not have safety stock of light bulbs may not want to wait for replacement until a shipment has arrived. If you forget about a birthday or anniversary until the last moment, a delayed delivery could have serious social repercussions.

Considerations in Evaluating E-Commerce Potential 6

Extent of customization needed: Highly customized items—e.g., insurance, plane tickets, personalization—allow the customer to do much of the work (i.e., data entry). - products and services for which specific information must be provided Customization can come in multiple forms -An airline ticket should be for a specific name for travel to a specific destination from a specific origin at a specific time Efficiency is introduced when the customer can enter the relevant data -Insurance policy requires customer-specific info -Clothing may now be customized taking into account many more measurement points This is actually a situation where online sales can reduce labor needed. It may actually be easier for a customer to type in his or her own information rather than having to spell names and other information to a clerk taking it in. In addition, transactions can be done at the convenience of the customer rather than during more limited store hours.

Considerations in Evaluating E-Commerce Potential 8

Extent of inventory value decline over time: A computer can be distributed to consumers at a lower price through retailers, but the process takes longer and computer parts lose value fast. It has been estimated that because of the rapid technological progress made in the computer field, computer parts may lose as much as 1.5% of their value per week. If shipping directly to the customer can reduce the channel time by five weeks, this potentially "rescues" as much as 7.5% of the product value. In such a situation, then, trying to reach the customer directly may make sense (through individual delivery), even if the direct costs of distribution are higher, because of the inventory value issue. - delivery may cost more than distributing through retail stores, but shipping to individual customers may be faster, thus resulting in a product that is more valuable at the time of purchase

Firm Level Issues Affecting Online Sales Potential

Firm reputation/credibility: Since the customer is buying a product without the opportunity to inspect it, and since the customer will need to have a certain confidence that the merchandise ordered will actually arrive, firms with stronger reputations will be more likely to receive orders. Volumes sufficient for: -Economies of scale in automation (e.g., automatic conveyor belts to assemble orders - limits labor costs of online sales) -Volume discounts on shipping (firms shipping more packages can negotiate lower shipping costs per unit) Ability to sell multiple items together: Useful to spread the costs of packaging and shipping across a number of different items. - The more different but complementary items that an online vendor carries, the more likely it is that customer orders will tend to include a number of different items. Synergy with traditional retail store operations ("bricks-and-clicks"): Well known retail chains (Staples, Costco, Nordstrom's) have established reputation and are more likely to be trusted. - Having retail locations also makes it easier to accept returns, and the combined sales of online and brick-and-mortar outlets make for a greater bargaining power Location for minimization of sales taxes: - The rules of taxation of items sold out-of-state through Internet orders are complex. - Increasing number of online merchants, including Amazon, have now agreed to collect sales taxes on shipments to California and a number of other states. There are, however, still some online merchants that manage to avoid collecting sales tax on merchandise shipped to certain other states. Internationally, there may also be opportunities to avoid sales and duties—sometimes legally and sometimes not. Location for low labor and land costs - With ready access to shippers such as UPS and FedEx in most of the U.S., there is no significant advantage in being located in a major city - Small towns often have much lower real estate costs. - Firms can also locate in areas where wage levels tend to be lower (e.g., because of high levels of unemployment or other economic depressors). Potential for repeat sales to the same customer: *** -Increased business volume: Just as in traditional brick-and-mortar sales, it is often more cost effective to sell to existing customers than constantly trying to reach new ones. This is true online as well - Application of collaborative filtering: based on knowing what the customer has bought in the past, it is possible to identify other customers who have bought these same items and identify additional common purchases among these relatively similar individuals. --> (ability to recommend additional products of possible interest based on a customer's overlap with purchases of another)

Books Example

For very large markets—products that a lot of people want to buy—competition becomes intense. --> Although serving a large market may seem highly attractive, competition drives down prices dramatically—regardless of whether the product is sold online or in brick-and-mortar stores. It may be more attractive to focus on specialty markets where competition is less intense. In some cases, an online merchant may choose to carry a certain product in order to be credible as a seller in the merchandise category in question, which then allows the firm to sell other products that may be more profitable (establish brand) For example, a brick-and-mortar hardware store may find it necessary to carry red bricks even though these are heavy and bulky and may sell only for, say, fifty cents a piece. Customers simply expect that a hardware store would carry this product and would consider the store unreliable if they did not carry such staples. Although they may lose money selling bricks, they can make money selling items with greater margins. Similarly, although an online book seller may lose money selling current bestselling hardcover novels, they may be able to sell other books with higher margins. (Note that Amazon is ultimately banking on selling an increasing proportion of its books sold in electronic form. Although the price of these is lower than print versions, the distribution costs of the electronic books are much less since no tangible product is being shipped. Picture Comparison: (not shown) For a paperback book by the same author that is not currently a bestseller, a smaller percentage of discounting is needed. - Note that although the absolute margin here is lower, the bulk is also considerably less. This may be a product that could be sold in combination with other items. - Less pressure to discount; thus, greater gross margin

Considerations in Evaluating E-Commerce Potential 7

Geographic dispersal of consumers: Even if direct-to-consumer sales are not efficient, this may be the only cost effective way to reach customers who are widely dispersed (e.g., bee keepers, Civil War buffs, tall people). This, then, is not a case of efficient delivery, but rather a matter of reducing the inefficiency of delivering this product as much as possible. There are certain products for which an efficient method of distribution simply does not exist. If a product is a specialty one where few communities have a large enough number of local customers needed to make a store brick-and-mortar cost effective, selling online with shipment to the customer may end up being the least inefficient method of getting a product to the customer. For specialty products, customers may be scattered over large areas—e.g., -Bee keeping equipment -Specialty collector items -Big and tall clothing --> Both brick-and-mortar and online distribution will be costly, but, by default, online sales may be less so

Normal Profits

In economics, the profit levels that you would expect for a given level of investment and risk are known as normal profits. In a free market, in the long run, competition drives down profits to these normal levels. If firms in an industry are making "supernormal" profits—higher than the normal profits that would be expected—other firms will enter the market to take advantage of this opportunity for high prices. This entry will continue until profits have been driven down to "normal" levels. Online competition is likely to be intense since a firm is now competing at least at the national level, and quite possibly at the international level. - If it is more efficient to perform certain types of sales online, prices will generally be driven down and all the savings go to the customer.

Basic Internet Economics

In most markets, online merchants tend to have HIGHER costs than do conventional retailers -Much more of the work is done by the merchant rather than by the customer Intermediaries usually add value through specialization of labor and consolidation of tasks. Eliminating intermediaries usually results in higher costs. Customers do a lot of the work when they select, aggregate, bring for check-out, and carry away their products. Employees of e-commerce companies and their transportation services have to be paid to do this work!

Poll Q/A: In selling online with shipment of purchases to customers (E-commerce) A. Competition is likely to be intense B. Percentage margins are more important than dollar margins C. Labor costs will tend to be much lower than in a retail store D. For most products, overall costs are likely to be lower than in brick and mortar stores E. Products with low value to bulk ratio are likely to be profitable if absolute margins are low (high value to bulk ratio are more profitable not the other way around)

In selling online with shipment of purchases to customers (ecommerce) A. Competition is likely to be intense B. Percentage margins are more important than dollar margins C. Labor costs will tend to be much lower than in a retail store D. For most products, overall costs are likely to be lower than in brick and mortar stores E. Products with low value to bulk ratio are likely to be profitable if absolute margins are low (high value to bulk ratio are more profitable not the other way around)

International Examples

In the Chinese market, the e-commerce market has evolved somewhat differently from the U.S. market. Alibaba and associated companies (China) -Alibaba is mostly an eBay like brokering service between buyers and sellers (does not sell merchandise by itself) -Initially focused on bringing together fragmented groups of manufacturers and retailers connected by costly, inefficient state owned distributors -Introduced Alipay (now spun off from main company Alibaba)—electronic payment system -Associated businesses sell online, promote fashions, and are now entering traditional retail Currency shortage in India has spurred the growth of electronic payment systems: government efforts to crack down on crime and tax evasion included a dramatic reduction in available currency. Thus, there was not enough cash to go around to allow for all desired transactions. Electronic payment systems have helped significantly in alleviating this problem. Struggles between Amazon and Walmart owned subsidiaries in India: In rapidly growing markets, competition to get in is usually intense. This means that firms may lose money in the short run, hoping to recover these losses and make larger profits as the market matures. Amazon reaches places that are completely off the grid → 2 day shipping Data driven decisions trying to maximize and make the most out of what we can

If the costs of selling online are lower... *frequently missed on exam

Lower costs (no labor costs if selling online) → Higher short term profits → More competitions enter → Lower prices → Normal long term profits Normal profits are profit levels expected under free competition in a market with similar types of risks and investment requirements. If any firms are making "supernormal" (very high) profits, competitors will enter, offering slightly lower prices. This will continue until competition causes the benefits of lower prices to go to customers. In some cases, selling online is clearly less expensive than selling in a brick-and-mortar setting. - Ex. customer can do most of the data entry work when airline tickets are bought online rather than through a brick-and-mortar travel agent suggesting that entering businesses where such cost advantages exist will result in high levels of profit. This, however, is not the case. Sellers who have this cost advantage will be competing with other firms that also have this cost advantage. Therefore, over time, competition will drive prices down and all, or nearly all, the cost savings ultimately go to the customer. You are not competing just against dinosaurs!

Micro-payments—problems, opportunities, and applications

Micro-payments involve payments of small amounts of money: Theoretically, it would be possible to sell a number of virtual products online (songs or documents) at very low prices since marginal costs of production and distribution are minimal. Thus, it would be possible to make money on volume even though the revenue for each item is small Considerable online content and services could be made profitably available for a small charge (i.e. 1 cent-2 dollars) - Usually only viable for electronic content NOT tangible goods (Shipping is too expensive for a small amount (low absolute margin)) However, Collecting small amounts of money can be: - Costly (processing charge or significant per transaction fee) - Cost of cutting a payment into very small payments (payment over time) is too high given credit card transaction fees - Inconvenient (customer not willing to enter too much info) Mobile technology (smart phones or tablets) with active login may be helpful for higher end micropayments (50 cents and above) due to established billing relationships - Cell phone service providers—who have an established billing relationship with their customers—may be able to offer this service in the near future as more people switch to ordering through mobile devices.

Bounce Rate

Percentage of times a visitor leaves the website almost immediately after viewing only one page Provides direction on how to make a website more effective by analyzing which pages are the most frequent entry/exit locations

Quality Links to Site

Quality Links to a Site: The Most Important Factor in Ratings •Link quality: Links from other sites ranked highly on a term in question count heavily; links from low ranked sites count very little •Link quantity: The more links from high rank sites, the greater the impact •Exclusivity of links: The weight of a page is generally divided among the outgoing links—thus, being a single link on a page will have more impact than being one of 50 •Placement: Links early on a page count more

Two types of online sellers

Service level strategy: Both brick-and-mortar and online retailers can offer various degrees of service. To assess cost effectiveness of each approach, the comparison should be between vendors (online and offline) with comparable levels of service MANUFACTURERS: sell their own products directly to customers (e.g., Dell, Geico) - Typically offer more limited assortment ONLINE RETAILERS: from multi combining merchandise PLE manufacturers (e.g., Amazon, Staples) - Larger assortment Typically more frequent purchases --> Note that manufacturers and retailers may each use more than one channel path—e.g., Dell sells directly and also through retailers; Staples sells both in stores and online.

Online/Brick and Mortar Costs vs. Service Levels

Service levels offered by online merchants and different retail chains vary -Walmart offers very low cost retail distribution, but with limited service -Best Buy offers high levels of customer service—well trained "blue shirt" employees -High and low service levels can be offered both at online and brick-and-mortar stores -Retail chains that also sell online can offer services for online customers through retail stores (e.g., easier returns) ("Bricks-and-Clicks") High and low service levels can be provided both online and in brick-and-mortar stores Service level strategy: Both brick-and-mortar and online retailers can offer various degrees of service. To assess cost effectiveness of each approach, the comparison should be between vendors (online and offline) with comparable levels of service Ex. Best Buy has very high costs due to the large number of "blue-shirt" employees they maintain (provides experts available). Walmart operates retail stores very efficiently, offering acceptable but lower levels of service. Thus, it is important to compare like levels of service when comparing online and brick-and-mortar sales (service levels and venue of sales are not the same thing) --> Comparing the costs of a high service brick-and-mortar retailer with the costs of a low service online merchant is not a legitimate analysis.

Showroomning

Showrooming: a process where a customer visits store to touch, feel, discuss product's feature with sales associate and instantly compare price to online price to see whether a better deal is available If amazon price is better you can buy it through one click using the showrooming Amazon app

How Suitable For Internet Commerce? Are There Differences Among Segments?

Some products considered: •Current selling novel (hardcover) (from Amazon.com) •TV set (from Walmart.com) •Typewriter (from OfficeDepot.com) •Pearl earrings (from Costco.com) - Costco online product - Sales tax varies among states - Hard to tell the sizing online (have a model wear the product and include a picture) - Many people who buy pearl earrings know that they want to buy them - Good value to bulk ratio - Easy to return to costco - Reviews offered online (hard to provide in brick and mortar store) In examining the suitability for online sales, we need to consider both the interests of the buyer and the seller. Note that: • Buying a product online may be very attractive to customers, but not a cost effective way of selling the product for the merchant (paper towels expensive to ship relative to the sales revenue they bring in) •In short run, many merchants are willing to run up considerable losses when they enter the online market. --> This is done with the hope that they will eventually become profitable as they learn to operate more efficiently and as the market matures. --> Firms may compete heavily in the beginning to become established sellers. As some firms drop out, it is anticipated that prices can be raised. •In the long run, firms may be willing to continue to incur losses on some product categories. --> It may be necessary to carry these products in order to be considered a convenient venue for customers to shop, and firms may be able to recoup the losses on these products from the more profitable sales they can make on others. •In the long run, firms will generally need to be able to profit on online sales as a whole and therefore they must start facing true costs. --> They can either stop selling online, drop certain products, charge higher prices, and/or impose a separate shipping charge, making the offer much less attractive to customers.

Web Metrics - evaluating sites

Some variables -Unique visits -Repeat visits -Average time spent on site Google now offers a set of "Analytics" tools, including a set of web traffic statistics. Webmasters can sign up voluntarily to participate in this by placing certain "meta tag" code in their web pages. (This code is invisible to people viewing the respective web page in its regular display mode). Therefore, for such sites, Google does, in principle, have access to traffic information from all sources, including other search engines or links from other sites. It is not clear whether Google actually uses this information, however.

Sentiment Analysis

Using a technique known as sentiment analysis: - Allows marketers to analyze data from social media sites to collect consumer comments about companies and their products - Data is then analyzed to distill customer attitudes and preferences including reactions to specific products and campaigns - New insights into what consumers really think (can allow for numerous quick changes such as a product rollout, new advertising campaign, reactions to customer complaints) - Salesforce offers sentiment analysis to help its clients such as GE, Kodak, Microsoft, PepsiCo engage with their customers

Problems with Cryptocurrencies

•Facilitation of illegal activities (e.g., ransomware, illegal drug sales, human trafficking) •Tool for circumventing taxation (facilitate income tax evasion since untraceable payments and receipts can be hidden from authorities) •Use by terrorist groups (can allow terrorist organizations to engage in money making activities) •High fluctuation in value (value is based on supply and demand, exchange rates to ordinary currencies) •Relies heavily on computing power; high energy costs (consumption of large amounts of electricity)

Micro-Payments are NOT

•For tangible goods. Shipping is too expensive for a small amount (low absolute margin). •For paying over time. The cost of cutting a payment into very small payments is too high given credit card transaction fees. In China, Alipay, a former subsidiary of Alibaba, has dramatically reduced the cost of online transactions. The base cost is much less, and thus, it is much more cost effective to collect small amounts of money.

Internet of Things Which of the following best represents an example of the Internet of Things? a. Orbitz can sell airline tickets online at a lower cost than that experienced by a brick-andmortar travel agent. b. By using collaborative filtering, Amazon may be able to sell more different books to a customer than a conventional brick-and-mortar bookstore can. c. An irrigation system is connected to the Internet and reduces watering when an area has received a lot of rain. d. As part of its market research efforts, Walt Disney World uses sentiment analysis. e. When selling an MP3 on iTunes, Apple collects a micropayment.

c. An irrigation system is connected to the Internet and reduces watering when an area has received a lot of rain. An increasing number of devices and appliances can be connected to the Internet through: -Wi-fi -Cellular connections -Bluetooth and other "patch-ins" Thus, it is possible for appliances to send back error codes to manufacturers, to download software upgrades automatically, and to be controlled remotely. Here are some examples of possibilities: •A printer, sensing that it is about to run out of toner, can automatically notify Amazon to send a replacement cartridge without human intervention. •A vending machine can notify its operator about how many of each items offered are left so that (1) unnecessary trips can be avoided when all items are available in sufficient quantity and (2) the operator can avoid bringing more merchandise than is actually needed. •A car can send error codes to the factory and cause an e-mail to be sent to the customer indicating the needed repair, its level or urgency, and an estimated cost. •When a homeowner receives a call from a service person who has arrived to repair his or her washing machine, the homeowner can unlock the door so that the repair person can enter the laundry room. •A dog collar can check for changes in heart rate, blood pressure, and body temperature and notify the owner what a dog may be suffering so that care can be provided as quickly as possible

Social Media: International Issues

•Censorship (e.g., Russia, China, Egypt) - authoritarian governments realize that the Internet can be used to organize opposition to government policies and the values of its leaders. - In the West, one would hardly consider Parenting a politically oriented magazine, but this publication has been among material censored in China because of government disapproval of Western parenting styles that may reward questioning the system and why things are they way they are. •Country or region specific platforms -May take on different combinations of functions—e.g., •Messaging •Photo share •Blogging •Micro-blogging (brief postings of the type made at Facebook and Twitter) •Commercial content (e.g., movies or TV like shows)

Cryptocurrencies

•Electronic currencies such as Bitcoin allow for anonymous online transactions (a number of parties are involved in verifying a transaction, reducing the role of any centralized organization.) •The details of the technology are rather complex. •These can be used to circumvent oppressive governments (e.g., women may not be able to open independent bank accounts in Saudi Arabia, but can be paid in cryptocurrency. •Security may be enhanced under some circumstances. - There are some potential benefits in that such currencies, including the potential for processing micropayments at a reduced cost. - Cryptocurrencies often appeal greatly to certain civil libertarians who want to reduce the role of the government both in being the main source of currency and to regulate and oversee transactions between individuals.

M-Commerce

•High growth in mobile technology (cellular phones, portable devices) with Internet access -Access through Internet browsers (.mobi domain is intended for web sites optimized for small screens) -Smart phone "apps" (access firm's content easier) •E.g., banking (for specific bank), information (e.g., Yelp: optimized for the display of relevant information) •Integration with GPS, messaging •Many countries are running ahead of the U.S. •Growth opportunities with "tablet" (e.g., iPad) computers that offer easy portability with larger screens M-Commerce tends to be more developed in certain countries—e.g., Japan, Finland, and even India—than in the U.S. In places where fewer people have easy access to computers, accessing the Internet through a smart-phone will tend to be more popular—thus the emphasis on M-Commerce in India, for example. Recent research in the United States has also found that a large proportion of young people from a lower socio-economic background report a cell phone as their primary means of accessing the Internet. One significant promise of M-Commerce is that this may make micro-payments more cost effective. It is generally very costly and difficult to collect small amounts of money—say, 25 cents to $2.00 through traditional credit cards. Usually, the bank involved will want a minimum of $0.30 plus some 1.75-3.5% of the amount charged. The percentage is not as big a problem, but $0.30 eats a great deal of a 50 cent—or even $1.00—charge. However, since cell phone service providers already have an established billing relationship with its customers, they may be able to collect these small amounts more easily, keeping costs down.

Some types of specialty products

•Industrial equipment •Collectibles (and replacement parts) •Replacement parts for rare products (e.g., specialty foreign automobiles) •Climate related products outside primary area of use (e.g., equipment to deal with snow, auto snow chains, fertilizer for tropical plants) •Other region related products outside primary regions (e.g., agricultural products in cities) •Specialty foods or regional/ethnic foods outside primary region Ways to distribute specialty products: •Special orders through conventional retailers (labor intensive and expensive) •Online merchants -Specialty oriented -Massive assortment merchants (e.g., Amazon) •Sales listed through multi-sided platforms such as eBay -Consumer-to-Consumer (C2C)—costs of labor may not be counted -Consumer-to-Business (C2B—rare) -Business-to-Consumer (B2C) -Business-to-Business (B2B) •Products may be sold on an ad hoc basis -Selling of inventory one got "stuck with"—inventory was not acquired for purposes of resale and the seller may know little about levels of demand -E.g., a collector sells to others; items bought at liquidation are resold; unreturnable merchandise is resold (e.g., auto parts)

Reality of Online Competition??

•Intense competition for large market products (large quantity demanded attracts many sellers) •Use of large demand products as loss leaders (e.g., Amazon.com bestsellers)?? •Competition will force reduced costs—if any—to be passed on to customers. Even if there is a cost advantage to selling online in a particular market, you will NOT be competing just against "brick-and-mortar" stores but also against those who have the same cost advantage in selling to customers. In the long run, you can probably make NORMAL profits but not above market level profits. - By the forces of supply and demand, online prices will then be driven down so that the profit from selling online will be no greater than that from traditional retailing. Any reduced costs would then be expected to go to customers. •Competition makes charging for shipping and handling difficult. This is usually more expensive than traditional distribution because of -Lesser economies of scale -Lower likelihood that the customer will be home to take delivery the first time around •Less competition on specialty products --> greater margins

Opportunities in M-Commerce

•Location based services ("L-Commerce") - Identification of offers and services based on GPS location (restaurant or pharmacy) - Certain smart phone apps may alert users either when they pass by a location offering a special deal (e.g., discounted restaurant meals) or of special sales in a store that the customer is currently visiting •Mobile banking and micro-payments •Mobile tickets and documentation •Beyond the browser: Mobile apps •Secure transactions on the go (established security protocol with phone carrier—not when open wi-fi is used) •Mobile entertainment

E-Commerce Closing Thoughts

•Online firms which emphasize automation and efficiency are likely to be relatively more successful •Only certain items are suitable for sale online—generally need a sufficient absolute margin •In markets where costs of selling online are lower, other online competitors will have the same advantage, driving long run profits down to "normal" levels •For a given store chain, online and "brick-and-mortar" sales can complement each other E-commerce, ultimately comes down to economics. Costs of selling online are often higher, and competition is likely to be intense, in part because the seller now is competing at least nationally, and sometimes internationally, instead of locally. In cases where online sellers actually do have a cost advantage over brick-and-mortar sellers, this will not result in exceptionally high prices because they have to compete with others who have that same cost advantage.

Social Media

•Paid advertising -"Sponsored" posts targeted by •Demographics, interests, and other characteristics •Search behavior •Online behavior (e.g., liking or commenting) •Unpaid firm/brand pages (channels) -include customer contributed content such as questions, photos, and commentaries •Hashtags used to identify: -Brands (@) -Product category -Context -Pseudo-hashtags (longer descriptions, usually unique—e.g., "#abouttimemomfedme" by baby or dog) ==> This is useful for so-called "sentiment analysis," or computer interpretation of social media posts.

Penalties for Gaming

•Some factors that may reduce page and site rankings: -Appearance that links to site have been paid for rather than resulting from editorial selection for good content on the originating site -Duplication of material available on other sites -"Hidden" text and "spamming" of keywords (repetition of keywords without apparent editorial purpose) -Links to "suspect" sites that appear to be intended to manipulate search engines •Other criteria are evolving and are kept proprietary For Google, some of the main ranking factors appear to be: 1. Number and quality of links to the site, as discussed above. This is by far the most significant factor. 2. Relevant keywords. Note that the ranking algorithm tests for "spam." Reckless repeating keywords may actually count against the rating of the site. 3. The "click-through" share of the site. Sites that are selected more frequently may improve in rank and those less frequently selected—despite their merits presumed from the other factors—may move down. 4. Location. This is a new factor that has recently begun to affect items. A user's geographic location can usually be identified based on his or her "IP address," a way of identifying a particular computer. If one were to search for "Chinese restaurants" on a computer located at USC, many of the results would be generally, discussing issues relevant to Chinese restaurants overall without any necessary reference to any specific ones. However, certain prominent Los Angeles area Chinese restaurants may also be listed. In Portland, OR, the list would thus be different, possibly including some local establishments there. 5. The extent to which the site is "small screen" (i.e., smartphone) friendly. 6. Successful integration with social media and sizable followings on social media platform (evidence of the impact of this factor appears to be inconsistent).

Search Engine Optimization

•The most important factor in search engine rankings is the "quality" and number of links to the site ("Popularity Index") •Links from highly ranked sites ("high quality") have much more impact than lower ranking sites - User trusts the website Many Internet users find desired information and sites through search engines. Research shows that a large proportion of the traffic goes to the first three sites listed, and few people go so sites that appear beyond the first "page" or screen. Getting a good ranking or coming up early on the list for important keywords is vitally important. Many consultants offer, for large fees, to help improve a site's ranking. Some search engines, such as Google, base rankings strictly on merit (although sites are allowed to get preferred paid listings on the right side of the screen). Other search engines allow sites to "bid" to get listed first. Some sites may end up paying as much as a dollar for each surfer who clicks through. If a potential customer is valuable enough, it may be worth paying for enhanced listings. Often, however, it is better to be listed as number two or three since only more serious searchers are likely to go beyond the first site. The first listed site may attract a number of people who click through without much serious inspection of the site. Some search engines are more specific than others. The goal of Google, Yahoo! and MSN is to contain as many sites as possible (hub).

Bricks and Clicks

•Traditional retail chains and online presence tend to have synergy -Online access to store information—hours, locations, directions -Checking on "in stock" status on local stores -Online orders with store pickup -Online orders with delivery; store return option •Brand equity •Volume purchasing power: With combined higher sales volumes from the two outlets, the firm gains greater bargaining power with suppliers and will often be able to negotiate lower prices. These lower prices be used to increase margins and/or to offer customers lower prices that can lead to even higher sales volumes. •Inventory assortment warranted (validated) by combined store and online sales There is a potential for synergy between brick-and-mortar retail operations and online sales for the same firm. - Ex: if both the Staples retail stores and its online operations are owned by one firm, these assets will generally be worth more than if two different firms each owned one of the two for a number of reasons: 1. Retail chains with established reputation and are more likely to be trusted when consumers are looking for an online seller. 2. The seller can avoid using valuable floor space on products with low sales volume by selling these only online. 3. Items bought online can be returned to a retail store, reducing costs for both the customer and the seller.

Search Engines

•Use an algorithm to identify the most optimal links •Algorithms may involve: -"Popularity" (number of links pointing inward) -Usage of keywords (limited impact) -"Click-through" rates from the respective search engine (NOT overall traffic volume on the site) -Location (as determine by IP address) (added 2010) -Small screen friendliness -Possible impact of social media "likes" (mixed evidence" -Other criteria—often proprietary •Historically, key word repetition was the most important factor. Today, on Google, quality links appear to be more important than key words. •Internet consultants will make recommendations for a fee. Many have strong opinions on "what works." Most are short on evidence that they are correct. ⇒ there are measures in place to avoid people coming in and "gaming" search engines (manipulating)

Social Media: Types and Strategies

•User generated content -Blogs -Video channels (e.g., Youtube - competition for attention is very high) -Instagram (useful for engagement: getting customers to come back over time to see interesting things posted, useful for high involvement and "experiential" products.) -Twitter: Mostly for announcements (help spread information) •Contests to encourage user generated content: To generate "authentic" content that is credible among potential customers, it may be useful to create contests where, for example, the three best photos with a specific hashtag are given some award.