Misguided Models of E-Commerce: The U.S. Experience in the Late 20 th Century

1. Misguided Models of E-Commerce:The U.S. Experience in the Late 20th Century Dr. Bert Rosenbloom Professor of Marketing and Rauth Chair in Electronic Commerce LeBow College of Business Drexel University Philadelphia, Pennsylvania USA

2. E-commerce in the United States during the last few years of the 20th Century was based on some rather dubious models that contributed to its rapid implosion during the first year of the new millennium.

3. In this presentation we will present some of the most popular misguided “new paradigms” and explain why, in most cases, they were not a solid foundation for the future development of E-commerce.

4. The forthcoming list of misguided E-commerce models is not an exhaustive one, but will include the most commonly heard and heavily publicized “new paradigms” that emerged during the height of the E-commerce phenomenon in the United States

5. Misguided Model #1Disintermediation Elimination of middlemen in distribution channels Intermediaries become superfluous because producers gain exposure to vast numbers of customers in Cyberspace All that’s needed is a Web site. Millions of customers have access to thousands of producers via the Internet. So, who needs middlemen. • Dell Computer $40 million per day

6. Misguided Model #2Lower Average Cost for Internet Channels $ Per Unit of Product Sold Conventional Channel ATC C1 0 Q1 Units of Products Sold $ Per Unit of Product Sold Internet Channel C1 ATC 0 Q1 Units of Products Sold

7. Profit After Break-Even Point Paradigm: Conventional vs. Internet Distribution Channels BE Point BE Point Conventional Model TR $ Costs & Revenues Profit TC Loss FC Sales (units) Internet Model TR $ Costs & Revenues Profit TC Loss FC Sales (units)

8. Misguided Model #3Physical Products Flow Over the Internet • Five Flows in Marketing Channels • 1. Product flow • 2. Negotiation flow • 3. Ownership flow • 4. Information flow • 5. Promotion flow • Internet superb at handling 2,3,4, and 5 because these can be digitized and moved at speed of light. • Product flow cannot be digitized and is processed (often by humans) and moves at best at speed of sound. • Product flow is the Achilles' Heel of E-commerce.

9. Misguided Model #4Profits Can Wait • Why? • Because in the world of E-commerce, if the firm has earned a profit “too soon” it is probably spending too little to stake its claim by establishing infrastructure and customer recognition as a destination Internet player

10. Misguided Model #5First Mover Advantage It’s not important to have a perfected or even a carefully considered business concept or plan to operate on the Net. The same goes for offering an IPO. What is important is to be first because the first is the one customers remember.

11. Misguided Model #6Market Cap is All That Matters Who cares about sales, earnings, real assets and people. The only thing that matters is the size of your market capitalization

12. Misguided Model #7Convenience and Efficiency are King • Business to Consumer Market • E-commerce via the Internet would grow spectacularly because consumers want convenience and Internet shopping provides the ultimate in convenience. • Caveat • How about behavioral motives for shopping? • Business to Business Market • E-commerce via the Internet will be virtually the only way • businesses deal with each other because of the cost effectiveness and efficiency of the technology. • Caveat • Non-rational motives also exist in the B-to-B market.

13. Misguided Model #8The Pure-Play Advantage • In the world of E-commerce, new start-ups have a huge advantage over firms with established conventional marketing channels because they can avoid channel conflict. • Conventional channels of existing companies become “baggage” when they attempt to sell via the Internet. The poster child is: • Compaq Computer

14. Misguided Model #9Valuation by Publicity • Publicity, promotion, and hype generated by the dot.com firm its executives, investment bankers, and the media create a “buzz.” • Excitement and wild expectations about the firm would drive up its stock price drastically • IPO mania creates: • Stock price of dot.com correlated to news releases. • Positive spin must be fostered and maintained. • Generating “news releases” becomes more important then substantive progress.

15. Misguided Model #10Internet is a Whole New Culture Unless you are: • Under 30 • Have virtually no experience • Untainted by having worked at a conventional company • Guaranteed substantial stock options • Convinced you are a master of the Web universe • You are not suitable to work for, provide consulting to, or even mix socially with the Internet elite.

16. What We’ve Learned about B2C E-Commerce: A Multi-Channel Perspective

17. Three Dimensions UnderlyingE-Commerce Channels • Technological Dimension • Economic Dimension • Behavioral Dimension

18. Technological Dimension of E-commerce Channels • Information technology placed on pedestal and worshipped • “Internet changes everything” • Transformational force to revolutionize individual and institutional behavior • If something could be done it would be done • Technology drives channel strategy and structure • Everyone will do all their shopping on the Net

19. Economic Dimension ofE-commerce Channels • Efficiency and cost savings are key • Physical Infrastructure (bricks and mortar) replaced by electrons flowing through cyberspace • Disintermediation would be inevitable result ---efficiency of direct connection of buyers and sellers via the Internet would make middlemen superfluous • Economics drives channel strategy and structure

20. Behavioral Dimension ofE-commerce Channels • Technology and economics are supplyside dimensions (demand adjusts to the will of supply) • Behavior is a demand side dimension (supply adjusts to the will of demand) • Behavior of consumers drives channel strategy and structure

21. Customer Centric Marketing Channels All of the major areas of channel management including strategy formulation, channel design, selection of channel members and adaptation of channel structure over time must be derived from patterns of consumer behavior

22. Multichannel Strategy is the Only Channel Strategy for Most Firms • Different customer segments may choose to buy via different channels • The same customer segments may choose to buy through different channels in different circumstances • Both of the above may change their channel preferences over time

23. Online Sales (2001)Pure E-tailers vs. Multichannel Retailers Source: (Business Week E-B:2 )

24. Bricks and Mortar Retailers Here To StayOnline Retail Sales as Percentage of Total Retail Sales Source: Jupiter-Media Metrics

25. Retailing becoming “Threetailing” StoreCome in CatalogCall in WebsiteLog on

26. Threetailing Requires Integrated Channel Strategy “Left channel” has to know what the “right channel is doing Channel confluence instead of channel conflict Cross channel synergies should be the goal

27. Integrated Multiple Channels will be needed to meet the demands of the new breed of consumer “channel surfers.”

28. National Retail Federation Study of Channel Surfing • Integrating all three channels increases customer spending • 50% of online shoppers who receive a catalog look for or buy something they first see in print • Store shoppers who visit a retailer’s Web site purchase 8% more frequently and have 24% higher transaction amounts compared with the average shopper

29. Retailer Brand Equity = f(s,c,o) Where: s= customer satisfaction with store channel c = customer satisfaction with catalog o= customer satisfaction with online

30. Conclusion: The Winner Will be theChannel Convergence (Multi-channel) Paradigm “Pure-play” Internet firms operating only in cyberspace had the early advantage. • But long-term future belongs to the “bricks and mortar,” “legacy, land-based firms.” • The “old economy” firms are leveraging their name recognition, resources, and infrastructure and will overwhelm the “new kids on the block.”