TRANSFORMATIONS IN THE MARKETING MIX
Regardless of stock market upheavals, electronic markets are here to stay.
Companies wanting to maintain or gain a competitive edge can no longer neglect
electronic marketplaces and the Internet. But how can companies make effective use of
this new medium? Simply transposing traditional marketing strategies into the world of
electronic marketplaces will not work. The Internet is not a place for sending out blatant
advertisements to E-mail accounts around the world as fierce consumer debates on
listservs and in discussion groups evidence. Where companies quickly see the benefits of
“viral marketing” consumers see nothing but spam (unwanted email). Aggressive push
marketing strategies not only prove inefficient but detrimental on the Web and will
increasingly give way to some form of permission marketing [Godin, 1999 #2256].
Frustrated by the low click-through rate of advertising banners on the Web, companies
become more aggressive again. Recently, many e-companies have changed their
advertising policies and allow now for much larger banner displays on their Web-sites. It
is too early to tell but chances are that this strategy is headed for another disaster. As
Richard Mandeberg, President and CEO of iQ.COM puts it, “[T]he Internet was never
meant for spewing banners – it’s at its best when it provides true interactive
communication between brand and customer. The Net has already proven itself an
effective, measurable direct marketing vehicle and will ultimately become the most
efficient channel for managing two-way customer relationships” [Anon., 2001 #2383].
But for this to happen, it behooves companies to adopt an attitude that is in line with the
culture of conversation that characterizes the Internet [Levine, 2000 #2282].
This global network has a strong culture of free discourse and a bias against
anything resembling a sales pitch (Cronin 1994). Yet it is uniquely suited to develop
strong relationships, establish dynamic customer communities, and enter into two-way
communication with highly involved lead users of technical products (Cross, 1994;
Levine, 2000). Internet and other electronic marketplaces, however, seem to pose
opportunities and threats that do not fit very well in the traditional marketing concept of
the four P’s (see Table 1). What is needed is a new and extended framework. In
electronic marketplaces, the boundaries of the marketing-mix elements are getting
increasingly blurred.
Products
Products for which electronic marketplaces are feasible can be determined by
asking the following question: can the company help a customer in the purchase process
by providing information about the product via an electronic medium? This is definitely
the case for commodities and standardized products that are easy to describe and where
asset specificity is low. But even products that are somewhat complex in nature can let
customers narrow their search according to a few important product features and might,
therefore, succeed in electronic marketplaces (Malone, Yates, and Benjamin 1989). In the
United States, for example, over 30% of car buyers were “shopping” for cars on the
Internet before shopping for them in the physical marketplace (Deck 1998).
Products with substantial transactional volume in electronic marketplaces include
computer software, books, graphical designs, movies, music, and the like because they
can be maintained in digital form and are easy to transmit over a computer network
without any physical inventory movements. But also all manufactured goods sold
through mail-order perfectly fit the requirements for being traded in electronic
marketplaces (Benjamin and Wigand 1995). For such products, almost everything except
the physical entity can be digitized. It should be noted that although digitized, multimedia
representations of physical products assist the buyers in their purchasing decisions, such
representations do not eliminate the uncertainties of electronic markets.
One of the greatest advantages of the electronic marketspace is its ability to
provide value to customer through product versioning [Shapiro, 1998 #1934].
Information-based products such as books, music and video can be disassembled and
reassembled according to the unique need of the individual customer. Songs on the
Internet can be offered in different formats, varying in length, sound quality, number of possible replays, price and other dimensions, leaving it up to the consumer to make the
choice that fits her current needs. Or consider newspapers that are sold electronically.
Unlike the physical version where the consumer can only choose between the whole
newspaper and no newspaper at all, the Internet allows for an almost unlimited set of
choices, adding value for the consumer. Why should a customer pay the full price when
all she wants to read are only a few sections? Without getting to deep into a discussion of
the implications of versioning for cost-based versus value-based pricing strategies, it
should become clear that the Internet allows for product variations whose value need to
be understood by companies and consumers alike.
Of course not all products sell in electronic marketplaces, especially not those that
require extensive explanation and a face-to-face contact with a salesperson (Lowenthal in
Andelman 1995). Before declaring a product unsuitable for electronic markets, however,
one has to see the opportunities the electronic marketplace offers. Who would have
thought of selling used cars over a computer network? Having inspected the used cars,
collected photos, and verified the information, Japan’s AUCNET was able to provide all
the relevant information for used car dealers in digital form and stimulated online
purchase decisions. The content of the transaction, the used car, was replaced by digital
information in the electronic marketplace. In some cases this even allows for the
complete replacement of a physical product with an information-based service. This
happened to the answering machine which is being replaced by voice messaging services
(Dholakia and Venkatraman 19xxx, Rayport and Sviokla 1994).
An even greater opportunity arises for companies in service-based businesses.
Having produced digital assets, companies can either create their own proprietary
electronic marketplace or use their digital assets to expand the scope of their operations,
or both. Bloomberg Financial Systems, for instance, offered a proprietary system with all
the financial data an investment professional desired. Having developed a user base,
Bloomberg started using its system to expand its scope. Users of the Bloomberg terminal
could also display sports scores, purchase opera tickets, or preview vacation destinations.
In this way Bloomberg was able to satisfy more and more of its customers’ needs in its
electronic marketplace (Rayport and Sviokla 1995). With the rapid growth of the Internet
and the explosive growth in financial information available on the Internet, however,
proprietary terminals became less attractive and Bloomberg had to reorient its strategy
towards the Internet (Kover 1998).
Price
Because of new forms of value creation in the electronic marketplace the
traditional cost-based pricing offers little guidance to marketers [Greenstein, 2000 #2297;
Zott, 2000 #2272]. The main difference for companies that produce information -based
products and services is that the value chain is no longer "vertical", like the chain found
in most manufacturing. A vertical value chain implies that activities must be performed in
a hierarchical sequence that is often characterized as linear, leading from upstream to
downstream. Step 2 cannot be taken before step 1 is finished and all steps are necessary
for completing the whole product (i.e. value). "Instead, the value chain underlying
electronic commerce is closer to being a "platform" [Greenstein, 2000 #2297, p. 154].
Components can be added and taken out of product arrangements in a non-linear way and
can even be left out entirely as for slimmer software versions. The crucial aspect of a
non-vertical value chain is that in many cases products that have less value in the
marketplace (e.g., a trial versions of a computer application) is more expensive to
produce than the complete program.
Another aspect is the decrease in search costs for customers. As search costs
decrease, so do prices and profit margins for commodities and standardized products.
Eventually commodity markets may even be destabilized by price wars that eliminate any
excess profits once enjoyed in the physical marketplace (Bakos 1991). Other factors may
also lead to lower prices in electronic markets. In many cases, sales or value-added taxes
may be saved because goods are shipped across state or national boundaries. Elimination
of intermediaries can save costs. By conducting up to 40% of its business over the
Internet, Cisco Systems reduced its annual operating expenses by $270 million (Ghosh
1998). Some of these savings may be passed on to buyers as lower prices.
This being the case it will become ever more important to distinguish one’s offer
from the competition by adding additional value and position it on dimensions other than
price. If a high degree of product differentiation can be achieved in the electronic
marketplace (e.g., through added value), buyers are less inclined to settle for anything
else than their ideal product. The more an electronic product offering fits the buyer’s
ideal preference, the more desirable it becomes for the buyer and the higher the price the
company may be able to charge for the product and services (Bakos 1991). For instance,
commissions for Web-based stock trading services ranged from $8 to $30 per trade.
Ameritrade, a no-frills web stockbroker, charged $8 while Schwab and Fidelity, which
positioned themselves as “life goals” oriented financial sites offering a range of services
besides trading, charged $25-30 per electronic trade (Brooker 1998).
The opportunities to add value to information-intensive products and services in
electronic marketplaces become virtually limitless (Cash 1994). Phone companies with
their voice mail services, for example, offer increased convenience and functionality over
the answering machine. This translates into added value for the customer and allows the
phone companies to charge – on a discounted cash flow basis – several times the cost of
the competing physical product. In the AUCNET system, buyers were willing to pay a
6% to 7% average price premium because they got a better selection of used cars with
greater convenience (Rayport and Sviokla 1994).
Place
Some of the most important structural changes in electronic marketplaces are
disintermediation — elimination of wholesale and retail layers and selling directly to
consumers – as well as reintermediation by “cybermediaries” that are specialized in
electronic commerce. Such changes are most evident for digital products which can be
distributed over the Internet itself, obviating even the need for physical distributors.
But how does one price products that can be delivered right over an electronic
network? Distribution is a large cost factor in the physical marketplace but can approach
zero for digital products in electronic marketplaces (Cash 1994). One way chosen by
Network Associates, the anti-virus software developer, is to make its software freely
available on the Internet and ask for license fees only after it had been installed and tested
on an organization’s computer system. New software releases are scheduled every six to
eight weeks and are included in the two-year license fee. The combination of free
software distribution to individuals and subsequent collection of license fees from
commercial customers fits very well with the prevailing culture of the Internet (Cronin
1994). It is also conceivable that customers are no longer charged for product parts that
they do not want. Companies can develop custom products – containing only the
requested components and features -- and price them accordingly (Cash 1994). Dell and
Gateway have shown that such BTO (build-to-order) methods not only result in happy
customers but also in enormous savings in inventories.
The innovative method Network Associates and others use to offer and distribute
free software is another indication for the disruption of the traditional marketing-mix in
electronic marketplaces. What difference would it make if Network Associates was not
located in California, but somewhere on the other side of the globe? Virtually none! In
ubiquitous electronic marketplaces physical location becomes irrelevant and so do large
amounts of retail space, or shelf space (Bosley 1994). It is as if all stores were at one
location (Cash 1994).
This is especially appealing to small companies at remote locations and nichers
that do not have a large enough market in their city or region. For companies with digital
assets, distance does not even affect delivery costs because their product or service can be
shipped electronically (Anderson 1995). It also allows aggregation of widely dispersed
niche markets that would need different outlets in the physical marketplace. This has
been done successfully by companies such as Virtual Vineyards which has been offering
not only a selection of excellent wines but also a variety of authentic specialty foods from
around the world. Businesses offering their products in electronic marketplaces such as
the Internet, however, should be aware that they are targeting a global audience and have
to be prepared to handle shipping, customs, and payment problems, many of which the
company may have no prior experience with (Cohen in Orme et. al. 1995).
As physical location in electronic marketplaces becomes irrelevant, decisive
factors of place (or distribution) shift to the creation and utilization of new, boundary-free
infrastructures to reach a critical mass of consumers (Zimmermann 1995). Until homes
are wired for easy-to-use interactive devices that provide consumers with high-quality
video interactions in the electronic marketplace, electronic sales channels will be
somewhat limited in their ability to make inroads with the consumer.
For small companies that set up a website, this means that they may not
necessarily generate enough traffic to their site unless they make some use of
cybermediaries. Renting space in an electronic mall, registering the site with the
important Internet directories, creating a “cool site” that gets listed as such, and trying to
get as many hits as possible among the popular search engines are just some of the
options smaller companies have to increase volume of transactions on the Internet. But
just as with physical location, prime "real-estate" in cyberspace is expensive and hard to
come by. At the end of the day, even popular search engines and cybermediaries have
only limited shelve space that they sell for a premium to companies with large advertising
budgets.
Promotion
Electronic marketplaces also offer endless opportunities to promote a company
and its products or services. With its ever-growing pool of middle to upper class users,
the Internet provides access to prime target groups. In addition, at a fraction of the costs
of traditional means such as print, television, or radio, online promotion can be delivered
almost instantaneously around the globe. A study by IBM indicated that firms putting
forth online catalogs on the Internet could save up to 25% in processing costs and reduce
cycle time by up to 62% (Hoffman and Novak 1996). It is, therefore, no surpise that the
biggest market for the Internet is considered to be advertisement and marketing
(Anderson 1995).
The Internet means the end of business as usual and companies that want to be
successful in using the Internet as a promotional tool have to be conversant with the rules
of this new medium (Levine, 2000). The old mass-market approach and hype of
television, billboard, and magazine advertisement will not work on the Internet, where
the audience is far better educated and more upscale than the average consumer (Daniel
Janal in Network World 1995). In fact, almost everything in this new medium is different
from the traditional mass communication model where no interaction between the
consumer and the firm takes place.
On the Internet the message is hardly ever sent to the consumer; rather the
consumer comes to the message. Consumers control the type and duration of advertising
exposure. Web users can link to the site of a company where they are free to explore as
little or as much of the information as they want, instead of having it all shoved down
their throats. This shifts power considerably to consumers (Gerald O’Connell in
Anderson 1995) and reverses the typical one-to-many communication process to a manyto-
one process. The push-type promotional strategies of traditional markets give way to
pull-type promotional strategies in electronic markets. Smart companies are even able to
go one step beyond and enter into a one-to-one communication process with the members
of their target audience by customizing their offers to individual customers. Cookies –
pieces of data transmitted by web servers to client computers – allow marketers to track
the users’ navigation paths within a website (Leibrock 1997). Through such tracking, site
visitors’ interests and preferences can be learned, and marketers can tailor their offerings
and promotional approaches to specific website visitors. Such tracking, of course, has
raised concerns about privacy (McGrath 1999).
To reach online buyers marketers have to create an information-rich, interactive
form of marketing communication for a personalized sales approach (Levine, 2000). The
World Wide Web with its multimedia and interactive capabilities has the potential to
offer exactly this. It is a medium that allows publishing, real-time communication
broadcast, and narrowcast all in one. Information can be updated instantaneously and
retrieved 24 hours a day. Most importantly, the interactive nature of the medium makes
it possible to engage consumers in asynchronous dialogues that occur at both parties’
convenience (Deighton 1997, Hoffman and Novak 1995a).
Businesses can make use of interactive ads, for instance, to give customers
exactly the information they are looking for. Consumers simply click on icons or
hypertext to obtain more detailed information on the products they are interested in and
get it in the form of text, picture, audio, or video. This can be a very effective way to
reach consumers who generally do not like the mass-market hard-sell approach and who
would not respond to any other form of advertisement. This new way of non-intrusive
advertisement is expected to work best on the World Wide Web where users, unlike
commercial online services, do not face time charges for accessing marketing information
and are, therefore, likely to spend more time reviewing it (Daniel Janal in Network
World).
The World Wide Web also offers unprecedented opportunities to tailor the
promotion-mix precisely to the individuals’ needs and enter into ongoing relationships
with the customers. The crucial difference to any other medium before is that the Internet
fosters conversation and companies must be ready to listen rather than to talk (Levine,
2000). Early efforts to use the Internet for promotional purposes saw companies such as
Hello Direct or DEC (now Compaq) strategically locate E-mail buttons on their websites
to elicit comments about their products and services from their customers. They also
presented sophisticated fill-out forms and other incentives to obtain relevant information
from customers in order to serve them more effectively in the future (Hoffman and
Novak 1995a). This allowed businesses such as Virtual Vineyards, the wine and
specialty foods merchant on the Internet, to recommend and customize special offers to
its customers (Dholakia, 1995). Digital Equipment Corporation also employed such as
strategy. Each of the Alpha computer users had to fill out a variety of demographic
information which generated substantial leads and became part of DEC’s corporate leadtracking
database (Andelman, 1995). In combination with the use of small icons as
electronic ads in E-zines this fits right in the culture of the Internet -- non-intrusive, but
available to those who want it (Jones, 1994). But the Internet offers more promotional
channels than just the World Wide Web and some companies understood that they can
also benefit from newsgroups or mailing lists. As found by Sivadas, Kellaris, and Grewal
(1995), readers of a particular newsgroup are avid consumers of products/services related
to the type of the newsgroup. Newsgroups and mailing lists resemble more the
traditional media as they deliver the message right into the hands of the users. There is,
however, a strong bias in the Internet community against raw sales pitches and only a few
newsgroups do not oppose advertisements.
In recent years, companies have redoubled their efforts to engage in conversations
with their customers, even with non-customers. One can now find discussion groups
hosted on the companies' Web-site where product users converse directly and in real-time
with company employees and fellow customers. There, product failures, flaws, and fixes
are being discussed openly and company engineers participate to offer technical advice,
explain the status of ongoing research, and calm upset customers. In another discussion
group, investors may be discussion the past, present and future outlook for the company
and company managers are participating to offer their opinion. Such openness is risky but
inevitable for future success in electronic markets (Levine, 2000). In fact, companies
need to understand that such open conversation with the market is not risky at all but the
most valuable form of customer relationship management conceivable [Means, 2000
#2200].
In order to succeed in these media, companies must strictly adhere to so-called
“netiquette” and offer information about their products and services only where
appropriate. It is strongly suggested to identify the target audience first before starting
any promotional program. The Internet provides effective means, such as search engines,
to find likely groups and by following the discussions in these groups companies can find
out whether the community would appreciate their information or not. It is essential that
the information provided be of high quality and that customers can respond conveniently
to the company.
An even better way for companies to promote their products and services is to
start their own newsgroup or mailing list. Then they can let people know about their
offerings, get feedback on what customers like and do not like, solve customer problems,
and get a better understanding of the interests and trends in their market (Levine, 2000).
Companies that have set the standards in these areas are mainly from the computer
industry. Adobe or Dell, for example, dedicate several people to monitor their (and
competitors’) newsgroups in order to respond to customers’ problems and suggest new
uses of their products. As Internet users are generally early adopters of new product
technologies, this gives them a competitive edge in realizing new product opportunities
and shifting trends in the market. Additionally, this two-way form of communication
offers the opportunity to build strong relationships with a segment that is extremely
unwilling to respond to any traditional one-way form of marketing communication such
as mass advertising (Mehta and Sivadas, 1995).
Strong customer relationships are paramount for companies that want to compete
effectively with businesses offering products of higher quality or lower prices.
According to Treacy and Wiersema (1995) “customer intimacy” is a very useful route to
market leadership. Customer-intimate companies do not pursue one-time transactions but
they try to cultivate relationships in order to gain lifetime customers. For that they need
detailed customer knowledge to respond quickly to almost any need, which often only
they, by virtue of their close relationship with the customer, recognize.
No other medium besides the Internet seems to be so uniquely suited to collect
and analyze these huge amounts of customer data at such a low cost. Interactive websites
allow companies to obtain relevant customer information for the purpose of building
customer relationships. Web servers can provide information on which pages are
accessed, when and for how long they are accessed, which website the user previously
visited, and which domain address the user belongs to (Hoffman and Novak 1996). Hello
Direct, for example, uses this information to learn about the interests of its customers and
find out which products are getting the most attention. Subsequently the information is
used to update Hello Direct’s offerings -- almost instantly compared to mail-order
catalogs (Verity in Verity and Hof, 1994).
More sophisticated websites follow consumer’s electronic trail which gives a
much more detailed account of the online consumer. Tracking software is now able to
monitor every minute detail of consumer activity [Locke, 2000 #2286]. Besides the
obligatory and already somewhat antiquated clickstream analysis and cookies, computers
can now capture where consumers go with their mouse and how long they linger at a site.
What is more, software can capture whether a consumer who was exposed to company
X’s banner advertising when visiting website Y, actually visits company X’s website
even if he does so three days later [Allard, 1999 #2283]. With such information at hand,
stored in massive databases yet accessed and analyzed with lightning speed if needed,
software packages produce a consumer description in real-time that can be matched
against one of hundreds of pre-configured profiles or, as in collaborative filtering, against
other consumers with similar preferences.
Businesses using these means can develop extensive customer databases and use
them to enter into a new era of low-cost micro marketing. As consumers increasingly
demand products targeted to their individual tastes or preferences, companies must
customize their offerings for ever smaller segments, eventually all the way down to the
individual consumer. The Internet is an efficient instrument for developing true one-toone
relationships and extract value from them [Peppers, 1997 #2258]. Companies
lacking the capability of reaching micro segments efficiently might end up with offerings
that are designed for everyone but appeal to no one (Cronin 1994).
The Internet offers more than just a low-cost database-driven marketing approach
to achieve new levels of customer relationships. It is an ideal medium for creating and
sustaining true customer dialogue (Cross 1994, Deighton 1997). Newsgroups and
mailing lists are excellent media to discuss product features, solve customer problems,
suggest new product uses, and get customer feedback. E-mail, as a one-to-one
communication medium, is uniquely suited to provide customer support in an
asynchronous dialogue that occurs at both parties’ convenience. This allows firms to be
closer to the customer than ever before and respond faster to changes in its competitive
environment. It also offers new opportunities to create stronger brand identities which
may translate into brand loyalty (Upshaw in Hoffman and Novak 1995a). Companies
engaging in this form of marketing will reap the benefits by building and maintaining
customer relationships that promise to be highly profitable in the long run.
CONCLUSION
Companies that want to stay ahead of competition can no longer ignore electronic
commerce and associated electronic marketplaces. To gain a real competitive advantage,
however, they have to understand the logic of these emerging electronic markets. Simply
transposing traditional marketing-mix strategies into the world of electronic marketplaces
will not yield satisfactory results.
In ubiquitous electronic marketplaces physical location becomes irrelevant and so
do large amounts of retail space, or shelf space. Many products and services exist in
digital format only and may even be distributed as such. Product offerings, prices, and
promotional campaigns are no longer geared towards the mass-market but can
customized to the individuals’ needs in cost-efficient ways. Electronic marketplaces are
also ideal marketing communication media for creating and sustaining true customer
dialogue (Deighton 1997). This allows firms to be closer to the customer than ever
before and achieve and maintain new levels of profitable long-term customer
relationships.
Although most of the excitement about electronic commerce and electronic
marketplaces is based on the tremendous growth of the Internet, sales on the Internet
have been relatively slow to develop, especially in markets other than USA and Canada.
In the global context, the Internet has often served more as a channel for public relations
and image building than as a sales channel (Mundorf, Zwick and Dholakia 1999). This is
changing rapidly, though, as users become more comfortable with the act of buying on
the Net.
While electronic commerce has exhibited explosive growth in recent years, this
method of doing business is still in its infancy. As greater numbers and a wider variety of
actors in kaleidoscopic patterns of relationships appear in the electronic marketplace,
these types of markets will become more complex, often much more so than their
physical counterparts. Success will be increasingly difficult to predict as new types of
technologies emerge and transform parts of the electronic marketplace. To survive and
prosper in the electronic marketplace, market players will have to be ready with
contingency plans based on scenarios that take into account potential technological
innovations as well as changes in consumers’ preferences and behaviors.
Regardless of stock market upheavals, electronic markets are here to stay.
Companies wanting to maintain or gain a competitive edge can no longer neglect
electronic marketplaces and the Internet. But how can companies make effective use of
this new medium? Simply transposing traditional marketing strategies into the world of
electronic marketplaces will not work. The Internet is not a place for sending out blatant
advertisements to E-mail accounts around the world as fierce consumer debates on
listservs and in discussion groups evidence. Where companies quickly see the benefits of
“viral marketing” consumers see nothing but spam (unwanted email). Aggressive push
marketing strategies not only prove inefficient but detrimental on the Web and will
increasingly give way to some form of permission marketing [Godin, 1999 #2256].
Frustrated by the low click-through rate of advertising banners on the Web, companies
become more aggressive again. Recently, many e-companies have changed their
advertising policies and allow now for much larger banner displays on their Web-sites. It
is too early to tell but chances are that this strategy is headed for another disaster. As
Richard Mandeberg, President and CEO of iQ.COM puts it, “[T]he Internet was never
meant for spewing banners – it’s at its best when it provides true interactive
communication between brand and customer. The Net has already proven itself an
effective, measurable direct marketing vehicle and will ultimately become the most
efficient channel for managing two-way customer relationships” [Anon., 2001 #2383].
But for this to happen, it behooves companies to adopt an attitude that is in line with the
culture of conversation that characterizes the Internet [Levine, 2000 #2282].
This global network has a strong culture of free discourse and a bias against
anything resembling a sales pitch (Cronin 1994). Yet it is uniquely suited to develop
strong relationships, establish dynamic customer communities, and enter into two-way
communication with highly involved lead users of technical products (Cross, 1994;
Levine, 2000). Internet and other electronic marketplaces, however, seem to pose
opportunities and threats that do not fit very well in the traditional marketing concept of
the four P’s (see Table 1). What is needed is a new and extended framework. In
electronic marketplaces, the boundaries of the marketing-mix elements are getting
increasingly blurred.
Products
Products for which electronic marketplaces are feasible can be determined by
asking the following question: can the company help a customer in the purchase process
by providing information about the product via an electronic medium? This is definitely
the case for commodities and standardized products that are easy to describe and where
asset specificity is low. But even products that are somewhat complex in nature can let
customers narrow their search according to a few important product features and might,
therefore, succeed in electronic marketplaces (Malone, Yates, and Benjamin 1989). In the
United States, for example, over 30% of car buyers were “shopping” for cars on the
Internet before shopping for them in the physical marketplace (Deck 1998).
Products with substantial transactional volume in electronic marketplaces include
computer software, books, graphical designs, movies, music, and the like because they
can be maintained in digital form and are easy to transmit over a computer network
without any physical inventory movements. But also all manufactured goods sold
through mail-order perfectly fit the requirements for being traded in electronic
marketplaces (Benjamin and Wigand 1995). For such products, almost everything except
the physical entity can be digitized. It should be noted that although digitized, multimedia
representations of physical products assist the buyers in their purchasing decisions, such
representations do not eliminate the uncertainties of electronic markets.
One of the greatest advantages of the electronic marketspace is its ability to
provide value to customer through product versioning [Shapiro, 1998 #1934].
Information-based products such as books, music and video can be disassembled and
reassembled according to the unique need of the individual customer. Songs on the
Internet can be offered in different formats, varying in length, sound quality, number of possible replays, price and other dimensions, leaving it up to the consumer to make the
choice that fits her current needs. Or consider newspapers that are sold electronically.
Unlike the physical version where the consumer can only choose between the whole
newspaper and no newspaper at all, the Internet allows for an almost unlimited set of
choices, adding value for the consumer. Why should a customer pay the full price when
all she wants to read are only a few sections? Without getting to deep into a discussion of
the implications of versioning for cost-based versus value-based pricing strategies, it
should become clear that the Internet allows for product variations whose value need to
be understood by companies and consumers alike.
Of course not all products sell in electronic marketplaces, especially not those that
require extensive explanation and a face-to-face contact with a salesperson (Lowenthal in
Andelman 1995). Before declaring a product unsuitable for electronic markets, however,
one has to see the opportunities the electronic marketplace offers. Who would have
thought of selling used cars over a computer network? Having inspected the used cars,
collected photos, and verified the information, Japan’s AUCNET was able to provide all
the relevant information for used car dealers in digital form and stimulated online
purchase decisions. The content of the transaction, the used car, was replaced by digital
information in the electronic marketplace. In some cases this even allows for the
complete replacement of a physical product with an information-based service. This
happened to the answering machine which is being replaced by voice messaging services
(Dholakia and Venkatraman 19xxx, Rayport and Sviokla 1994).
An even greater opportunity arises for companies in service-based businesses.
Having produced digital assets, companies can either create their own proprietary
electronic marketplace or use their digital assets to expand the scope of their operations,
or both. Bloomberg Financial Systems, for instance, offered a proprietary system with all
the financial data an investment professional desired. Having developed a user base,
Bloomberg started using its system to expand its scope. Users of the Bloomberg terminal
could also display sports scores, purchase opera tickets, or preview vacation destinations.
In this way Bloomberg was able to satisfy more and more of its customers’ needs in its
electronic marketplace (Rayport and Sviokla 1995). With the rapid growth of the Internet
and the explosive growth in financial information available on the Internet, however,
proprietary terminals became less attractive and Bloomberg had to reorient its strategy
towards the Internet (Kover 1998).
Price
Because of new forms of value creation in the electronic marketplace the
traditional cost-based pricing offers little guidance to marketers [Greenstein, 2000 #2297;
Zott, 2000 #2272]. The main difference for companies that produce information -based
products and services is that the value chain is no longer "vertical", like the chain found
in most manufacturing. A vertical value chain implies that activities must be performed in
a hierarchical sequence that is often characterized as linear, leading from upstream to
downstream. Step 2 cannot be taken before step 1 is finished and all steps are necessary
for completing the whole product (i.e. value). "Instead, the value chain underlying
electronic commerce is closer to being a "platform" [Greenstein, 2000 #2297, p. 154].
Components can be added and taken out of product arrangements in a non-linear way and
can even be left out entirely as for slimmer software versions. The crucial aspect of a
non-vertical value chain is that in many cases products that have less value in the
marketplace (e.g., a trial versions of a computer application) is more expensive to
produce than the complete program.
Another aspect is the decrease in search costs for customers. As search costs
decrease, so do prices and profit margins for commodities and standardized products.
Eventually commodity markets may even be destabilized by price wars that eliminate any
excess profits once enjoyed in the physical marketplace (Bakos 1991). Other factors may
also lead to lower prices in electronic markets. In many cases, sales or value-added taxes
may be saved because goods are shipped across state or national boundaries. Elimination
of intermediaries can save costs. By conducting up to 40% of its business over the
Internet, Cisco Systems reduced its annual operating expenses by $270 million (Ghosh
1998). Some of these savings may be passed on to buyers as lower prices.
This being the case it will become ever more important to distinguish one’s offer
from the competition by adding additional value and position it on dimensions other than
price. If a high degree of product differentiation can be achieved in the electronic
marketplace (e.g., through added value), buyers are less inclined to settle for anything
else than their ideal product. The more an electronic product offering fits the buyer’s
ideal preference, the more desirable it becomes for the buyer and the higher the price the
company may be able to charge for the product and services (Bakos 1991). For instance,
commissions for Web-based stock trading services ranged from $8 to $30 per trade.
Ameritrade, a no-frills web stockbroker, charged $8 while Schwab and Fidelity, which
positioned themselves as “life goals” oriented financial sites offering a range of services
besides trading, charged $25-30 per electronic trade (Brooker 1998).
The opportunities to add value to information-intensive products and services in
electronic marketplaces become virtually limitless (Cash 1994). Phone companies with
their voice mail services, for example, offer increased convenience and functionality over
the answering machine. This translates into added value for the customer and allows the
phone companies to charge – on a discounted cash flow basis – several times the cost of
the competing physical product. In the AUCNET system, buyers were willing to pay a
6% to 7% average price premium because they got a better selection of used cars with
greater convenience (Rayport and Sviokla 1994).
Place
Some of the most important structural changes in electronic marketplaces are
disintermediation — elimination of wholesale and retail layers and selling directly to
consumers – as well as reintermediation by “cybermediaries” that are specialized in
electronic commerce. Such changes are most evident for digital products which can be
distributed over the Internet itself, obviating even the need for physical distributors.
But how does one price products that can be delivered right over an electronic
network? Distribution is a large cost factor in the physical marketplace but can approach
zero for digital products in electronic marketplaces (Cash 1994). One way chosen by
Network Associates, the anti-virus software developer, is to make its software freely
available on the Internet and ask for license fees only after it had been installed and tested
on an organization’s computer system. New software releases are scheduled every six to
eight weeks and are included in the two-year license fee. The combination of free
software distribution to individuals and subsequent collection of license fees from
commercial customers fits very well with the prevailing culture of the Internet (Cronin
1994). It is also conceivable that customers are no longer charged for product parts that
they do not want. Companies can develop custom products – containing only the
requested components and features -- and price them accordingly (Cash 1994). Dell and
Gateway have shown that such BTO (build-to-order) methods not only result in happy
customers but also in enormous savings in inventories.
The innovative method Network Associates and others use to offer and distribute
free software is another indication for the disruption of the traditional marketing-mix in
electronic marketplaces. What difference would it make if Network Associates was not
located in California, but somewhere on the other side of the globe? Virtually none! In
ubiquitous electronic marketplaces physical location becomes irrelevant and so do large
amounts of retail space, or shelf space (Bosley 1994). It is as if all stores were at one
location (Cash 1994).
This is especially appealing to small companies at remote locations and nichers
that do not have a large enough market in their city or region. For companies with digital
assets, distance does not even affect delivery costs because their product or service can be
shipped electronically (Anderson 1995). It also allows aggregation of widely dispersed
niche markets that would need different outlets in the physical marketplace. This has
been done successfully by companies such as Virtual Vineyards which has been offering
not only a selection of excellent wines but also a variety of authentic specialty foods from
around the world. Businesses offering their products in electronic marketplaces such as
the Internet, however, should be aware that they are targeting a global audience and have
to be prepared to handle shipping, customs, and payment problems, many of which the
company may have no prior experience with (Cohen in Orme et. al. 1995).
As physical location in electronic marketplaces becomes irrelevant, decisive
factors of place (or distribution) shift to the creation and utilization of new, boundary-free
infrastructures to reach a critical mass of consumers (Zimmermann 1995). Until homes
are wired for easy-to-use interactive devices that provide consumers with high-quality
video interactions in the electronic marketplace, electronic sales channels will be
somewhat limited in their ability to make inroads with the consumer.
For small companies that set up a website, this means that they may not
necessarily generate enough traffic to their site unless they make some use of
cybermediaries. Renting space in an electronic mall, registering the site with the
important Internet directories, creating a “cool site” that gets listed as such, and trying to
get as many hits as possible among the popular search engines are just some of the
options smaller companies have to increase volume of transactions on the Internet. But
just as with physical location, prime "real-estate" in cyberspace is expensive and hard to
come by. At the end of the day, even popular search engines and cybermediaries have
only limited shelve space that they sell for a premium to companies with large advertising
budgets.
Promotion
Electronic marketplaces also offer endless opportunities to promote a company
and its products or services. With its ever-growing pool of middle to upper class users,
the Internet provides access to prime target groups. In addition, at a fraction of the costs
of traditional means such as print, television, or radio, online promotion can be delivered
almost instantaneously around the globe. A study by IBM indicated that firms putting
forth online catalogs on the Internet could save up to 25% in processing costs and reduce
cycle time by up to 62% (Hoffman and Novak 1996). It is, therefore, no surpise that the
biggest market for the Internet is considered to be advertisement and marketing
(Anderson 1995).
The Internet means the end of business as usual and companies that want to be
successful in using the Internet as a promotional tool have to be conversant with the rules
of this new medium (Levine, 2000). The old mass-market approach and hype of
television, billboard, and magazine advertisement will not work on the Internet, where
the audience is far better educated and more upscale than the average consumer (Daniel
Janal in Network World 1995). In fact, almost everything in this new medium is different
from the traditional mass communication model where no interaction between the
consumer and the firm takes place.
On the Internet the message is hardly ever sent to the consumer; rather the
consumer comes to the message. Consumers control the type and duration of advertising
exposure. Web users can link to the site of a company where they are free to explore as
little or as much of the information as they want, instead of having it all shoved down
their throats. This shifts power considerably to consumers (Gerald O’Connell in
Anderson 1995) and reverses the typical one-to-many communication process to a manyto-
one process. The push-type promotional strategies of traditional markets give way to
pull-type promotional strategies in electronic markets. Smart companies are even able to
go one step beyond and enter into a one-to-one communication process with the members
of their target audience by customizing their offers to individual customers. Cookies –
pieces of data transmitted by web servers to client computers – allow marketers to track
the users’ navigation paths within a website (Leibrock 1997). Through such tracking, site
visitors’ interests and preferences can be learned, and marketers can tailor their offerings
and promotional approaches to specific website visitors. Such tracking, of course, has
raised concerns about privacy (McGrath 1999).
To reach online buyers marketers have to create an information-rich, interactive
form of marketing communication for a personalized sales approach (Levine, 2000). The
World Wide Web with its multimedia and interactive capabilities has the potential to
offer exactly this. It is a medium that allows publishing, real-time communication
broadcast, and narrowcast all in one. Information can be updated instantaneously and
retrieved 24 hours a day. Most importantly, the interactive nature of the medium makes
it possible to engage consumers in asynchronous dialogues that occur at both parties’
convenience (Deighton 1997, Hoffman and Novak 1995a).
Businesses can make use of interactive ads, for instance, to give customers
exactly the information they are looking for. Consumers simply click on icons or
hypertext to obtain more detailed information on the products they are interested in and
get it in the form of text, picture, audio, or video. This can be a very effective way to
reach consumers who generally do not like the mass-market hard-sell approach and who
would not respond to any other form of advertisement. This new way of non-intrusive
advertisement is expected to work best on the World Wide Web where users, unlike
commercial online services, do not face time charges for accessing marketing information
and are, therefore, likely to spend more time reviewing it (Daniel Janal in Network
World).
The World Wide Web also offers unprecedented opportunities to tailor the
promotion-mix precisely to the individuals’ needs and enter into ongoing relationships
with the customers. The crucial difference to any other medium before is that the Internet
fosters conversation and companies must be ready to listen rather than to talk (Levine,
2000). Early efforts to use the Internet for promotional purposes saw companies such as
Hello Direct or DEC (now Compaq) strategically locate E-mail buttons on their websites
to elicit comments about their products and services from their customers. They also
presented sophisticated fill-out forms and other incentives to obtain relevant information
from customers in order to serve them more effectively in the future (Hoffman and
Novak 1995a). This allowed businesses such as Virtual Vineyards, the wine and
specialty foods merchant on the Internet, to recommend and customize special offers to
its customers (Dholakia, 1995). Digital Equipment Corporation also employed such as
strategy. Each of the Alpha computer users had to fill out a variety of demographic
information which generated substantial leads and became part of DEC’s corporate leadtracking
database (Andelman, 1995). In combination with the use of small icons as
electronic ads in E-zines this fits right in the culture of the Internet -- non-intrusive, but
available to those who want it (Jones, 1994). But the Internet offers more promotional
channels than just the World Wide Web and some companies understood that they can
also benefit from newsgroups or mailing lists. As found by Sivadas, Kellaris, and Grewal
(1995), readers of a particular newsgroup are avid consumers of products/services related
to the type of the newsgroup. Newsgroups and mailing lists resemble more the
traditional media as they deliver the message right into the hands of the users. There is,
however, a strong bias in the Internet community against raw sales pitches and only a few
newsgroups do not oppose advertisements.
In recent years, companies have redoubled their efforts to engage in conversations
with their customers, even with non-customers. One can now find discussion groups
hosted on the companies' Web-site where product users converse directly and in real-time
with company employees and fellow customers. There, product failures, flaws, and fixes
are being discussed openly and company engineers participate to offer technical advice,
explain the status of ongoing research, and calm upset customers. In another discussion
group, investors may be discussion the past, present and future outlook for the company
and company managers are participating to offer their opinion. Such openness is risky but
inevitable for future success in electronic markets (Levine, 2000). In fact, companies
need to understand that such open conversation with the market is not risky at all but the
most valuable form of customer relationship management conceivable [Means, 2000
#2200].
In order to succeed in these media, companies must strictly adhere to so-called
“netiquette” and offer information about their products and services only where
appropriate. It is strongly suggested to identify the target audience first before starting
any promotional program. The Internet provides effective means, such as search engines,
to find likely groups and by following the discussions in these groups companies can find
out whether the community would appreciate their information or not. It is essential that
the information provided be of high quality and that customers can respond conveniently
to the company.
An even better way for companies to promote their products and services is to
start their own newsgroup or mailing list. Then they can let people know about their
offerings, get feedback on what customers like and do not like, solve customer problems,
and get a better understanding of the interests and trends in their market (Levine, 2000).
Companies that have set the standards in these areas are mainly from the computer
industry. Adobe or Dell, for example, dedicate several people to monitor their (and
competitors’) newsgroups in order to respond to customers’ problems and suggest new
uses of their products. As Internet users are generally early adopters of new product
technologies, this gives them a competitive edge in realizing new product opportunities
and shifting trends in the market. Additionally, this two-way form of communication
offers the opportunity to build strong relationships with a segment that is extremely
unwilling to respond to any traditional one-way form of marketing communication such
as mass advertising (Mehta and Sivadas, 1995).
Strong customer relationships are paramount for companies that want to compete
effectively with businesses offering products of higher quality or lower prices.
According to Treacy and Wiersema (1995) “customer intimacy” is a very useful route to
market leadership. Customer-intimate companies do not pursue one-time transactions but
they try to cultivate relationships in order to gain lifetime customers. For that they need
detailed customer knowledge to respond quickly to almost any need, which often only
they, by virtue of their close relationship with the customer, recognize.
No other medium besides the Internet seems to be so uniquely suited to collect
and analyze these huge amounts of customer data at such a low cost. Interactive websites
allow companies to obtain relevant customer information for the purpose of building
customer relationships. Web servers can provide information on which pages are
accessed, when and for how long they are accessed, which website the user previously
visited, and which domain address the user belongs to (Hoffman and Novak 1996). Hello
Direct, for example, uses this information to learn about the interests of its customers and
find out which products are getting the most attention. Subsequently the information is
used to update Hello Direct’s offerings -- almost instantly compared to mail-order
catalogs (Verity in Verity and Hof, 1994).
More sophisticated websites follow consumer’s electronic trail which gives a
much more detailed account of the online consumer. Tracking software is now able to
monitor every minute detail of consumer activity [Locke, 2000 #2286]. Besides the
obligatory and already somewhat antiquated clickstream analysis and cookies, computers
can now capture where consumers go with their mouse and how long they linger at a site.
What is more, software can capture whether a consumer who was exposed to company
X’s banner advertising when visiting website Y, actually visits company X’s website
even if he does so three days later [Allard, 1999 #2283]. With such information at hand,
stored in massive databases yet accessed and analyzed with lightning speed if needed,
software packages produce a consumer description in real-time that can be matched
against one of hundreds of pre-configured profiles or, as in collaborative filtering, against
other consumers with similar preferences.
Businesses using these means can develop extensive customer databases and use
them to enter into a new era of low-cost micro marketing. As consumers increasingly
demand products targeted to their individual tastes or preferences, companies must
customize their offerings for ever smaller segments, eventually all the way down to the
individual consumer. The Internet is an efficient instrument for developing true one-toone
relationships and extract value from them [Peppers, 1997 #2258]. Companies
lacking the capability of reaching micro segments efficiently might end up with offerings
that are designed for everyone but appeal to no one (Cronin 1994).
The Internet offers more than just a low-cost database-driven marketing approach
to achieve new levels of customer relationships. It is an ideal medium for creating and
sustaining true customer dialogue (Cross 1994, Deighton 1997). Newsgroups and
mailing lists are excellent media to discuss product features, solve customer problems,
suggest new product uses, and get customer feedback. E-mail, as a one-to-one
communication medium, is uniquely suited to provide customer support in an
asynchronous dialogue that occurs at both parties’ convenience. This allows firms to be
closer to the customer than ever before and respond faster to changes in its competitive
environment. It also offers new opportunities to create stronger brand identities which
may translate into brand loyalty (Upshaw in Hoffman and Novak 1995a). Companies
engaging in this form of marketing will reap the benefits by building and maintaining
customer relationships that promise to be highly profitable in the long run.
CONCLUSION
Companies that want to stay ahead of competition can no longer ignore electronic
commerce and associated electronic marketplaces. To gain a real competitive advantage,
however, they have to understand the logic of these emerging electronic markets. Simply
transposing traditional marketing-mix strategies into the world of electronic marketplaces
will not yield satisfactory results.
In ubiquitous electronic marketplaces physical location becomes irrelevant and so
do large amounts of retail space, or shelf space. Many products and services exist in
digital format only and may even be distributed as such. Product offerings, prices, and
promotional campaigns are no longer geared towards the mass-market but can
customized to the individuals’ needs in cost-efficient ways. Electronic marketplaces are
also ideal marketing communication media for creating and sustaining true customer
dialogue (Deighton 1997). This allows firms to be closer to the customer than ever
before and achieve and maintain new levels of profitable long-term customer
relationships.
Although most of the excitement about electronic commerce and electronic
marketplaces is based on the tremendous growth of the Internet, sales on the Internet
have been relatively slow to develop, especially in markets other than USA and Canada.
In the global context, the Internet has often served more as a channel for public relations
and image building than as a sales channel (Mundorf, Zwick and Dholakia 1999). This is
changing rapidly, though, as users become more comfortable with the act of buying on
the Net.
While electronic commerce has exhibited explosive growth in recent years, this
method of doing business is still in its infancy. As greater numbers and a wider variety of
actors in kaleidoscopic patterns of relationships appear in the electronic marketplace,
these types of markets will become more complex, often much more so than their
physical counterparts. Success will be increasingly difficult to predict as new types of
technologies emerge and transform parts of the electronic marketplace. To survive and
prosper in the electronic marketplace, market players will have to be ready with
contingency plans based on scenarios that take into account potential technological
innovations as well as changes in consumers’ preferences and behaviors.
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