Marketing problems emanating from e-commerce reprinted from: APICS SM SIG special issue September 2000.

Abstract

It is virtually impossible to read a newspaper or magazine without being exposed to the virtues of e-commerce. The purpose of this article is to highlight problems that may emanate from e-commerce and the Internet.

A problem well stated is a problem half solved.

Charles F. Kettering

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Problem 1--Costs are transparent

In an insightful article, Indrajit Sinha indicates the following:

   Everyone knows that the Web makes price comparisons much easier. But that's
   just one aspect of a far deeper problem. The real threat is what economists
   call cost transparency, a situation made possible by the abundance of free,
   easily obtained information on the Internet. All that information has a way
   of making seller's costs more transparent to buyers--in other words, it
   lets them see through those costs and determine whether they are in line
   with the prices being charged. (p. 43)

Sinha further states the following:

   Cost transparency threatens both retailers and manufactures. For retailers,
   it means customers will have a much better sense of a product's wholesale
   costs. That's already changing the way car dealerships operate. Car buyers
   routinely enter the showroom armed with detailed breakdowns of wholesale
   auto prices that have been downloaded for free from any of a dozen Web
   sites.

   For manufactures, cost transparency means consumers will be better able to
   infer a product's manufacturing costs, making it much harder to impose
   large price premiums. The threat, moreover, will be felt not just on-line.
   As consumers gain a greater knowledge about cost structures, they will be
   able to use that information to deal with traditional merchants as well.
   (p.44)

Problem 2--Products and services are turned into commodities

To Sinha, cost transparency also brings other problems:

   Second, cost transparency turns products and services into commodities. The
   example of online brokerages illustrates this point. It has now become
   practically impossible to distinguish among online stock-trading companies,
   which include Ameritrade, E-Trade, National Discount Brokers,
   MyDiscountBroker, and Datek. They all provide nearly the same information
   and services--company new, analyst research, real-time quotes, and
   portfolio monitoring--while collecting bargain basement commissions. As a
   result, the trading public has become increasingly skeptical about the
   rationale for traditionally high commissions charged by such
   well-established firms as Merrill Lynch and A.G. Edwards. The commissions
   don't seem to match up with the inferred costs.

   Under the circumstances, more and more people are looking at stock trading
   as an undifferentiated service--in short, as a commodity. (p.45)

He indicates, "The optimal way of counteracting cost transparency is through innovation. Consumers will reward makers of new and distinctive products that improve their lives." (p.48)

I would add that corporations compete on the basis of price, value, and service. A firm may not have the best price in town, but it can still be competitive if it has deep, industry-specific knowledge. Employees of this firm are nominally selling a product, but in reality they are selling a solution to the problem posed by the customer. For example, a local hardware store probably cannot compete with the prices offered by national hardware chains. However, the small local hardware store, with its knowledgeable staff, is selling a solution to the customer's problem--how to fix a plumbing leak, for example. Offering the correct solution could easily offset the higher price the local store must charge for pipes, joints, and other items that are in integral part of the solution that the customer requests.

Problem 3--There is competing against corporate brethren.

Consider the following:

   Retail stores that once targeted customers in separate geographical areas
   are casting for national and international customers. Sometimes they have
   the blessing of their head office; sometimes they don't. Either way, it can
   be a vexing problem for the entire system. The outlet owners essentially
   are competing against their brethren elsewhere in the nation and, in some
   cases, competing against their corporate head office that has its own
   e-commerce site and wants to control all such commerce itself.

      `It's sort of like opening kiosks all over, wherever you want ...' says
   Michael Seid, a longtime franchising consultant in West Hartford,
   Connecticut, who primarily represents head offices. `We're often seeing
   independent Web sites from franchisees.'(Morse, 2000, pp.1-2)

Problem 4--How does a manufacturer go online without destroying its relationship with its retailers?

This question is asked and answered by Bob Duncan, who cites the case of American Leather, of which he is CEO and cofounder. He realized that American Leather could sell its furniture via its own Web site or through a furniture e-tailer.

   Whatever we do, though, it cannot conflict with the sales of our existing
   dealers. One possibility is to offer our collections on the American
   Leather site at a normal retail (not a lowball) price. In this scenario the
   product would be delivered--and the after-sale support handled-by the
   dealer located closest to the buyer. We would then pay the dealers the
   approximate margin that they would have made on the sale if it had taken
   place in their showroom. Such an arrangement would give customers the
   convenience of shopping over the Internet while increasing sales for our
   dealers as well as for ourselves. (p.30)

Problem 5-E-tickets are not the equivalent of conventionally purchased travel tickets.

Recently, US Airways and its flight attendants reached an agreement, thereby averting an airline strike.

   But until US Airways and its flight attendants reached a tentative accord
   early Saturday morning, passenger holding e-tickets for US Airways flights
   faced a real dilemma. While other airlines and even Amtrak said they would
   try to accommodate US Airways passengers with paper tickets, travelers with
   e-tickets could not expect such service. Computers at different airlines do
   not yet communicate well enough to share information on tickets that have
   been issued electronically. (Sharkey, 2000, p. C15)

Problem 6--Protection of privacy is still a concern.

Consider the following:

   Privacy has become a hot issue for Web users. DoubleClick Inc., an internet
   advertising specialist at the center of the storm, had to back down last
   month after announcing plans to create a database that would link names,
   addresses, and other personal details with anonymous logs of where users go
   on the Web.

   Now some lawmakers are calling for new privacy regulations over the way Web
   merchants and advertisers handle personal data. But there's a fundamental
   problem: The Web's basic technical structure, designed years before it
   became a hub of the global economy, makes it easier for marketers and
   advertisers to scoop up personal data from users who are generally none the
   wiser. (Hamilton, 2000, p.B1)

REFERENCES

Duncan, Bob (2000). "First do no harm." Inc. Tech 2000. No. 1, p. 30.

Hamilton, David P. (2000). "Web's design hinders goals of user privacy." The Wall Street Journal, April 3, B1.

Laurence, Peter (1989). "Peter's quotations ideas for our Time." Bantam Books, 426.

Morse, Dan (2000). "Individual outlet owners set up e-commerce sites." The Wall Street Journal downloaded from http://www.msnbe.com/news), March 30, 1-2.

Sharkey, Joe (2000). "US Airways strike threat shows Drawbacks of e-tickets." The New York Times, March 27, G15.

Sinha, Indrajit (2000). "Cost transparency: The net's Real threat to prices and brands." Harvard Business Week, March-April, 43.

Ira Smolowitz
Professor of Finance and
Dean, Bureau of Business Research
American International College
Springfield, MA 01109