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Chapter 11. Strategies For E-Markets

Foundations of the Net-Enabled Organization

Detmar Straub, 1st EditionCopyright © 2003 John Wiley & Sons, Inc.

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Copyright John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that named in Section 117 of the United States Copyright Act without the express written consent of the copyright owner is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. Adopters of the textbook are granted permission to make back-up copies for their own use only, to make copies for distribution to students of the course the textbook is used in, and to modify this material to best suit their instructional needs. Under no circumstances can copies be made for resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

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Chapter 11. Learning Objectives• To describe the unique capabilities of Internet

technologies• To differentiate between vertical and horizontal

marketing channels• To utilize marketing tools and strategies in case

applications• To point out the advantages and disadvantages of

online firms• To discuss the characteristics of customer

relationship management (CRM) systems• To explain the critical pricing issues related to

cyberspace

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Chapter 11. Outline1. Introduction

2. Strategy and E-Markets

3. Strategic Marketing Issues related to the Uniqueness of E-Markets

4. Reprise: B2B Verses B2C

5. Vertical Channels

6. Pre-NE Era Tools for Reaching Out: Database Marketing, Data Mining and Data Warehousing

7. B2B Marketing Strategies

8. B2C Marketing

9. Pricing Issues in Cyberspace

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11.1 Introduction

Marketing Issues for NEOs:• How can marketing products and services benefit

from Net-Enablement?• In what ways is cyberspace different as a

marketplace from traditional , physical spaces?• How do marketing strategies differ between B2B

and B2C?• What are the marketing strategies that make sense

for hybrids?

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11.2 Strategy and E-Markets

• Which channels does a firm have to bring together effectively?– Raw materials and sub-components together on

the supplier-side– Products and services to brokers and customers

on the customer-side

• The challenge of handling all the vendor, complementor and supplementor relationships goes beyond the boundaries of traditional marketing.

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Strategy and E-Markets

• When firms move towards greater virtuality, they must explore channels “outside the box”. Where and when should such channels be deployed?

• “Channel conflict” is a critical issue that must be resolved as channels need to complement each other when ever possible.

• In what ways will pricing at all supply chain levels change as a result of Net-Enablement?

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11.3 Strategic Marketing Issues Related to the Uniqueness of E-Markets

• The Web enables new forms of business, such as those listed in the following slides, making new forms of marketing possible.

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11.3.1 Unique Capacity #1: Online Auctions

• Gathering individuals from the far reaches of the planet at a given time, with the overall auction running continuously, is not feasible in physical commerce.

• This is the perfect case of the substitution of informational for physical processes.

• The challenge is to retain user interest and liveliness of bidding so both buyers and sellers return frequently to the site.

• eBay’s markets for small groups of buyers and sellers are unique to each transaction. Buyers and sellers must return for new purchases.

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11.3.2 Unique Capacity #2: Web Exchanges

• Online exchanges represent an unprecedented expansion of markets as they can potentially reach a global market at a fraction of the cost of bringing buyers and sellers together in the physical world.

• Issuing the request for bids (RFB), the features of each lot of product can be specified and bidders who may ordinarily be frozen out can participate.

• Online exchanges therefore favor multi-sourcing over sole sourcing.

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11.3.3 Unique Capacity #3: New Communications Media

• Media enhancements through Internet technologies affect nearly all channels.

• Interactive responses (such as online chat) can be a powerful tool in strengthening customer relationships.

• Furthermore, sales reps in cyberspace are capable of maintaining contact with 3 customers at a time – a 3-fold increase in productivity!

• Newer technologies promise ever greater simulations of human social contact.

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11.3.4 Unique Capacity #4: Web Cam Broadcasting

• Influential brand images can now be conveyed using “video streaming” over the Internet, delivered anywhere at the customer’s convenience.

• Live shots capitalize on a sense of immediacy that is important in establishing customer involvement. Figure 11.2 real-time traffic on the

Verrazano Narrows bridge

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11.3.5 Unique Capacity #5: Peer-to-Peer (P2P) Communications

• P2P technology allows entities to exchange data, such as file-sharing, directly, without the intervention or control of a 3rd party.

• The software includes a search capacity to determine where the information is located and then to establish a direct connection through the Internet to that IP address.

• The digitalization of content combined with the ability to share it over networks has overturned physical constraints and make new business propositions possible.

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11.3.6 Unique Cap. #6: Global Reach and Range

• Global accessibility is one of the unique and distinctive features of the Internet.

• Range can be achieved by companies like Amazon.com, with extensive inventory often supplied by affiliates and based on its ability to aggregate content from their own and other firm’ sites.

• Products and services can thus be offered on a worldwide basis via a comparatively modest investment.

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11.3.7 Unique Capacity #7: New Pricing Models

• Priceline and other variants have changed the underlying pricing of traditional auctions by reversing the roles of buying and selling.

• Here the price is initiated by the buyer but is determined by the lowest bid by the seller. This is transparent to all participants, who are able to adjust their successive bids accordingly.

Figure 11.4 Priceline’s new pricing model

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11.3.8 Unique Capacity #8: Novel Display Capabilities

• Wine.com is an example of the way goods and services are able to be presented in unique ways, by type, region or winery, in ways that would be extremely difficult to duplicate physically.

• In cyberspace, each way of displaying the inventory is equally valid because the physical processes of display have been supplanted by information.

Figure 11.4 Novel display features at wine.com

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11.3.9 Unique Capacity #9: Personalization and Recommender Systems

• The Web can be programmed to treat customers as individuals.

• When a customer identifies him/herself or is identified by cookies set, this underlying intelligence can be used to effectively respond to customer needs.

• Recommender systems that assemble and process customer needs can personalize responses in ways that are difficult for physical stores to duplicate.

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11.4 Reprise: B2B Verses B2C

• B2B relationships tend to be higher in volume and less cash-driven, and involving higher levels of trust as well as different procurement process structures and intermediary handling of goods and services.

• For individual buyers, trust in the product and vendor is relatively important, while building a long term relationship with the vendor less so since transactions may be infrequent and sales values relatively small.

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11.5 Vertical Channels• B2B channels are

usually seen as a chain (“the supply chain”), with suppliers at different ‘tiers’.

• Goods & services move ‘vertically’ along this chain.

• Net-enabled orgs. are interested in working effectively with horizontal partners and other stakeholders as well. Fig. 11.6 Vertical marketing channels

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Figure 11.7 Horizontal Partnerships in the marketing channels

It is increasingly

likely that NEOs

will have both

competitive and

cooperative

relationships

with their rivals.

21Figure 11.8 Criteria for determining competitors and

complementors

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11.6 Pre-NE Era Tools for Reaching Out: Database Marketing, Data Mining, and Data Warehousing

• Firms need data and information to reach out to their vertical and horizontal partners or customers.

• Traditionally, data is seen as raw signals emerging from the environment that is captured and then stored in computer systems where it is processed into information.

• Information serves to reduce uncertainty about threats to the firm and to give insights into new opportunities to pursue.

• The ability of a NEO to use more and varied information than competitors is mission critical, esp. since product cycles keep getting shorter.

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Figure 11.9 Information and data in the general systems model of the firm

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11.6.1 Database Marketing

• 3rd party providers of market analysis gather data from a variety of sources and aggregate it for resale, often from both private and public sources.

• What does the Web offer a database marketer?– Enormously expanded markets

for its services– Opportunities to collect fees in

real time– Ability to repackage services

and cross-sell them

Figure 11.10 Database marketing a firm’s home page on the web

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11.6.1 Use of Database Marketing Services by NEOs• The value of information acquired through 3rd

parties is that it allows a firm to segment its market and its marketing efforts.

• Firms can also combine this external data with their internal transactional data, such as through online ordering - which is extremely useful, especially in B2C contexts.

• The desire to capture such information is obvious and the online environment has the advantage of requiring individual customers to identify themselves.

• Clickstream data is related to individual customer behavior and can tell a great deal about their preferences.

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11.6.2 Data Warehousing

• Data warehouses combine data from numerous sources into a single repository that can be:– searched and queried,

– mined with data mining software,

– and probed for new perspectives on how to market to customers through the various channels available.

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11.6.3 Data Mining

• Data mining is a set of tools that allow managers to view data in new ways.

• Figure 11.12 shows data mining software used to examine Bank of America’s consumer finance interest rate can be highlighted in its row or column.

• Using computers, various comparisons are then possible, as well as “rolling up” and “drilling down” to get more precise information or for trouble-shooting the effectiveness (or lack) of certain goods and services to a degree not previously possible.

28Figure 11.12 Data mining of bank interest rates

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11.7 B2B Marketing Strategies

• B2B Marketing stresses connections between channel participants who are businesses.

• These exchanges are either where there is an ultimate consumer at the end of the chain, or where a business is itself the end of the chain.

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11.7.1 Supply Chains & Electronic Trading Networks

• ETN (Electronic Trading Networks, like Covisint) business exchanges are a new B2B development.

• They are typically either intermediary or shared infrastructure atomic models.

• The ETN strategy needs to take account of the relatively weak position of these.

• However, the effect is to make supply chains more efficient and cheaper.

Figure 11.13 Covisint ETN home page

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11.7.2 Development of Buying Networks rather than Pure 1-to-1 Auctions

• Buyer networks are being developed in part to create information visibility in the supply chain.

• Unlike traditional auctions that are one-off transactions at arm’s length, ETNs encourage alliances.

• Bids may be set up for long term supply at fluctuating prices, and terms renegotiated over time.

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11.7.3 B2B Information Visibility

• As trust grows between partners, information sharing may help reduce clinches in the supply chain, thus countering the “bull-whip” effect – over/under ordering due to imprecise information.

• Buying networks also create flexibility by contracting dual and multi-sourcing arrangements.

• Sharing transactional information can greatly help all downstream partners estimate demand and develop a long term perspective.

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Figure 11.14 Bullwhip effect from information invisibility in the supply chain

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11.7.4 Changes in Distribution Channels and Logistical Failures

• The supply chain can break down at numerous points, such as if a key supplier has its manufacturing plant wiped out by a flood.

• This could have a very bad effect unless a plan is in place with alternative sources to replace the lost capacity.

• Information visibility could help avoid the problem by allowing adjustments to take place that keep the system in equilibrium.

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11.7.5 Long Term Channel Conflicts In Atomic Business Models

• Channel conflicts can result in lower network performance over time while synergies can increase performance.

• E.g., the direct-to-consumer model conflicts with shared infrastructure since both try to own the relationship with the customer.

• Full service providers, on the other hand, include partners like intermediaries and suppliers in their network.

• The effects of combining different business models are presented in Table 11.2.

36Table 11.2 Channel Conflicts in NE Business ModelsCON = conflict, SYN = synergy, ? = questionable combination

1. Content Provider

----

2. Direct-to-consumer

CON ----

3. Full service Provider

? ----

4. Intermediary ? SYN ----

5. Shared Infrastructure

CON ? ? ----

6. VNI CON ? ? ----7. Virtual Community

SYN SYN SYN ----

8. Single Point of Contact

SYN SYN ? ? ----

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11.7.6 B2B Intermediaries• There are numerous B2B 3rd

parties, like Microsoft’s Biztalk, that depend on serving in an intermediary role in the flow of goods and services through the supply network.

• Other firms, like i2, Apache, Ariba, SAP, and Web Methods, provide middleware for firms to make the electronic connections to their down and up stream partners.

Figure 11.15 Microsoft’s Biztalk B2B Intermediary

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11.7.7 A Network, Not a Chain

• The evolving relationships among firms, partners, and customers can be described as a network of interconnections, rather than as ‘chains’.

• Networks differ from chains in that network nodes may (or may not) be connected to each other.

• The potential for complete connectivity means that information can be spread throughout the network wherever it is needed so participants only handle a good or perform a service as required.

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Figure 11.16 Former traditional supply chain for CompUSA

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A Network, Not a Chain

• The evolution of CompUSA’s supply chain into a network demonstrates these principles.

• Goods are delivered by Ingram to either the retailer or customer, speeding up delivery while simultaneously reducing CompUSA’s inventories.

• Figure 11.17 shows how the network changes when the need for new products arises.

• Information from the customer flows both to IBM and CompUSA, then IBM sends feedback about new products and features to Solectron, the manufacturer.

41Figure 11.17 Adaptive supply networks

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11.8 B2C Marketing

• B2C marketing differs markedly from B2B, both in terms of volume and the fact that consumers are more likely to engage in ‘impulse’ buying.

• How should “e-tailers” think about creating a sales channel that will drive sales?

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11.8.1 Models of Cues In B2C

• In terms of why consumers buy, different factors in play for the hearts and minds of consumers on the Web compared to traditional retail sales.

• Sayrac-Yaverglu found both traditional marketing variables and factors unique to the Web to be important for encouraging sales.

• Rose and colleagues discovered that the longer it took for a Web page to download, for example, the less interested is the consumer.

• Trust, security and privacy are also major considerations for motivating online B2C sales.

44Figure 11.19 Reports on why e-consumers buy online

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11.8.2 Inherent Deficiencies and Advantages of Online Shops

• Feature #1: While Websites can present the consumer with visually and aurally stimulating information, but cannot yet emulate the sense of touch.

• Feature #2: Digital stores cannot yet transfer physical offerings directly to customers.

• Feature #3: Dynamic pricing is much easier to manage in a Web store.

• Feature #4:Customers entering their own data can give insights into patterns of buyer behavior, but privacy may be an issue.

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Inherent Deficiencies and Advantages of Online Shops (cont.)

• Feature # 5: Immediacy in terms of shopping where one is, but online security is an issue.

• Feature #6: Search engines are the boon and bane of Web stores as while they open up the world, they still generate many false hits.

• Feature #7: Email and FTP are potential channels for communicating with customers for after-sales support, etc.

• Feature #8: The Web is a pull rather that push phenomenon, so customers are usually ‘half-sold’ already.

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11.8.3 Personalization, Mass Customization, and Markets-of-One

• Personalization is a unique capacity of electronic storefronts that B2C strategists need to be conversant with in terms of tailoring responses to the specific individual who is visiting.

• There are 3 forms of personalization:–Tailored offerings–Recommender systems–Configuration engines

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3 Forms of Personalization

• Tailored offerings: Amazon.com, for example, exploits this capacity by “pushing” information about products related to prior purchases.

• Recommender Systems: these are Web applications that accept general preference information from individuals and then try to match these interests with products and services

• Configuration Engines: these personalize by offering customers their choice of features on products or complementary products, and may note when products will not function together.

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Figure 11.21 Reviews of products at epinions.com

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11.8.4 e-Branding and Spiral Branding

• Making products and services known for cyber products seems to be moving in the direction of spiral branding.

• Voice mail refers to a firm’s Web site, which also provides telephone contact numbers, or TV, etc, also refers to Web sites or call center numbers, thereby giving consumers plenty of contact choices.

• “Bail-out chutes” are absolutely essential for maintaining a continuous thread of contact with the customer.

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11.8.5 Clickstream Analysis of Consumer Transactions

• Vendors can track the movement of a user through their Web site via the http that carries information about the originating site link, or through cookies set.

• Tracking this “clickstream” provides firms with a very powerful tool to learn a great deal about consumer behavior and preferences - particularly if combined with demographic data - as well as which parts of their sites are working and which are not.

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11.8.6 Interactive Marketing, including CRM• This takes advantage of the

ability of a Web site to respond to a consumer in multiple ways.

• www.talkbycom is a live chat vendor, whose software allows a firm to conduct multiple live chat sessions between sales reps. and visiting users.

• The customer thus perceives the Web site as highly responsive, since questions can be answered, problems resolved and after sales support rendered.

Figure 11.22 TalkBy live chat associated with IBM’s home page

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Customer Relationship Management Systems• The careful management of the relationship with

customers through computer supported systems is one way of creating an effective interactive marketing channel.

• www.scoutsolutions.com software gives employees access to contact and sales prospects from the field

• Online Call Centers: these will remain a critical marketing tool, at least for now.

• Typical CRM Management System Modules include:– 1. Acquisition Module– 2. Profitability by customer and customer segment module– 3. Retention module– 4. Loyalty module– 5. Service module

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11.9 Pricing Issues in Cyberspace (B2B)

• A price is an economic equilibrium point that represents a compromise between a buyer and a seller.

• For longer term B2B relationships, the agreed on price will benefit both parties.

• Opportunistic behavior should be minimal as it is not in the interests of either party to see the other fail.

• Buyers have a broader awareness of pricing options, while sellers have a larger marketplace for their bids.

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Pricing Issues in Cyberspace (B2C)• Dynamic pricing is a potential marketing

advantage for Web stores.• Moreover, pricing can be programmed, based

on immediate demand conditions, etc (as airlines do), and in this way higher volumes or higher margin goods or services can be sold.

• In theory, with the availability to compare prices on the Web, there is every reason to believe that consumers will enjoy lower prices in the long run.

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End of Chapter 11