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In an article on Nov.13, 2000, in the Financial Times' Mastering Management
series, Wharton operations and information management professor Eric
Clemons and Wharton Ph.D. student Michael Row note the critical
importance of consumer behavior when it comes to establishing a web
retailing strategy. Below, the researchers look at the type of relationship
between buyer and seller, the scope of goods and services linking buyer and
seller, and the four competitive landscapes that result from the interplay of
these forces.
Consumer behavior should be the principal determinant of corporate ecommerce
strategy. While technology will improve, consumer loyalty, for
example, is likely to differ significantly between, say, online booksellers and
providers of financial services. Two factors seem critical in predicting behavior
and determining an appropriate e-commerce strategy.
First, what is the duration of the relationship between buyer and seller? That
is, does the buyer have a relationship with a favorite seller, in which they
come to learn about each other, or does the buyer search for a different
electronic vendor for each interaction? The former suggests an opportunity for
tuning offerings; the latter precludes stable relationships.
Second, what is the scope of goods and services linking buyer and seller?
Does the consumer purchase a single good or service, or a bundle of related
goods and services? The former suggests the consumer searches for the
provider of the best individual goods and services, while the latter suggests a
search for the best provider of a collection of goods and services.
Combining these indicates that different companies, in different industries, will
find themselves in one or more of four competitive landscapes.
Consumers buying products that can be described as opportunistic spot
purchases exhibit no loyalty; each purchase may be from a different vendor
and there is no one-stop shopping. They may buy a ticket from British Airways
one day and United the next, and book their hotels separately.
Opportunistic store markets occur when consumers exhibit no loyalty or
relationship continuity to brands or stores. Unlike the spot market, however,
they do use intermediaries to construct bundles of goods. They may shop at
Sainsbury one day and Tesco another; they may use Amazon.com one day
and Buy.com another.
Consumers buying in categories that may be described as loyal links exhibit
continuity when choosing vendors and service providers, but have no desire
to have bundles prepared for them. They may never leave home without their
American Express cards, but see no reason for their card issuer to be their insurance provider or financial planner.
Finally, consumers buying in categories that may be described as loyal chains
will have preferred providers. Additionally, they will count on these providers
for a range of tightly coupled offerings. They may work with a financial
consultant at Merrill Lynch who helps pick stocks, reminds them to draft a will
and arranges guardians for their children, helps find a lawyer and reviews their
insurance. The integrated service is so effective they seldom consider
switching providers or taking the time to provide these things for themselves.
Each of these environments has a different competitive feel, and requires a
different strategy and use of different assets. This is as true in the physical
world, where companies understand it pretty well, as it is in the dot-com world,
where companies are struggling to develop profitable strategies.
Note that no e-commerce company [operates in just one environment]. There
are, for instance, loyal link customers and companies may pursue them with
loyal link strategies, but in reality some customers may use a web site for spot
purchases and others may show great loyalty. The challenge for companies is
to guide the consumer to the behavior matching the company's strategy;
where this is not possible, companies should match the strategy to the
customer's behavior. The approach given here may help managers discover
the forces that determine their best strategy.

Opportunistic spot
Competition in opportunistic spot markets is based on price, since there is little
loyalty to influence consumers' decisions. This brutal competition is
exacerbated by nearly perfect web-based information. Thus, for standardized
products such the latest Harry Potter book, we observe both Amazon.com and
BN.com selling at cost price. Where possible, companies try to soften
competition by creating quality differences and ensuring consumers are aware
of them. However, this branding must be based on real differences, since with
nearly perfect information it is difficult to deceive consumers. There is a limited
role for intermediaries. They may reduce risk in conducting transactions, but in
most instances, consumers will buy from a set of trusted, well-known
manufacturers and service providers.
The Internet will be used for supply chain management and logistics to ensure
the lowest cost structure and the lowest prices. It will also support access to
information on consumers, both current and potential new accounts, to allow
the most accurate setting of prices where differential pricing is required. That
means no applicant for insurance can be undercharged based on inaccurate
risk assessment and no applicant for a credit card can be given too good a
deal. In a market where no one can be overcharged without losing the
account, there is little margin for error and little opportunity to recover from
under-charging anyone. The ability to predict the profitability of a new
customer, and so to determine a price to offer, is called predictive pricing.
It is essential to recognize consumers exhibiting opportunistic spot market
behavior and to develop an appropriate marketing and pricing strategy. For
example, in markets that exhibit this behavior, buying market share is unwise
since it can be acquired only temporarily; when prices are raised to cover
losses, customers will flee. Similarly, a policy of offering selected items below
cost as loss leaders to attract traffic will be unwise, because consumers may
easily purchase loss leaders from one site and the rest of their items
elsewhere. Only time will tell whether the market for books, CDs or DVDs exhibits this behavior, so it is too early to assess the validity of Amazon.com's
customer acquisition strategy or the promotional items of other web retailers.

Opportunistic store
In the absence of consumer loyalty, competition in opportunistic store markets
again is based on price; however, it is the pricing of bundles rather than
individual items that attracts consumers. Unlike spot markets, there are
opportunities for intermediaries to add value, through logistical savings
(shipping a box of books), or through assembly or integration (selling a
package tour or designing a digital imaging platform where camera, printer and
computer work together).
In this scenario, intermediaries enjoy power over manufacturers because
consumers select bundles with little attention to components. Thus, when filling
an order for paper towels, a grocer will use the product with the highest
margins. This pursuit of margins, in the absence of brand loyalty from
customers, shifts economic power to intermediaries.
Manufacturers will attempt to use the web for branding, to create consumer
awareness of product differences and to weaken intermediaries' power. While
it is dangerous to antagonize the existing channel in the opportunistic store
scenario by trying to sell directly, branding offers manufacturers the ability to
counter some of the power of intermediaries. As in the spot markets,
manufacturers will also use the Internet to improve efficiency. Intermediaries
will use the Internet to create branding for their web stores, so weakening
price competition. They will use customer information, as manufacturers did in
spot markets, for predictive pricing.
As in spot markets, no consumer can consistently be overcharged, so it is
difficult to recover from undercharging anyone. While loss leaders can work in
these markets, since a customer may fill a basket or obtain a bundle of
services, there is little loyalty to assure repeat business; thus, as in spot
markets, buying market share is risky since there is no assurance that initial
losses can be recouped by overcharging for later purchases.
Of course there may be reasons to buy share in a "scale-intensive" industry
where volume is needed to bring down unit costs. Indeed, some aspects of
online retailing, such as grocery shopping, may be extremely scale-intensive,
which could initially appear to justify buying share. However, without customer
loyalty, the danger is that capital will be spent more on training users to accept
online shopping and less on training users to accept your online shop.
Loyal Link
Competition in loyal link markets is based on retaining the best customers
through a careful blend of service and pricing. For the customer, relationship
value and pricing improve over time. For example, anecdotal evidence
suggests online PC seller Dell has succeeded in creating loyal link behavior in
customers, many of whom have bought several generations of computer from
Dell.
In fact, no incumbent should ever lose desirable business to an attacker. If a
less well-informed competitor were to attempt to persuade a loyal customer to
transfer his or her business, the current supplier could decide whether or not
to match the new offer. If the current supplier, with its detailed knowledge,
were to choose not to match the new offer, odds are that the new supplier is making an offer that is too low. Successful attempts to get customers to switch
in loyal link markets probably represent pricing mistakes by the attacker.
Relationship pricing and value work to soften pure price competition in loyal
link markets.
Buying market share will work under certain conditions, since it is possible to
learn enough to price effectively. However, buying market share is ineffective
without loyalty, as online brokerage firms are discovering; so it is critical to
assess whether the company is operating in an opportunistic spot or loyal link
market.
Using loss leaders in a link market will be unrewarding; offering online banking
below cost to gain credit card business is unlikely to succeed in a link market,
where customers will pick the best hotel and the best air service, or the best
online banking and the best credit offers, independently.
Systems will be used for branding and attracting customers and to support
relationship pricing and relationship service to keep the best accounts. These
markets may appear to have only a limited role for intermediaries; however,
intermediaries enjoy an advantage in controlling customer information and may
end up owning customer relationships.
Loyal Chain
Competition in loyal chain markets, as in loyal link markets, is based on
attracting and retaining the best customers and, as in loyal link, relationship
value and relationship pricing improve over time. However, in chain markets,
which are composed of a tightly coupled set of links, pricing to individual
customers and the value they receive are determined by a bundle of goods
and services.
Taking the earlier example of the digital-imaging platform, it may not be
necessary to replace all components when upgrading. However, if buying a
higher-resolution camera and a faster laptop, it is helpful to determine if the
new computer and the old printer and are compatible, otherwise the customer
may experience an unpleasant surprise if picking and choosing components in
a spot or link fashion. If the previous chain supplier is used to update the
components, unpleasant surprises are likely to be avoided, since his vendor
can be relied upon to provide components that are compatible with those
bought before. Evidence suggests Amazon has succeeded in encouraging a
degree of loyal chain behavior from its best customers, who value the book
recommendations made to repeat buyers.
Loyal chain markets represent a power shift from producers to intermediaries.
Online intermediaries can reconfigure the virtual store to show loyal
purchasers the brands they wish to see; customers without a preference can
be shown brands that earn the highest margins. Indeed, it is a small step from
this relationship-based presentation to demanding rebates from manufacturers
to ensure that their offerings will be shown to customers with no brand
preference. While physical stores charge a fee for preferred locations such as
displays near checkouts, they cannot reconfigure the store for each customer.
This shift in online power greatly increases the importance of branding for
manufacturers, because a powerful brand is the best counter to pressure from
retailers. It also suggests that, to the extent permitted by legislators,
manufacturers should form consortia for web retailing. This would avoid loss of
control to retailers with significant information advantage. However, a broad consortium is needed since online markets reward scope and breadth.
Intermediaries may effectively buy market share through pricing low, enabling
them to pursue informed relationship pricing over time. Likewise, they may use
loss leaders to increase traffic through their web site, selling other items to
consumers interested in a complete bundle.
Systems play many roles in chain markets. Intermediaries will use them for
branding, to attract customers and for informed relationship pricing and
service. Likewise, manufacturers will use the Internet for branding, so limiting
price pressure from online retailers. However, efficient markets still place
significant price pressure on retailers, assuring the role of systems for
logistics and other forms of cost control. Likewise, manufacturers and service
providers will use the web for their own cost control.
Conclusions
Three observations are true across all four competitive landscapes:
l Only differences between brands, and consumer awareness of them,
can blunt pure price competition in an efficient market.
l Cost control is important: efficient access to information makes it
almost impossible to overcharge.
l As online information makes markets more efficient, predictive pricing
will be used in spot and store markets, and relationship pricing in link
and chain markets. Pricing strategies will be limited by adverse publicity
that companies receive from charging different prices for the same
goods.
Other conclusions follow from these:
l The role of buying market share will vary. In opportunistic markets,
buyers will leave when you raise prices.
Similarly, the role of loss leaders will vary. In spot and link markets, consumers
will pick off loss leaders and do the rest of their shopping elsewhere. Once
customer traffic has been acquired, there is a chance to sell extra items.