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

Smolowitz, Ira

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

**********

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