Online Retailers

Online retailers?
Use a website to merchandise newly manufactured physical goods for which they take title. Rely in third party service providers.(UPS)

DELIMITATIONS
It is not concerned with online auction sites such as e-bay that create a market for second hand goods. It does not describe the business model for online retailers with their own infrastructure for local delivery. It does not take into consideration companies that use the internet to sell services.

CATEGORIZATION
Merchandising :1. Horizontal(wal mart) 2. Vertical(garden.com) 1. 2. 3. Pricing:Fixed pricing(egghead.com) Group pricing(mercata.com) Deep discount(buy.com)

Create value for customers

Web retailing can deliver beyond what printed catalogs can deliver. 1. An increase in online households 2. An increase in the percentage of people online who are purchasing. 3. Increased spending online per buyer.

Product categories
Information- rich products. Large selection Product trial High value to-weight ratio Easily customizable products. Rapid changes in stock availability Replenishment driven Unpleasant environments.

Barriers to Online Shopping..

Inability to handle the product before purchasing. Confusing websites. Credit card information over the web. Lack of Familiarity-pure play competitors.

fly-by-night.
Willingness to wait.

Types of shoppers..
E-bivalent Newbies-somewhat older, likes online shopping and spends the least amount of time online. Time-sensitive Materialists-wants to save time and maximize convenience. Clicks and Mortars-shop online but prefer offline and are more female homemakers. Hooked, online and single-young, single males with high incomes. Hunter-Gatherers-Married, comparison of products and prices. Brand loyalists-Go directly to the website for purchasing.

Economies for online versus offline Retailers.

Operating Costs-

Brick and Mortar-10% of revenue on rent and 14% on labor,

online 3% on maintaining website and 12% of revenue on

warehouse, customer service and other operating

expenses.

Physical location.
Online have lower general and administrative expenses.

Working Capital
Inventory turns at least 10 times per year versus 3-5 times

in offline.
Online retailers hold less stock compare to brick and

mortar.
Online retailers have an inventory carrying cost advantage

over printed catalog.

Margin structure for online retailers.

Gross margin=Revenue from product sales and shipping fees paid by customer less the cost of goods sold, shipping expenses paid to third party

courier services and credit card processing fees.

Sourcing directly from manufacturers.

Volume based discounts.

Co-op marketing funds.

Contd
Distribution and customer service expenses-cost associated with picking and packing merchandise. Website Development-online retailers incur costs to add features to their websites, these technology development costs decreases with increment in sales.

Sales and Marketing

Pure play online retailers has spent heavily. PlanetRx- 179% of revenue, eToys 43%, Amazon 21%. General and Administration Semi-fixed overheads. PlanetRx- 25%, eToys 9%, Amazon 4%. Amazon and its profitability. Profit margins in online retailing are sensitive to scale. Balancing the cost of customer acquisition against lifetime value of these new customers. Implication- GBF

GBF
Amazon.com- $1 billion sales in three years, 6-10 years by other brick and mortar retailers. Conditions: strong network effects, scale economies are significant, high customer retention rates.

Network effects: Occurs when adoption of a product or service by a new customer increases the value of that product or service for customers already using it. Minimal for online retailers.

Scale economies large share of their cost base varies directly with revenues. Volume growth yields economic benefits. Magnitude of scale benefits varies by product category. Drugstore companies, booksellers and computer retailers vs their breakeven point. Retention rate: Retention rates and network effects. Attributes to promote customer retention:
a. b. c. d. Customer service performance Personalizes recommendations Switching costs Loyalty programes.

Why GBF strategy fails?

First: online retailers do not benefit from network effects. No significant benefit from scale of economies. No benefit from intrinsically high customer retention rate. Wave of imitation :Amazon and their strategy. Amazon of the XYZ category Opportunities for entrepreneurs and venture capitalists: Petstore.com by Discovery communications, Pets.com by Amazon.com etc.

Online supply of pet retailing: Site do not exhibit positive payoff for GBF strategy. Difficult to achieve differentiation. Executionally- intensive.
a. Logistics: e-tailers cannot fill orders. b. Communication: between e-tailers website manager and managers in fulfillment operations. c. System integration between call centers and warehouse database.

By 2000, mostly failed or laid off workers.

 Exception : Staples.com
a) Difficult channel entry.
b) Offline competition is relatively fragmented.

Lifetime Value of a Customer

Clear indication with e.g. of Staples.com that
GBF- style investments in customer acquisition has meaning when:
Lifetime value of new customers acquired > cost of acquiring them If there is a low retention rate then lifetime value decreases and vice versa

E.g. Amazon Vs. eToys

Tactics for Success

Customer Service

Community

Personalization

Issues Facing Online Incumbents

Incumbents Advantage:
Branding & Customer Relationships

Supplier Relationships
Fulfillment & Customer Service Operations Cross- Channel Delivery & Returns

INCUBEMENTS DISADVANTAGES
1. Threat of cannibalization of their offline business(self cannibalize) As online business can reduce its market It has been proved customers who shop through all three of its channel (stores, catalog, and website) spend much more heavily than its catalog-only customer. Gaps report says that 50% of its multichannel shoppers spend more as they did before only in bricks-and-motors stores. So, no customer loyalty worked here.

Contd.
2. Coordination of online and offline activities. Both has to be in tandem(lined up one behind another) Their has to be coordinating price policies

Strategy
The idea of extension has resulted in profit for some retailers - online business has increased the sales Eg. Staples

WHO WINS ?
Established companies start putting efforts in arena where they lack expertise . Incumbents has considerable advantage as they move online (brand and customer relationships, distribution, customer service capabilities of offline business)

Some Strategies
1. SHOPPING BOTS Websites which collect information from multiple online retailers on their product pricing, features, and availability. This made users to compare price, goods. This can lead to price wars between online retailers. According to users online products are comparable high than offline but some brand has done well like Amazon(offers are given no low pricing strategy ). This shopping bots is good(source of sales referrals) and bad as comparison is done .

Disintermediation
Manufacturer sell directly to consumers not through retailers Expected to be biggest, baddest impact on online retailing Manufacturers fear by directly selling because of their retailers Eg. Levis jeans their strategy failed as it is very tuff to manage supply chain

HYBRID BUSINESS MODEL

1. Combination of online retailing with other Internet business models Eg. Garden.com retailer and content provider It is difficult to manage: Require mastery of diverse skills Sourcing content can be expensive

2. Combination of online retailing with other Internet access provider business models Eg. Kmart (partnership with yahoo!) Help in strengthening relationship with their customers