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Marketing Fundamentals
ELECTRONIC COMMERCE
USES OF THE INTERNET IN MARKETING
Online marketing can serve several purposes:
Actual sales of products —e.g., Amazon.com.
Promotion/advertising : Customers can be quite effectively targeted in many
situations because of the context that they, themselves, have sought out. For example, when a consumer searches for a specific term in a search engine, a “banner” or link to a firm selling products in that area can be displayed. Print and television advertisements can also feature the firm’s web address, thus inexpensively drawing in those who would like additional information.
Customer service : The site may contain information for those who no longer have
their manuals handy and, for electronic products, provide updated drivers and software patches.
Market research : Data can be collected relatively inexpensively on the Net.
However, the response rates are likely to be very unrepresentative and recent research shows that it is very difficult to get consumers to read instructions. This is one of the reasons why the quality of data collected online is often suspect.
ECONOMICS OF ELECTRONIC COMMERCE:
SELLING ONLINE IS USUALLY MORE EXPENSIVE
Some people have suggested that the Internet may be a less expensive way to distribute products than traditional “brick-and-mortar” stores. However, in most cases, selling online will probably be more costly than selling in traditional stores due to the high costs of processing orders and direct shipping to the customer. Some products may, however, be economically marketed online. Some factors that are relevant in assessing the potential for e-commerce to be an effective way to sell a specific products are: “Value-to-bulk” ratio. Products that have a lot of value squeezed into a small volume (e.g., high end jewelry and certain electronic products) are often more cost-effective to ship to end-customers than are bulkier products with less value (e.g., low end furniture). Absolute margins. Some products may have a rather high percentage margin—e.g., a scarf bought at wholesale at $10 and marked up 100% to be sold at $20. However, the absolute margin is only $20-$10=$10. In contrast, a laptop computer may be bought at $1,000 and be marked up by only 15%, or $150, for a total price of $1,150. Here, however, the absolute margin will be larger--$150. This allows the merchant to spend money on processing, packaging, and shipping the order. Ten dollars, in contrast, can only cover a small amount of employee time and very limited packaging and shipping. Some online merchants do charge for shipping, but doing so will ultimately make the online merchant less competitive. Extent of customization needed. Some products need to be customized—e.g., checks
have to be personalized and airline tickets have to be issued for a specific departure site, destination time, and travel time. Here, online processing may be useful because the customer can do much of the work. Willingness of customers to pay for convenience. Some consumers may be willing to pay for the convenience of having products delivered to their door. For example, delivering high bulk, generally low value groceries is generally not efficient. However, for some customers, it may be worthwhile to pay to avoid an inconvenient trip to the grocery store. Geographic dispersal of customers. Electronic commerce, when value-to-bulk ratios and absolute margins are not favorable, is often not viable when customers are located conveniently close to a retail outlet. However, for some products—e.g., bee keeping equipment—customers are widely geographically dispersed and thus, a centralized distribution center may be more economically viable. Specialty books— e.g., for collectors of vintage automobiles—may not be worthwhile for bookstores to stock, and these may thus be economically sold online. Vulnerability of inventory to loss of value. Some products—especially high tech products—have a very high effective carrying costs. It has been estimated that because of the rapid technological progress made in the computer field, computer parts may lose as much as 1.5% of their value per week. If shipping directly to the customer can reduce the channel time by five weeks, this potentially “rescues” as much as 7.5% of the product value. In such a situation, then, trying to reach the customer directly may make sense, even if the direct costs of distribution are higher, because of the inventory value issue.
There are a number of economic realities of online competition:
As discussed, costs of handling online orders is often higher than that of distributing through traditional stores. Even if online selling is more cost effective in some situations, a firm selling online will, in the long run, be competing with other online merchants—not just against traditional “brick-and-mortar” stores. By the forces of supply and demand, online prices will then be driven down so that the profit from selling online will be no greater than that from traditional retailing. Any reduced costs would then be expected to go to customers. Competition will be greater for products that have large markets than for those where markets are smaller and more specialized. Amazon.com, for example, has found it necessary to discount best selling books deeply. Higher prices—closer to the list price—can be charged for specialty books, but for a large part of the market, competition will be intense. A new online merchant will face competition from established traditional merchants. These will often have the cash reserves to stay in business for a long time even with temporary competition. The online merchant, if it has no cash reserves other than stockholders’ investment, may run out of cash before it can become profitable.
Collaborative filtering is a process that can be used to identify products that an individual may be interested in buying based on identifying purchases which overlap with those of specific others. This allows the identification of products “discovered” by other customers to a customer who is statistically likely to find that product of interest. For example, two psychologists—Drs. Jonathan Kellerman and Stephen White—both write murder mystery novels in which the protagonist is a psychologist who helps police find the killers. Very likely, individuals who have read several novels by one of the authors would find those by the other of interest. In the conventional bookstore, novels are typically arranged in alphabetical order, making this similarity difficult to detect. Online vendors such as Amazon.com, however, can rely on “brute force” computations in identifying overlaps of customer purchases. If even 10% of customers who have bought novels by Jonathan
service alerting the recipient that a free e-mail account can be had there. Google offers a free e-mail account with a full gigabyte of storage. This is available only by invitation from others who have such e-mail accounts. Amazon.com at one point invited people, when they had completed a purchase, to automatically e-mail friends whose e-mail addresses they provided with a message about what they had just bought. If the friend bought any of the same items, both the original customer and the friend would get a discount.
Another method of gaining traffic is through online advertising. Sites like Yahoo! are mainly sponsored by advertisers, as are many sites for newspapers and magazines. Individuals who see an ad on these sites can usually click to go to the sponsor’s web site. Occasionally, a firm may advertise their sites in traditional media. Geico, Dell Computer, and Progressive Insurance do this. Overstock.com has also advertised a lot on traditional TV programs. Conventional advertising may also contain a web site address as part of a larger advertising message.
Viral marketing is more suitable for some products than for others. To get others involved in spreading the word, the product usually must be interesting and unique. It must also be simple enough so that it can be explained briefly. It is most useful when switching or trial costs are low. It is more difficult, for example, getting people to sign up for a satellite system or cellular phone service where equipment has to be bought up front and/or a long term contract is required makes viral marketing more difficult. Viral marketing does raise some problems about control of the campaign. For example, if a service is aimed at higher income countries and residents there spread the word to consumers in lower income countries, people attracted may be unprofitable. For Google’s one gigabyte e-mail account, for example, there are large costs that may be covered by advertising revenues from ads aimed at people who can afford to buy products and services. Advertisers, however, may not be willing to pay for targets who cannot afford their products. It is also difficult to control “word of mouth” (or “word of keyboard”). Measuring the effectiveness of a campaign may be difficult. When a viral campaign relies on e-mail, messages received may be considered spam by some recipients, leading to potential brand damage and loss of goodwill.
Online promotions. One way to generate traffic is promotions. Many sites often offer new customers discounts or free gifts. This can be expensive, but sometimes, the gifts can be ones that have a low marginal cost. For example, once the firms pays for the development of a game, the cost of letting new users download it is modest. The U.S. army uses this approach in making a game available. To be allowed to use some of the “cooler” features, the user has to go through various stages of “basic training.”
SEARCH ENGINE OPTIMIZATION
Many Internet users find desired information and sites through search engines such as Google. Research shows that a large proportion of the traffic goes to the first three sites listed, and few people go so sites that appear beyond the first “page” or screen. On Google, the default screen size is ten sites, so being in the top ten is essential.
Because of the importance of search engines, getting a good ranking or coming up early on the list for important keywords is vitally important. Many consultants offer, for large fees, to help improve a site’s ranking.
There are several types of sites that are similar to search engines. Directories involve sites that index information based on human analysis. Yahoo! started out that way, but now most of the information is accessed through search engine features. The Open Directory Project at http://www.dmoz.org indexes sites by volunteer human analysts. Some sites contain link collections as part of their sites—e.g., business magazines may have links to business information sites.
Several issues in search engines and directories are important. Some search engines, such as Google, base rankings strictly on merit (although sites are allowed to get preferred paid listings on the right side of the screen). Other search engines allow sites to “bid” to get listed first. Some sites may end up paying as much as a dollar for each surfer who clicks through. If a potential customer is valuable enough, it may be worth paying for enhanced listings. Often, however, it is better to be listed as number two or three since only more serious searchers are likely to go beyond the first site. The first listed site may attract a number of people who click through without much serious inspection of the site.
Some search engines are more specific than others. The goal of Google, Yahoo! and MSN is to contain as many sites as possible. Others may specialize in sites of a specific type to reduce the amount of irrelevant information that may come up.
Search engines often have different types of strategies. Google is very much technology oriented while Yahoo! appears to be more market oriented. Another major goal of Google is speed. Some sites may contain more content of one type than another. For example, AltaVista appears to have more images, as opposed to text pages, indexed.
Search engine rankings. The order in which different sites are listed for a given term is determined by a secret algorithm developed by the search engine. An algorithm is a collection of rules put together to identify the most relevant sites. The specific algorithms are highly guarded trade secrets, but most tend to heavily weigh the number of links from other sites to a site and the keywords involved. More credit is given for a link from a highly rated site—thus, having a link from CNN.com would count much more than one from the site of the Imperial Valley Press. On any given page, the weight given from a link will depend on the total number of links on that page. Having one of one hundred links will count less than being the only one. One source reports that the weight appears to be proportional so that one out of one hundred links would carry one percent of the weight of being the sole link, but that may change and/or vary among search engines.
For Google, some of the main ranking factors appear to be:
- Number and quality of links to the site, as discussed above.
- Relevant keywords. Note that the ranking algorithm tests for “spam.” Reckless repeating keywords may actually count against the rating of the site.
- The “click-through” share of the site. Since late 2006 or early 2007, Google reportedly fine-tunes rankings by observing the percentage of the time that a particular site is chosen for a given set of search terms. Sites that are selected more frequently may improve in rank and those less frequently selected—despite their merits presumed from the other factors—may move down.
Types of search engines. Some engines, such as Google, are general purpose search engines. Some are specialized. Some are hybrids, containing some directory structure in addition to search engine capabilities. Some “reward” sites such as iwon.com attract people by allowing them to enter a lottery when doing a search. Some sites are aggregator sites— they do not have their own databases but instead combine the results from simultaneous searches on other search engines. In 2009, Microsoft released the Bing, the “decision engine,” which is intended to provide more “intuitive” results. Rather than identifying a number of airlines offering a fare between two cities, for example, is intended to actually show these fares. Yahoo has signed an agreement to use Bing as its search engine source.
Text optimization. It is important to repeat important words as much as possible subject to credibility. Search engines today are increasingly sophisticated in identifying “spamming” through frivolous repetition of the same words or early use of words that are
