Marketing on the Internet

Francisco Iniesta and Ramón Díaz Bernardo

The Internet is the fashionable meeting place for the world in our end-of-the-millennium society. It seems likely to revolutionize the way in which we understand business and society. In this article, we try to show the impact of the Internet on companies' business activities

1. Distinctive characteristics of the Internet

The main characteristic that distinguishes the Internet from other means of communication or information exchange is its interactivity. This means of communication is able to give an individualized response in real time. The network is universal, open to all and almost completely unregulated. It can provide full multimedia communication and allows low-cost access to both the user surfing the network as well as the companies or institutions appearing on the net.

This powerful tool allows a product to be presented to a potential consumer anywhere in the world, at any time, without the need for people and materials to be moved around physically. The opinion of potential customers can be heard first hand, and any deal closed. These features should make us reflect upon and consider how this could affect our present way of doing business.


2. Effects of the Internet on marketing

2.1. Effect of the Internet on market research

Let us consider a new scenario in which the researcher does not actually have to go out in order to find a representative sample but has it connected "on-line" to his page. Let us consider groups of consumers sharing, for example, a mutual sports hobby who can "meet up" for a chat at a given "site". Let us consider a list of customers for whom we have complete identification variables such as social and demographic profiles, purchase frequency, product preferences, response to promotions patterns, etc. The consequences of the existence of a network that allows direct inter-action with the customer, in real time and at low-cost, will be a major change in the usual meth-ods of gathering information in market research and the possibility of knowing much more about our customers. We don't need to imagine any more. Services such as online panels, focus groups, web-based questionnaires, site visitor research, online product testing, and more are currently being offered by research firms. They promise to change slow, expensive, and often discontinuous research into more efficient, cheaper insight. Today, companies' attitudes and behaviour such as the failure to exploit information on current pages or to respond to visitors' emails are among the limitations of the potential of these new promises.

2.2. Effect of the Internet on product decisions

Most products are part physical and part information. The interactivity of the Internet may allow companies to make improvements to the intangible aspects of their products such as post purchase support, customer service, spare parts information and distribution, complaint handling, etc.

When a consumer buys a car or a camera, he or she is buying the physical product plus all the information and "accessories" (after-sales service, warranty, logistics, financing) that are associated with it. In the real world, all of this is acquired in a single "package": some argue that in the virtual world, this package can be "split up". The manufacturer will be able to specialize in making the product, leaving the "accessories" to specialists, or design customized packages for each customer with the best prior selection of the market's suppliers of these accessories.

The development of new products will also be affected. Traditionally, the logical steps in the developmental process of new products started with the identification of a customer need, the search for possible techniques that will satisfy that need, creation, design and development of a product concept, transfer of the design to the production line, manufacture and launch on the market. Each of these stages implied a major investment that cannot normally be recovered if the product fails or has to be substantially modified. Iansity and MacCormack(1) suggest the concept of product development in "Internet Time". The idea is to make the process of new product development more flexible by interacting with customers right from the initial phases of a project for a new product, and delaying, as much as possible, irreversible decisions regarding its final design. In this way, those designing the new product are in constant contact with the customer's needs, they can try out different technical solutions and integrate their findings in a coherent product design. This strategy is particularly useful in fast moving industries in which technology and consumer tastes change more rapidly. Software companies such as Netscape and Microsoft, or car manufacturers such as Fiat and General Motors are already using this system in their product development processes.

2. 3. Effect of the Internet on pricing decisions

The pricing policy of a company trading on the Internet will also have to adapt to this new channel. Very often sales made through the Internet will mean that intermediaries and management costs are eliminated. The customer will expect this saving in costs to be reflected in the price of the product or service acquired on the network. A few companies have understood this and have started to charge less for services processed on the Internet such as Bankinternet with its mortgages or Simply Computers with computer accessories.

The presence of buyers and sellers in the same virtual market has given rise to companies with web sites acting as intermediaries between these two groups. At these sites the potential buyer is confronted with a wide range of suppliers within a given product category, such as AutobyTel (cars) or Insweb (insurance), or a seller with several buyers in a virtual auction, such as On­Sale (computer sales). In either case, the more complete the information given and the more homogenous and similar the commodity being exchanged is with/to other products, the closer the price of that commodity will be to the perfect competition price.

2.4. Effect of the Internet on distribution channels

The elimination of intermediaries appears to be one of the initial consequences of trading on the Internet. Companies use distribution channels in order to minimize their transaction costs; but if they discover that on the Internet transactions are more efficient without intermediaries, they will choose to deal directly with the end customer. The direct-sales model (mastered by Dell in computers) is becoming increasingly popular for computer and network products. Distribution partners who helped make computers ubiquitous in the workplace are scrambling for ways to add value to their position in the supply chain.

Things can, however, be a little more complex. First of all, the intermediaries may not be eliminated entirely, but rather some of the different individual functions of the distribution channel are removed. As a consequence, the traditional intermediary is usually left with fewer functions while super-specialized mediators appear. For example, Amazon.com sells its books directly to the customer, but it uses Ingram Books for storage, UPS for shipping and America Online for advertising.

Secondly, the removal of intermediaries does not always reduce the total cost of the transaction but may in fact pass these costs on to the customer. If there are no intermediaries, the customer has no choice but to take on the costs of research, comparison, evaluation and negotiation. In order to reduce the total cost of the transaction, new intermediaries will be required to aid the end customer in the quest for and selection of the best supplier. This will give rise to specialists in certain industries who will provide the potential customer with information on what is available for a given product category such as: Travelocity (travel), Insweb (insurance) or Schwab (investment). The final stage of this specialization would be what Professor Sawhney(2) calls meta-intermediaries, that is, the situation arising when the consumer thinks in terms of activities or meta-markets rather than in terms of products. The activities which are logically connected in the consumer's mind, are present in various industries. The consumer does not think in terms of car magazines, comparative tests, prices of the different brands, insurance, financing, spare parts, after-sales service, guarantee, second-hand prices, etc. but instead, in terms of "owning a car". The meta-intermediary groups all suppliers involved in an industry together at one virtual site, reducing the consumer's research and evaluation costs on the one hand and, on the other, the costs to the supplier of acquiring customers. Examples of this type of intermediary are: Edmunds (cars), BabyCenter (baby care products) or The Wedding Channel (weddings).

Traditional industrial channels will also need to adapt to the changing circumstances. Strategies such as channel assembly, co-location, or outsourcing participation are innovative experiments for some distributors as tools in fending off the challenge from direct selling. Channel assembly means bringing part of the manufacturer's functions to the distributor's door. Manufacturers may ship semi-finished products to distributors who configure them to client specifications and complete production before shipping the products. Co-location in turn has distributor employees work from vendor manufacturing sites to ship completed high demand models to ei-ther resellers or end users. This strategy can save days in the delivery cycle. Distributors are also finding new ways to capitalize on their existing relationships with resellers who also are moving towards a more service oriented role. Resellers, who in the past may have used channel assembly to bring together a number channel and product activities to client specifications may find that outsourcing the customization steps to a distributor frees employees to provide more services for the client.

2.5. Effect of the Internet on advertising decisions

The Internet is essentially a communication tool and will therefore influence a company's communications policy. The network has several characteristics that are quite different from other traditional media such as the press, radio or TV. Once again, the first of these characteristics is interactivity, that is, the possibility of individual communication with the user. Interactivity and the freedom enjoyed by the user as he or she surfs the Internet, means that the consumer is in a more powerful position with regard to the advertiser. The mass communication media confine themselves to programming their advertisements where they consider they will get the best response (peak viewing times, front page); on the Internet, the consumer decides what to look at, which advertisements to "click through" and which ones to skip. Another feature is that the Internet user does not like to see advertisements he or she has not requested appearing on his screen. "Intrusive" advertising strategies do not work well on the Internet. Its users enjoy an active position whilst a TV audience is normally passive and more receptive to the interruptions made by the advertisements.

Advertising on the Internet is done mainly at search engine sites (i.e., Yahoo, Altavista, Lycos, Olé, etc.) that have a large number of visitors; and at websites that may have fewer but more homogeneous visitors. In either case, the interactivity of the network means that specific messages can be assigned to specific users. For example, while searching for information on certain book titles, your favourite composer or a classic movie in Altavista, Amazon.com's advertisement should immediately appear on the user's screen together with the information requested.

Leading companies in mass consumption products such as Coca-Cola, Budweiser or Procter and Gamble are having problems attracting Internet users to their sites. Companies trying to establish a brand name on the Internet have to persuade the consumer to visit their site. They must try to unite the traditional emotional message with an actual service offered only on the company's web page. For those companies selling packet soups or soft drinks, this strategy is hard to follow, but it has worked for GM in its car sales. GM is picking up 80% of its customers for its Saturn division, more than twice as many as last year, via the Internet. The old Saturn page gave the model's classic specifications and addresses of authorized dealers, but a year ago, GM decided to change the page, introducing new useful functions for the user such as a calculator for working out monthly payments should financing be required, an interactive design shop for selecting options and seeing them on the car and a form for placing on-line orders. The web page strategy was complemented by a TV advertisement emphasizing the characteristics of the new web page and using a humorous scenario: two students using the Internet to order a Saturn say "it's as easy as ordering a pizza".

The real power of advertising on the Internet will be in the intimate conversation with the customer, acting as a complementary tool, perhaps, to advertising in tradition-al media. Today, there are still concerns on the role of advertising on the Internet. Denis Beausejour, vice-president for worldwide advertising at Procter and Gamble stated in early 1998 that the single biggest obstacle to the rapid development of on-line advertising was a lack of knowledge about how this new tool was supposed to work.


3. Trade through the Internet

Marketing's focal variable is the transaction, under-stood as the exchange of goods or services that give added value to both buyer and seller. As far as transactions are concerned, it can be said that the Internet is not delivering its promise, or at least it is not growing at the rate predicted by the gurus of the "digital economy". The forecast for sales through the Net for the year 2000 range from a mere 5 to a more optimistic 12 billion dollars(3), still a modest figure compared, for example, to the amounts spent on advertising on the Internet, which will amount to 200 billion dollars.

It would seem from the information we have, that the Internet is becoming consolidated as a tool for information exchange and communication, but there are still major obstacles to its growth as a market for other kinds of commercial exchange. A few of the frequently mentioned difficulties are: slowness of communications, learning costs, buying habits, security and confidentiality concerns, cost of equipment, language barriers, and access costs.

Data transmission on the Internet is so slow at times, that some disillusioned users talk about the "world wide wait". The connection time between the different links is very often infuriatingly long, and this may turn a browse on the Internet into a profoundly tedious experience. The promise of a digital future cannot be fulfilled until a technical solution is found to the problem of slowness. The solution, according to the experts, would be to extend the bandwidth. Various companies are gradually wiring cities to allow connection to the network at a rate 500 times faster than that of the conventional telephone. In the US, as many as 15% of homes have already been rewired, but only 1% of these homes has subscribed to the new service. It seems that two effects are superimposing themselves and creating a sort of vicious circle: on the one hand, the slow progression of the re-wiring in the cities, and on the other, the slow adoption of the new service once it becomes available.

Whatever the causes, the effect is a low diffusion of the new technology and a fewer number of transactions carried out through the network than might have been expected. The fact that the necessary levels of market penetration have not been attained (referred to as "critical user mass") means that companies are not deciding to commit to the Internet as an established channel for their sales.

Another major obstacle to growth is the learning cost. The process of learning to use the Internet requires time, and learning to shop at a given site, even more time still. The advantages to the user of purchasing through the Internet must exceed the cost involved in learning to use it and the risk associated with wasting time on something that may not give any added value.

In a survey carried out among managers of Spanish companies, consumer shopping habits scored as the main obstacle to the growth of sales through the Internet. The need to touch and feel the product, particularly in the case of certain categories of products, make them hard to sell via the Internet. In addition, the pleasure associated with real shopping, disappears or has a different meaning in the case of virtual shopping.

The lack of security and confidentiality in the transaction is another possible cause of the slow growth of sales through the Internet. We consumers are reluctant to give our personal details and even more so, when it comes to giving the details of our credit cards, for fear that they might be intercepted. We do not experience this apprehension when we are paying by credit card in a restaurant or when we buy a ticket for the theatre on the phone, even though the risk that the information might be used fraudulently or intercepted is probably greater in these cases.

Finally, other obstacles such as the cost of the hardware or language barriers will become progressively less of a problem and will virtually cease to exist. The latest generation of computers under 500 dollars launched recently in the US means that the cost of computers is becoming less and less of an obstacle. In addition, the language barrier is disappearing with the development of more powerful and faster translation software. Connection costs are also suffering dramatic reductions.

None of these problems seems insurmountable in the near future. Even with the current technology and habits, Internet sales volume doubles every year and some estimate that total electronic commerce will account for as much as 6% of United States' GDP by 2005(4).


4. Strategies on the network

Presence on the Internet requires from companies a certain degree of organizational development, with people who have the knowledge and skills to move around comfortably in the digital world and to incorporate this new channel into their daily routine. In addition to this, the strategy that a company develops for the network will depend on how well-suited its product or service is to this new channel, and on the growth prospects of the Internet as a channel for trade.

4.1. Different degrees of product match to the Internet

The investment strategies of companies on the Internet can be shown on a two-dimensional matrix with degree of Internet penetration (relative number of users) and product or service match to the Internet channel as its axes. (See Figure 1.)

Those companies that consider that their product is not matched to the Internet and that the degree of penetration amongst their customers is also low, will opt for "Non-Investment" in presence in Internet. They will not normally be present, or they will have a symbolic presence "because everyone's on it", with a catalogue-type, informative web page.

Companies who feel that their product is not well-matched to the Internet, but for whom the degree of Internet penetration among their customers is high, will opt for "Low Investment". This strategy will give the company what we call a "Promotional Presence" whereby a page is designed to promote the company's products and services, even though it knows that its profile is not explicitly adapted to the Internet. These companies will usually buy advertising space at highly visited sites such as search engines to try to direct these visitors to their page. Once the user has clicked into the company's page, he or she will find information on its products, its social activities, games and amusements for visitors, etc. The Coca-Cola, Procter and Gamble or Kellogg sites are examples of this kind of page. In general, this strategy is more common in companies marketing perishable consumer goods.

At the other end of the scale, are the companies who realize that the degree of Internet penetration of their product is still low, but the characteristics of that product mean that it ought to sell well on the Internet. In this case, the company will opt for "Low Flame Investment" giving it what we call "Active Presence", which means designing a page that encourages active communication between the customer and the company. The company will use its presence to try to give added value to the sales package, adding services, features, etc. Direct lines of communication between the company and its customers will be opened via e-mail. The page should endeavour to be a meeting point for consumers with a mutual interest in the brand or product, to facilitate the informal exchange of ideas between customers, messages, answers to user questions, to test out the products in a virtual medium, to customize the product design or allow users to give their opinions on the product features. Examples of this strategy are the pages of several car manufacturers such as GM or BMW. The "Low Flame Investment" strategy would be a prior step for a company planning "High Investment".

Companies with a high level of Internet penetration among their customers and with a product or service adaptable to sale on the network (such as computer equipment, travel and leisure, books, music and video, gifts, hard-to-find goods, niche specialties, etc.), will follow a strategy of "Transactional Pres-ence", whereby the company seeks to develop a new channel for its sales via the Internet. This strategy is followed by manufacturers who sell their products directly on the network, such as Dell (computers), specialists such as Amazon.com (books) or virtual food markets such as Peapod.

The cost associated with the design and maintenance of a "Transactional Presence" on the network is far greater than for the other strategies. According to a study(5) of 20 large companies that sell their products through the Internet, the average development cost is one million dollars and it takes one year to launch. The cost of an "Active Presence", would be ten times less, at around 100,000 dollars.

Companies should not underrate the dangers of introducing changes in the company's organization design and "bypassing" the established sales channel, when deciding which strategy to adopt for their presence on the Internet.

4.2. Different ideas on the development of the Internet

For the Internet to become a really useful tool, it must attain a level of technological development and diffusion that encourages both companies and consumers to use it.

Developments in infrastructure, the spread of the Internet among consumers, the enormous increase in the numbers of suppliers of Internet related services, and the rapidly growing number of communities interested in electronic commerce, would give rise to what some call a virtuous circle in the implementation of electronic commerce(6).

This virtuous circle is nothing more than the development dynamics of one of the matrix dimensions shown earlier. Each company's expectations and perceptions with regard to the development of this virtuous circle will determine its position in relation to the Internet.


5. Conclusion

The growing presence of the Internet in our lives as a meeting place, is a widely accepted fact. The most obvious characteristic of the network is the possibility it gives for direct communication, in real time, between a company and its customers (interactivity). Some transactions through the Internet are not developing at the rate that might have been expected. We have pointed out the lack of technological development to speed up data transmission, the learning costs and the persistence of traditional shopping habits as obstacles to its growth.

The question of how to react to the Internet using 1) the analysis of the degree of Internet penetration/interest among the company's customers and 2) a study of the match of its product or service to the Internet, can be answered by managers. Research into competitor actions may be useful at that point. The degree of development of the new channel for a given product or service category may be outside of the manager's decision powers. That should not be an excuse for not being prepared. Amazon.com started selling books on-line in mid-1995, followed within a few months by Ingram, and later joined by Barnes & Noble. Ingram had logistic savvy and its entry, Bookserve.com, beat Amazon on price. Barnes & Noble had an established brand among traditional store customers, huge volume to support aggressive tactics and an established distribution system while it roughly duplicated Amazon.com in terms of contents, selection and price. By 1998 Amazon seems to be outperforming them. Early brand building activities, intelligent advertising, pioneering word-of-mouth and partnerships with Web points-of-entry all contributed to this advantage. Late reactions may be too costly. Learning first hand to be fast, the hallmark of the new economy, might be good advice.

 1 ·Iansity, Marco and McCormack Alan, "Developing Product on Internet Time", Harvard Business Review, 75 (5), 108­117, Boston, 1997.

2 ·Financial Times 12/10/98, London.

3 ·Forrester Research, Actualidad Económica.

4 ·Forrester Research, ibídem.

5 ·Deighton, John, "Note on Marketing and the World Wide Web", Harvard Business School, Boston, 1997.

6 ·Harrington, Lorraine, "Electronic Commerce (Finally) Comes of Age", The McKinsey Quarterly, 2, 68­77, 1996.

7 ·Adapted from Harrington, Lorraine, 1996.

REVISTA DE ANTIGUOS
© IESE 1999