INFORMATION AS A TOOL IN MARKETING STRATEGY


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TABLE OF CONTENTS

1 Introduction

1.1 Forces Driving Changes In Consumer Behaviour 1.1.1 Supply Side: Technology Evolution
1.1.2 Technologies for Personal Use
1.1.3 Demand Side: Lifestyle and Demographic Changes
2 Emerging Trends In Consumer Behavior 2.1 Disintermediation, and Reintermediation

2.2 Personalization: From Aggregation to Dis-aggregation and Re-aggregation

2.3 Shopping on Demand

2.4 Consumers as Co-producers

2.5 Greater Value Consciousness

2.5.1 Money
2.5.2 Time
2.5.3 Effort
2.5.4 Space


2.6 Blurring Between Consumer and Business Markets

2.7 Power Shift from Marketers to Consumers

2.8 The Automation of Consumption

3 Strategies for Capturing Consumer Information 3.1 Constraints In Physical Marketplaces

3.2 Categories of Information that Marketers look for

3.3 How Online Markets Help To Eliminate Information Constraints

3.4 Role of Information Intermediaries

3.5 Uncertainties

3.5.1 Expanding the reach of online environments
3.5.2 Technology Deployment
3.5.3 Scope of information capture
3.5.4 The potential impact of privacy concerns


3.6 Four Value-Creation Scenarios

3.6.1 The information toll road scenario
3.6.2 The information fragmentation scenario
3.6.3 The information integrator scenario
3.6.4 The customer control scenario


3.7 Explicit Information Capture Strategies

3.7.1 Targeting high-value information
3.7.2 Capturing high-value information
3.7.3 Leveraging the value of information capture
4 Emerging Strategies for e-commerce 4.1 Choosing A Marketplace Model 4.1.1 Are there transaction savings or benefits to be realized?
4.1.2 Is an electronic market for our product developing quickly?
4.1.3 Do we have substantial market share or buying power?
4.1.4 Would a neutral intermediary be beneficial?


4.2 Rules For Winning

5 CONCLUSIONS
 
 

1.0 INTRODUCTION

In the not so distant future, rapid advances in technology, escalating global competition, and rising consumer expectations for quality, speed of response, and customisation will require companies to substantially rethink their business models. One thing is clear; the future will be substantially different from the present. Society went through dramatic changes and upheavals as a result of the transition from the agricultural age to the industrial age; the transition to the information age will be accompanied by even greater change. That transition is underway but still remains in its early stages.

The emerging consensus about the future of various information industries today is that they will converge because they are all increasingly based on digital electronic technology. The vision revolves around the presence of an interactive broadband digital "highway" terminating in very high-resolution multimedia display terminals in consumers' homes and workplaces. The viewer would be in control of content scheduling and selection; information would not, for the most part, be "broadcast" (except for live events); rather, it would be stored in digital "video servers" to be viewed or downloaded on demand.

Today’s World Wide Web (WWW) represents a crude approximation of the capabilities and functionality that are expected to be widely deployed by the middle of next decade. It is serving as a very large test bed for companies and as a "training platform" for consumers to learn new modalities of interaction and consumption.

From the perspective of consumers, the primary impact of the deployment of such an infrastructure will be to ease the often severe time and place constraints that are currently placed on them. No longer will goods and services be offered primarily at the convenience of the seller; "anytime, anywhere" purchasing as well as consumption will become commonplace.

These impacts will become more acute as communication bandwidths rise exponentially and terminal equipment becomes simultaneously more powerful, sophisticated, easier to use, affordable, and portable (smarter, easier, cheaper and smaller). Once the appropriate hardware is in place and the telecommunications infrastructure has been established, an enormous range of services can be exchanged at nominal incremental cost, such as location-independent shopping and banking, computer-mediated education, and training, professional consultations, and various informational, entertainment, and leisure services. This combination of technologies is likely to become quite widespread in the United States by the year 2005 and in other advanced countries by 2010.

Changing consumer behaviour will make it necessary for the marketing function to change dramatically as well. In fact, the marketing function will be at the centre of change; marketing will become increasingly decentralised and fully integrated into business operations. Marketing and its institutions have a great deal to lose as well as many opportunities to make dramatic gains. Successful marketing in this new environment will involve "monocasting" or "pointcasting" of communications, "mass customisation" of all marketing mix elements, a high degree of customer involvement and control, and far greater integration between marketing and operations. There will be more efficient utilisation of marketing resources, reduced customer alienation resulting from misapplied marketing stimuli, "desirable" customers.
 

1.1 Forces Driving Changes In Consumer Behaviour

Two major forces influence consumer behavior, evolving technology, and changing lifestyles and demographics. These are respectively described below.
 

1.1.1 Supply Side: Technology Evolution

Undoubtedly, the pace of technological evolution in recent years is having and will continue to have a great impact on the lives of consumers. Rudy Puryear, a senior information technology strategist at Andersen Consulting, describes the new age as the "age of less". However, mass customisation applies to more than just the product. Technology allows consumers to: Following aspects of technology are of particular significance: Benefits include

1.1.2 Technologies for Personal Use

Technologies having the fastest gains in price-performance are those intended for personal rather than institutional use. Personal information devices have been riding and will continue to ride a steep experience curve based on the unique "economics of electronics." One of the fundamental properties of such technologies is their inverse economies of scale; the smaller the unit, the greater the price-performance. This is due to the fact that smaller units can be produced in mass quantities with very low (sometimes near-zero) variable costs. Large units, on the other hand, tend to be produced in small volumes and retain a significant proportion of variable costs. Thus, today's personal computers offer far more by way of "MIPS per dollar" than do today's mainframes or supercomputers; video games and other lower end consumer devices tend to offer even better price-performance than that.

Consumers will rely heavily on these technologies, while producers will rely on a mix of personal and institutionally oriented technologies. As the power and pervasiveness of the technologies at their command grow, consumers will be in the hitherto unique and unaccustomed position of controlling a far greater share of the information and communication flow between the buyer and seller than ever before. In other words, consumers can and will have more information about product providers in most cases than providers will have about consumers; far from being passive "targets" of marketing activity, consumers will dictate the timing and modality of communications, and they will determine the time and place of any resulting transaction.
 

1.1.3 Demand Side: Lifestyle and Demographic Changes

Broad demographic shifts are underway that are causing gradual but major changes in society. These macro-level changes have a major impact on individual consumer behaviour. Other developed nations are experiencing even more severe effects from this trend because they tend to have much lower levels of immigration than the United States (more than 90 percent of the population growth in the United States between 1990 and 2050 will be due to immigration). Populations in most developed countries are actually shrinking. The trends for Japan are especially ominous. Between 1990 and 20930 alone, the number of Japanese under the age of 50 will decrease by some 24 million people, a net 26 percent loss of population. Birth rates in less developed countries by and large continue above the replacement level, although the overall trend is downward.

The differences in median ages across countries can be quite dramatic. The median age of adults in the United States is now 43 and will reach 50 in less than two decades. According to Wolfe (1996), the "psychological centre of gravity" (PCG) is a five-year window around this median age of adults, or 38 to 48. He suggests that this PCG defines the primary tendencies of a culture; for the United States, this suggests that middle-age values and perspectives will increasingly come to dominate the national psyche. In particular, older consumers tend to respond more favourably to relationship marketing approaches than do younger consumers.
 
 


 

2.0 EMERGING TRENDS IN CONSUMER BEHAVIOUR

Consumer behaviour has been changing that has been the driving force behind the need of consumer information. We foresee eight major trends in consumer behavior. These trends are listed in Figure 2.1.


Figure 2.1 Changes in Consumer Behaviour


We now discuss each of these eight trends and how changes in them affect the marketing strategy.

2.1 Disintermediation, and Reintermediation

The current marketing practice depends heavily on the presence of multiple intermediaries between the producer and consumer. These intermediaries primarily add time and place utilities to the product utility "engineered" into a niche offering by the producer. They provide broader and more convenient access to the products for a wider range of customers. In addition to serving as essential conduits for getting products to the market, intermediaries have also served as informational conduits.

Producers contact-with end-user customers and must rely on them for information pertaining to those customers. Intermediaries play a role in directing and filtering information from producers that is intended for end users. Building an adequate distribution channel is usually the biggest hurdle that a new entrant must face in establishing a foothold in a market; this is usually the slowest and most expensive part of the marketing mix to implement. Distribution channels add huge cost elements. For example, they may include multiple warehouses at the factory, wholesaler, retailer, and even at consumer level.

As has already been well documented, the electronic world changes all that. Companies small and large are able to achieve high level of accessibility almost immediately. Establishing a two-way information flow directly with end users is readily possible. The automation of numerous administrative tasks enables the company to serve huge numbers of customers efficiently and effectively. Innovations such as demand-driven marketing can dramatically lower inventory levels. As a result, more and more companies are finding it possible to deal directly with more and more of their customers. In the process, they are putting enormous pressures on their intermediary (e.g., wholesaling and retailing) partners.

This trend towards disintermediation is still in its early phases, and massive dislocations will occur as a result of it. The trend will also cause major growth in the support services needed by companies that deal directly with larger numbers of customers. For example, growth in small package shipping will likely far exceed that in bulk shipments or the building of warehouse space. Another consequence of this trend may well be reintermediation. By this we mean that new categories of intermediaries will emerge to capture the value-creating opportunities that will undoubtedly be thrown up by the use of new ways of interacting between consumers and producers. As with traditional intermediaries, these too will thrive on the basis of economic transfer principles; intermediaries that deliver greater value at lower cost will prosper.

Examples of new types of intermediaries may include rating services, automated ordering services, services based on consolidating numerous small orders from numerous consumers into more economically viable quantities, and so forth. Market specialists could emerge who would orchestrate the offerings of numerous suppliers around the specialised needs of a single customer.

2.2 Personalization: From Aggregation to Dis-aggregation and Re-aggregation

The emergence of a relatively homogeneous mass market earlier in this century led to the development of various mass marketing approaches that continue to define and dominate the marketing function today. For some time now, we have recognised that the mass market is splintering (even atomising) into ever-smaller segments. Talk has even arisen in recent years of a so-called segment of one, and Stan Davis came up with the powerful oxymoron of "mass customisation" as the way in which we will have to increasingly operate in the future. Although we certainly agree with the broad premise of this argument, we believe some important caveats apply. First, customers are not always looking for customized products; they may be perfectly content in many cases with a well-designed standardised product.

However, mass customisation applies to more than just the product:

2.3 Shopping on Demand

As discussed earlier, consumer behavior in the future will increasingly feature shopping on demand and consumers will cease to be held hostage to the time and place constraints historically imposed on them by businesses. Shopping on demand will include anytime, anywhere procurement as well as anytime, anywhere consumption. Shopping on Demand in many facets of consumption, consumers will take on increasingly active roles. For example, they will become directly involved in customising the products they purchase. They will take over some of the support functions that are normally performed by companies; this trend is akin to the one toward self-service in retailing. For example, FedEx now allows its customers to track their own packages via the Internet, bypassing the customer service department altogether.

2.4 Consumers as Co-producers

There is a distinct trend from Insourcing to Outsourcing. Somewhat paradoxically, as consumers take more control over certain commercial relationships, they will also relinquish a measure of control in other areas. This is not as contradictory as it might first appear; after all, consumers have a limited amount of time and effort that they are willing to expend, necessitating trade-offs. As a result of escalating time pressures and growing economic resources, consumers will begin to outsource household functions much more over time. The argument here is very similar to the one that drives outsourcing in the business context; specialist vendors will be used to deliver far better price-performance value than consumers can create in-house. In other words, the make-versus-buy question will increasingly be resolved in the favour of buy.

Many services (such as lawn care, house cleaning, and child-care) are already outsourced to a significant degree. Many new areas will be outsourced in the future. For example, household product needs may be outsourced to such firms as Proctor and Gamble, home dining may be outsoureed to restaurants that will deliver prepared food daily to the consumer at home

2.5 Greater Value Consciousness

Although they have benefited in many ways as well, consumers have paid the price for marketing's extraordinary lack of productivity in the past. High advertising budgets, the proliferation of brands, runaway sales promotions and uneconomic levels of inventory build up. All of these activities cost way out of proportion to the value they created (which was, in many cases, negative). As marketing reforms, customer expectations for value received will soar.

Consumers will demand and receive more value in exchange for the four primary resources at their disposal: money, time, effort, and space.

2.5.1 Money

Consumers will expect to pay more for most products. They will willingly pay more, provided that the additional value offered exceeds the incremental price. Because of their recent experience with major product categories such as computers and consumer electronics, consumers have come to expect as a given the proposition that products get better and cheaper over time. An era of negative inflation will characterise many more product categories.

2.5.2 Time

For many consumers, especially those in two-income households, time is a more valuable currency than money. Many consumers will gladly make a trade-off, paying a higher price if they can save time in the process. Marketers must be extremely wary of placing heavy time demands on consumers.

2.5.3 Effort

As life gets ever more complex in so many dimensions, consumers are looking for convenience and simplicity wherever they can find it.

2.5.4 Space

Given a choice, consumers would rather not be forced to warehouse large quantities of products in their basements in order to benefit from lower prices. Heavy users should get the advantages of scale economy; however, they should not have to swallow huge lumps of inventory in order to do so. Value buying will become paramount, as consumers become more value conscious than ever. Efficiency, with which information will be shared between customers and companies, it will be almost impossible for companies to survive without delivering peak value. In contrast with the past, Consumers will respond far more to innovation-based differentiation than to image-based differentiation. Barriers to consumption will increasingly disappear as a result of the adoption of value-based marketing, more creative pricing approaches (leasing, metering), the separation of form from function.

Given the right value equation, the limits to consumption will be revealed as being far less than what were believed possible. It is now commonplace for households to have numerous radios, telephones, calculators, and even computers. Many consumers own three or more watches. Greater competitive pressures on pricing coupled with an enhanced ability to easily locate the best price, will be a fact of life in the New World. The impact of this will be threefold.

2.6 Blurring Between Consumer and Business Markets

The lines between the home and the workplace are rapidly blurring. More and more people work at least part-time in their homes, and a growing number of people undertake some of their personal tasks at the office. As this trend continues, many consumer decisions will become more like business decisions. Many technology applications traditionally seen as home based will be important to businesses as well. For example, video shopping has great potential in a business environment; an automobile mechanic will be able to see a picture before ordering a part. To see how to make repairs the worker has not done in a long time, he or she will be able to view a video clip. This movement of home based services to business and vice versa can already he observed. Typical homebound applications such as television and VCRs are now "trickling up" into business applications. Telephone answering machines trickled up to businesses as voice mail. Business applications such as e-mail, the Internet, EDI, and accounting software are trickling down into the home market. Dual-purpose applications include video shopping, distance learning, travel planning, news on demand, legal or financial advice, information services, on-line databases, and so forth. Some applications will remain geared to the business or consumer market, although even here analogous applications may be developed.

2.7 Power Shift from Marketers to Consumers

Inevitably, increased competition and greater access to more powerful information tools will put greater power in the hands of savvy consumers. As a result, it is possible that buyers will increasingly be viewed as marketers and sellers as prospects in the marketplace. In any event, consumers will no longer be targets of marketing activity; they will be knowledgeable and demanding drivers of it. Marketers will have to show far greater respect for consumers, who have increasingly become immune to marketing hype. Instead, they will demand content-rich information and demonstrable product innovations.

2.8 The Automation of Consumption

Consumers' time poverty and an abundance of information technology will lead to a greatly increased level of automated transactions with marketers. Akin to automatic replenishment as practised in the business-to-business marketing area today, such arrangements will become increasingly commonplace in the future. They may happen directly between consumers and manufacturers for larger purchases, and through intermediaries for smaller purchases.
 

3.0 STRATEGIES FOR CAPTURING CONSUMER INFORMATION

The history of consumer marketing during the past two decades reflects a growing realisation that information about customers is a key competitive asset. Banks have invested heavily to integrate information systems that facilitate access to broad activity profiles of customers across the major product categories offered by a bank. Yet much of the information marketers want most about consumers has nearly always been out of reach. When is a consumer going to make a purchase? What is the precise impact of advertising on that decision? What (and how much) are consumers buying from competitors and across categories?

Online markets (e.g., the World Wide Web or proprietary online services such as America Online or CompuServe) hold the potential to allow consumer marketers to answer these questions for the first time. They can provide better visibility of what consumers are buying, when they’re buying it, and from whom they’re buying it. Companies best able to capture this information and use it strategically will see market power shift their way as improved information flows allow them to select the most desirable customers and to better target them when they’ve signalled an intent to purchase. Already a new breed of network-based intermediaries is positioning to accomplish this information capture by aggregating people and resources on networks. Once these aggregations reach critical mass, the new intermediaries will be well positioned to create and capture value by leveraging rich profiles of consumer and vendor activities.

The implication for companies of all stripes is that they must begin to pursue explicit information-capture strategies addressing issues of targeting, capturing, leveraging, and competing for information about consumers. These strategies must in turn reflect a thorough understanding of the range of potential scenarios by which a still immature online marketplace is developing.

3.1 Constraints In Physical Marketplaces

Vendors in physical markets, for example, often find that their "window" on transaction histories tends to be limited to their own customers. For example, United Airlines can identify a business traveller who flies extensively on United and selectively upgrade service to that traveller to increase loyalty to United. It has much less ability to identify an American Airlines frequent flyer that happened to book a flight on United. From United’s perspective, this passenger appears as a relatively uninteresting passenger because she doesn’t appear to travel much; therefore she would not receive special attention or service. If United had access to integrated travel profiles of all its passengers (even people who have never flown United before), it could be much more effective in targeting and serving highly profitable business travellers.

Retailers are in a better position than vendors to see a broader range of customer activity, but even they are hampered by two obstacles.

In addition to integrated transaction histories, marketers also strive to obtain better visibility on intent to purchase, especially for higher ticket items such as homes, cars, and airline travel. Unfortunately, access to this information is also very limited in traditional market environments.

Market research techniques have been developed to measure preferences and likelihood of purchase but these techniques tend to be segment-based and less useful in identifying specific individuals who are about to buy. Even direct survey questions on intent to purchase have limited ability to pinpoint those who actually will purchase.

3.2 Categories of Information that Marketers look for

3.3 How Online Markets Help To Eliminate Information Constraints

The emergence of online marketing environments offers the potential to enable marketers to overcome the constraints on information capture that exist in the physical world. Broadly speaking, this is taking in place two directions.

3.4 Role of Information Intermediaries

The second broad change to information capture brought about by online market-spaces is to make it possible for an entirely new set of companies to capture information. Unlike in physical markets, where vendors or retailers are usually best positioned to learn about customer preferences and transactions, in online markets a new category of network-based intermediaries is strongly positioned to create value by aggregating people and resources on networks and thereby developing rich profiles of consumer and vendor activities. These players could be in a position to capture rich profiles of network users and their transactions on the network - in many cases, much broader profiles than individual vendors might hope to capture and much more linked to specific consumers than traditional retailers have been able to capture. Suddenly previous assumptions about who best captures what kind of information are now no longer so certain. Related assumptions about who extracts the value from this information now also need to be reassessed.

3.5 Uncertainties

The full potential and implications of information capture in online environments won’t be realised until a number of challenges are addressed. These challenges and uncertainties fall broadly into four categories: reach, technology deployment, scope of capture, and privacy.

3.5.1 Expanding the reach of online environments

Online environments are still relatively new platforms for consumers in general and for commercial transactions in particular. But there is another dimension of reach that is also relevant — What percentage of consumer transactions in relevant product categories is actually conducted online? Obviously, the ability to capture information about transactions assumes that these transactions are actually performed online. Today, very few consumer transactions are conducted online, although the frequency and value of these transactions are growing and many providers are building out consumer transaction capabilities on networks. In part, the rate of growth of consumer transactions is likely to be a function of the growth of targeted consumer advertising that is coupled with transaction capability. In this respect, advertising is likely to lead transactions.

3.5.2 Technology Deployment

Information capture in online environments also depends on the deployment of an array of technologies focused on measuring, tracking, collecting, and analysing user activities on the network. Specifically, Internet-based players are wrestling with two related challenges: With regard to the first, companies, including NetCount and Inters, are investing aggressively in the technologies necessary to differentiate "hits" to a Web site from actual visits. In some sense, these companies aspire, in part, to become the Nielsens of the Internet, and to assist advertising firms and consumer marketers in improving the effectiveness and efficiency of advertising in this emerging media. As advertisers have become aware, hits are an almost meaningless measure of user activity since they are distorted in a number of ways. For example, accessing a single web page with four graphics icons stored as separate graphics files on the Web site will register as five hits on that page even though it was just one person accessing that page one time.

The nature of the second challenge and the aspirations of players such as I/PRO and Agents, Inc. are different from those of players focused on tracking site traffic — that being to strengthen and develop relationships with individual consumers. The technologies typically involve creating a unique identifier embedded in the user’s browser software or establishing some type of third-party registration service. The least attractive option, but the one most widely used today in the absence of some of the new user identification technologies or services, involves requiring users to register at individual Web sites. The technology innovation to address these needs is well underway today and any of the technologies are already in an early stage of commercialisation. There will, however, be inevitable lead times in the deployment of this technology and potential issues regarding standardization.

There’s a third technology issue, which also bears a mention, although it applies to only one category of players in the online environment: those companies who also have significant business presence in traditional marketing environments. These companies must wrestle with the non-trivial issue of integrating the information captured in online environments with the information captured on legacy systems in traditional marketing environments.

3.5.3 Scope of information capture

If the technological hurdles to information capture on the Internet are likely to be resolved soon, another obstacle may prove more difficult. This involves the scope of information capture by any individual company, especially in fragmented network environments like the Internet. In one extreme view of the Internet, individual product and service vendors will use the network to dis-intermediate traditional intermediaries and deal directly with consumers from their own Web sites.

The implications of this scenario for information capture are profound. In the absence of any aggregating intermediaries, each Web site will capture a rich profile of the activities on that Web site but, in most cases, that profile is likely to be a very narrow slice of the total profile of any consumer’s activity on the Internet. Unless there is an active market to trade this information across Web sites, the value of this information will be significantly diminished for all but the largest vendors. This issue may well lead to the emergence of a broad range of new, network-based intermediaries who add value by aggregating people and resources on the network. In this scenario, the value of the information would be greatly enhanced by the ability to aggregate either across an individual consumer’s full set of activities or at least across a broad range of related transactions. Unlike traditional retailers, these new, network-based aggregators would be able to link these activity profiles with identifiable consumers who could then be targeted and served with tailored marketing programs.

3.5.4 The potential impact of privacy concerns

The final hurdle that must be overcome in realising the full economic value of the information captured in online environments has to do with privacy. Ironically, this obstacle grows in size as the three prior challenges are overcome. The greater the reach of online environments, the more robust the information capture technology platform, and the broader the scope of information capture by individual companies, the more privacy is likely to rise as a significant policy issue.

In dealing with concerns over privacy, it is important to remember a key distinction. When consumers are asked about concerns over privacy, they invariably express a high degree of concern. However, when the question is re-framed to test willingness to accept something of value in return for access to detailed information about the consumer, respondents seem to become much more favourable to providing the information. What seems to upset consumers most is when the information is captured without their knowledge and when they appear to receive nothing in return for the information. Privacy policies could evolve in a number of directions. At the two extremes, there may be no restrictions on information capture or, alternatively, all forms of information capture may be prohibited. What is much more likely is that privacy policies may require treating information capture as an option to be chosen by the user. A more modest resolution would be to allow information capture except in situations where the user actively takes steps to block information capture. Privacy policies may differ depending on the category of information involved. For example, ability to capture information about transaction histories may be more tightly controlled than information about basic demographics such as age, sex, and size of family. Similarly, privacy policies may differ depending on whether the issue is information capture or information liquidity. For example, one set of privacy concerns deals with the ability of vendors or intermediaries to capture information about consumers and use this information in their own business. A very different set of privacy concerns may be triggered on issues of information liquidity — whether or not the vendor or intermediary capturing the information can then "sell" this information to third parties. One quite plausible outcome would be tighter restrictions on information liquidity than on information capture itself.

3.6 Four Value-Creation Scenarios

These scenarios can be described by focusing on two key dimensions of uncertainty: the scope of information capture by individual companies in online environments and the degree of information liquidity.
       

      Figure 3.1: Value Creation Scenarios

3.6.1 The information toll road scenario

In this scenario, new, network-based intermediaries emerge who focus on aggregating people and resources in online environments and, as a result, are well positioned to capture very broad profiles of consumer activities on the network. The scope of information capture by individual companies — i.e., these new intermediaries — is therefore quite high. In contrast, information liquidity — the ability to buy and sell this information to others — is assumed to be very low as a result of privacy concerns over potential abuses of information. As a result, the intermediaries are well positioned to become organisers of customer webs, leveraging the unique asset that they accumulate over time: the rich activity profiles of the customers they aggregate. Unable to "sell" their profiles to third parties, the intermediaries become natural channels for interactive advertising and shopping, providing opportunities for third parties to leverage the customer profiles without actually "acquiring" them and, in the process, further enriching these profiles based on the next wave of consumer activity. These customer profiles have substantial commercial value and it is likely that the intermediaries who own them would end up capturing the bulk of the value-creation potential. Distinct sub-scenarios can be defined by focusing on the potential roles of categories of intermediaries (e.g., virtual communities, electronic market makers, gateways, and network access providers, billing/payment service providers).

3.6.2 The information fragmentation scenario

A second scenario imagines that information capture is quite fragmented on networks — no entity is able to capture more than a very narrow slice of a user’s activity profile online — and that information liquidity is also low. Under these conditions, the potential for value creation through information capture in online environments is likely to be low and fragmented among many players. This scenario favours the very large vendors of products and services who are better able to capture information about their customers online. These vendors can then treat this information as a distinctive asset that reinforces their competitive advantage.

3.6.3 The information integrator scenario

A third scenario also assumes that information capture is fragmented on networks, but that information liquidity is high. Under these conditions, one might expect to see the emergence of specialised information integrators that would collect the information captured in many different locations and aggregate this information into integrated customer activity profiles. In this scenario, the value creation potential of the integrated profiles would be high and the ability to capture this value creation potential would depend upon the concentration of information integrators relative to information capturers and information customers. Hence, a value-maximising extreme might see few large integrators — with many collection points and sophisticated integration tools — compiling and brokering highly comprehensive consumer profiles. This scenario would tend to favour smaller vendors of products and services on the network who would have increased access to a broader range of information about potential customers. More generally, this scenario would favour companies who are very skilled in the application of customer information to improve marketing programs.

3.6.4 The customer control scenario

In this scenario, privacy concerns dictate that the customers themselves become the primary location of information capture and therefore "owners" of the information captured. Information capture could occur through software installed as a plug-in to the browser residing on the customer’s PC. As the customer navigates through the network, the activity profile is automatically and transparently captured by the customer’s software. This information could then be managed by a new form of information intermediary who acts as an agent for the customer, providing a variety of filtering, vendor seeking, and information "rental" services that optimize the value of the customer profile to the customer, consistent with the customer’s privacy preferences. Under this scenario, the value creation is quite high because the profiles are rich and comprehensive for individual customers and the customer is in the best position to capture the value creation potential inherent in these profiles.

This scenario would represent a fundamental shift from traditional information capture roles in physical space. Traditionally, consumers’ roles have been limited to providing data about themselves through surveys, transactions, etc. In the customer control scenario, consumers would become key collectors and controllers of primary information, potentially obviating the need for information capturers and, in the process, staking an important piece of the value chain. As a result, the value-added roles of other players would shift toward data integration and analysis and away from information capture.

3.7 Explicit Information Capture Strategies

3.7.1 Targeting high-value information

The key issue here is: What kind of information about customers (and potential customers) is most valuable to your business? For example, many consumer businesses aspire to establish long-term relationships with customers and therefore value profiles of transaction histories to provide a measure of the economic potential of that customer. This focus is especially important when the consumer makes repeated purchases of specific products or services over a long period of time. However, such a focus may not be as relevant for a residential real estate broker who is more concerned about information that would suggest a particular person or family is about to enter the housing market. Similarly, leading vendors in specific markets are more likely to place higher value on an increased amount of information about their own customers to strengthen customer retention programs or to better identify cross-selling opportunities. In contrast, new entrants focused on customer acquisition will be more focused on information about the broader market rather than their own customers. Being explicit about what kind of information has the greatest value can be very helpful in developing more targeted and cost-effective information capture and acquisition strategies.

3.7.2 Capturing high-value information

Once you have a clear focus on the information that is most valuable to the business, the key challenge is to assess the relative importance of online environments in facilitating capture of this information and the specific approaches best suited to exploiting the potential of online environments as a capture medium The temptation here is to focus too much on technology platforms without adequately considering business models and their impact on the scope of information capture. Traditional business models may be much too constrained in terms of exploiting information capture potential.

3.7.3 Leveraging the value of information capture

This is perhaps the biggest challenge to senior management. Even in traditional market environments, a large and growing gap has emerged between the amount of information actually captured or readily available for capture and the actual use of this information to create economic value. Technology barriers (i.e., the limitations of legacy systems), skill barriers (i.e., the data mining, analytical and marketing skills required to apply the information in the marketplace) and organizational barriers (i.e., "smokestack" functional or product organizations that limit the ability to share information across organizational boundaries) are all responsible for this gap.

Senior management must avoid the temptation to focus on information capture issues while under-managing the major challenges involved in leveraging the value of this information. Addressing the following questions may help:

One key question senior management needs to address is who else might be in a position to capture this information in an online environment (including the customers themselves) and what are the implications for your business? Here, the risk is that senior management takes too narrow a view of potential competitors for high-value information. While focusing on existing competitors in traditional market environments is important, it is essential to remain alert to the implications of new, network-based intermediaries who may be in a position to capture a much broader scope of information.

At the extreme, customers themselves may become competitors for information about themselves. If they succeed in establishing ownership rights to this information, the implications for existing businesses could be dramatic. Virtual space offers the potential to fundamentally alter who captures what kinds of information about customers. Properly understood, online market-spaces offer significant opportunity to create new value based on a deeper insight into customers and their activities and preferences. Larger companies in particular must carefully think through the implications of broader and deeper access to information about customers. Many companies today enjoy a significant advantage resulting from unique access to limited information about their own customers. These advantages may be under attack by new entrants who leverage the powerful information capture potential of online environments to level the playing field or, even worse, to shift the balance of information power to create new kinds of advantaged players on that playing field.
 
 
 

4.0 EMERGING STRATEGIES FOR E-COMMERCE

Electronic commerce is fulfilling its early promise for business-to-business trade. Marketplaces that connect buyers and sellers are up and running in many product categories, and are creating value by making trading more efficient. The rewards are split in three ways. Sellers can reach more customers, gather better information about them, target them more effectively, and serve them better. The marketplaces also create value for the third-party intermediaries that organise some of them. Intermediaries can earn transaction commissions and fees for value-added services such as information capture and analysis, order and payment processing, the integration of buyers’ and sellers’ IT systems, and consulting services. The best rewards go to buyers, however. Able to compare products and prices easily, they will compel suppliers to compete more fiercely than ever.

There are three types of marketplace: those controlled by sellers, those controlled by buyers, and those controlled by neutral third parties as shown in the table below:
 


Seller Controlled
  • Information-only vendor Web sites
  • Vendor Web sites with online ordering
Buyer Controlled
  • Web site procurement posting
  • Purchasing Agents
  • Purchasing Aggregators
Neutral (Intermediaries)
  • Industry/product-specific search engines
  • Information Marts (Structured access to vendor and product information)
  • Business malls (multiple vendor store fronts)
  • Auction spaces 

Table 4.1: Types of Market Places

Marketplaces controlled by sellers are usually set up by a single vendor seeking many buyers. Their aim is to create or retain value and market power in any transaction. The corporate Web site set up by Cisco Systems, for example, enables buyers to configure their own routers, check lead times, prices, and order and shipping status, and confer with technical experts. The site generates $3 billion in sales a year — about 40 percent of the company’s total.

In addition, by publishing technical documents on line and giving customers access to order information, Cisco saves $270 million annually in printing expenses, order and configuration errors, and telephone-based technical support. Its online market may also increase customer loyalty by speeding up ordering and order status checking. Buyer-controlled marketplaces are set up by or for one or more buyers with the aim of shifting power and value in the marketplace to the buyer’s side. Many involve an intermediary, but some particularly strong buyers have developed marketplaces for themselves. Japan Airlines, a big purchaser of in-flight consumable items such as plastic rubbish bags and disposable cups, posts procurement notices on line in order to find the most attractive suppliers.

Buyers’ intermediaries act as agents or aggregators. FreeMarkets Online, a small company that helps traditional industrial firms locate a pool of competitive suppliers for semi-complex assembly parts such as plastic injection mouldings and iron castings, is an example of an agent. First, it offers an offline consulting service to refine the buyer’s specifications and screen potential suppliers. When the best contenders have been identified, it sets up and conducts an online bidding session, which can last for up to three hours. The service offers buyers average price savings of 10 to 25 percent, and helps them buy more effectively because suppliers submit bids that better match their needs.

Aggregators take a different approach, combining the purchases of several companies to increase their collective buying power. TPN Register, a joint venture between GE Information Services and Thomas Publishing, grew out of an initiative within GE to consolidate purchases, first within a single division (GE Lighting), then across all divisions. Finally, it expanded beyond GE to include other leading corporations in a buying consortium. The results have been a reduction in order processing time (from a week to one day for GE Lighting) and processing costs, and 10 to 15 percent lower prices. Forrester Research estimated that from its inception in January 1997 through year-end, TPN Register’s purchases would reach $1 billion.2 The marketplace expects to handle purchases worth $15 billion by the end of 1998.

Neutral marketplaces are set up by third-party intermediaries to match many buyers to many sellers. One such intermediary is FastParts, which operates an anonymous spot market for the trading of overstocked electronic components. It receives notice of available stock from sellers, then matches buyers to sellers at an online auction. All parties benefit. Sellers get higher prices than they would through a traditional broker; buyers get market-driven prices that are lower than brokers’, plus guaranteed quality because FastParts inspects the products; and FastParts earns up to 8 percent commission. The losers are the traditional brokers.

Neutral electronic marketplaces do not necessarily eliminate traditional intermediaries, however. Digital Markets established itself as an electronic intermediary for the trading of electronic components. Its aim was not to change the relationship between buyers and sellers, but to make their transactions more efficient. Its online marketplace routes buyers’ orders to their preferred distributors after checking for order entry errors and suggesting substitute products. The intermediary then notifies the buyer of availability and passes on delivery and pricing information from the seller. Digital Markets also enables buyers to confirm and track their orders. For this service, it charges a transaction fee to sellers when an order is placed. Buyers pay nothing.

4.1 Choosing A Marketplace Model

How should companies decide which electronic marketplace model suits them best or, indeed, evaluate when or whether to participate in a market? The answers to the following four questions will help them determine an appropriate strategy.

4.1.1 Are there transaction savings or benefits to be realised?

Cost reduction through greater process efficiency is one of the main attractions of the electronic marketplace. Companies should therefore conduct a detailed analysis of their selling and procurement processes to discover how much can be saved and where. In early electronic marketplaces, most companies have focused on reducing the cost of publishing and distributing printed documents by making promotional materials available on Web sites. DEC estimates that putting its promotional materials on line is saving $4.5 million annually in catalogue and mailing costs.

Yet there are many other steps in a typical selling and procurement system that can be streamlined. From product development to account information management on the selling side, and from assembling manufacturing specifications to tracking vendors’ performance on the procurement side, electronic marketplaces can have a measurable impact. How much of an impact depends on how lean the buying and selling operation already is. At Dell, many process costs had already been taken out via direct sales and by earlier efforts to automate and streamline the supply chain. Web selling has secured additional savings, but they have been small compared with what most companies could expect — including other competitors in the PC business. A second type of transaction benefit is improved reach. Hartford Computers has clearly benefited in this way, quadrupling sales by reaching more divisions of GE via TPN Register. A third advantage accrues for buyers: namely, the reduction in prices that comes of increased or more transparent competition.

4.1.2 Is an electronic market for our product developing quickly?

The higher the possible savings or benefits, the more enthusiastic competitors are likely to be about an electronic marketplace. But these are not the only concerns. If electronic markets are developing quickly for a company’s key product categories, then competitive dynamics might drive it to establish an early presence whether it is a buyer or a seller.

The speed with which an electronic market develops for any product will depend on two factors: the inefficiency of current transactions and the sophistication of buyers as shown in the figure below:

         


        Figure 4.1: Opportunities for Electronic Marketplaces
Transaction inefficiencies can arise from poor information flow, complex or multi-tiered distribution channels, and fragmented supplier and customer bases, among other factors. Customers’ sophistication is measured by their ability to define clear product specifications, their understanding of the differences between vendors, and how comfortable they are about buying a product without seeing it.

Product categories with inefficient transaction processes and sophisticated customers, such as MRO products, PCs, travel services, and low-end networking products, will probably move quickly to electronic marketplaces. Dell, for example, is already seeing the emergence of several electronic marketplaces for PCs, such as pcOrder.com, ECadvantage, and ONSALE. Because the company moved quickly to develop its own online sales site, it should at least slow the pace at which customers are attracted to other marketplaces, and hence defer (perhaps indefinitely) the erosion of its market share and price advantage. Buyers in fast-moving product categories should use electronic marketplaces to save money on the goods they buy, while sellers should seize the opportunity to reach new customers and delay the development of a buyer-controlled marketplace. Third parties should act promptly to attract a critical mass of buyers and sellers to their own marketplace.

4.1.3 Do we have substantial market share or buying power?

The answer to this question will determine which marketplace model will be most effective.

If a product stands out from competitors and is strongly branded, its maker should consider selling from its own Web site. Cisco is the clear market leader in routers, for example, and can therefore depend on its brand alone to draw customers to its site. The seller of a product with a weaker market position, on the other hand, should probably try to enter several marketplaces in order to broaden its reach.

Buyers’ competitive considerations are slightly different. Here the key variables are the size of procurement expenditure by product, and the fragmentation of the supplier base. Large buyers in product categories with legions of suppliers will probably choose to set up their own procurement site, or use a purchase aggregator to increase their buying power even more. Aggregators also make good sense for most small buyers. If none exists, small buyers with a large number of potential suppliers should use business malls (multiple vendor storefronts) to access suppliers easily, or preferably find auctions where intense competition between suppliers might result in lower prices.

4.1.4 Would a neutral intermediary be beneficial?

From a buyer’s or seller’s point of view, there are several reasons why marketplaces run by a neutral intermediary might be beneficial. The first is the advantage of scale in transaction processing. An electronic marketplace that sells nothing but caviar, say, may have insufficient volume to achieve scale in its back-office organization. But a marketplace that sells all kinds of gourmet food could be much more efficient. Similarly, a marketplace able to use the same technology to set up markets in different products would probably have a sizeable cost advantage over marketplaces tied to single products or industries. The advantages of scale are therefore likely to drive the emergence of third-party, neutral marketplaces that not only bring buyers and sellers together, but can act as service bureau’s, providing facilities such as customer data analysis, payment processing, and fulfilment/logistics. A second factor is the value of the information acquired during buying and selling. Here, the benefits will be enjoyed by the intermediary. A neutral third party can accumulate information about buying patterns that can be analysed and sold to sellers to help them improve their marketing. This is unlikely to happen in a buyer- or seller-controlled marketplace, as the controlling party has little incentive to pass information on. A third reason is anonymity. Companies’ concerns about giving competitors access to sensitive information through their Web sites are allayed in a neutral market in which participants’ identities are protected. Much of FastParts’ success is based on the value of this anonymity to electronic component manufacturers, which do not want to reveal details of their production levels or excess capacity. In product markets where anonymity is important, buyers and sellers alike will flock to neutral marketplaces. Finally, neutral intermediaries can be helpful because they understand how Internet marketplaces operate. This is a new channel that demands specific skills and experience. Savvy intermediaries can help market participants move up the learning curve quickly.

4.2 Rules For Winning

The development of electronic marketplaces is inevitable in many if not most industries. It will be driven by the release of value through transaction savings and the shift of power to buyers.

For buyers, the strategic imperative is clear. They have little to lose and much to gain. They could, however, be in danger of falling captive to a seller-controlled marketplace capable of analysing their buying patterns to extract additional economic surplus. Buyers should therefore organise a buyer-controlled marketplace as quickly as possible. The dynamics of electronic marketplaces also create clear opportunities for third-party intermediaries, which can create value by virtue of their neutrality. Their strategy will be guided by the answers to the same four questions that buyers and sellers must ask. They need to ascertain where transaction savings can best be realised in order to know how to integrate their service with buyers’ and sellers’ sales processes, and so offer most value; they must pick industries that are early targets for electronic marketplaces; they should avoid industries where sellers or buyers are particularly powerful; and they should consider areas where there is value in anonymity or in the information derived from transactions.

Sellers are the most vulnerable participants, because they will increasingly have to compete with other vendors in a transparent environment. Unless a seller stands to gain substantially from increased reach or reduced transaction costs, its strategy must be to attempt to coopt or prevent the formation of buyer-controlled markets capable of driving down margins to the lowest-cost producer. This can be done by quickly setting up seller-controlled marketplaces.

All participants may have to re-examine conventional assumptions about competition. A seller such as Dell could find that the right strategy is to open up its Web site to competitors’ products — surrendering some sales in order to retain control over the marketplace. A neutral party will probably discover that it cannot merely organise and operate the marketplace; instead, it must quickly integrate into buyers’ and sellers’ transactions and systems to enable full process savings and capture valuable information. Finally, buyers may find that they should cooperate with unfamiliar players (for example, purchasers of the same product in a different industry) to maximise their gains, pooling purchases, say, to exert as much control as possible over suppliers. The dynamics and rapid growth of electronic marketplaces are forcing businesses to choose their strategies now. Electronic business-to-business commerce is not simply a question of automating existing channels and processes. It is a whole new way of doing business.
 

5.0 CONCLUSIONS

In this paper we have discussed the broad parameters of developing an effective marketing strategy for the emerging business model i.e. the internet.

We have tried to present a view of the changing consumer needs over the next decade This need has been propelled by a variety of reasons -–technology being the main driver. In such a scenario most of the marketing models that were valid in the world of gravitational commerce will not work in the electronic commerce. We have just explored one particular area of research in the new paradigm of marketing that needs to be adopted to cope up with the fast changes taking place in this arena.

We see that the marketing strategy evolves around the consumer as shown in the diagram below: