Chapter Three: Supporting Data

Vermont Internet Commerce Research Project Final Report

Chapter Three: Supporting Data

Secondary Research

Introduction

The Internet has been called the hottest marketing trend and new consumer market by dozens of retail and computer experts over the course of the last four years. However, it hasn’t been until the last two years that the potential and the trends of Internet commerce have truly been identifiable. Online shopping was virtually nonexistent in 1994, but this year’s Christmas sales are expected to be two and a half times those of last year. (1) This means hundreds of thousands of online shoppers are seeking products, many of whom are first-time Internet shoppers. With this in mind, it is worth stepping back and examining exactly what is the phenomenon of Internet commerce.

Definition

Internet commerce (also called electronic commerce) is a method by which the wants of a consumer can be fulfilled electronically by the seller without the normal human-contact interaction. An electronic commerce system allows a retailer to maintain an electronic merchandising inventory and update the inventory database when items are received from suppliers or sold to customers. When the inventory of a particular item is low, the retailer may create a purchase order to replenish his or her inventory. The purchase order is distributed electronically to the appropriate managers and business partners, ultimately filled and billed electronically.

Electronic commerce has created a web of retailers, wholesalers, distributors, financial institutions, and consumers. Virtual storefronts (Web sites) and electronic malls (connections of numerous virtual storefronts) have made the Internet into an invisible network of business relationships that activate to meet the wants and needs of an "online" (Internet) consumer. The business model has removed certain layers of human processing and interaction, while increasing the efficiency and lowering the cost of many business operations. Thus, a benefit is accrued by both the business and the consumer.

The Trends

The predictions about the growth of Internet commerce are as diverse as the products available at thousands of Web sites. Every expert has a different perspective on which sectors will be the most successful and what the potential financial impact will be. The U.S. Department of Commerce released a major study of the economic impact of the Internet. (2) The major conclusions of that study were that:

Internet traffic is doubling every 100 days and electronic commerce should reach $300 billion by the year 2002.
More than 100 million people worldwide are online.
The digital economy is growing at double the rate of the overall economy, and represents more than 8% of the gross domestic product of the U.S.
Information Technology has replaced automobiles as the biggest manufacturing industry in the U.S.
Information technology has been responsible for over 25% of real economic growth over the last five years.
Radio took 30 years to reach an audience of 50 million; television took 13 years; the Internet took just four years to reach the 50 million mile-stone.

The Information Technology Association of America (ITAA) also predicts massive expansion in the online realm. The ITAA reported the following predictions: (3)

Online travel industry revenue will reach $12 billion by the year 2002.
Electronic commerce industry revenue will reach $54 billion by the year 2002 (by residential users); in 1997 it was $4.3 billion.
Domestic online music sales will reach $1.1 billion by the year 2002; international market will reach $1.6 billion.

These predictions may actually prove to be on the low side as computer and Internet technology improves. The technology that fuels the Internet market improves every day, whether it is hardware, software, or telecommunications equipment. In October of this year, a company called mySimon, Inc. debuted a new type of search engine – one that compares prices from thousands of online merchants in real time and delivers information on millions of products. (4) The new search engine will scour more than 800 unique Web merchants in categories including computers, electronics, sporting goods, collectibles, and fashion. The search engine returns a variety of information: sites selling the product, a price comparison, and product availability.

Technology will continue to drive the changes in Internet commerce and modify people’s shopping behavior. Will Internet shopping replace catalog sales or mall browsing? No, not any time soon. People tend to be social creatures and enjoy the experience of an afternoon at the mall. However, many businesses are moving away from the typical Christmas catalog approach and focusing more financial resources on their Internet Web sites. It is expected that catalog sales will decrease as more homes obtain computers and the Internet becomes an even greater integral part of people’s lives. Present estimates of home computer ownership range between 40% and 50% of all households. With personal computers now breaking the sub-$1,000 level, that percentage could easily reach 75% by the year 2002. And that means more than 200 million online American consumers who could potentially be buying products and services.

The Shopper

Market research experts have performed dozens of studies and surveys in order to create a picture of the "typical" online shopper. However, this is an extremely difficult task since the profile differs greatly, depending on the region of the country and the measurement tools. The characteristics of the online shopper change almost monthly as more and more first-time shoppers enter the online world. The standard profile description of today’s online shopper (for the year 1998) has been categorized as:

Male
Mid-thirties (average of 35)
Mid- to high-income range (average of $52,000)
Extensive Internet use (15+ hours per week)

It is interesting to compare this profile against older studies. The median income of online shoppers has apparently dropped in the last three years; at one point, studies were showing the median income closer to $70,000. This leads one to believe that computers and the Internet are becoming more accessible to the mainstream shopping community. However, it still appears that the typical shopper is in a household with income $10,000 or more above the national average.

Also, where once the use of computers and the Internet was restricted to those persons with extra disposable leisure time, use of the Internet is now being integrated into people’s personal lives. Today’s users of the Internet have a short attention span, but multi-task extremely well. In fact, according to a study by Inteco Corp., 8 million Americans use the Internet and watch TV simultaneously at least once a week. These people appear to be very receptive to advertising and online shopping, and are more likely than the average Internet user to visit a Web site advertised on TV. (5) This gives some additional support to the idea that businesses need to increase their advertising of Web site purchase capability on TV.

A firm that tracks online developments, called eMarketer, believes that there are 54.3 million Americans who are active users of the Internet. Of that group, approximately 61% are online shoppers and of those, 31% ultimately buy a product or service online. The company predicts that by the year 2002, 67% of the Internet users will be buyers. (6) However, these estimates vary greatly, depending on the research firm and the survey conducted. Intelliquest believes that the numbers are closer to 45 million Internet shoppers with 36% of those ultimately purchasing a product or service. (7) So, predicting the active use and the potential growth of Internet commerce is still somewhat of an inexact science, with much of it dependent on the changing technology, both computer and telecommunications.

There are barriers to the growth of Internet shoppers. Studies have found that age is an important factor in Internet purchasing behavior. (8) People over 55 are three times less likely to have made a purchase electronically than their younger counterparts. Also, income level is critical. Those making $60,000 per year are twice as likely to have made an electronic purchase as those in the $40,000 to $60,000 category, and over three times more likely than those earning $15,000 to $30,000. Also, education and income do influence trust. Those with post-graduate degrees and high incomes appear far less likely to trust their online vendors with personal information. The individual earning over $60,000 is almost four times more likely to have these concerns than the worker earning between $15,000 and $30,000.

Still, it is dangerous to make over-generalizations about the typical Internet shopper because that demographic profile is changing nearly as fast as computer technology itself. A recent study by Jupiter Communications of online users indicated that the typical online shopper is beginning to look more and more like the typical store shopper. (9) Of online shoppers, it appears now that nearly 40% are women; studies of only a year ago were saying that online shoppers were predominantly male. Also, a large younger group, the 19 to 34 age category, now makes up over 36% of online shoppers….not that much less than the 35 to 49 age group. So, the market of Internet commerce is a quickly changing one, and the business that will profit most from online sales is the one that remains up to date about the consumer profile.

The Product

There is no question that Internet sales are occurring and are generating millions of dollars in sales nationwide. But, what exactly are people buying? On this topic, the experts seem to agree. For the first six months of 1998:

Books was the number one category for Internet sales (approximately 5.6 million purchases)
Computer hardware was second in popularity (approximately 4.4 million purchases)
Computer software was third (approximately 4 million purchases)

In addition, business services are on the rise in popularity. Travel services bought or arrangements made online, such as airline tickets, hotel/car reservations, and vacation packages have increased substantially. In 1997, these accounted for 1.6 million purchases; in the first half of 1998, it accounted for 2.8 million purchases. Other sectors of business are also growing online and will soon rival the sale of products: transportation and delivery services; custom-built products (manufacturing services); and consulting (non-computer) services.

Experts believe that some of the most profitable future services that Internet businesses will provide are financial (traded stocks, mutual funds, bonds, etc.) and insurance. Analysts believe that the business and professional online services will grow tremendously in the next four years (10):

	1996	1998	2000	2002
Brokerage services	$8 million	$9 million	$10 million	$11.5 million
Marketing services	$4 million	$5.5 million	$7 million	$8 million
Financial services	$3 million	$4 million	$5.5 million	$7 million

Also, the massive growth of online auction houses is creating a new market (a sub-segment) within the Internet marketplace itself, turning many home Internet users into mini-clearinghouses and dealers with virtually no overhead. Online auction sites, such as eBay, are now competing directly with the businesses who have virtual storefronts. As yet, there are no studies indicating the extent of the competition or its impact on online businesses, but it is a new facet to Internet commerce that all businesses will be (or should be) keeping a close watch.

Internet "Do’s"

One thing that marketing experts almost universally agree upon is why businesses should be conducting Internet commerce. There are now hundreds of books and articles concerning the benefits of Internet commerce to almost any type of business; Action Research has taken that research and compiled them into its own "The Seven Strategic Advantages" to Internet commerce.

"The Seven Strategic Advantages"

Business Awareness – Much of what is considered as "business" is simply making connections and creating name awareness. The common catch-phrase is, "It’s not what you know, but who you know." This is extremely true, but it is a time-consuming endeavor, especially for new businesses. The Internet speeds and expands the awareness process by a hundred- or thousand-fold. It can be compared to passing out business cards to millions of people worldwide without requiring a visit or a moment of your own time.
Information Availability – It is time-consuming and costly to keep customers up to date about changes in products or services. It requires huge staffs for customer service and massive resources for mail/catalog campaigns. By using the Internet and a Web site, businesses can inform customers about anything and at a fraction of the cost. Best of all, it is 24 hour/7 day service!
Targeted Marketing – The demographics of Internet users are constantly changing, but it does make it easier to find and market a product or service to a small niche group…or a worldwide audience. The Internet has become one large box filled with thousands of small compartments, each compartment containing a little sub-segment of the population. Internet sales make it easy to locate and sell to that specialty group without costly market research or advertising.
Communication Enhancement – The demands upon customer service have been growing at an almost exponential rate as the needs (and demands) of the population grow. But, a significant portion of the phone communications goes toward answering the same questions or resolving the same problems over and over again. A sales Web site can post answers to frequently asked questions or provide updated problem-solving directions. In addition, e-mail allows for customers to inquire at low cost and allows the business to respond with the appropriate staff person or at an off-peak time.
Sales Development – A small, regional business is limited in the financial and personnel resources it can devote to expanding its sales to other states or countries. Many do not possess the ability to hire or develop marketing teams to tackle new markets. However, the Internet can do that at less cost and less time…reaching previously untapped markets. It is a 24-hour salesperson who doesn’t require workspace, salary, or benefits.
Product/Service Testing – The cost of introducing a new product or service to a large market, such as a city or even a state, can be costly and therefore prevent businesses from undertaking innovative ideas. However, the Internet can serve two purposes. It is a conduit for feedback concerning present products and services, allowing a business to make modifications based on real-time responses. And, it is a market in which to test a new product or service. For the price of a few pages of Web site programming, a new product can be viewed by, and feedback gathered from, millions of visitors.
Partnership Creation – Every business owner or president knows that a successful partnership with a complementing business can lead to increased profits and brand recognition. The challenge is in finding the right partners for your business. The Internet serves as a magnet for businesses that match well as potential partners. For example, distributors seeking new products to provide to a particular region or group. At the very least, the Internet is a huge source of businesses willing to "link" their Web page with your own, based on similar interests or shared preferences.

There are dozens of reasons why the Internet is worth the expenditure of resources to develop and cultivate as part of a business’ overall marketing strategy (but not the sole piece of it). These seven advantages highlight the most overt benefits, especially for newer or smaller businesses. But, there is no marketing plan or market segment that comes without costs or obstacles. It is just as crucial to business success to be aware of and prepare for these challenges as it is to take advantage of the Internet’s potential benefits.

Internet "Don’t"s

The Internet should not be viewed as a "miracle cure" for a failing business or the only market that a business should target. Electronic commerce has as many pitfalls as standard market tools and a business owner must remain aware of the potential failings of a poor Internet marketing plan. (11)

First, companies should not build a sales Web site solely for the sake of building something "cool" and new. The design of a sales Web site must include the customer. A business that focuses exclusively on the technology powering the Web site may create a cool online store, but one that the customers will visit only once and never return to.

Second, companies developing an online store must not assume that they already know their customer. The Internet is a new and different place from the city or state in which the business has typically marketed. The Web site should be designed to collect and analyze customer information, allowing for the development of marketing strategies that match those Internet purchasers.

Third, businesses with an online store should undertake the project with 100% commitment, nothing less. It needs to be fully integrated with a business’ other departments, such as the supply chain. If the site lacks an inventory or distribution system, then it is possible that orders will be delivered late or wrong, thereby defeating the purpose of having a Web site storefront.

And fourth, no business can rely solely on one source of revenue or advertising. The Internet is simply another tool to complement all the others. A business that focuses the majority of its advertising efforts on the Internet or ignores market expansion through more standard methods could find itself closed in six months. Just as it is a poor business model to rely on one large client, it is dangerous to rely on only one marketing strategy.

Conclusion

The purpose of this chapter was to provide a brief look at the Internet shopping market as a whole and provide some background information. However, it should also serve as a warning. In the words of John F. Welch Jr., Chairman and CEO of General Electric Co.,

"If the rate of change inside an organization is less than the rate of change outside, the end is in sight." (12)

It is these words that best describe the situation of businesses and the Internet. A business that today does not adapt and use the tools of the Internet will soon find itself closed. To ignore the Internet is to ignore millions of customers, and that is something that no business owner can afford to do in such increasingly competitive times. It can be assumed that the competition is going to use the Internet, and in the arena of computer technology the delay of a year, or even six months, can be disastrous. Whether you sell one product or a thousand, whether you are an advertising service or a mining company, the Internet is a doorway to a room full of potential clients. The choice is whether you step into the room…or remain in the hallway.

Endnotes

¹New York Times, December 10, 1998.

²U.S. Department of Commerce, Public Statement, 1998.

³Information Technology Association of America, Public Statement, October 27, 1996

⁴Electronic Commerce News, October 26, 1998.

⁵Computerworld, November 16, 1998.

⁶USA Weekend, November 27, 1998.

⁷Net Profit Center, Public Statement, November 1998.

⁸SellIt!, October 27, 1998.

⁹American Demographics, November 1998.

¹⁰Simba Information, Public Statement, date unknown.

¹¹The Industry Standard, November 17, 1998.

¹²From Mind to Market, Roger Blackwell, HarperBusiness, 1997.

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