Part 1: Internet Marketing Fundamentals
A. Introduction to Internet marketing
B. Internet Micro-Environment
C. Internet Macro-Environment
[A] An introduction to Internet marketing
1. Introduction – how significant is the Internet for marketing?
A description of modern multi-channel buyer behavior as consumers use different media to select suppliers, make purchases and gain customer support.
It explains how organizations can develop plans to manage all the different ways in which the Internet can be applied to support the marketing process. Let us look at two:
· Customer-centric marketing
An approach to marketing based on detailed knowledge of customer behavior within the target audience which seeks to fulfill the individual needs and wants of customers.
· Multi-channel marketing strategy
Defines how different marketing channels should integrate and support each other in terms of their proposition development and communications based on their relative merits for the customer and the company.
Marketing applications of Internet marketing
Internet-based media offer a range of opportunities for marketing products and services across the purchase cycle. Companies such as easyJet and BP illustrate the applications of Internet marketing since they show how organizations can use online communications such as their web site, third-party web sites and e-mail marketing as:
- An advertising medium. For example, BP plc and its subsidiary companies, such as Castrol Limited, uses large-format display or interactive ads on media sites to create awareness of brands and products such as fuels and lubricants.
- A direct-response medium. For example, easyJet uses sponsored links when a user is researching a flight using a search engine to prompt them to directly visit the easyJet site by clicking through to it. Similarly the easyJet e-mail newsletter sent to customers can encourage them to click through to a web site to generate sales.
- A platform for sales transactions. For example, easyJet sells flights online to both consumers and business travelers.
- A lead-generation method. For example, when BP offers content to business car managers about selecting the best fuel for company cars in order to identify interest from a car fleet manager.
- A distribution channel. For example, for distributing digital products. This is often specific to companies with digital products to sell such as online music resellers such as Napster (www.napster.com) and Apple iTunes (www.itunes.com) or publishers of written or video content.
- A customer service mechanism. For example, customers serve themselves on easyJet.com by reviewing frequently asked questions.
- A relationship-building medium where a company can interact with its customers to better understand their needs and offer them relevant products and offers. For example, easyJet uses its e-mail newsletter and tailored alerts about special deals to help keep its customers and engage them in a dialogue to understand their needs through completing surveys and polls.
2. What is Internet marketing?
The use of the Internet and other digital media to support marketing has been granted a bewildering range of labels by both academics and professionals. In this section we review some of the different definitions to help explain the scope and applications of this new form of marketing.
Before we start by defining these terms, complete Activity 1.1 which considers the relative popularity of these terms.
What’s in a term – what do we call this “e-thing”?
Purpose: To illustrate how different marketers perceive Internet marketing.
There are a range of terms used to describe Internet marketing – it is called different things by different people. It is important that within companies and between agency and client there is clarity on the scope of Internet marketing, so the next few sections explore alternative definitions.
One crude, but revealing method of assessing how commonly these terms are used, is to use the Google syntax which returns the number of pages which contain a particular phrase in their body or title. Type into Google the following phrases in double quotes or use intitle: “phrase” for these phrases and note the number of pages (at the top right hand of results page):
What, then, is Internet marketing? Internet marketing can be simply defined as: "Achieving marketing objectives through applying digital technologies."
The application of the Internet and related digital technologies in conjunction with traditional communications to achieve marketing objectives.
The term ‘Internet marketing’ tends to refer to an external perspective of how the Internet can be used in conjunction with traditional media to acquire and deliver services to customers.
Achieving marketing objectives through use of electronic communications technology.
Marketing is the management process responsible for identifying, anticipating and satisfying customer requirements profitably.
Identifying – the Internet can be used for marketing research to find out customers’ needs and wants.
Anticipating – the Internet provides an additional channel by which customers can access information and make purchases – understanding this demand is key to governing resource allocation to e-marketing.
Satisfying – a key success factor in e-marketing is achieving customer satisfaction through the electronic channel, which raises issues such as: is the site easy to use, does it perform adequately, what is the standard of associated customer service and how are physical products dispatched?
This has a similar meaning to ‘electronic marketing’ – both describe the management and execution of marketing using electronic media such as the web, e-mail, interactive TV and wireless media in conjunction with digital data about customers’ characteristics and behavior. Digital marketing involves:
· Applying these technologies which form online channels to market:
Web, e-mail, databases, plus mobile/wireless and digital TV.
· To achieve these objectives:
Support marketing activities aimed at achieving profitable acquisition and retention of customers ... within a multi-channel buying process and customer lifecycle.
· Through using these marketing tactics:
Recognizing the strategic importance of digital technologies and developing a planned approach to reach and migrate customers to online services through e-communications and traditional communications. Retention is achieved through improving our customer knowledge (of their profiles, behavior, value and loyalty drivers), then delivering integrated, targeted communications and online services that match their individual needs.
Let’s now look at each part of this description in more detail. The first part of the description illustrates the range of access platforms and communications tools that form the online channels which e-marketers use to build and develop relationships with customers.
The access platforms or hardware include PCs, PDAs, mobile phones and interactive digital TV and these deliver content and enable interaction through different online communication tools such as organization web sites, portals, search engines, blogs, e-mail, instant messaging and text messaging. Some also include traditional voice telephony as part of digital marketing.
Customer communications and product distribution are supported by a combination of digital and traditional channels at different points in the buying cycle.
Knowledge about customers’ needs characteristics, preferences and behaviors based on analysis of qualitative and quantitative data. Specific insights can be used to inform marketing tactics directed at groups of customers with shared characteristics.
E-commerce and e-business defined
The terms ‘e-commerce’ and ‘e-business’ are often used in a similar context to ‘Internet marketing’ but their scope is different. It is important for those managing digital technologies within any organizations to achieve clarity on the meaning of e-marketing, e-commerce and e-business to help define the scope of what they are trying to achieve! Electronic commerce (e-commerce) is often thought to simply refer to buying and selling using the Internet; people immediately think of consumer retail purchases from companies such as Amazon.
Electronic commerce (e-commerce)
All financial and informational electronically mediated exchanges between an organization and its external stakeholders.
Sell-side e-commerce - E-commerce transactions between a supplier organization and its customers.
Buy-side e-commerce - E-commerce transactions between a purchasing organization and its suppliers.
Electronic business (e-business)
All electronically mediated information exchanges, both within an organization and with external stakeholders, supporting the range of business processes.
Business or consumer model?
· Business-to-consumer (B2C). Commercial transactions between an organization and consumers.
· Business-to-business (B2B). Commercial transactions between an organization and other organizations (inter-organizational marketing).
· Consumer-to-consumer (C2C). Informational or financial transactions between consumers, but usually mediated through a business site.
· Consumer-to-business (C2B). Consumers approach the business with an offer.
3. What benefits does the Internet provide for the marketer?
· Transactional e-commerce site
· Services-oriented relationship-building web site
· Brand-building site
· Portal or media site
The 5 S of Internet Marketing
· Sell – Grow sales
Achieved through wider distribution to customers you can’t readily service offline or perhaps through a wider product range than in-store, or lower prices compared to other channels
· Serve – Add value
Achieved through giving customers extra benefits online or inform product content on site development through online dialogue and feedback.
· Speak – Get closer to customer
This is creating a two-way dialogue through web and e-mail forms and polls and conducting online market research through formal surveys and informally monitoring chat rooms to learn about them. Also speak through reaching them online through PR
· Save – Save costs
Achieved through online e-mail communications, sales and service transactions to reduce staff, print and postage costs
· Sizzle – Extend the brand online
Achieved through providing a new brand online proposition and new experience online while at the same time appearing familiar
A powerful method of evaluating the strategic marketing opportunities of using the Internet is to apply the strategic marketing grid of Ansoff (1957).
This shows how the Internet can potentially be used to achieve four strategic directions:
· Market penetration. The Internet can be used to sell more existing products into existing markets.
· Market development. Here the Internet is used to sell into new geographical markets, taking advantage of the low cost of advertising internationally without the necessity for a supporting sales infrastructure in the customers’ countries.
· Product development. New products or services are developed which can be delivered by the Internet. These are typically digital products.
· Diversification. In this sector, the Internet supports selling new products which are developed and sold into new markets.
4. A strategic approach to Internet marketing.
Some of the problems that we have commonly seen in organizations are:
- Unclear responsibilities for the many different Internet marketing
- No specific objectives are set for Internet marketing;
- Insufficient budget is allocated for Internet marketing as customer demand for online services is underestimated and competitors potentially gain market share through superior online activities;
- Budget is wasted as different parts of an organization experiment with using different tools or suppliers without achieving economies of scale;
- New online value propositions for customers are not developed since the Internet is treated as ‘just another channel to market’ without review of opportunities to offer improved, differentiated online services;
- Results from digital marketing are not measured or reviewed adequately, so actions cannot be taken to improve effectiveness;
- An experimental rather than planned approach is taken to using e-communications with poor integration between online and offline marketing communications.
The purpose of strategic Internet marketing activities:
A. Defining the online opportunity
1. Set e-marketing objectives: Companies need to set specific numerical objectives for their online channels and then resource to deliver these objectives. These objectives should be informed by and influence the business objectives and also the following activities:
1.a. Evaluate e-marketing performance: Applying web analytics tools to measure the contribution of leads, sales and brand involvement currently delivered by online communications such as search engine marketing, online advertising and email marketing in conjunction with the web site.
1.b. Assess online marketplace: Situation analysis reviewing the micro-environment (customers, competitors, intermediaries, suppliers and internal capabilities and resources) and the broader macro-environment, which influences strategy such as legal requirements and technology innovation. A Defining the online opportunity
B. Selecting the strategic approach
2. Define e-marketing strategy: Select appropriate strategies to achieve the objectives set at stage A1.
2a. Define customer value proposition: Define the value proposition available through the online channel and how it relates to the core proposition delivered by the company. Reviewing the marketing mix and brand values to evaluate how they can be improved online.
2b. Define e-communications mix: Selecting the offline and online communications tools to encourage usage of an organization’s online services and to generate leads and sales. Developing new outbound communications and event-triggered touch strategies to support customers through their relationship with the company.
C. Delivering results online
3. Implement e-marketing plan: This details the implementation of the strategy.
3a. Implement customer experience: Build the web site and create the e-mail marketing communications’ which form the online interactions customers make with a company. Create online customer relationship management capabilities to understand customers’ characteristics, needs and behaviors and to deliver targeted, personalized value.
3b. Execute e-communications: Managing the continuous online marketing communications such as search engine marketing, partnerships, sponsorships and affiliate arrangements and campaign-based e-marketing communications such as online advertising, e-mail marketing and micro-sites to encourage usage of the online service and to support customer acquisition and retention campaigns.
4. Customer profiling, monitoring and improving online activities and maintaining the online activities. Capturing profile and behavioral data on customer interactions with the company and summarizing and disseminating reports and alerts about performance compared with objectives in order to drive performance improvement.
5. How do Internet marketing communications differ from traditional marketing communications?
The six Is are useful since they highlight factors that apply to practical aspects of Internet marketing such as personalization, direct response and marketing research, but also strategic issues of industry restructuring and integrated channel communications.
· the customer initiates contact;
· the customer is seeking information (pull); it is a high-intensity medium – the marketer will have 100 per cent of the individual’s
· attention when he or she is viewing a web site;
· a company can gather and store the response of the individual;
· individual needs of the customer can be addressed and taken into account in future dialogues.
Internet should be used to encourage two-way communications, which may be extensions of the direct-response approach. For example, FMCG suppliers such as Nestlé (www.nescafe.co.uk) use their web site as a method of generating interaction by providing incentives such as competitions and sales promotions to encourage the customer to respond with their names, addresses and profile information such as age and sex.
Consumers can interact with the medium, firms can provide content to the medium, and in the most radical departure from traditional marketing environments, consumers can provide commercially-oriented content to the media.
It has taken ten years of the growth in use of individual recommendations, auction sites, community sites and more recently blogs and podcasts for the full extent of this shift to become apparent.
Podcasts: Individuals and organizations post online media (audio and video), which can be viewed, in the appropriate players including the iPod which first sparked the growth in this technique.
The Internet can be used as a relatively low-cost method of collecting marketing research, particularly about customer perceptions of products and services. In the competitions referred to above, Nestlé are able to profile their customers’ characteristics on the basis of questionnaire response.
A wealth of marketing research information is also available from the web site itself. Marketers use the web analytics approaches to build their knowledge of customer preferences and behavior according to the types of sites and content, which they consume when online. Every time a web site visitor downloads content, this is recorded and analyzed as ‘site statistics’ in order to build up a picture of how consumers interact with the site.
Web analytics: Techniques used to assess and improve the contribution of e-marketing to a business, including reviewing traffic volume, referrals, clickstreams, online reach data, customer satisfaction surveys, leads and sales.
Another important feature of the interactive marketing communications is that they can be tailored to the individual at relatively low costs, unlike in traditional media where the same message tends to be broadcast to everyone. Importantly, this individualization can be based on the intelligence collected about site visitors and then stored in a database and subsequently used to target and personalize communications to customers to achieve relevance in all media. The process of tailoring is also referred to as personalization – Amazon is the most widely known example where the customer is greeted by name on the web site and receives recommendations on site and in their e-mails based on previous purchases. This ability to deliver ‘sense and respond communications’ is another key feature of Internet marketing.
Summary of degree of individualization for: (a) traditional media (same message), (b) new media (unique messages and more information exchange between customers)
Personalization: Delivering individualized content through web pages or e-mail.
Sense and respond communications: Customer behavior is monitored at an individual level and the marketer responds with communications tailored to the individual’s need.
Mass customization: Delivering customized content to groups of users through web pages or e-mail. Delivering customized content to groups of users through web pages or e-mail.
· Outbound Internet-based communications: The web site and e-mail marketing are used to send personalized communications to customers.
· Inbound Internet-based communications: Customers enquire through web-based form and e-mail.
Channel requiring integration as part of integrated e-marketing strategy
Some practical examples of how the Internet can be used as an integrated communications tool as parts of supporting a multi-channel customer journey are the following:
· The Internet can be used as a direct-response tool, enabling customers to respond to offers and promotions publicized in other media.
· The web site can have a direct response or callback facility built into it. The Automobile Association has a feature where a customer service representative will contact a customer by phone when the customer fills in their name, phone number and a suitable time to ring.
· The Internet can be used to support the buying decision even if the purchase does not occur via the web site. For example, Dell has a prominent web-specific phone number on their web site that encourages customers to ring a representative in the call centre to place their order. This has the benefits that Dell is less likely to lose the business of customers who are anxious about the security of online ordering and Dell can track sales that result partly from the web site according to the number of callers on this line. Considering how a customer changes from one channel to another during the buying process, this is referred to as mixed-mode buying. It is a key aspect of devising online marketing communications since the customer should be supported in changing from one channel to another.
· Customer information delivered on the web site must be integrated with other databases of customer and order information such as those accessed via staff in the call centre to provide what Seybold (1999) calls a ‘360 degree view of the customer’.
· The Internet can be used to support customer service. For example easyJet (www.easyjet.com), which receives over half its orders electronically, encourages users to check a list of frequently asked questions (FAQ) compiled from previous customer enquiries before contacting customer support by phone.
Channel requiring integration as part of integrated e-marketing strategy
5. Industry restructuring
· Disintermediation: The removal of intermediaries such as distributors or brokers that formerly linked a company to its customers.
· Reintermediation: The creation of new intermediaries between customers and suppliers providing services such as supplier search and product evaluation.
For the marketer defining their company’s communications strategy it becomes very important to consider the company’s representation on these intermediary sites by answering questions such as Which intermediaries should we be represented on? and How do our offerings compare to those of competitors in terms of features, benefits and price?
6. Independence of location
Electronic media also introduce the possibility of increasing the reach of company communications to the global market. This gives opportunities to sell into international markets that may not have been previously possible. The Internet makes it possible to sell to a country without a local sales or customer service force (although this may still be necessary for some products). In such situations and with the restructuring in conjunction with disintermediation and reintermediation, strategists also need to carefully consider channel conflicts that may arise. If a customer is buying direct from a company in another country rather than via the agent, this will marginalize the business of the local agent who may want some recompense for sales efforts or may look for a partnership with competitors.
An interpretation of the differences between the old and digital media
6. A short introduction to Internet technology.
a. Internet and World Wide Web
· Marketers require a basic understanding of Internet technology in order to discuss the implementation of e-marketing with suppliers such as digital marketing agencies and with the internal IT team.
· The Internet has existed since the late 1960s when a limited number of computers were connected for military and research purposes in the United States to form the ARPAnet.
· Why then has the Internet only recently been widely adopted for business purposes? The recent dramatic growth in the use of the Internet has occurred because of the development of the World Wide Web. This became a commercial proposition in 1993 after development of the original concept by Tim Berners-Lee, a British scientist working at CERN in Switzerland in 1989. The World Wide Web changed the Internet from a difficult- to-use tool for academics and technicians to an easy-to-use tool for finding information for businesses and consumers.
· The World Wide Web is an interlinked publishing medium for displaying graphic and text information. This information is stored on web server computers and then accessed by users who run web browser programs such as Microsoft Internet Explorer, Apple Safari or Mozilla Firefox which display the information and allow users to select links to access other web sites. Promoting web site addresses is important to marketing communications. The technical name for web addresses is uniform or universal resource locators (URLs). URLs can be thought of as a standard method of addressing similar to postal codes that make it straightforward to find the name of a site. Web addresses are structured in a standard way as follows: http://www.domain-name.extension/filename.html
· The domain name refers to the name of the web server and is usually selected to be the same as the name of the company, and the extension will indicate its type. The extension is also commonly known as the global top-level domain (gTLD). Note that gTLDs are currently under discussion and there are proposals for adding new types such as .store and .firm.
· Common gTLDs are:
o .com represents an international or American company such as (www.travelocity.com).
o .co.uk represents a company based in the UK such as (www.thomascook.co.uk).
o .ac.uk is a UK-based university (www.derby.ac.uk).
o .org.uk and .org are not-for-profit organizations (www.greenpeace.org).
o .net is a network provider such as (www.demon.net).
b. How Does Internet Work?
c. From the Internet to intranets and extranets
[B] Internet Micro-Environment
All organizations operate within an environment that influences the way in which they conduct business. Organizations that monitor, understand and respond appropriately to changes in the environment have the greatest opportunities to compete effectively in the competitive marketplace. Understanding an organization’s environment is a key part of situation analysis for the Internet marketing strategy development process.
Situation analysis: Collection and review of information about an organization’s external environment and internal processes and resources in order to inform its strategies.
Environmental scanning and analysis: The process of continuously monitoring the environment and events and responding accordingly.
Different environment components
The Internet introduces new facets to the environment that must be considered by marketers since strategy development is strongly influenced by considering the environment the business operates in. Figure below illustrates the key elements of a business’s that will influence the organization.
Figure: The Internet marketing environment
The micro-environment, sometimes known as “the operating environment” is the immediate marketplace of an organization. For development of Internet marketing strategy, the most significant influences are arguably those of the micro-environment. This is shaped by the needs of customers and how services are provided to them through the competitors, intermediaries and upstream suppliers within the marketplace. The Internet and electronic communications have major implications for organizations and these must inform their Internet marketing strategy. We consider the changes to the micro-environment and their implications in this chapter.
The macro-environment is sometimes known as “the remote environment”, being provided by local and international conditions and legislation together with acceptable business practices. The Internet and electronic communications have also introduced major changes to the macro-environment. Reviewing the relevance of technological innovations to an organization is vital in providing opportunities for superior services to competitors and to changing the shape of the marketplace. Another significant macro-environment influence is legal, specific laws have been enacted to control online marketing and of course the influence of new technologies.
Micro-environment: Specific forces on an organization generated by its stakeholders.
Macro-environment: Broader forces affecting all organizations in the marketplace including social, technological, economic, political and legal aspects.
Table: Factors in the macro-environment and micro-environment of an organization and Internet marketing-related issues
The operation of an organization’s marketplace comprises the interactions between all elements of the micro-environment. In this section we review the great range of changes that the Internet has brought to the marketplace. The issues we will review include:
· Competitive forces. How are the major external forces on an organization affected by the Internet?
· From value chain to value network. The value network concept describes a more dynamic version of the value chain with increased interaction between partners.
· New channel structures. What changes can occur to linkages to upstream and downstream partners in the supply chain? What is the role of new intermediaries?
· Location of trading. What are the options for location of trading online?
· Commercial arrangements for transactions. How are these changed?
· New business and revenue models. What business and revenue models can be adopted in the Internet marketplace?
Intermediaries such as search engines, price comparison sites and even blogs often have a strong influence on the balance between the bargaining power of buyers and suppliers and tend to intensify rivalry between existing competitors.
Table: Impact of the Internet on the five competitive forces
· Commoditization: The process whereby product selection becomes more dependent on price than on differentiating features, benefits and value-added services.
· Soft lock-in: Electronic linkages between supplier and customer increase switching costs.
· Internet EDI: Use of electronic data interchange standards delivered across nonproprietary Internet protocol networks.
· Business-to-business exchanges or marketplaces: Virtual intermediaries with facilities to enable trading between buyers and sellers.
Value creation and value chain analysis
How businesses create value within their markets is fundamental to their success. Digital technologies have a significant role in changing the balance of value creation within a market, so the extent of this change and how well it has been implemented must be evaluated as part of environment analysis. Value delivered is dependent on the difference between the consumer benefit created by the business and the costs incurred in producing or delivering the value as suggested by the figure.
You can see that arguably the biggest impact of the Internet is the capability to reduce costs through reducing intermediaries such as physical stores and also through changing the intangible benefits. Together, these combine to form the online value proposition. To pass on the reduced costs of dealing direct it will be necessary for retailers, banks and other companies to change their structure and accounting practices to isolate online channels as a separate profit centre.
Figure: Value Chain Model Creation
Michael Porter’s value chain (VC) is a well-established concept for considering key activities that an organization can perform or manage with the intention of creating value for customers (Porter, 1980). We can identify an internal value chain within the boundaries of an organization and an external value chain where activities are performed by partners. By analyzing the different parts of the value chain managers can redesign internal and external processes to improve their efficiency and effectiveness.
Traditional value chain analysis (Figure below) of the internal value chain distinguishes between primary activities which contribute directly to getting goods and services to the customer (such as inbound logistics, including procurement, manufacturing, marketing and delivery to buyers, support and servicing after sale) and support activities which provide the inputs and infrastructure that allow the primary activities to take place.
Figure: Two alternative models of the value chain: (a) traditional value chain model, (b) revised value chain model
Value can be created for the customer by reducing costs of providing goods and services and adding benefits for customers:
· within each element of the value chain such as procurement, manufacture, sales and distribution;
· at the interface between elements of the value chain such as between sales and distribution.
In equation form this is:
Value = (Benefit of each VC activity – its cost) +
(Benefit of each interface between VC activities – its cost)
Understanding how Internet technologies can be used to process, transfer and share marketing-related information is vital to help Internet marketers evaluate and revise value chain activities. For example, if a grocery retailer shares information electronically with its suppliers about demand for its products, this can enhance the value chain of both parties since the cycle time for ordering can be reduced, resulting in lower inventory holding and hence lower costs for both. The retailer can also set up links between its online product catalogues and all appropriate comparison intermediaries for products using data transfer technologies such as XML.
Of course, the most obvious examples of value creation occur directly through the interface between the web site and the customer, for example through detailed product information, product selection guides, personalized product recommendations and online customer support facilities which involve reducing cost to serve and may have intangible benefits for the customer such as improved recommendations or decreasing the purchase time.
Restructuring the internal value chain
Traditional models of the value chain (such as Figure 2.5(a)) have been re-evaluated with the advent of global electronic communications. It can be suggested that there are some key weaknesses in the traditional value chain model:
· It is most applicable to manufacturing of physical products as opposed to services.
· It is a one-way chain involving pushing products to the customer; it does not highlight the importance of understanding customer needs through market research and responsiveness through innovation and new product development.
· The internal value chain does not emphasize the importance of value networks (although Porter (1980) did produce a diagram that indicated network relationships).
A revised form of the value chain has been suggested by Deise et al. (2000); an adaptation of this model is presented in Figure 2.5(b). This digital value chain starts with the market research process, emphasizing the importance of real-time environment scanning for decision making. For each of the different types of organization site introduced in Chapter 1, there are opportunities to create value by processing information in new ways:
1. Customer information collected on a transactional e-commerce site can develop greater understanding of the purchasing behavior of its target customers, which can also be analyzed in terms of demographic profiles through tracking online shopping preferences and sequences.
2. Service-oriented relationship building sites can collect information as part of creating a dialogue using profiling forms, feedback forms and forums on the site enabling their owners to better understand customer characteristics and purchasing behavior.
3. Brand building sites also have opportunities to collect information about the profiles and preferences of their site visitors or those in their target market using third-party sites.
4. Portal or media sites can potentially use visitors to contribute content. Think of the BBC web site, which now has feedback on its news, sport and entertainment sites, so adding value to its visitors. Even well-known media owner Rupert Murdoch has suggested that online newspapers consider recruiting bloggers to add value to their audiences (Murdoch, 2005).
External value chains and value networks
Reduced time to market and increased customer responsiveness can be achieved through reviewing the efficiency of internal processes and how information systems are deployed. However, these goals are also achieved through consideration of how partners can be involved be part of the internal value chain of a company.
Since the 1980s there has been a tremendous increase in outsourcing of both core value-chain activities and support activities. As companies outsource more and more activities, management of the links between the company and its partners becomes more important. It describe value network management as:
The process of effectively deciding what to outsource in a constraint-based, real-time environment based on fluctuation.
Electronic communications have facilitated this shift to outsourcing, enabling the transfer of information necessary to create, manage and monitor partnerships. These links are not necessarily mediated directly through the company, but can take place through intermediaries known as value-chain integrators or directly between partners.
In addition to changes in the efficiency of value-chain activities, electronic commerce also has implications for whether these activities are achieved under external control or internal control. These changes have been referred to as value-chain disaggregation or deconstruction and value-chain re-aggregation or reconstruction.
Value-chain disaggregation can occur through deconstructing the primary activities of the value chain and then outsourcing as appropriate. Each of the elements can be approached in a new way, for instance by working differently with suppliers. In value-chain re-aggregation the value chain is streamlined to increase efficiency between each of the value-chain stages.
The value network offers a different perspective, which is intended to emphasize:
· the electronic interconnections between partners and the organization and directly between partners that potentially enable real-time information exchange between partners;
· the dynamic nature of the network. The network can be readily modified according to market conditions or in response to customer demands. New partners can readily be introduced into the network and others removed if they are not performing well;
· different types of links can be formed between different types of partners. For example, EDI links may be established with key suppliers, while e-mail links may suffice for less significant suppliers.
In the figure below, which is adapted from the model of Deise et al. (2000), shows some of the partners of a value network that characterizes partners as:
1. supply-side partners (upstream supply chain) such as suppliers, business-to-business exchanges, wholesalers and distributors;
2. partners who fulfill primary or core value-chain activities. The number of core value chain activities that will have been outsourced to third parties will vary with different companies and the degree of virtualization of an organization, which involves outsourcing non-core services;
3. sell-side partners (downstream supply chain) such as business-to-business exchanges, wholesalers, distributors and customers (not shown, since they are conceived as distinct from other partners);
4. value-chain integrators or partners who supply services that mediate the internal and external value chain. These companies typically provide the electronic infrastructure for a company and include strategic outsourcing partners, system integrators, ISPs and application service providers (ASPs).
Figure: Members of the value network of an organization
New channel structures
Channel structures describe the way a manufacturer or selling organization delivers products and services to its customers. The distribution channel will consist of one or more intermediaries such as wholesalers and retailers. For example, a music company is unlikely to distribute its CDs directly to retailers, but will use wholesalers which have a large warehouse of titles that are then distributed to individual branches according to demand. A company selling business products may have a longer distribution channel involving more intermediaries.
Figure: Disintermediation of a consumer distribution channel showing: (a) the
original situation, (b) disintermediation omitting the wholesaler, and
(c) disintermediation omitting both wholesaler and retailer
· Channel structure: The configuration of partners in a distribution channel.
· Disintermediation: The removal of intermediaries such as distributors or brokers that formerly linked a company to its customers.
· Reintermediation: The creation of new intermediaries between customers and suppliers providing services such as supplier search and product evaluation.
· Countermediation: Creation of a new intermediary by an established company.
Figure: From (a) original situation to (b) disintermediation or (c) reintermediation or countermediation
A channel chain is similar – it shows different customer journeys for customers with different channel preferences. It can be used to assess the current and future importance of these different customer journeys. An example of a channel chain is shown in figure below.
Figure: Example of a channel chain map for consumers selecting an estate agent to sell their property
Location of trading in marketplace
While traditional marketplaces have a physical location, Internet-based markets have no physical presence – it is a virtual marketplace. Rayport and Sviokla (1996) used this distinction to coin the new term electronic marketspace. This has implications for the way in which the relationships between the different actors in the marketplace occur.
The new electronic marketspace has many alternative virtual locations where an organization needs to position itself to communicate and sell to its customers. Thus, one tactical marketing question is “What representation do we have on the Internet?”
Figure: Different types of online trading location
A particular aspect of representation that needs to be reviewed is the different types of marketplace location. They identify three key online locations for promotion of services and for performing ecommerce transactions with customers (Figure above).
The three options are:
§ Supplier-controlled sites (sell-side at supplier site, one supplier to many customers). This is the main web site of the company and is where the majority of transactions take place. Most e-tailers such as Amazon (www.amazon.com) or Dell (www.dell.com) fall into this category.
§ Buyer-controlled sites (buy-side at buyer site, many suppliers to one customer). These are intermediaries that have been set up so that it is the buyer that initiates the market-making. This can occur through procurement posting where a purchaser specifies what they wish to purchase, it is sent by e-mail to suppliers registered on the system and then offers are awaited.
§ Neutral sites or intermediaries (neutral location – many suppliers to many customers). For consumers evaluator intermediaries that enable price and product comparison have become commonplace as we have seen. B2B intermediaries are known as trading exchanges, marketplaces or hubs.
Commercial arrangement for transactions
Markets can also be considered from another perspective – that of the type of commercial arrangement that is used to agree a sale and price between the buyer and supplier. The main alternative commercial arrangements are shown in Table below that each of these commercial arrangements is similar to a traditional arrangement. Although the mechanism cannot be considered to have changed, the relative importance of these different options has changed with the Internet.
Table: Commercial mechanisms and online transactions
Owing to the ability to rapidly publish new offers and prices, auction has become an important means of selling on the Internet. A turnover of billions of dollars has been achieved by eBay from consumers offering items ranging from cars to antiques. Many airlines have successfully trialed auctions to sell seats remaining on an aircraft just before a flight.
Business models in e-commerce
A consideration of the different business models made available through e-commerce is of particular importance to both existing and start-up companies. It points out that existing businesses need to use the Internet to build on current business models while at the same time experimenting with new business models.
New business models may be important to gain a competitive advantage over existing competitors and at the same time head off similar business models created by new entrants. For start-ups or dot-coms the viability of a business model will be crucial to funding from venture capitalists. But what is a business model? Timmers (1999) defines a ‘business model’ as:
An architecture for product, service and information flows, including a description of the various business actors and their roles; and a description of the potential benefits for the various business actors; and a description of the sources of revenue.
It can be suggested that a business model for e-commerce requires consideration of the marketplace from several different perspectives:
· Does the company operate in the B2B or B2C arena, or a combination?
· How is the company positioned in the value chain between customers and suppliers?
· What is its value proposition and for which target customers?
· What are the specific revenue models that will generate different income streams?
· What is its representation in the physical and virtual world, i.e. high-street presence, online only, intermediary, mixture?
Timmers (1999) identifies no less than eleven different types of business model that can be facilitated by the web as follows:
1. e-shop – marketing of a company or shop via the web;
2. e-procurement – electronic tendering and procurement of goods and services;
3. e-mall – a collection of e-shops such as BarclaySquare (www.barclays-square.com);
4. e-auctions – these can be for B2C, e.g. eBay (www.ebay.com), or B2B, e.g. QXL (www.qxl.com);
5. virtual communities – these can be B2C communities such as Habbo Hotel for teenagers (www.habbo.com) or B2B communities such as Clearlybusiness (www.clearlybusiness.com/community) which are both important for their potential in e-marketing
6. collaboration platforms – these enable collaboration between businesses or individuals, e.g. E-groups (www.egroups.com), now part of Yahoo! (www.yahoo.com) services;
7. third-party marketplaces – marketplaces are intermediaries that facilitate online trading by putting buyers and sellers in contact. They are sometimes also referred to as ‘exchanges’ or ‘hubs’;
8. value-chain integrators – offer a range of services across the value chain;
9. value-chain service providers – specialise in providing functions for a specific part of the value chain such as the logistics company UPS (www.ups.com);
10. information brokerage – providing information for consumers and businesses, often to assist in making the buying decision or for business operations or leisure;
11. trust and other services – examples of trust services include Internet Shopping is Safe (ISIS) (www.imrg.org/isis) or TRUSTe (www.truste.org) which authenticate the quality of service and privacy protection provided by companies trading on the web.
Figure below suggests a different perspective for reviewing alternative business models. There are three different perspectives from which a business model can be viewed. Any individual organization can operate in different categories, as the examples below show, but most will focus on a single category for each perspective. Such a categorization of business models can be used as a tool for formulating e-business strategy.
Figure: Alternative perspectives on business models
The three perspectives, with examples are:
1. Marketplace position perspective. The book publisher is the manufacturer, Amazon is a retailer and MSN is a retailer, marketplace intermediary and media owner.
2. Revenue model perspective. The book publisher can use the web to sell direct and MSN and Amazon can take commission-based sales. Yahoo! also has advertising as a revenue model.
3. Commercial model perspective. All three companies offer fixed-price sales, but in its place as a marketplace intermediary, MSN also offers other alternatives.
Michael Porter (2001) urges caution against overemphasis on new business or revenue models and attacks those who have suggested that the Internet invalidates his well-known strategy models. He says:
Many have assumed that the Internet changes everything, rendering all the old rules about companies and competition obsolete. That may be a natural reaction, but it is a dangerous one . . . [companies have taken] decisions that have eroded the attractiveness of their industries and undermined their own competitive advantages.
He gives the example of some industries using the Internet to change the basis of competition away from quality, features and service and towards price, making it harder for anyone in their industries to turn a profit.
Revenue models specifically describe different techniques for generation of income. The main revenue models are shown in the second column of Figure above. For existing companies, revenue models have been based upon the income from sales of products or services. This may be either for selling direct from the manufacturer or supplier of the service or through an intermediary that will take a cut of the selling price. Both of these revenue models are, of course, still crucial in online trading. There may, however, be options for other methods of generating revenue: perhaps a manufacturer may be able to sell advertising space or sell digital services that were not previously possible.
Revenue models: Describe methods of generating income for an organization.
Situation analysis related to customers is very important to setting realistic objectives estimates for online customers and developing appropriate propositions for customers online. Customer-related analysis can be divided into two. First, understanding the potential and actual volume of visitors to a site (demand analysis) and the extent to which they convert to outcomes on the site such as leads and sales (conversion modeling). Secondly, we need to understand the needs, characteristics and buyer behavior of online customers, often collectively referred to as customer insight.
Demand analysis and conversion modeling
It is essential for Internet marketing and e-marketing managers to understand the current levels and trends in usage of the Internet for different services and the factors that affect how many people actively use these services. This evaluation process is demand analysis. If customer usage of online media is evaluated for customers in a target market, companies can identify the opportunity for influencing and delivering sales online.
They can also understand the drivers to usage and barriers to increased usage and so encourage adoption of online channels by emphasizing the benefits in their communications and explaining why some of the barriers may not be valid. For example, marketing communications can be used to explain the value proposition and reduce fears of complexity and security. Surveys reported in the social factors section of the next chapter show that the following are important factors in governing adoption of the Internet:
1. Cost of access.
2. Value proposition.
3. Perception of ease of use.
4. Perception of security.
· Customer insight: Knowledge about customers’ needs, characteristics, preferences and behaviors based on analysis of qualitative and quantitative data. Specific insights can be used to inform marketing tactics directed at groups of customers with shared characteristics.
· Demand analysis: Quantitative determination of the potential usage and business value achieved from online customers of an organization. Qualitative analysis of perceptions of online channels is also assessed.
· Conversion marketing: Using marketing communications to maximize conversion of potential customers to actual customers.
· Clickstream: The sequence of clicks made by a visitor to the site to make a purchase.
Assessing demand for e-commerce services
To set realistic strategic objectives such as leads or sales levels for online revenue contributions for digital channels, e-marketing managers need to assess the level of customer Internet access and activity for different markets and the online market share that a particular organization has achieved. For each customer segment and for each digital channel such as Internet, interactive digital TV or mobile we need to work to assess the volume and share of customers who:
1. Have access to the digital channel;
2. Are influenced by using the digital channel but purchase using another channel as part of the multi-channel buyer behavior;
3. Purchase using the digital channel.
This can be simplified to the ratios: ‘Access : Choose : Buy’. This information can be gathered as secondary research by the researcher by accessing published research for different sectors. Primary research can be used to better understand these characteristics in the target market.
As part of situation analysis and objective setting, experienced online marketers build conversion or waterfall models of the efficiency of their web marketing. Using this approach, the total online demand for a service in a particular market can be estimated and then the success of the company in achieving a share of this market determined. Conversion marketing tactics can then be create as many potential site visitors into actual visitors and then convert these into leads, customers and repeat visitors. A widely quoted conceptual measurement framework based on the industrial marketing concepts of purchasing decision processes and hierarchy of effects models, which can be applied for conversion marketing. The model assesses efficiency of offline and online communications in drawing the prospect through different stages of the buying decision. The main measures defined in the model are the following ratios:
· Awareness efficiency: target web-users/all web-users.
· Locatability or attractability efficiency: number of individual visits/number of seekers.
· Contact efficiency: number of active visitors/number of visits.
· Conversion efficiency: number of purchases/number of active visits.
· Retention efficiency: number of repurchases/number of purchases.
Evaluating demand levels
We will now review each of the following three factors that affect demand for e-commerce services in a little more detail, starting with consumers in the B2C marketplace.
1. Internet access
2. Consumers influenced by using the online channel
3. Purchased online
Understanding the nature of customers is fundamental to marketing practice and it is equally important online. A further technique that can be used as part of situation analysis is customer scenario and persona analysis, which is an online technique for user- or customer-centric web site design.
This is an extension of the traditional marketing approach of psychographic segmentation. See the box ‘Psychographic segmentation for transactional e-commerce’ for an example of this type of segmentation applied to online purchase behavior. Which profile do you fit?
· Psychographic segmentation: A breakdown of customers according to different characteristics.
· Demographic characteristics: Variations in attributes of the populations such as age, sex and social class.
Within each country, adoption of the Internet also varies significantly according to individual demographic characteristics such as sex, age and social class or income. This analysis is important as part of the segmentation of different groups within a target market. Since these factors will vary throughout each country there will also be regional differences. Access is usually much higher in capital cities.
From Activity 2.5 it can be seen that the stereotype of the typical Internet user as male, around 30 years of age and with high disposable income no longer holds true. Many females and more senior ‘silver surfers’ are also active.
To fully understand online customer access we also need to consider the user’s access location, access device and ‘webographics’, all of which are significant for segmentation and constraints on site design. ‘Webographics’ is a term coined by Grossnickle and Raskin (2001). According to these authors webographics includes:
· Usage location. In most countries, many users access either from home or from work, with home being the more common location. Work access places constraint on Internet marketers since firewalls will not permit some plug-ins or rich e-mail to be accepted.
· Access device. For example, browser type, screen resolution and computer platform (available from web analytics services as described in Chapter 9), digital TV or mobile phone access.
· Connection speed – dial-up or different choice of broadband speed.
· ISP – a portal-based ISP such as AOL or Wanadoo, or an ISP which does not provide any additional content.
· Experience level – length of time using the web and their familiarity with online purchase.
· Usage type – mode of usage, for example, work, social, entertainment.
· Usage level – frequency of use and length of sessions giving total usage level in minutes per month.
Online demand for business services
We now turn our attention to how we assess online customer demand and characteristics for business services. The B2B market is more complex than that for B2C in that variation in online demand or research in the buying process will occur according to different types of organization and people within the buying unit in the organization. We need to profile business demand according to:
Variation in organization characteristics
· size of company (employees or turnover)
· industry sector and products
· organization type (private, public, government, not-for-profit)
· application of service (which business activities do purchased products and services support?)
· country and region.
· role and responsibility from job title, function or number of staff managed
· role in buying decision (purchasing influence)
· product interest
· demographics: age, sex and possibly social group.
For generating demand estimates, we can also profile business users of the Internet in a similar way to consumers by assessing the following three factors.
1. The percentage of companies with access
2. Influenced online
3. Purchase online
3. Online Buyer Behavior