The business world: Three factors that lead to successful e-commerce

Author: Hamish McRae

But already phase one of the Net is past: in many corners of the commercial forest the land has been staked out and newcomers find it hard to gain access. Take books: it would be hard to imagine another springing up to rival the first mover, unless Amazon was to score some spectacular own-goal. So what will follow this initial phase of the Net’s development?

Two obvious developments are happening: the use of the Net as an additional distribution arm by established corporations, and its use to make production of goods and services more efficient. Most established businesses are using the Net in some way to sell their products or services with varying degrees of success. And they are developing or implementing strategies for using the capability of the new technology to cut the costs of production, usually by linking suppliers and customers electronically so components and other supplies can be ordered without human intervention. Computers talking to other computers are better at certain tasks, such as controlling inventories, than humans talking to each other.

So what should we look for next? The most thought-provoking analysis I have seen on phase two of the development of e-commerce comes from two Boston Consulting people, Philip Evans and Thomas Wurster. They say success in e-commerce will be determined by three factors: reach, richness and affiliation. Their ideas are published in a book, Blown to Bits, published by Harvard Business School Press, but a shorter version of the thesis is in the November/December Harvard Business Review.

Reach is straightforward – how many people with whom a business can connect. That includes how many potential customers get to know about your products, how many suppliers are available and how you connect with them. This is the most obvious area where the Net is changing commercial relationships. Companies can reach more customers more directly, but new businesses can leap into their markets and pull customers away more easily too.

Richness is how much information companies have about their customers and how much customers have about companies. Customers have now the terrifying (for businesses) ability to compare prices and quality of service across the spectrum of suppliers. For the first time, various price-comparison agencies can talk to each other, posting instant “reviews” of corporate quality.

For example, dissatisfied air passengers in the US have set up hate sites about airlines with lousy service. It is not much good an airline showing a TV advert with paid actors saying how wonderful it is, when it is being bad-mouthed by real passengers who say it isn’t. On the other hand, if customers post love mail (is that the opposite of hate mail?) on the Net, that is a far more persuasive advertisement than anything the company could manage. And it is free.

Conversely, companies also gain information about their customers from the Net. This is still badly organised, compared with, say, the information available to the credit agencies. But this will grow as companies learn how to use the information.

There are considerable concerns about privacy, particularly when mobile phones become a more common method of accessing the Net. The analysis authors, being American, do not seem aware of the potential impact of a mobile phone system that can access the Net, or the commercial applications happening in Europe. But the ability of the mobile phone (and hence the company supplying it) to know where the user is, gives it a richness of information that PC-based e-commerce cannot rival. But would you like commercial companies to be able to buy the information about where you are whenever you have your phone switched on?

The concepts of reach and richness will seem familiar; the third idea, affiliation, is less so. The idea here is that customers need to know whose side the seller is on. In conventional retailing it is clear: the seller wants to sell something and the buyer has to make up his or her mind.

If the product or item being sold is done through an agent the relationship may be less clear: we know an estate agent is working for the seller, not the buyer, but we are less sure whether the financial adviser is on our side or the side of the insurance company selling the life policy. At least we know the territory, even if it takes a while to figure out who is working for whom. With the Net it is harder, largely because it is so new, but also because of the way it changes the relationship between buyer and seller.

The newness means we are not yet sure whether the “portal”, the entry point onto the Net, is really working on our behalf giving us as customers the highest quality information available, or whether we are being fed pre-digested information designed to make us buy something. The Net is like the glossy fashion magazines, where it is hard to figure what is an advertisement and what is editorial.

But if companies on the Net can win the trust of users, the value is enormous. Truly independent agents will have customers beating a path to their door, and companies with consumer-friendly policies can create virtual clubs, where their customers can link in mutual admiration. Well, maybe not quite that far, but at least in mutual support. Companies that can generate this are enormously helped by Internet technology.

So success in the next stage of e-commerce will not just depend on finding a catchy name and a new idea for capturing a corner of retailing.

And it certainly won’t be enough to run up the banner on a website and hope the fans will flock to buy. The prizes will go to companies that exploit the special characteristics of the Net, in particular those under the second and third heads above: those, say, best at collecting and using customer information and those that manage to create genuine customer clubs.

That must be right as a principle. Just how you put it together is, of course, extremely difficult. But while there are really no pointers to success in implementation except “suck it and see”, at least we will all learn more in the next few weeks.

This Christmas and New Year will see a string of online experiments, as e-commerce companies try to shout louder than their competitors and established retailers try and fight back with their own e-commerce divisions.

My guess is that come January we will all know a lot more about what works in e-commerce, and what doesn’t.

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