Effect of Internet

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Henley Business School 2012 www.henley.reading.ac.uk

Marketing & Consumer Behaviour

The Impact of the Internet

Peter Cook

17th February


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Communications

A Brief History

"nothing contributes more to facilitate commerce than the safe,

speedy and cheap conveyance of letters." John McCulloch 1883

Postal System

Universal Long Distance Communication Telegraph

Fast Universal Long Distance Communication

Telephone

Real Time Personal Communication

Cellular Phone Mobile Communication

Internet

Computer to Computer Communication


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50 Million People

To get a market of 50 Million People Participating: Telephones took 100 years

Radio took 38 years

TV took 13 years

The PC took 16 years

Once open to the Public, The Internet took 6 years

All technologies drive business change

The post gave us mail order

The telephone gave us telesales

The Internet has

Simply sped up existing process?

Not really changed things?Yet!


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The Internet

A network of networks

Allows one computer to talk to another

A dominant design has emerged

Standards set by agreement (RFCs) Strong Network effects

Key Applications

E-mail

Information Access (WWW & search engines) Distribution of Digitised Products (Music/Video)

Social networking

Cloud Computing?


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Consumer use of the Internet

E-Commerce is principally a B2B channel

Most is Computer to Computer.

UK E-Commerce Sales in 2010 totalled 385Bn.

25% via a website, 75% by other ICT means.

UK Retail sales in 2011 averaged 5.8Bn/week UK Internet retail sales in 2011 were 523M/week

Tesco retails 900M/week in the UK (55M 6%

online)

The Internet B2C market is small(ish) 5.6 % of the Total E-Commerce market

8-10% of the Total Retail market

In the UK 60% of Tescos business

But! see its impact on promotionSources ONS, Tesco


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Internet Business Models

Sell The Internet Hardware & Software for the Internet

ISPs

The Sales Model Sell content over the Internet

Products and Services

The Media Model Give content away

Sell advertising, and access to customer information

The Synergy Model The Internet supports other revenue sources

Reduces Operating Costs

Increases Revenues

From Stewart & Zhao (2000)


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4Ps of marketing Product

What are we selling

Functionality, Representationality, Services

Price

How much can we charge

Who pays and how

Place

Where we sell it

How we supply it

Promotion How do we advertise

What is our message

What is the impact of the Internet


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Product

Conventional Products No Real Difference Internet is a Sales Channel

Information Products

Internet is also a Distribution Channel

Digitized Product

DRM Issues

Piracy

Try before you Buy

Internet Products??

Online gaming?

Cloud Services?


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What Does Google Sell

They give away Search

Goole Mail

Google Apps

Google Phone

Google+

Chrome

Android

..

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Revenues US$38,491Million

Profits US$11,815 Million


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Product

Conventional Products No Real Difference Internet is a Sales Channel

Information Products

Internet is also a Distribution Channel

Digitized Product

DRM Issues

Piracy

Try before you Buy

Internet Products??

Online gaming?

Cloud Services?


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Price on the Internet

A more efficient market

Lower Prices

Less Price Dispersion

More frequent price changes

Price comparisons easier

Price changes easier (and cheaper)

Low cost provider gets the advantage


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The Other side of Price

Thin markets get thicker

Rare or Inimitable Goods

More potential purchasers

Value based pricing

What the traffic will bear

Auctions

Reverse Auctions

Yield management systems

Pricing changes as goods get more valuable

Customer Surprises

Distribution Costs (Post & packaging) Currency Risks (Fluctuations)

Additional Charges (Tax, Customs Duties etc)

Is this the Future?


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Free Is it a price?

Two prices on the Internet Free & Anything Else

Direct Cross Subsidy

Free entices you to pay for something else

E.g. free shipping

Three Party Market

Two sided market someone else paysyou get the free

Media model

Google, Facebook ..

Freemium

Basic product is free to most, premium product pays the cost.

Non Monetary Markets

Something given away with no expectation of payment

Done for the reputation, fun, self expression..

13Anderson 2009 Free


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Place

The Disappearance of Geography?

What is place on the Internet Search Engine Position

Domain Address

Twitter Feed

Banner Ads on High Traffic sites Infomediaries

Able to target a global market

Distribution methods

Parcels Couriers Next day Delivery Timescales

Cost of Shipping borne by the Customer

Electronic


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The Problems of Place

Channel Conflict

Administration Costs Web site maintenance

Catalogue Details

Currencies

Stock Availability One or two at a time vs Bulk Shipments to Wholesalers

Customer Complaint handling

Distribution Low Volumes

Delivery Timescales Cost of Shipping

Getting Paid

Legal, Regulatory and Tax Issues


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Legal Issues

The Customer is in the UK

The Supplier is in China

The Order Processing Website is Hosted in India

The payment intermediary is legally based in Luxembourg

The payment is made in US$ via a server in the US

The Courier is Australian

Which legal jurisdiction controls things

What tax rate is paid

By whom

To which authorities

GermanyArgentina

Mexican

The Cayman Islands

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The Problems of Place

Its POSSIBLE that every customer will be different!!!!!


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Promotion

Advertising Another One to Many Communications Channel

Post Print

Broadcast Advertisement placement How do you get people to look?

Banner Ads Pop-up

Direct E-mail (Spam?)

Something for the Customer? Free Information Entertainment


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Promotion on the Internet

One to One Advertising Targeted Advertising

Customise the Page for the User

Prices

Product Linkages Many to many advertising

Get customers involved

Viral marketing

Social networking

Blogs

An Information Supply Channel


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Search is Important

Things Internet users have done on line in a month(US) 92% Use a search engine to find information

92% Send or read e-mail

83% Look for health/medical info

81% Check the weather 78% Look for information about a service or product

76% Get news

71% Buy a product

71% Watch a video on a site like YouTube or Vimeo

67% Visit a local, state or federal government website 65% Buy or make a reservation for travel

65% Use an online social networking site

61% Do banking online

Source Pew Internet & American Life Project Tracking surveys 2010 & 2011


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Information in the market Information Intensity of marketplace

Search Negotiation Monitoring & Enforcement

Regular Purchases Repeated Purchases

Food, Energy, Transport Information from past Experience Low Information intensity

Occasional Purchases Stochastic Purchases by the Individual

Information Needed to Find Goods Understand Capability Understand Quality

High Information Requirement

( from Casson, M. (1997). Information and Organization a New Perspective on the Theory of the Firm. Oxford, Clarendon Press.)


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The Rise (& Fall) in Occasional Goods

50%

52%

54%

56%

58%

60%

62%

64%

66%

68%

70%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Year

UK Household final consumption expenditure (excluding housing)less Food, Energy & Transport as a % of Total

Source: National Statistics website: www.statistics.gov.ukCrown copyright material is reproduced with the permission of the Controller of HMSO


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The Problems of Promotion An Advertising Channel

Hard to Segment

Geographic differences Pricing

Culture

Branding

A source of Information for Customers The happy keep quiet

The dissatisfied make waves

Its also a source for Competitors

Many Important users of websites are Robots Price comparison Sites

Search Engine Spiders

They are not people!!!

Click Fraud?


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Synergistic use of the Internet

As an adjunct to an existing business model

Promotion

E-catalogue

Market Research

New Product Ideas

Internet as a support Channel

Product Information

Updates

Support Desk

Self-help Forums

Account management

Payments

Warranty


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The Long Tail?

Demand has been constrained by inventory costs

The profit on sales of a product

The cost (inc opportunity costs) of keeping it in stock

Niche suppliers aggregate demand

The Internet

Aggregates demand from (much) wider markets

Reduces Inventory Costs (particularly for Digital products)

Very small volumes can make a profit

Aggregate demand for many small sales is big business


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The Long Tail

Ignored

Revenues from each Class

Products Listed by Frequency of Sale

Cost of supplying each Class


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Winner Takes All?

The Attraction of the Best

Recommenders

A network effect

People who have bought also bought

Recommend on Sales Data

Cannot Recommend New Products

Recommend Most Popular Products

Individual Diversity Increases

Aggregate Diversity Decreases The Successful get More Recommendations Positive Reinforcement

The Specialised Get Fewer

The death spiral


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Diversity


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The long tail vs the Stars

The Mid MarketLoses eitherway?


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Ethical Issues

Spam

Customer Information Security

Data Mining What do you use it for

How do you get it

Opt in or Opt Out

Webwise/Phorm

Contacting the customer Information Network Effects

The more data you have the more information you can extract

The Value of YOU

Direct marketing E-mail


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Virtual Worlds?

Virtual Spaces Product?

Promotion?

Price?

Place?

Second Life MMOGs

World Of Warcraft

In game advertising placement

Monetisation of Virtual Profits? BitCoin - Virtual Money

Over to You!!!


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Thank you for listening

And remember

Be careful what you tell yourcomputer

You never know what herInternet friends might be

doing with the information!!

Documents

Effect of Internet