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October 23, 2000
A Glass of Wine Helps Show What Buyers Want
By DAVID CAY JOHNSTON
HEN the Internet began evolving into a mass medium in 1995, it struck fear into the hearts of retailers, who worried that enabling consumers to quickly and easily compare prices would force ever thinner profit margins. Then their businesses, like the cursed fat lawyer in Stephen King's 1994 novel "Thinner," would be reduced to skin and bones.
Paying the lowest price possible might seem like a shopper's dream, but ultimately consumers would lose because there would be too little profit to sustain a vibrant market, resulting in a scarcity of goods.
But shoppers, it turned out, do not always pay the lowest price, and not because they are unaware of it, according to research by several professors who have studied Internet pricing. The research suggested that retailers could expand their businesses and keep healthy profit margins from Internet sales if they understand what consumers want.
"Price is not the only factor in making a purchase," said Erick Brynjolfsson, an associate professor at the Massachusetts Institute of Technology's Sloan School of Management.
Many retailers discovered last holiday season that factors other than price could influence buying decisions, like convenience, quality and reliability. As the holiday neared and as carriers like the Postal Service and United Parcel Service became swamped with packages, many customers made buying decisions based solely on delivery needs.
But there is a difference between learning from a knock on the head and learning from studies that are more controlled and better designed. As a result, Professor Brynjolfsson's work is part of a growing field of Internet business research conducted by economists like himself, as well as consumer behavior specialists and psychologists. Research at M.I.T. has included what makes consumers trust, or distrust, commercial Web sites; how to design sites to make them easier to navigate; and how to convert more visitors into buyers by analyzing data on how people click through a site.
Other institutions and universities have been doing similar work. Research at the I.B.M. Institute for Advanced Commerce has included an examination of Web merchandising, an analysis of online advertising, a look at the effectiveness of online stores and a study of business negotiations on the Internet.
"We are now well past the point where you trust your gut on the Internet," Professor Brynjolfsson said. "Companies want solid research."
M.I.T.'s Center for eBusiness has 30 corporate sponsors, who are trying to understand how the Internet affects retailing and wholesaling. Many of the papers that M.I.T. researchers have written can be viewed at ebusiness.mit.edu.
In a paper that asked whether the Internet was to shopping what the Colt .45 revolver supposedly was to Dodge City, Kan. -- the great equalizer -- Professor Brynjolfsson and others found that when an identical product was offered, consumers would often shun the lowest price vendor, even when a list of vendors was ranked with the lowest prices on top.
RESEARCHERS studied book sales with the help of Deal time.com, a shopping site that scoured online booksellers to find every vendor and then rank them by price for a book from cheapest to most expensive.
"We gathered more than a million price observations," Professor Brynjolfsson said, "and we found that people often did not click on the lowest price, even when the lowest price was the first one listed."
Instead, consumers weighed brand recognition as well as concerns about whether an order would be filled promptly and accurately, and they showed a loyalty to vendors with whom they did business.
Analysis showed "that price was important, and having lowest price, all else being equal, increased odds that consumers would pick you," Professor Brynjolfsson said. "But we also found that advertising levels, which create awareness of the vendor, were a major factor. Amazon.com received 400 percent as many clicks as you would expect based solely on price."
The research found that quality issues, like whether orders would be filled quickly and accurately, weighed heavily on consumers. So did shopping habits. Consumers went with higher priced vendors if they had bought from them before or had an online account with them.
Prof. Dan Ariely, who studies consumer decision-making at M.I.T., said that "the Internet has this amazing power to convey information about quality and by giving good detailed information about what you are selling and how you are selling it." Merchants can not only charge higher prices, but they can also build customer loyalty.
Prof. John G. Lynch Jr. of the Fuqua School of Business at Duke University, and Professor Ariely, who was a graduate student there in 1998, sold wine during that time as an experiment to determine how consumers reacted to low prices, lots of information and other factors.
The professors said they decided to use wine in the test because most people lacked the knowledge to evaluate subtle differences in bouquet, flavor and body. They also did not know which wines go with which foods or in certain social settings. This lack of knowledge, Professor Ariely said, can make differences with satisfaction or regret over a purchase.
A wine expert filled the sites with quality information on wines, which were then offered for sale to graduate students and faculty at Fuqua.
Eight sites were created, some emphasizing price, others emphasizing information to help select a wine. There were different levels of ease in comparing sites, some wiping out tentative purchases when a customer switched between sites, while others retained the basket of prospective purchase until the customer returned to either buy the wines or cancel the order. The professors also held wine tastings to gather more information. (The professors did not actually sell the wine but acted as a marketing agent for a licensed seller to comply with alcohol control laws.)
"We found with wine that if you give good information, consumers become less price sensitive," Professor Ariely said. "They like the wine that they buy more, and they stay longer with the service that sold it to them."
Like Professor Brynjolfsson, the Fuqua researchers found that information is most important in swaying consumers who are buying subtle or exotic products. When people shop for a product they know is widely available -- Levi blue jeans, for example -- price trumps everything.
But that is not true of all products, even if carefully presented and accompanied by thorough information. "Before you buy a new chair for your office," said Professor Ariely, "you are still going to want to sit in it."
Professor Lynch said the wine project and other research showed that Internet merchants should in some cases adopt the same collaborative spirit with competitors as bricks and mortar businesses do. He cited the example of a hotel that has run out of rooms when someone drives up, or the hardware store that lacks equipment a customer wants.
Smart hoteliers and hardware store owners direct the customer to the competitor who has what the customer wants, expecting to build loyalty with the customer and make future sales.
In online retailing, Professor Lynch said, such collaboration works when sellers are offering products that consumers perceive are different, regardless of whether the differences are only illusory.
"Online shopping creates incentives for sellers to have more private labels," Professor Lynch said, "more exclusives and more branded variance, in which a manufacturer makes slightly different products with slightly different model numbers, but the differences are enough that consumers can't readily tell that they are essentially the same."
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