3. Selling Goods and Services on the Net

A great number of players are examining the utility of the net as a new channel to distribute their services and goods. This model covers the widest range of offerings and merchandizing variations. Services as diverse as advisory business services, financial service and economic consulting services, and products as varied as computers, cigars and herbs are now being offered on the net.

There are wide fluctuations among estimates and statistics of on-line sales from different sources. Forrester Research foretold $1.1 billion on-line sales in 1997. But Cendent alone was projected to process $1.5 billion in 1997. Business Research Group reported $2.5 billion on-line retail sales in 1996. Yankee Group quoted $254 million in 1995 and $2.7 billion in 1997.

Even though the most optimistic sales estimates are small compared to overall total retail (~3%), the speed of growth and coverage is impressive. A survey by Ernst & Young on internet shopping listed on-line retailers all major airlines, all major apparel brands and specialty stores, major bookstores and office supplier chain, major computer makers and retailers, major electronics stores, major consumer goods makers, department stores, grocery chains, music and CD retailers, and other niche players (e.g., tickets, golf shops).

In spite of the increasing prevalence of net sales, great number of retailers and manufacturers are approaching the net-sales as a defensive measure, out of concerns for eroding market shares and lost customers. In fact, the majority of traditional retailers and manufacturers (68% and 79% respectively) still don't have plans for web transaction presence.

Part of the inconsistent estimate lies in new roles on-line retailers and wholesalers play in contrast to the traditional channel distributors. For instance, netMarket and Shopping.com own no inventory. It makes them brokers instead of resellers comparing to traditional distribution players. Net goods and services distributors are also playing innovative merchandizing games. CUC's netMarket, for example, derives most of its revenues from membership fees.

The net as a new channel is challenging traditional definitions and modes of selling. Despite the difficulties of examining various new and old net sales approaches within a coherent framework, the basic transactional relationship remains invariant. Sellers offer goods or services of value, and buyers purchase them for a price. The new channel are, however, posing new questions as to changing value propositions, issues regarding to transactions and relationships among buyers, sellers and makers.

Some Examples of Retailers and Wholesalers

Retailers:

• Provenance. On-line art gallery.
• Amazon.com. Bookstore.
• CD Now. On-line CD retailer.
• Internet Auctioneer.
• Quick Quote. On-line insurance distributor.
• Microsoft Expedia Travel Services.
• E*Trade

Wholesaler:

• Dell Computer Corp.
• Industry.net.
• GE Trading Process Network.

Why Sell on the Net

The dynamics of pull and push are driving retailers to sell on the net. The pull factors include:

• An affluent customer base. Average age is 32, 64% have at least college degree(91% if including some college education), medium household income is $60,000, and 41% are married.
• Less price-sensitive. Net shoppers are non-traditional channel buyers. 53% of them shop for convenience (v. 35% of non-net buyers) and 25% shop on net for fun (v. 15% of non-net buyer).
• People with active life style and expensive taste. 51% net shoppers are avid moviegoers, 48% are gardeners, 38% travel for fun, 25% enjoy gourmet cooking and 21% play golf.
• They are global! While 73% users are from US, 11% now come from Europe and increasing (from 18 million in 1996 to 67 million in 2001). 5 million in Japan by year 2000.

The push factors include:

• Market share retention and growth
• Customer retention
• Differentiation
• Cost reduction
• Competitive positioning.

Significantly smaller percentage of wholesalers are going on line (21% v. 38%). The answer to the question by wholesalers is different.

• 88% of on-line wholesalers state "Strengthening their competitive position" as the main driver
• 33%, however, worry about the existing channel relationships

Value Propositions to Different Players

The value proposition of using the net differs for retailers, wholesalers and consumers. Virtual retailers derive additional values from reducing resources spent on pushing up demand in traditional channels. They include:

• Reduce inventory costs
• Increase asset utilization (turns)
• Decreasing (eventually) SG&A expenses
• Decreasing COGS.

The revenue-generating model of a great deal of virtual retailers borders on that of the traditional brokers. They often carry very little inventory or no inventory at all. Their chief role is to match supplier and customer together. The goods and services they sell rarely flow through their physical possession. In this sense, the revenue-generating model of this group resembles those charging for transactions.

Net consumers shop online for:

• Convenience
• Choice
• Information
• Entertainment
• Cost

Most of current online transactions are concentrated in several categories. Buyers are buying:

• Computer and computer related products: 40%
• Books: 20%
• Travel: 16%
• Clothing: 10%
• Music/CD: 6%
• Subscription: 6%
• Gifts: 5%
• Investment products/services: 4%.

The majority of them buy infrequently:

• 33% buy once a year
• 50% buy 2-4 times a year
• 13% buy 5-10 times a year
• 4% buy >10 times a year.

The wholesalers enjoy the following benefits:

• Better supply chain management
• Sharper focus on serving own value chain
• Efficient contracting management
• Less working capital commitment
• Better asset utilization
• Better customer relationship management
• Possible innovative manufacturing solutions.

Barriers to Successful Online Sales

The major barriers to online sales growth include:

• Security
• Cost
• Complexity
• Online business regulatory uncertainty
• Concerns for the existing channel relationships.

Even though ever increasingly larger amount of participants are joining the online wagon, significant barriers exist to impede the healthy growth of the online goods and services sales business. Most people are still feeling uneasy about giving out their credit card information. Another reason for their uneasiness to engage online transaction may be the concern for misappropriation of personal information.

The actual number of consumer buyers grows slowly and often far bellow the break-even point. The industry is still in the formative stage that very few dominant players or operating modes have emerged. The spread of customers and high technology investment and uncertainty are making it rarely a profitable business to most of players. The cost of buying is equally high. Access cost, hardware and software investment and learning efforts are making it an expensive proposition for consumers.

Although the current online buyers list "convenience" as the most important purchasing criterion, online shopping is by no means a convenient experience. Earl Rynerson of the Rynerson and Associates conducted somewhat non-scientific yet illustrative experiment (http://www.computerworld.com/) in which he asked three buyers to purchase the same basket of goods through three channels (Catalog, Internet and Hybrid). The buyer who searched the net for information but placed orders through phone and fax did the best. The catalog buyer fared the second and the Internet buyer gave up in frustration.

There are also significant regulatory uncertainties in the business. Tax, tariff and export/import control are yet to be resolved. The contractual relationships between buyers and sellers are ill defined in areas of how to handle information unique to on-line transactions (or it's less expensive to warehouse the data). Copyrights and IPR(intellectual property rights) issues are common to all forms of e-commerce and still fuzzy.

Conclusion

The current status of online shopping is best described as tentative. The numbers are impressive and the business not profitable. Despite of the retailers' efforts to woo customers, the net is still only used by small percentage of people for small percentage of purchase. The general net shopping experience simply is effortful, exhausting, and hardly economical. More people take advantage of the information rich nature of the sites set-up by merchandisers than those who actually buy. Manufacturers are able to afford technology investments to take advantage of the communication and ease to integrate data of the net to squeeze some efficiency out of the supply chain. The ones who venture to sell direct risk their conventional channel relationships.