INFS7040 E-Commerce for Managers Semester 2, 2007 – Major Assignment

Managing the Digital Enterprise Digital Markets
Ahmad Fauzie Nur (u4450324), Andress Hamenda (u4330344), Andrey Hasiholan Pulungan (u4435830), Anindya Khrisma Sari (u4383790) Patarika Piyapanee (u4348405),

Word Count: 8,540 words (excluding references)

Due Date: Monday 17 September 2007, 12:00 noon as follows: E-copy: via email to walter.fernandez@anu.edu.au Paper copy: assignment box, ABIS School Office

Last Update: 16 July 2007 File Name: INF7040_Assignment_Template v 02.doc

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Contents
1. 2. 3. Introduction Key Success Factors in the Digital Market Major Issues/Considerations 1 2 4

3.1. The Types and Infrastructure of Electronic Market.......................... 4 3.1.1. The Types of Electronic Market .............................................. 4 3.1.2. Electronic Market Infrastructure .............................................. 5 3.2. The Effects of Digital Market on Price........................................... 7 3.2.1. Digital Market and Price Elasticity of Demand.......................... 8 3.2.2. Digital Market and Price Dispersion ........................................ 9 3.3. Switching Costs in the Digital Market ......................................... 10 3.3.1. The Importance and Types of Switching Costs........................ 11 3.3.2. The Movement of Switching Costs in Electronic Markets ........ 12 3.4. Promotion in Digital Market ....................................................... 12 3.5. Customer Relationship Management ........................................... 16 3.6. Ethics in the Digital Market ........................................................ 19 3.6.1. Privacy ............................................................................... 19 3.6.2. Trust................................................................................... 20 3.6.3. Security .............................................................................. 21 4. Potential Impact 4.1. 4.2. 4.3. 5. 6. 22

Impact of Digital Market on Society ............................................ 22 Impact of Digital Market on Organisations................................... 24 Impact of Digital Market on Individuals....................................... 25 27 28

Conclusion References

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Introduction

Tables
Table 1: Membership and Individual Contribution............................................................................b Table 2: Human Resources Mismanagement Penalties. .....................................................................b Table 3: Topics and Teams....................................................................................................................ii Table 4: Internet Advertising Method................................................................................................ 14

Figures
Figure 1: Percentage of Global Population with Internet Access ...................................................... 2 Figure 2: The E-Business Market Trading Model .............................................................................. 5 Figure 3: Electronic Payment Process .................................................................................................. 6 Figure 4: Percentage of Business with Internet Access..................................................................... 23

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Introduction

1.

Introduction
Digital market today is playing a significant role in the world’s economy

particularly in the way of conducting business. Both digital and traditional markets have a basic function of assisting the buyer and seller conducting transaction through the exchange of products, information and payment (Bakos, 1998, p.35). Moreover, the application of internet in commerce is predicted may reform the communication in the marketplace and lead to the perfect market, which has many sellers, buyers and substitutable goods and services as well as symmetric information (Bar, 2002, p.29). For years, digital market has raised many issues, for instance whether digital market increases the level of competition in the market or whether digital market affects the price. Janssen and Moraga (2000, p.2) argue that the internet will reduce the search cost for consumer and increase competition among sellers that will lead to higher level of welfare and lower price of commodity. Another researcher, Bakos (1998, p.42) also claims that it is clearer that internet-based marketplaces will support better economic efficiency and maintain economic growth. The digital market may also change the way of the business implementing the marketing strategy and managing its relationship with costumers. Song and Zahedi (2005, p.222) state that the internet can be used as an alternative medium by business to perform product branding and conduct transaction and maintain the relationship with public. This may bring positive effects on lower cost of communication and transaction, improved communication with customers and vendors in the terms of speed and quality, as well as broader market scope (Song & Zahedi, 2005, p.222). The objectives of this report are to analyse the key aspects in digital market and how the digital market affects the market dynamics nowadays as well as its impact on individuals, organizations and society in overall. To achieve those objectives, we examine six major issues in digital markets, which are communication infrastructure of digital markets, the effect of digital market on price, switching costs, promotion and customer relationship management function, and ethical issues in electronic market. Furthermore, we explore the overall effects of digital market on society, organizations and individuals. Finally, in the last section, we present the conclusion of all issues in the digital market.

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Key Success Factors in the Digital Market

2.

Key Success Factors in the Digital Market
Digital market or e-market is an international organization systems where

buyers and sellers exchange information each other about products offered and price (Bakos, 1991, p.296). Varadarajan and Yadav (2002, p.297), then, extended the electronic market definition as networked information systems enable buyers and sellers to exchange information, trade, and execute other activities related to the transaction made. The purpose of digital market is to attract large numbers of suppliers and buyers, which then become the member of that marketplace (Ferreira & Ferreira, 2004, p.254). The role of internet in trading and commercial activities has become dominant over time. Figure 1 below shows how the percentage of internet users in the world had been increased in 1995-2000 (Chaffey 2002). The interactive between buyers and sellers has been transformed from physical to virtual form. Time and distances are no longer being the barriers or obstacles for buyers and sellers to make a transaction through the internet. It creates a borderless world that change the way of business today.

Figure 1: Percentage of Global Population with Internet Access Source: www.nua.ie/surveys , cited in Chaffey, 2002.

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Many companies can achieve their best performance by using information technology or internet in their operations. According to Turban et al (2008), Boeing, for instance, can successfully develop their jet aircraft with its 3800 direct suppliers. In maintaining the relationship with its suppliers, Boeing develop ten multimedia rooms for the use of collaboration teams which is open 365 days a year, 24 hours a day (Turban et al. 2008). On the other hand, Clark (2001) reported the bankruptcy of Boo Hoo, an etailer company. Boo Ho collapsed because they fail to get sufficient buyers fast enough to generate revenues that exceed the company’s setup cost (BBC 2000). People who visited their websites have over expectations on Boo Ho (Clark 2001). At the end, Boo Ho were forced to sell their technical equipment to another UK internet venture and sell their web address to a Unites States fashion retailer (Clark 2001). There are several reasons that might cause the failure companies that participate in the digital market. First, companies might not aware of the price structure in the digital market. Second, the high cost of customer relationship management reduces significantly the profit of companies. Third, companies fail to ensure the customers of the security and privacy of customer data, so that customers are reluctant to conduct transactions in the digital market. Therefore, the purpose of this report is to analyse several important factors that are required to support the success of companies in the digital market.

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Major Issues/Considerations

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Major Issues/Considerations
In this section, we examine six different issues related with electronic markets.

First, we explain the communication infrastructure needed to support the operation of digital market. Second, we evaluate the effects of digital markets on the price, particularly about the price elasticity of demand and price dispersion. Third, the effect of digital market in the switching cost will be described. Fourth, we examine how digital market affects the marketing strategy as well as the customer relationship management implemented by the seller. Finally, we analyse the ethical issues in digital markets

3.1. The Types and Infrastructure of Electronic Market
As stated earlier, electronic market is a place that links buyer and seller. Electronic market is unlikely to sustain unless it has a large number of buyers and sellers, for example MetalSite, an electronic market in metal industry, was shut down in 2001 because the trade volume was too small for MetalSite to survive (Papazoglou & Ribbers, 2006, p.217). In contrast, Ebay is able to survive because it has 233 million registered users worldwide (Ebay 2007). Gillespie (2005) reports Amazon had nearly 49 million active customers, in which most of them bought more electronics during 2004 holidays. Furthermore, Yahoo and media companies CNET states in their annual reports in 1998 that their profitability was driven by customer loyalty (Goldfarb 2003, p.266).

3.1.1. The Types of Electronic Market
According to Berryman et al. (cited in Chaffey, p.43), there are three types of electronic marketplace: 1. Sell-side electronic marketplace is a site which is controlled by seller. For example the supplier’s home page which can facilitate e-commerce transactions.

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2. Buy-side electronic marketplace or buyer controlled site is an intermediary in which the buyer initiates the creation of the market. For instance when the buyer requests to the number of suppliers through the intermediary, to procure the goods and services required. 3. Marketplace or neutral site is an autonomous intermediary who can provide the comparison of price and product. 3.1.2. Electronic Market Infrastructure According to Papazoglou and Ribbers (2006), in electronic markets, there are suppliers who offer their products to the electronic market and buyers who search and review product offerings. Orders from buyers are then sent to suppliers through messaging system, which also communicates the order status to buyers (Papazoglou & Ribbers 2006). Figure 1 below shows how electronic markets working.

Supplier

Supplier

Supplier

Supplier

register/offer/sell
E-market

search/select/buy

Buyer

Buyer

Buyer

Buyer

Figure 2: The E-Business Market Trading Model Source: Papazoglou & Ribbers 2006

In conducting purchasing transaction in electronic market, the credit card is the most common method of payment. That is why most of transaction on the web depends on credit card payment processes (O’Brien 2005) However, in banking and retailing industries, the major form of payment systems is electronic fund transfer (O’Brien 2005). Figure 2 below shows electronic payment done in electronic market.

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Customer Request Client Browser * Verify merchant * Receive order info * Receive payment info * Confirm order Payment Server Merchant’s Web Server

Merchant

* Verify customer * Review payment info * Authorize or deny payment

Online third-party computers with links to multiple payment systems Credit Cards VISA MasterCard Bank Accounts Debit cards Online banking Online Buying Payflow Pro 1 ClickCharge E-Bill Payment CheckFree Paytrust Electronic Cash BillPoint Paypal

Figure 3: Electronic Payment Process Source: O’Brien 2005

The question is how sellers can offer their products to market place, and how buyers can search and review offers from sellers. In other words, what types of communication technologies are needed to form the electronic market infrastructure. Several researchers, for example Bar (2002), Maes, Guttman, and Moukas (1999, p.81) argues that basically internet provides infrastructure and channel for the electronic market. Internet is the “global interconnected network environment” (Turban et al. 2008, and Strauss, El-Ansary, & Frost 2003). It is a place where buyers and sellers meet and make business transaction (Bar 2002, p.39). It also makes exchanging information about product and services become faster (Bar 2002, p.36). The debate about the internet as the infrastructure of electronic market is whether internet is only a network-aided commerce, which is to make market process more efficient rather than essentially a new market process (Bar 2002, p.27). The improvement that the internet offers is argued similar with any other improvements done by communication technologies (Bar 2002, p.37). For example the invention of fax also enables buyers and sellers to exchange information faster. Internet only makes it more rapidly and possibly more efficient. Thus, there are two reasons behind this argument; first, in order to be the basic of a new market process, the

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improvements done by internet need to be different with what has been done by previous communication technologies and, second, the improvements represents the first phase in a new cyclical pattern of the new market (Bar 2002, p.37). Nevertheless, Bar (2002, p.38) states that internet becomes the communication technology that underlies the new market process mainly because it develops new market architecture. The infrastructure of the traditional market is physical (Varadajan & Yadav 2001, p.296), in where the organizations are brick-mortar, which are purely physical organizations (Turban et al. 2008). Basically, the physical marketplace can only be reached by nearby consumers. In contrast, with the internet, the market infrastructure is no longer physical but network or electronic (Varadajan & Yadav 2001, p.296). The impact, then, electronic markets can serve much larger scale of sellers and buyers (Varadajan & Yadav 2001, p.296). For example, Kelkoo.com, founded in 2000, served 8.5 million users from across Europe

(http://www.kelkoo.co.uk/co_4293-corporate-information-company.html). Hence, we find internet can be defined as a communication technology that forms a new market process because it does not only create market more efficient, but because it underlies the new market architecture. Internet has created the new market infrastructure, which is network. It is different with the physical infrastructure used in traditional market.

3.2. The Effects of Digital Market on Price
The internet is believed to change the structure of market closer to perfect competition. In the economic theory, a perfectly competitive market is identified by homogenous product, no power to set the price, mobility of resources and symmetric information among participants (Thompson Jr. & Formby 1993). Internet attracts more buyers and sellers to participate in electronic exchange because of the benefits offered by the transparency of information in that market. Buyers that have more information about the product will have better decision making. Sellers also gain better knowledge of their customers, business partners and competitors. Furthermore, with low cost of implementation and wide offerings of applications, internet will lessen the entry barrier and spread the bargaining power among the participants in the market, which then bring near to perfect market (Bar, 2002, p.28).

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The market that is more efficient may affect to the fall of price, to the narrow price spread, to the smaller and more frequent price changes and high price elasticity of demand (Bailey cited in Häring 2003, p.2). The internet reduces the cost of searching of customers, thus, lessens the bargaining power of sellers in the market, particularly in setting the price (Janssen & Moraga, 2000, p.2). On the other hand, suppliers also try to increase profit, which may decrease due to lower cost of searching, by increasing the level of its product differentiation (Bakos, 1998, p.41). Thus, in the next parts, we examine the explanation of the effect of the digital market to the price in digital market will cover price elasticity of demand and price dispersion.

3.2.1. Digital Market and Price Elasticity of Demand
The implementation of the digital market in exchanging goods and services might affect the level of price elasticity of demand. Price elasticity of demand would become higher since buyers tend to search for the best price for the goods and services needed, particularly for homogenous products. Ellison and Ellison (2004, p.4) found that search-for-price activity through the internet was frictionless and might affect to the significant increased demand elasticity. Moreover, charging the low price for low quality goods might encourage not only their sales, but also the medium and high quality products (Ellison & Ellison, 2004, p.4). Chevalier and Goolsbee (2003, pp.204-205) found that in the online book market, for example Amazon.com and BarnesandNoble.com, the price was more volatile than in the conventional market. In addition, the demand in this homogenous market was significantly elastic to price (Chevalier & Goolsbee, 2003, p.216). This result is consistent with the research conclusion conducted by Brown and Goolsbee (2002, p.483) in the life insurance industry. Furthermore, these outcomes may happen because the buyer is provided with the facility to search and compare the price in easy, inexpensive and fast way (Rappa, 2007). Besides the frictionless of the price searching activity, another factor that drives the decline price is the advertisement. The more frequent the product advertised in the internet, the tendency of its price to decline became higher (Clay, Krishnan & Wolff, 2001, p.522). In contrast, other researchers have found that the demand was far from sensitive related to the sellers’ products sales, even in homogenous products. Smith

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and Brynjolfsson (2001, p.542) conducted a research using the sample of shopbot consumers, who were considered as the most-price-sensitive consumers. They found that the consumers really considered about the brand of retailers, even for the homogenous product, in this case were books (Smith & Brynjolfsson, 2001, p.542). There were two reasons behind this finding, which first, the brand might reflect the non-contractible aspects (i.e. quality) of products, which were not informed well in the electronic market, for example the shipping time (Smith & Brynjolfsson, 2001, pp.542,553-555). Second, suppliers tended to differentiate their products and services from their competitors (Smith & Brynjolfsson, 2001, p.542,556-557). Thus, it becomes difficult to compare those goods because of their differentiated characteristics. The demand, furthermore, becomes less sensitive to the price changes. Despite the increasing number of information provided by the internet, the asymmetric information among the participants still does exist. The quality of products and its related services were not well informed through the internet (Ellison & Ellison, 2004, pp.3). Moreover, sellers had the intention to do that obfuscation in order to make their consumers less informed of the product then could not compare the price accurately (Ellison & Ellison, 2004, pp.4,38-40). The motive of sellers behaving in that way was to avoid direct price competition because they had to cover relatively high expenses related with the adoption of internet, handling the order individually and the increasing number of advertising (Ellison & Ellison, 2004, pp.4,38-40).

3.2.2. Digital Market and Price Dispersion
In this part we examine whether the electronic market could affect the price dispersion. The major factor of the narrow price dispersion is the low of searching cost. Brown and Goolsbee (2002, pp.504-505) found that in the early stage of the use of internet as a searching tool, price dispersion in life insurance market increased. However, as the wider spread of internet use, its dispersion becomes narrow Brown and Goolsbee (2002, p.505). The more numbers of consumers involving in the online market and searching intensively made tougher the competition among the sellers, thus brought the pressure to the sellers to keep the price close to their competitors. It also happened in online book industry (Clay, Krishnan & Wolff 2001, pp.521-522).

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On the contrary, sellers tended to avoid the price competition by differentiating their products and services from their competitors. They did differentiation in brand, price as well as the depth of the offerings (Clay, Krishnan & Wolff, 2001, p.522). This strategy was supported with fact that there was not equal competition among commodity goods and some numbers of consumers did not migrate to online market (Clay, Krishnan & Wolff, 2001, p.537).. The sellers applied high price to get surplus from those offline consumers, which might cause substantial amount of the price dispersion still existed (Janssen & Moraga, 2000, pp.3-5). Generally, even in the homogenous product,,sellers try to deliver distinct products and services to their consumers. They prefer to increase their economies of scope than to increase their economies of scale. Sellers avoid the direct price competition in order to get higher revenues over their high expenses. In addition, the heterogeneity of buyers particularly in their needs and preferences might support the implementation of differential pricing (Clemons et al., 2002, p.75) Moreover, the existence of asymmetric information among participant in online market, particularly in buyers’ side might also bring the same effect (Bailey, Faraj, & Yao, 2007, pp.5759). Then, the substantial price dispersion will exist. Overall, we find that in most cases, suppliers tend to differentiate their products and services to customers because they are more likely to avoid direct price competition that may reduce their profits. As the result, they tend to set their price that is different with the average price in the market. The price elasticity of demand, thus, will not be as higher as expected and there will be still significant price dispersion in the market.

3.3. Switching Costs in the Digital Market
Switching costs can be defined as costs incurred when economic agents, for example buyers change their suppliers (Ke, Minyi, & Li, 2004, p.1). It is like ‘two edged sword’ (Shapiro & Varian, 1999, p.111), which may be dislike by customers, but embraced by certain suppliers. According Goldfarb (2003, p.267), switching cost in electronic market can be measured and easily perceived, such as email accounts, or can be more subtle, for example psychological cost or brand loyalty cost (Klemperer, 1995, p.518). In this section, we discuss why switching costs are important in the

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digital market, types of switching costs and whether switching costs decline in digital market.

3.3.1. The Importance and Types of Switching Costs
Switching costs should be considered important in digital market (Glassberg & Merhout, 2000, p.54) because they may determine the success or failure of sellers in electronic market. Switching costs prevent customers to move to other suppliers (Chenn & Hitt, 2000, p.134), thus, if a company fails to recognize the switching costs in its business competition, the company is likely to have a high risk of failure (Shapiro & Varian, 1999, p.111). As this essay explains previously, an electronic market needs a large number of buyers and sellers to keep going (Papazoglou & Ribbers 2006), thus, many emerging e-commerce companies intend to recruit new customers (Chenn & Hitt, 2000, p.134) so they may survive. However, there are customers who are reluctant to change their existing suppliers to the new one. In some cases, it may cause the close of electronic market. Eumedix, for example, could not continue its electronic market operation in medical industry because of the reluctant of hospitals to change their suppliers, which created difficulties to the new suppliers to sell their products (Papazoglou & Ribbers 2006). At the end, Eumedix did not have sufficient number of buyers and sellers, which caused Eumedix to close its operation (Papazoglou & Ribbers 2006). Klemperer (1987, p.375) argues that there are three types of switching costs, which are transaction costs, learning costs, and artificial or contractual costs. Transaction costs are costs occurred to begin a new relationship with a supplier and occasionally also include the costs needed to end an existing relationship (Chenn & Hitt, 2000, p.136). Second, learning costs are the effort needed by customers to learn a new product so that they can use it in the same level of comfort or facility with the old product (Chenn & Hitt, 2000, p.136). If somebody makes a cake mix, for example, it is easier for that person to buy from the same brand that the person already familiar with because the person already knows how to prepare the mix cake by using it rather than to buy a new brand, even though the person knows that those brands have the same quality (Klemperer, 1995, p.517). Shapiro and Varian (1999, p.117) includes the learning cost as part of searching cost. Artificial switching costs

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are costs made by intentional actions of firms and are very common in the marketplace, such as frequent flyer programs (Chenn & Hitt, 2000, p.136).

3.3.2. The Movement of Switching Costs in Electronic Markets
It is argued that information technology might reduce the switching cost, particularly searching cost. Benslimane, Plaisent, and Bernard (2001, p.221), for example, concludes that the used of the world wide web could reduce search costs because the world wide web may help buyers to identify potential suppliers quickly and easily. Similarly, Xiao, Feng, and Roche (2005, p.189) suggest that information technology is likely to reduce searching costs, which is the part of switching costs, yet, the effect of information technology is insignificant to the switching cost in overall (Xiao, Feng, & Roche 2005, p.189). On the other hand, Chen and Hitt (2000, p.143) and Chen (2002, p.92) empirically measured online switching costs in the online broker market and found that switching costs vary substantially across brokers in electronic markets. Chen (2002, p.92) also found that firms can significantly control their switching cost through retention strategies. Goldfarb (2003, p.272) concludes that switching costs faced by users can create market power and economic profits. Suppliers may create switching cost to increase their profitability (Goldfarb, 2003, p.273). Ivang and Sorensen (2005, p.401) argue that interdependency relationship between suppliers and customers increase the switching cost for both suppliers and customers. Generally, we found that switching costs do not significantly decline in the electronic market. Information technology seems to be only able to reduce searching costs but not to the switching costs in overall. Even though buyers attempt to reduce switching costs by bargaining and having alternative suppliers, suppliers are likely to increase the switching costs in order to retain their existing customers (Shapiro & Varian 1999, pp.135-141). Thus, switching costs will be difficult to decline.

3.4. Promotion in Digital Market
The debate about how effective the promotion in the electronic market has been raised for years. As explained earlier, in the digital market, buyers and sellers do not have to meet physically in certain place and specific time to make transactions. They can do it from everywhere and anytime. However, buyers face some

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uncertainties about products that they want to buy, particularly about the physical conditions of products since they cannot examine the product physically (Sun, 2006, p.626). In doing promotion in the digital market, information has become its own viable product because the physical product has been replaced by the product information on web site (Allen & Fjermestad, 2001, p.14). On the other hand, sellers have to answer challenges in providing the information accuracy and reliability about their products through the internet. Allen and Fjermestad (2001, p.18) argue that the ‘traditional marketing’ is no longer effective and tends to be expensive over time. Sellers must initiate and maintain the relationship with their potential buyers so that they will be able to sell their products repetitively in the future (Allen & Fjermestad, 2001, p.18). Other researcher, Sun (2006, p.626) also argues that by using the internet, sellers can give the signals to buyers who are able to search and learn for further information about the products. Sellers can conduct several approaches in promoting their products through the internet, such as unsolicited advertising, permission marketing, as well as interactive and targeted advertising (Turban et al. 2008). Unsolicited marketing is a method of distribution of emails to several potential customers without their request or permission before (Turban et al. 2008). This type of marketing is including ‘spam’ and ‘pop-up’ advertising (Turban et al. 2008). Permission marketing asked authorization first from the consumer to receive the online advertising and e-mail (Turban et al. 2008). Usually the costumer will receive e-mails periodically or advertising messages with incentives. (Turban et al. 2008). Targeted advertising is using specific group as the marketing target (Turban et al. 2008). There are many methods of internet advertising can be used as decribed on following table.

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METHOD

DESCRIPTION

Banners and buttons

Pop up, pop under Automated targeted advertising (search-related ads) Sponsored links in search engine results

E-mail

Electronic catalogs and rich media ads Spy ware banners Classified ads Wireless localization

Online chat Affiliated marketing Blog advertising

Viral marketing Online promotions

Brief ads that can be targeted or customized; you can click on them to go to the advertiser’s site Automatically launched, unsolicited, when you wait, enter, or exit Web Sites Google’s AdSense and Microsoft’s AdCenter are leading examples. These are targeted text hints that appear when you conduct a search Appear on top or right side of a page; bring you search results of Google, Yahoo, MSN, or other search engine. Paid by sponsors to be on first page Relatively inexpensive. Can be targeted to a group of recipients or individuals; frequently unsolicited. Advertise products/services; some with price comparisons Advertiser-sponsored unsolicited ads; can be in different formats Similar to newspaper classifieds. Search them to find what you need Knowing where you are, an ad is sent to your cell phone or PDA regarding a business close to your location Customers are invited to text chat with sales representatives Advertisers pay Web sites (“partners”) to place a banner on partner’s sites Advertisers pay blog owners commission if visitors click (and buy) on banners displayed in the blogs Online “word-of-mouth”, ”forward our information to others” Several innovations that provide entertainment or incentives to be exposed to ads

Table 4: Internet Advertising Method

Source: Turban et al. 2008

Buyers can now compare the competing products and services with minimal effort and less personal time (Srinivasan et al., 2002, p.41). Through digital market, buyers have many choices of product sizes, types, and colours. On the other hand, through the web pages or internet, sellers can provide almost unlimited information, especially if it contains links to different sites (Samaniego, Arranz & Cabezudo 2006,

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p.165). Sellers can also use hyperlinks as the effective promotional vehicle (Wehling 1996, p.171). Electronic markets also give a low cost for suppliers and manufacturers in engaging direct links with buyers (Nolle, 2007, p.11). It can reduce the promotional and advertising costs as well as increase the time effectiveness. Some companies who tried to promote their products and services through internet have some difficulties when their potential buyers cannot find their web pages. This obstacle may disturb the company sales target achievement. As the solution, companies can use the promotions that inform the companies’ web site addresses (Lee, 2003, p.306). Moreover, there are some opportunities and challenges for companies to sell their products through internet. Sellers in the electronic market can give more options of products rather than in the physical market as well as details of product information (Evans & Wurster, 1999, p.84). Sellers can also design and manage the web site content so that the potential buyers can make one-stop-shopping and find the product they need in effective way. In digital market, product branding will still become the important part in internet marketing (Allen & Fjermestad, 2001, p.18). Moreover, the new visitors tend to search the products’ information based on the brands or logo that are familiar to them (Quelch & Klein, 2006, p.70). It means that most of the customers still rely on previous experience of buying and using the products (Quelch & Klein, 2006, p.70). Thus, the trust to the products is the significant factor in buying decision (Quelch & Klein, 2006, p.70) In order to introduce product branding, web marketers should be able to utilize consumer information to produce substantial value for the potential buyers. Taylor and England (2006, pp.77-85) proposed the better way for web site design. They introduce two methods of web site design; first, the web site content ranking which puts the most required website contents higher in web site display, and second, web site content grouping which gathers the similar web site content in the same place (Taylor & England, 2006, pp.77-85). For marketing purposes, the main purpose of this method is to increase the accessibility and prominence of the web site that may lead to the higher sales of products (Taylor & England, 2006, pp.77-85). However, promotion in digital market has some limitations. Consumers do not always give the requested information to the companies through internet marketing

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because of the privacy concerns (Allen & Fjemerstad, 2001, p.18). The other limitation is the cultural issues. If the companies failed to include the cultural characteristics in doing promotion through the internet in a country, then the adoption of product knowledge will be slow (Gong, Li, & Stump, 2006, p.69). Another difficulty in promoting new products is the high switching costs in electronic market. As examined in the previous sections, the higher the switching costs, the less likely the customer will move to the new products. Therefore, companies must have the clear defined objectives which are integrated in the company strategy in doing promotion through website unless they will hard to achieve the commercial goal of the website (Tiago et al., 2007, p.138) Overall, we find that by using the internet in its promotion and marketing strategy, companies can potentially increase their sales as well as market share. From buyers’ perspective, they can select the most suitable product as their needs and preferences.

3.5. Customer Relationship Management
Customer Relationship Management (CRM) is essential for corporations because it can increase customers’ loyalty through building one-to-one relationships and aid the profitability of a corporation (Turban et al. 2008). In order to build this relationship, a firm needs technology to keep interacting with its customers personally. Internet technology, a communication technology in digital market to connect groups of sellers and buyers together (Papazoglou & Ribbers 2006), which can bestow great impacts on the interaction between sellers and buyers, is more likely to improve their relationship. In digital market, sellers are able to share the information about their goods and services through internet and buyers are also able to learn about products before buying them (Rappa 2007). In contrast, according to Reicheld and Schefter (cited in Chaffey p.330), it is costly to obtain online customers, because firms will spend around 20 to 30 per cent of their budget higher compared to conventional one. They also state that corporations may find it difficult to yield profits in a period two to three years at the beginning of their business. This finding, however, presents that corporations will be able to increase their profits from 25 to 95 per cent if corporations can maintain even merely 5 per cent those customers (Reicheld & Schefter, cited in Chaffey p.330). If

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corporations are able to make customers loyal, these customers will speed up their profitability compared to the conventional businesses due to less costs to service these customers (Reicheld & Schefter, cited in Chaffey p.330). Srinivasan, Anderson, and Ponnavolu (2002, pp.42-45) propose some business factors (8Cs) that influence the cutomers’ loyalty in the digital market as follow. (1) Customization. It is the ability of buyers to adapt products and services as well as transactional environment to individual buyers. (2) Contact interactivity. This refers to the activities between buyers and sellers through their websites. (3) Cultivation. This is the level in which a seller gives the relevant information and rewards to its buyers with the purpose to lengthen their purchases over time. (4) Care. It refers to the positive awareness from a seller to all the stages of purchasing in order to maintain a long-term customer relationship. (5) Community. Community means an online community that consists of existing and potential buyers. In this community, sellers organize, facilitate, and

maintain the information exchange related to the offered products and services in internet. (6) Choice. Sellers in the digital market can offer more categories of products and services rather than in the conventional one. (7) Convenience. Convenience refers to the level of the buyers’ satisfaction on using the website due to its user friendly and simplicity. (8) Character. The attractive display of a website can positively affect the sellers’ image in potential buyers’ view. According to Strauss, El-Ansary, and Frost (2003), customer relationship management is the process of relationship of obtaining not only final consumers (B2C) but also business customers (B2B), maintaining them, and developing these consumers for long time period. In the digital market, firms use database-driven websites to apply personalisation and customization technologies. Strauss, El-Ansary, and Frost (2003) point out that the basic role of the personalisation is to greet customers’ names once they are online, which is easier than the customization’s role. Customization is more difficult to implement because it changes the content of a site in order to match the preferences of a user (Strauss, El-Ansary, & Frost 2003).

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Furthermore, Renner (cited in Strauss, El-Ansary, & Frost p.424) states that these technologies enable firms to increase their profit as they are able to identify their high-value customers, who buy products more frequently and spend their money most. With respect to obtaining consumers, companies can acquire both business consumers and final consumers through online (i.e. internet) and offline. A call center is one of the most essential devices used by firms to deal with customers’ matters. Turban et al. (2008) point out in the digital market, firms can develop a call center to the more advanced tools, for examples email and automated response, which are cheaper and faster in answering customers’ questions, disseminating the confirmation or the information of a product. In the online market, customers’ information will be transferred to companies’ databases once these customers visit the companies’ websites, which enable companies to determine customers’ similarities and differences (Strauss, El-Ansary, & Frost 2003). A firm is also able to provide chat rooms as the part of its customer service in order to attract new customers and to develop their loyalty so that they can share their experiences in shopping (Turban et al. 2008). In addition, according to Bickerton, Bickerton, and Pardesi (2000), firms should include their addresses, maps, phone numbers, and opening hours on the internet to reach customer easier. In this case, the internet is also able to encourage offline channels because some customers are probably interested to see products directly in showrooms (Bickerton, Bickerton, & Pardesi 2000). As for maintaining customers, firms should focus on knowing the percentage of customers’ retention and the percentage of customers’ attrition. Strauss, El-Ansary, and Frost (2003) suggest that in the practice of CRM, firms are better to eliminate customers who do not repeat to purchase firms’ products in a period of time and focus on customers who buy their products frequently. Cisco system, Inc., for example applies Web-to-live contact center and the collaborative whiteboard, which enable customers to communicate their problems to Cisco’s workers. As a result, Cisco could increase the customers’ satisfaction and save $340 million in a year (Strauss, ElAnsary, & Frost 2003). With regard to developing consumers, customers’ loyalty is essential to increase corporations’ performance for a long time period (Ghosh 1998, cited in Strauss, El-Ansary, & Frost p.406). Companies are able to build customers’ loyalty if

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they can communicate and collaborate with specific customers continuously to attract and satisfy them. In addition, customers would have positive image about products and services offered if they are interested and satisfied with those products and services in internet. Thus, it may encourage them to buy more frequently. Overall, we find that applying CRM in electronic market may not earn profit in corporations’ short term performances (approximately during the first two to three years). However, organizations should start considering their CRM in digital market, because it assists them to improve customers’ loyalty which may also result in improving their profitability for long term.

3.6. Ethics in the Digital Market
Other issues related to the electronic market is ethics, particularly privacy, trust, and security. The ethical issues in digital market are new species of generic moral problems. This is true when it comes to online communication as in any other area of computing. The generic problems are privacy, property, the line between individual freedom, and public private authority, respect, and responsibility (Gurak cited in Johnson, 1997, p.61). All of the above things show that ethics is an important part of doing ebusiness. However, ethics is not easy because the availability of the ethical resources to the ordinary person is rapidly fragmented, distributed and ambiguous (Introna, 2002, p.72). In the digital market, it is common that companies buy information about individual, personal details, and shopping habit which can be considered as unethical acts (Leitch & Warren, 2001, p.56). Thus, in this section we discuss the ethics in digital market particularly privacy, trust, and security.

3.6.1. Privacy
In the way of digital market use, the privacy is the most publicized ethical issues. Privacy becomes a major concern for both consumers and enterprises in the digital market. Information about customers can be leaked out in all the processes of buying goods at e-commerce stores (Tan & Guo, 2005, p.217). Many research

efforts have been devoted to the development of privacy protecting technology (Byun, Bertino & Li, 2005, p.102). Privacy in particular is a notion that has sparked much

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interest and sometimes causes alarms to be raised, especially when reports of privacy violations are cited in the popular media. The privacy issues come from the idea to gather the information about buyer and seller that that will improve relationship between buyer and seller (Medley et al. 1998, p.62). Thus, in the United States, the code of ethics is more focus about privacy, for example the intentional interception of the electronic communication is prohibited (McCauley, 1997, pp.110-114). However, some customers loose their personal data when being collected and used in improper way by companies (Jensen, Potts & Jensen, 2005, pp.206).

3.6.2. Trust
In the real world, the good relationship between buyers and sellers is depending on trust (Cazier, Shao & St.Luis, 2006, p.718). Customer’s trust in the emarketplace will be fostered by both the market-maker and seller in comparison with the e-marketplace where trust is built by only the seller who plays a role of a market maker at the same time (Kim & Ahn, 2005, p.195). Trust is the most simply consideration when customers decide to interactive with the providers. Trust, in general, is an important factor in many social interactions, involving uncertainty and dependency (Einwiller et al., 2000 and Einwiller & Will, cited in Grabner-Krauter, Kaluscha, 2003 p.784 ). Trust can serve as the instrument to reduce the complexity of human conduct in situations when people with uncertainty (Luhmann, 1989 cited in Grabner-Krauter, Kaluscha, 2003 p.784). Lack of trust is one of the most frequently reasons for consumers who not purchase in electronic market (Grabner-Krauter, Kaluscha, 2003 p.783). Consumer’s trust to digital market is affected by many factors, such as technology, ethics, policy environment, enterprise reputation. Under this condition, the target of trust and the forms of trust are both different. It is suggested to trust network technology, online store and online products except for trusting person (Zeng, Zeng & Guo, 2005, p. 221-225). According to Shaw’s structure, there are four entities in digital market into buyer, seller, third party and technology (Bellman et al., 1999 cited in Yang, Hu & Chen 2005, p.188). In the part of buyer, demographic factors, experience, familiarity, individual culture, privacy were the key factors that will induce trust (Bellman et al.,

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1999 cited in Yang, Hu & Chen 2005, p.188). In the part of seller, brand-equity, competitiveness, availability, variety and customization were the elements that determine the trustworthiness of web seller (Fung & Lee ,1999 cited in Yang, Hu & Chen 2005, p.188).

3.6.3. Security
Another ethics issues need to be considered internet users is security. Both customer and seller in digital market will get beneficial from increasing the security systems and the trust worthy of online companies because trust is a mechanism to reduce uncertainly and complexity in electronic market (Grabner-kraeuter, 2002, p.49). In electronic market, it is necessary for security to be able to verify and identical parties who doing transaction to make sure that nobody can get benefit from exchange information and to prevent the disruption of service and application (Tan & Guo, 2005, p.218). However, many questions about actions with the internet ethics scopes are unanswered because they are difficult to assume that actions unethically. It is important to e-commerce participants to ensure consumers’ trust. In the digital market, people must be revealed personal data, credit card code, and any of esignature to dealers. According to that reason, many of e-commerce store owners had decided to create the internet security to protect their clients’ secrets. Internet security is trivial; integrity, privacy, and personal conduct are controlled primarily by a social contract (Krull, 1995, pp.12).

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Potential Impact

4.

Potential Impact
The digital market, as discussed earlier, has affected not only the market

dynamic, but also the society, organization and individuals in general level. In this section, we will present the impact of digital market evolution on the society, organizations and individuals.

4.1. Impact of Digital Market on Society
The first impact of electronic market to society is to enforce government to enact law to protect it. The number of business involve in electronics market is growing continuously. Thus, the first effect of the digital market on society is the increase need of legal infrastructure. Figure 4 below shows that business that has access to internet in 2006 increase significantly since 1997 (97). ONS data in 2000, the second largest used is finding information about goods and services (ONS 2000, cited in Chaffey, p.123). This growth of electronic market transaction needs legal protection because the transaction process in electronic market is different with in the traditional market and there are risks of dispute between buyers and sellers. Customers, for example, cannot fully protect their information when they make transaction through the internet. Buyers can sell their customers’ data to other parties and administrators of web servers can transfer their servers’ logs to other companies (Tan & Guo, 2005, p.217). Therefore, the first effect of the electronic market is to enforce government to enact law to protect particularly customers’ rights in that market.

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Figure 4: Percentage of Business with Internet Access Source: DTI, 2000, cited in Chaffey, 2002, p.131

The example of country that provides law is the United States where regulatory environment is significantly better than in other countries. Inadequate legal protection was rated high by 11% of respondents, and business laws that cannot support e-commerce only 8% (Shih, Dedrick & Kreamer, 2005, p.61) In the United States, the intentional interception of the electronic communication is prohibited (McCauley, 1997, pp.110-114). By this electronic Act, the clients’ information which is in the attorneys’ hands should be encrypted by the encryption software (McCauley, 1997, pp.110-114). If the clients’ information is leaked thus endanger people’s privacy, the lawyer who involves in that prohibited action will be punished under the code of internet ethic (McCauley, 1997, pp.110-114). The second impact of electronic market to society is to make market more competitive. There are several factors that may lead market becoming more competitive. Firstly, the heterogeneonous consumers, who have different preferences and needs, in the digital market will enforce supplier to have more variety of products. Secondly, the lower searching cost for suppliers may help them to identify the condition of their competitors. Suppliers will find the digital market attractive as they could use them to reach a wide range of new customers in easier and costeffective ways and to find information about their competitors in their market too (Narin cited in White & Daniel, 2003, p.248). Finally, the lower searching cost for buyer may also lead to the increase of the competition in the digital market. In conclusion, the competition in digital market will be more competitive.

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4.2. Impact of Digital Market on Organisations
Digital markets have brought great potential impacts on the operations of the organisations. Several corporations are able to obtain advantages through digital markets, yet, other corporations are difficult or even failed to gain the benefits of electronic markets (Biswas & Krishnan, 2004, p.681). The ‘technological uncertainty’ of obtaining actual advantages in digital market may negatively affect the behaviour of prospective members of electronic markets, for example buyers and sellers (Papazoglou & Ribbers 2006). Buyers and sellers tend to wait before joining in electronic market systems with the expectation that they will be able to learn from other organisations’ experiences (Papazoglou & Ribbers 2006). However, Papazoglou and Ribbers (2006) also explain the essential impacts of digital market on market structure and efficiency as follow: 1. Cost reduction Digital market can decrease the cost of gaining information, called searching cost, about alternative suppliers’ products and prices and the advertising cost to additional customers. The reduction of this searching cost is more likely to influence competition since corporations, that act as buyers, are able to obtain better information about their suppliers’ best prices. 2. Network externalities Digital markets can generate more value for their members since more businesses link their interorganizational systems. 3. Switching costs Substantial investment in digital markets, such as hardware, software, employee training, and the business process reengineering in the organisations, will probably become useless once their members make decisions to migrate to other markets. The higher the switching cost, the more reluctant buyers change their existing suppliers to new suppliers. In addition, Lancastre and Lages (2006, pp.774-775) claim electronic markets have influenced firms’ decision to focus on improving their cooperative relationship with customers. In digital market environment, firms generate communication and interaction with their customers more frequently through emails, automated responses, and chat rooms in order to increase customers’ satisfaction as buyers can

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share easily their expectations with sellers (Turban et al. 2008). Corporations will also be able to create customers’ loyalty through these long term relationships (Strauss, ElAnsary, & Frost 2003). Furthermore, Song and Zahedi (2005, p.222) state that corporations, that are able to enter the electronic market, can decrease their geographical boundaries, transactions and communication costs by making the names of their products, transactions, and public relations. These costs can be reduced because corporations can raise communication’s pace and quality with their potential consumers and suppliers (Song & Zahedi, 2005, p.222). A publisher in electronic market, for example, is able to reduce the costs of printing, circulation, inventory, and has better relationship with the customers than traditional publishers (Song & Zahedi, 2005, p.222). Overall, we find that even though the technological uncertainty in this marketplace may negatively affect potential participants’ behaviour, firms which are able to adapt in this market are likely to increase their profits. It is because firms can decrease their searching costs. Electronic markets may support firms to build their relationship with customers and obtain benefits from network externalities.

4.3. Impact of Digital Market on Individuals
The digital market affects not only the whole society and business organizations, but also individuals as the consumers in the market. Rappa (2007) argues that buyers in the digital market can have more information about the products and sellers in more cost-effective way than in the traditional market. Thus, it may provide not only the more choices of goods, services and suppliers, but also the lower searching cost of information in the digital market. Regarding those benefits, whether the existence of the digital market can dramatically attract consumers to migrate to online market is questionable.

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The first important factor that most consumers consider to conduct a business transaction is price. Both in traditional and digital markets, most consumers always look for the best price, which is the cheapest one. On the other hand, the difference between traditional and digital markets is the availability of the easy, convenient, cheap, and fast tool for searching the price offered among multiple sellers. Kumar, Lang, and Peng (2005, p.88) argue that digital markets have search engines which offer for the fast access and customized service at no cost, thus they may reduce the searching cost for consumers. The lower the searching cost for consumers, the lower the price (Brown & Goolsbee, 2002, p.482). However, as discussed earlier at section 3.2., we find that the lower the searching cost does not necessarily lead to the lower price because in most cases, sellers try to avoid the direct price competition by differentiating their products, which then can charge the premium price to consumers. As the result, the price level the in digital market will not significantly induce consumers to choose digital market rather than traditional market. The other important factor that may influence consumers in choosing the best channel transaction is the security of their personal data. The easy, fast, convenient and cheap way of transaction may become meaningless when the security is not assured. Ho (2006, pp.47-48) states that the valuable personalization and security system are both required to attract consumers to use digital market. Järveläinen and Puhakainen (2004, p.340) found that consumers prefer to use the traditional market than the digital one because they do not believe in the lower cost and the accuracy of the electronic transaction. We find that in most cases, building trust in consumers particularly in the inexperienced ones is hard to achieve. Thus, we can conclude that most consumers still prefer the traditional market than the digital market regarding the security and privacy issues. In conclusion, despite the benefits offered by the digital market, consumers are constrained with significant threats, such as higher prices and unsecured transactions. Hence, it is likely that fewer consumers will use the online market for conducting business transaction.

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Conclusion

5.

Conclusion
We find that the electronic market is a new form of marketplace, which usea

the internet as its communication infrastructure. Internet is argued to be the communication infrastructure mainly because it creates new marketplace architecture. Second, we conclude that the demand in the electronic market is as not elastic as expected to the price and the significant price dispersion still occurs. This is mainly caused by product differentiation. Third, we find that overall, switching costs in the electronic market do not decline even though the searching cost is likely to decrease. We also conclude that overall, suppliers and buyers should use internet as a tool to make transaction because internet will support to reduce searching costs for consumers and advertising costs for suppliers. Companies prefer to improve their customer relationship management because they want to create customers loyalty and to increase corporations’ profitability. Furthermore, ethical issue, such as security, trust, and privacy can influence consumer to be reluctant to make transactions in the digital market. The potential impact of the electronic market to individual customers is not significant because the price in the electronic market is unlikely to decline and it is difficult to build trust in customer perception. In contrast, the electronic market provides benefits to organizations because it supports companies to increase their profit and maintain relationship with their customers. The electronic market also makes market more competitive because of the heterogeneous of customers and the decline of searching costs. The growth of the electronic market affects the government to enact law related to it, since the electronic markets bring more risks than in the physical market.

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References

6.

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