Online Retailers

Online retailers?
• Use a website to merchandise newly manufactured physical goods for which they take title. • Rely in third party service providers.(UPS)

• It does not describe the business model for online retailers with their own infrastructure for local delivery. • It does not take into consideration companies that use the internet to sell services.DELIMITATIONS • It is not concerned with online auction sites such as e-bay that create a market for second – hand goods. .

com) Deep discount(buy.CATEGORIZATION • Merchandising :1. .com) Group pricing( • 1. Vertical(garden. 3. Pricing:Fixed pricing(egghead. Horizontal(wal – mart) 2.

. An increase in the percentage of people online who are purchasing. 3. Increased spending online per buyer. 1.Create value for customers • Web retailing can deliver beyond what printed catalogs can deliver. An increase in online households 2.

Product categories • • • • • • • • Information. .rich products. Large selection Product trial High value –to-weight ratio Easily customizable products. Rapid changes in stock availability Replenishment driven Unpleasant environments.

• Credit card information over the web. • Inability to handle the product before purchasing. • “Lack of Familiarity”-pure play competitors. • Willingness to wait.Barriers to Online Shopping.. • “fly-by-night”. • Confusing websites. .

comparison of products and prices. • Time-sensitive Materialists-wants to save time and maximize convenience. . • E-bivalent Newbies-somewhat older. • Brand loyalists-Go directly to the website for purchasing. • Hunter-Gatherers-Married. single males with high incomes. • Clicks and Mortars-shop online but prefer offline and are more female homemakers. online and single-young.Types of shoppers. • Hooked. likes online shopping and spends the least amount of time online..

online 3% on maintaining website and 12% of revenue on warehouse. . • Online have lower general and administrative expenses. • Operating Costs- • Brick and Mortar-10% of revenue on rent and 14% on labor. customer service and other operating expenses. • Physical location.Economies for online versus offline Retailers.

• Online retailers hold less stock compare to brick and mortar. . • Online retailers have an inventory carrying cost advantage over printed catalog.Working Capital • Inventory turns at least 10 times per year versus 3-5 times in offline.

• Volume based discounts. • Co-op marketing funds. shipping expenses paid to third party courier services and credit card processing fees. • Sourcing directly from manufacturers. . • Gross margin=Revenue from product sales and shipping fees paid by customer less the cost of goods sold.Margin structure for online retailers.

• Website Development-online retailers incur costs to add features to their websites. . these technology development costs decreases with increment in sales.Contd… • Distribution and customer service expenses-cost associated with picking and packing merchandise.

GBF . • Amazon and its profitability. Amazon – 21%.179% of revenue.Sales and Marketing • Pure play online retailers has spent heavily. eToys – 9%. • PlanetRx. • Profit margins in online retailing are sensitive to scale. • PlanetRx. • Implication. General and Administration • Semi-fixed overheads. • Balancing the cost of customer acquisition against lifetime value of these new customers. Amazon – 4%.25%. eToys – 43%.

$1 billion sales in three years. . scale economies are significant. Network effects: • Occurs when adoption of a product or service by a new customer increases the value of that product or service for customers already using it. • Conditions: strong network effects.GBF • Amazon. high customer retention rates. • Minimal for online 6-10 years by other brick and mortar retailers.

• Drugstore companies. • Volume growth yields economic benefits. d. c. Customer service performance Personalizes recommendations Switching costs Loyalty programes. • Attributes to promote customer retention: a. booksellers and computer retailers vs their breakeven point. b. .Scale economies • large share of their cost base varies directly with revenues. • Magnitude of scale benefits varies by product category. Retention rate: • Retention rates and network effects.

com by Discovery etc. No significant benefit from scale of economies.Why GBF strategy fails? • • • • • • First: online retailers do not benefit from network effects. No benefit from intrinsically high customer retention rate. Pets. “Amazon of the XYZ category” Opportunities for entrepreneurs and venture capitalists: Petstore. Wave of imitation :Amazon and their strategy. .com by Amazon.

c. b.Online supply of pet retailing: • Site do not exhibit positive payoff for GBF strategy.intensive. • By 2000. Logistics: e-tailers cannot fill orders. Communication: between e-tailer’s website manager and managers in fulfillment operations. • Executionally. • Difficult to achieve differentiation. . mostly failed or laid off workers. a. System integration between call centers and warehouse database.

com a) Difficult channel entry. b) Offline competition is relatively fragmented.• Exception : Staples. .

g.Lifetime Value of a Customer • Clear indication with e. eToys .com that – GBF.g. of investments in customer acquisition has meaning when: • Lifetime value of new customers acquired > cost of acquiring them • If there is a low retention rate then lifetime value decreases and vice versa • E. Amazon Vs.

Tactics for Success Customer Service Community Personalization .

Channel Delivery & Returns .Issues Facing Online Incumbents • Incumbents’ Advantage: Branding & Customer Relationships Supplier Relationships Fulfillment & Customer Service Operations Cross.

Gap’s report says that 50% of its multichannel shoppers spend more as they did before only in brick’s-and-motor’s stores. . So.INCUBEMENT’S DISADVANTAGES 1. Threat of cannibalization of their offline business(self cannibalize) As online business can reduce its market It has been proved – customers who shop through all three of its channel (stores. and website) spend much more heavily than its “catalog-only” customer. no customer loyalty worked here. catalog.

Contd…. Coordination of online and offline activities. Both has to be in tandem(lined up one behind another) Their has to be coordinating price policies . 2.

online business has increased the sales Eg.Strategy The idea of extension has resulted in profit for some retailers . Staples .

customer service capabilities of offline business) . distribution.WHO WINS ? Established companies start putting efforts in arena where they lack expertise . Incumbents has considerable advantage as they move online (brand and customer relationships.

Some Strategies 1.  This shopping bots is good(source of sales referrals) and bad as comparison is done . .  This can lead to price wars between online retailers. SHOPPING BOTS  Websites which collect information from multiple online retailers on their product pricing. goods. features. and availability.  According to users online products are comparable high than offline but some brand has done well like Amazon(offers are given no low pricing strategy ).  This made users to compare price.

Disintermediation Manufacturer sell directly to consumers not through retailers Expected to be “biggest. baddest” impact on online retailing Manufacturers fear by directly selling because of their retailers Eg. Levi’s jeans their strategy failed as it is very tuff to manage supply chain .

HYBRID BUSINESS MODEL – retailer and content provider It is difficult to manage: Require mastery of diverse skills Sourcing content can be expensive . Garden. Combination of online retailing with other Internet business models Eg.

Kmart (partnership with yahoo!) Help in strengthening relationship with their customers . Combination of online retailing with other Internet access provider business models Eg.2.