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Marketing & Consumer Behaviour

The Impact of the Internet Peter Cook 17th February

Henley Business School 2012

www.henley.reading.ac.uk

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

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!

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 promotion

Sources ONS, Tesco

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)

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 ..

Revenues US$38,491Million Profits US$11,815 Million

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 pays you 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..
Anderson 2009 Free 13

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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The Problems of Place


Legal Issues
The Customer is inArgentina the UK Germany The Supplier is in China The Order Processing Website is Hosted in India The payment intermediary is legally based in Luxembourg The Cayman Islands The payment is made in US$ via a server in the US The Courier isMexican Australian

Which legal jurisdiction controls things What tax rate is paid


By whom To which authorities 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% 92% 83% 81% 78% 76% 71% 71% 67% 65% 65% 61% Use a search engine to find information Send or read e-mail Look for health/medical info Check the weather Look for information about a service or product Get news Buy a product Watch a video on a site like YouTube or Vimeo Visit a local, state or federal government website Buy or make a reservation for travel Use an online social networking site 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


70% 68% 66% 64% 62% 60% 58% 56% 54%
Source: National Statistics website: www.statistics.gov.uk Crown copyright material is reproduced with the permission of the Controller of HMSO

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

52% 50% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Year

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


Revenues from each Class

Cost of supplying each Class

Ignored

Products Listed by Frequency of Sale


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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 Market Loses either way?

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Ethical Issues
Spam Direct marketing E-mail 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


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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 your computer You never know what her Internet friends might be doing with the information!!
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