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December 7, 1998

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Myths And Realities

continued...page 4 of 4

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Meanwhile, conventional distributors are embracing the Web. W.W. Grainger Inc., the largest business supplies distributor in the United States with revenue of more than $4 billion, is building an electronic catalog to let customers buy online directly from their SAP R/3 applications. In the computer industry, Dell and Gateway aren't the only companies that let customers configure and buy their PCs online; No. 1 distributor Ingram Micro is adding that capability to its extranet for resellers and retailers. Few companies have leveraged the Web earlier and more effectively than semiconductor and electronics distributor Marshall Industries, whose E-commerce site helped boost sales 24% in fiscal 1998.

But perhaps most notable of all is the rise of new, usually industry-specific Web intermediaries. Almost every industry has one: Chemdex for chemicals, MetalSite for steel, pcOrder.com for computers, PlasticsNet for plastics, Instill Corp. for food services. Because the Internet makes it easier to aggregate information and commerce capabilities for an entire business community, these new intermediaries are bringing buyers and sellers together online.

"As long as you have an industry with a fragmentation of suppliers, you will always have middlemen," says Venky Harinarayan, VP of business strategy at Junglee Corp., a content aggregator acquired earlier this year by Amazon.com. Adds Chemdex president David Perry, "If you have only three or four suppliers, you certainly don't need an electronic marketplace. But most industries have a lot more than that."

MYTH NO. 7: It means the end of mass marketing.
Once again, the theory is simple enough: The Web is the first communications channel that enables cost-effective one-to-one marketing on a huge scale. Marketing to a "segment of one" has long been the goal of database marketing, data mining, and telemarketing, but Web technology enables marketing of unprecedented exactitude and low cost.

But how do companies get people to come to their Web sites in the first place? Customization and personalization are fine for customer retention but not so good for customer acquisition. "In the global world of the Internet, what counts is brand," says Compaq's Meyer. That's why Yahoo posted billboards at San Diego's Qualcomm Stadium during the World Series, and why Web shopping site Buy.com kicked off a $25 million mass marketing campaign with ads on Monday Night Football last month.

Can consumers click on a stadium billboard or TV ad to purchase something, which is what the "mass marketing is dead" pundits claim all ads should let buyers do? Of course not. Buy.com founder and CEO Scott Blum knows that it will take conventional marketing channels such as Monday Night Football, as well as low-priced merchandise online, to achieve his company's goal to leapfrog Amazon.com. "We want to be a household name," says Blum, and that won't happen with only targeted Web banner ads. Witness the proliferation of mass-media ads for Web sites during the current holiday shopping season.

Mass marketing is also a necessity for the captains of online industry. Dell isn't the largest online PC seller only because of execution; it also heavily markets its direct-selling approach--on prime-time TV and elsewhere. "In theory, an Internet-only computer company should have surpassed Dell by now," says US Web's Laube. "But there is no 'PCs.com,' at least not one that's been very successful. In E-commerce, branding and mass marketing are more important than ever."

Ultimately, that's just common sense--at least for those who understand there's more to E-commerce than click-throughs. "You can't just build it, because they will not come," says Cliff Conneighton, CEO of Icoms Inc., which has developed commerce sites for Houghton-Mifflin, Hasbro, Fujitsu, and other companies. "Tiger Electronics doesn't expect people to find Furby.com, so they run TV ads. The Net is like TV with 10 million channels. You can't just hope that someone surfs by."

MYTH NO. 8: It leads to product commodization.
Some disciples of this dogma point to Priceline.com, the site where consumers set the price they want to pay, then let airlines and other suppliers compete to meet that price. Certainly, it's an innovative model that wouldn't be possible without the Web. Online auction sites such as OnSale and eBay have also been successful and have their place for some types of products. But price isn't the No. 1 selling point for most companies online.

Amazon.com and Dell have the most online customers in their industries, and they don't always offer the lowest prices. That's because customers also want brands and service they trust. And they're figuring out that searching the Web to save a few bucks can be no less aggravating than driving all over town for a bargain. Online shopping agents, or "bots," such as Excite Product Finder and MySimon, have their fans, but they can still be frustrating and ineffectual (see story, "Call Your Agent For Online Shopping").

"In E-commerce, the quality of the participant is more important than ever," says Office Depot VP Gaffney. "Price information alone is very imperfect information. It tells you nothing about reliability, product availability, merchant behavior, or returns and exchanges policies. You might be able to lure online customers with the lowest price, but it doesn't mean you keep them."

Even in commodity industries, price is only one factor in E-commerce strategies. "Gas and electricity are commodities that we sell online, but there are differentiating things we can do in the E-commerce space," says PG&E's Keast. "We're developing billing information and the ability for a buyer to customize their bill online. Our role is to differentiate the commodity by providing other things around it that add value."

E-commerce is anything but a myth. It's a major trend that's reshaping businesses and the IT that runs them. But there's a common theme that runs through each of the myth dissections above: E-commerce, in almost all cases, doesn't change some fundamental rules of business.

Doing business on the Web successfully takes capital, innovative leadership and execution, marketing savvy, perseverance, and the intelligent application of IT. As the Internet continues to speed the pace of change in the coming years, many aspects of business will be altered and transformed--but those guiding principles will always remain.