This E-Commerce App is based on the Marketing App at TheProduct.com, which in turn is based on the Problem Solving Format. The logic of the Problem Solving Format should be reviewed before using this e-commerce material.
The sample site was created by a student in the Web Business Strategy course.
It is tempting to say that Web business is business on the Web, but there is much more to it than that. The Internet has facilitated new ways of doing business and hence new businesses. World-wide, real-time auctions (eBay), books and other products sold through affiliate programs (Amazon.com) and third-party perishable inventory sales (invented but perhaps not perfected by Priceline.com) are examples of businesses that require the Internet to operate.
Of course, some Internet commerce is simply an extension of sales to a new channel of distribution. Walmart on the Web is an Internet version of the traditional retail chain and Red Envelope is a gift store on the Web that could, conceivably, exist without the Internet. Indeed, with the exception of Amazon the most successful e-commerce stores right now are so-called "bricks and clicks," which are brick and mortar stores with Web sites.
Other sites serve information and service functions for traditional businesses, but even here there are many examples of services that are highly-dependent on the Internet, such as package tracking for Federal Express or UPS.
So Web business is business that is made possible by the Web. Your first challenge, then, is to consider a business that is possible because of the Internet.
Web commerce discussion
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Although you might have a Eureka! idea while sitting in Starbucks sipping a latte, it is far more likely that a good idea originates from a logical approach to idea generation. The best place to start is with consumer needs and wants, because satisfying them is what successful marketing, hence business, is all about.
Needs and Wants. Existing businesses have many ways to determine needs and wants of customers or potential customers. Sometimes customers just tell them what they want, perhaps by not buying their product! Or they may survey potential customers or simply observe competition. But as an entrepreneur, you will have to figure out how to fill a new need or want. One of the best places to start is with consumer "problems."
Think of some problems you are having as a consumer or business-to-business customer. Chances are that other people are having the same problems. For example, why is it that it is so difficult to find items from week to week in grocery stores? Sometimes they are out of stock, but other times they have been dropped. So you have to go to another store for these items but then they disappear from that store. Do we have time for this?
Based on recent history Web grocers are probably not the answer. It may be that the need is just information—what happened to this product? How can I replace my stock of it? Why can't someone do this for me? If you list some of your frustrations as a consumer, you will probably end up with a good idea for a new business.
Another logical approach to coming up with a new business idea is called Morphological Analysis. This is a technique that forces you to consider new and different combinations of product features. Some of the combinations will be products that already exist and so all you could do with that idea would be to enter an existing market with the same product. Other combinations would be nonsensical, so it would make sense to do nothing with them! But others may be so novel that they create new business categories that no one had imagined before. Of course, such ideas could be worth millions.
Automobiles sold to adults through retail is traditional automobile dealerships—not too much opportunity here. But what about automobiles sold to adults through the Internet? Id dealers didn't have such a lock on state legislatures there would be true Internet sales of automobiles.
Autos-sold-to-kids is nonsensical, but not toys sold to kids through TV. Is there a business opportunity for music sold to kids over the Internet? There are Internet businesses selling premium pet food over the Internet, although as you might imagine they have been less than popular. (It's too easy to throw a bag of Pedigree in your grocery car or stop at PetSmart. Are Internet investments for pets the next big thing?
A final approach to coming up with new business ideas is brainstorming. Get together with people you trust and brainstorm new business ideas. The give and take may produce just the right idea. Still, if the idea is not a response to a consumer need or want or a novel solution, it has less of a chance of success.
Once you have a good business idea, you must compare it with the solution offered by competing technologies or companies. Simply put, your idea has to be first, different or better.
Perhaps the biggest mistake you can make as an entrepreneur is to try to do something you are not qualified for or lack interest in. Just because something is a good idea doesn't mean it is a good idea for you.
Finally, if your idea can be easily duplicated, you stand little chance of succeeding. But there are some very logical steps you can take to protect your business idea against competition. These are called MAGIC strategies, which stands for Marketing Actions Given Intelligent Competitors. There are four levels of MAGIC strategies, but only two are relevant to protecting Web business ideas. For your business idea, which of the following strategies can you use?
As for your marketing plan, your market share would be 100% if you had no competition. One of your goals should be to figure out how to stop competition in its tracks. This is another one of those areas where logic can help (but where textbooks seem to miss the point). An approach that works in practice is called MAGIC, and we have already seen a few MAGIC strategies that apply to Internet businesses. To open up even more possibilities, here is a logical hierarchy of steps that you can take to protect your marketing plan against competition. MAGIC stands for Marketing Actions Given Intelligent Competitors, which is a pretty good assumption to make about your peers.
Here are the things you should do, in this order:
Patents, trademarks and copyrights are good places to start since they preclude direct competitive reaction. Contracts have the same effect. If you have the contract to provide weather information to a portal, no one else can do that. You can also use unique capabilities since unique means unmatchable.
After exhausting these things, you can try some things that probably won't be matched. If you have deep pockets for example, you can probably outspend your competition. If you have a product that is inconsistent with a competitor's product, you could communicate that to consumers. If your product is available in brick and mortar stores and your competitor's is not, you could probably benefit from a promotion based on this fact (something that Barnes & Noble has done a poor job with in their competition with Amazon).
Assuming that you have taken all the actions that you can that cannot be matched or probably will not be matched, then you can consider actions that are not readily visible. Your margins, your research and development budget, your sales force compensation and so forth are not apparent to competitors until perhaps it is too late. How can you price so low? (You have the lowest costs.) How can you come out with so many new products? (You have put a lot of money into R&D.) Why is your sales force beating down the bushes? (They have fat bonuses to earn.) Questions like these will puzzle your competitors.
If you have exhausted your stronger MAGIC options, you can always rely on gamesmanship, making targeted, short-term and understandable changes in your product, price, place and promotion variables. These changes will be seen for what they are, short-term moves to get a new product launched, new promotion to jump start a lagging product's sales or simply seasonal or other predictable marketing actions that are intelligent if not unmatchable. Why does everyone have holiday sales? Gamesmanship.
After coming up with a good business idea that compares favorably with competition and can be protected from it, you must decide how you will develop your new business. Without help, your business may get nowhere. But with help you may lose some control over your equity. What you must do if you are to do more than just dream about a new business is choose a development strategy and then pursue it. Another possibility is to work for another Internet company first and use that experience as the springboard for your own business.
For awhile it seemed like the days of plentiful venture capital were over, but today a good business idea that has some protection from competition can be funded with little trouble. Ideas that are not so good or ones that are easily copied will have trouble finding capital, even if they initially find customers. Groupon, for example, fails on both.
A business model is how a business makes money, i.e., profit. Sometimes marketers talk about "the razor-blade theory of marketing." Gillette makes its money by "giving away" razors and making profit on the blades. Similarly, Hewlett-Packard makes a lot of money on high-margin cartridges for printers. Other companies rely on volume to make up for low margins. Grocery stores must have high volumes to make profit on low-margin products. When grocery stores add higher margin goods or services such as prepared food or catering, that changes their business model. Similarly, automobile manufacturers have always had business models based on the fact that they make much more profit on more expensive vehicles. This is because the cost to manufacture an SUV, for example, is not proportionately more than the cost to manufacture an entry-level car. Why do you think auto companies love to sell "fully loaded" vehicles?
One way to think about your business model is to figure out the revenue equation, total revenue = price x quantity sold. It's surprising how many companies get into trouble by, say, trying to sell a few items at low margins. The business model for computer retailers has shifted as they have been forced to accept smaller margins. If volume doesn't change, they are in the soup.
Basic Business Models. There are just a few basic business models that account for most of Internet commerce:
The "business model" for a nonprofit organization is how it meets organizational goals such as membership, attendance, donations or any other measurable goal or activity related to goals.
In practice, business models are sometimes "pure" applications of each of these models, but often are combinations of models.
If an Internet year is equal to one month, you will have a couple of days to write your business plan! Not to worry. If you show it to the right people, they are also on Internet time. The key elements of a business plan include three of the things you have already done: a good business idea, a viable business model and MAGIC strategies that protect your idea from competition. The next step is to formulate a Marketing Plan.
Peter Drucker said that the purpose of a business is to create a customer. Thus, the most fundamental determinant of marketing success is meeting the needs and wants of some specific segment of the market. You must start with a definition of the market you are planning to serve. If it is books sold on the Web, the market would be the Internet Book Market. That market can be segmented by demographics such as age and gender since there could be sites for women's books or children's books, by psychographics such as lifestyle if products were designed for homebodies or adventurers or benefits sought such as price, selection and service. The intersection of each segment represents a possible market opportunity for a new product. For example, you could start a book site for men who see themselves as adventurers and value selection and service but care less about price, say Serengetibooks.com. Or you could market to all possible segments of the market, like Amazon.com or Barnes & Noble.com.
Your market coverage strategy defines your target market. If you went after the whole market with one site, that would be an undifferentiated market coverage strategy. If you planned to reach two or more markets with separate sites, say one for adults and a special site for children, that is a differentiated market coverage strategy. A concentrated market coverage strategy would be focus on just one market niche. The market coverage strategy determines your target market. For example, Amazon.com's target market is everyone (since they follow an undifferentiated strategy) while our Serengetibooks.com's target market would be the segment of adventurous men who care about selection and service.
Now you can begin to think about an exhaustive list of needs and wants for your target market without fear of coming up with the wrong needs and wants. After all, you know who is in the market.
If your product doesn't meet the needs and wants of a specific segment of the market—possibly the whole market—it will fail. Hardly rocket science, you would think this point would be so well understood that product failure rates would be low. But quite the opposite, they are high, estimated to be about 85% for consumer packaged goods! You can avoid failure by meeting consumer needs and wants.
But your product also must have meaning in the minds of consumers, something achieved through positioning. Without meaning, your product will probably fail since people will be confused about what it is relative to the competition. Why would someone visit a Web site they didn't understand? They wouldn't.
Positioning starts with figuring out how consumers make buying decisions. Here a buyer behavior analysis can help. This is a challenging task to do, but if you do it right, everything else in positioning will fall into place. The goal is to uncover, through putting yourself in the shoes of your buyers, the evaluative dimensions that they use to choose among brands in the target market. You already have a head start. You know some of the benefits sought (from the segmentation analysis) and most of the needs and wants. All you need to do is to arrange the more important ones in a hierarchy, which you can even draw as a flow chart.
Consider the process that consumers use when shopping on the Internet. Let's apply it to Amazon.com. People trust Amazon.com and certainly one-click buying provides ease of purchase. Purchase incentives for Amazon.com include sales and promotions and Amazon's service is executed with great dedication and attention to detail. Finally, Amazon offers buying rewards that make people want to come back and buy again. Are we surprised that Amazon is so successful? I don't think so.
To explain Amazon's success, we can see that Amazon has capitalized on the universal evaluative dimensions of convenience and selection and offset atmosphere with other evaluative dimensions such as product information in the form of peer evaluations and ease of buying. Competitor Barnes & Noble may trump Amazon in "literary atmosphere"—with comfortable chairs, background music and Starbucks coffee—but Amazon is convenient to those who think buying from their home is more convenience than driving to a store and Amazon effectively uses purchase incentives such as free shipping to overcome lack of atmosphere. But most of all, Amazon.com has won the trust of its customers and trust is a very important determinant of where people shop.
The key steps in the purchase process can be summarized as:
Purchase venue > Purchase intention > Purchase confidence > Buy > Purchase satisfaction > Repeat Purchase.
This process explains both venue choice and store choice. It relies on the concept of evaluative dimensions which are factors that consumers use to choose among brands. They are not the same as product attributes. There are always more product attributes than evaluative dimensions since some product attributes do not affect brand choice.
In choosing between Amazon.com and Barnes & Noble consumers may use "literary atmosphere" to help choose but are unlikely to use color of the logos, which is nevertheless a product attribute.
| Key Steps | Evaluative Dimensions |
|---|---|
| Purchase venue | Convenience |
| Price | |
| Selection | |
| Atmosphere | |
| Purchase intention | |
| — Product information | Point of purchase |
| Sales assistance | |
| Peer evaluations | |
| Purchase incentives | |
| — Ease of buying | Ordering/checkout |
| Payment | |
| Purchase confidence | Trust |
| Return policy/warranty | |
| Expected service/support | |
| Purchase satisfaction | Product performance |
| Realized service/support | |
| Buying rewards |
If this all seems so simple, that's because it is. There is virtually nothing new about Internet marketing—just too few people who understand it and who can execute it. Successful marketing is all about getting things approximately right rather than exactly wrong.
(To understand the details of this important step you can use the Marketing App at TheProduct.com.)
The final part of positioning is to substantiate the meaning of the product with product features. The product principle says that every product is a combination of physical and psychological attributes. Perception of "luxury" in a car may be substantiated by styling or features (both physical attributes) or just a name (Lexus, for example, coined to connotate luxury and elegance).
Serengetibooks.com hopefully sounds adventurous. Amazon.com sounds big. Barnes & Noble sounds, well, like a physical bookstore where you could sit down to browse through books with a cup of coffee. There are many other psychological attributes that can lend meaning to your product as well. That is why we sometimes speak of a brand "personality." Who wants a brand with no personality?
Today the idea of positioning extends even to people. After all, Facebook and Google+ are all about your "personal brand."
The core benefit proposition of a brand, then, is a restatement of its meaning in a few words, perhaps just those words that represent the brand's positioning on the evaluative dimensions. Best Buy represents—well—the "best buy." If you can't state a core benefit proposition for your product you have done something wrong. And if you don't know what it is, the consumer will never know. And that means no meaning. And that means failure.
You may have a product that meets the needs and wants of your target market. You may have a product with a clear meaning in the minds of your consumers and are positioned where their preferences are. Finally, you may have a product design that delivers on the product promise. The next thing to make sure of is that you align the marketing mix with the core benefit proposition.
It seems to be a surprise to some that the marketing mix variables are arranged in a hierarchy. Indeed, almost every marketing textbook lists them in a different order! The 4 P's of marketing should be in the order of product, price, place and promotion. In fact, since we have determined the product strategy through positioning, there are really just 3 P's to worry about.
The two most basic price strategies are skimming, which means pricing slightly above your competition, and penetration, which means pricing slightly below your competition. The competition that we are speaking of is your direct competitors. Patagonia uses a skimming strategy since relative to its direct competitors its outdoor clothing is priced higher. REI uses a penetration strategy since relative to its direct competitos its products are priced slightly lower. This does not mean that there arn't higher-priced brands—like Arc'teryx—or lower priced brands—like Lands' End.
Place strategies are distribution strategies. The two most basic place strategies are intensive distribution which means selling your product in as many places as possible to reach the target market, and selective distribution, which means limiting the number of places used to reach the target market.
Anyone who has an Internet business uses intensive distribution by definition. Normally it would be inconsistent for brand positioned as a premium or even luxury brand to use intensive distribution. But luxury brands can be sold on the Internet if their physical distribution is limited. If not, the consumer will soon realize that the brand is "luxury" in name only. And that, of course, means that the brand has lost its meaning.
Rolex doesn't sell directly from their Web site, but rather recommends dealers—and a limited number of them in each geographic location. Rolex and other luxury brands make extensive use of social media without risk to their positioning. Jimmy Choo, on the other hand, sells directly from its Web site.
The final marketing mix variable is promotion. This means that promotion—communicating product benefits to consumers—is the last thing to determine, and, in reality, is the least important. Strategy dominates tactics, so no amount of pull promotion such as media advertising or push promotion such as sales force effort can overcome a product that has no meaning. No amount of advertising could help Blockbuster if consumers didn't know what the brand stood for anymore. But in-game advertising for Redbox promises to be sucessful since consumers know just what the brand means. By raising prices and confusing consumers with new sales plans Netflix may be emulating Blockbuster more than Redbox—not a good thing.
There are not too many ironclad principles of marketing, but one of them is to advertise product benefits so that consumers can form a meaning and thus basis for choosing the brand.
If there are inconsistencies among these tactical marketing mix variables, the product may be less successful. Unlike surefire ways to fail such as not meeting needs or wants or not having meaning, poor tactical strategies usually mean underperforming your competitors. If these variables are set right, i.e., logically derived from the core benefit proposition then you will have achieved a strong marketing plan.
Remember that use of this app follows from use of the Marketing App at TheProduct.com, in particular the Problem Solving Format.
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