Misguided Models of E-Commerce:

The U.S. Experience in the Late 20th

Century

Dr. Bert Rosenbloom

Professor of Marketing and
Rauth Chair in Electronic Commerce
LeBow College of Business
Drexel University
Philadelphia, Pennsylvania USA
E-commerce in the United
States during the last few
years of the 20 Century
th

was based on some rather

dubious models that
contributed to its rapid
implosion during the first
year of the new millennium.
In this presentation we will
present some of the most
popular misguided “new
paradigms” and explain
why, in most cases, they
were not a solid foundation
for the future development
of E-commerce.
The forthcoming list of
misguided E-commerce models
is not an exhaustive one, but
will include the most commonly
heard and heavily publicized
“new paradigms” that emerged
during the height of the E-
commerce phenomenon in
the United States
 Misguided Model #1

Disintermediation
Elimination of middlemen in distribution channels

Intermediaries become superfluous because producers

gain exposure to vast numbers of customers in
Cyberspace

All that’s needed is a Web site.

Millions of customers have access to thousands of
producers via the Internet. So, who needs middlemen.

 Dell Computer $40 million per day

 Misguided Model #2
Lower Average Cost for Internet Channels
$ Per Unit
of Product
Sold Conventional
Channel
ATC

C1

0 Q1 Units of Products Sold

$ Per Unit
of Product
Sold Internet
Channel
C1

ATC

0 Q1 Units of Products Sold

 Profit After Break-Even Point Paradigm:
Conventional vs. Internet Distribution Channels
Conventional Model

TR
$ Costs & BE Point
Revenues Profit
TC

Loss
FC

Sales (units)

Internet Model
TR
$ Costs & BE Point
Revenues
Profit

TC
Loss
FC

Sales (units)
 Misguided Model #3
Physical Products Flow Over the Internet

 Five Flows in Marketing Channels

 1. Product flow
 2. Negotiation flow
 3. Ownership flow
 4. Information flow
 5. Promotion flow

 Internet superb at handling 2,3,4, and 5 because these

can be digitized and moved at speed of light.
 Product flow cannot be digitized and is processed
(often by humans) and moves at best at speed of
sound.
 Product flow is the Achilles' Heel of E-commerce.
 Misguided Model #4

Profits Can Wait

 Why?
 Because in the world of E-
commerce, if the firm has
earned a profit “too soon” it is
probably spending too little to
stake its claim by establishing
infrastructure and customer
recognition as a destination
Internet player
 Misguided Model #5
First Mover Advantage
It’s not important to have a perfected or
even a carefully considered business
concept or plan to operate on the Net.

The same goes for offering an IPO.

What is important is to be first because

the first is the one customers remember.
 Misguided Model #6
Market Cap is All That Matters

Who cares about sales, earnings, real assets and people.

The only thing that matters is the size of
your market capitalization
Sales Earnings Office/Store/Factory Employees Market Cap
Space

AOL $2.6B $92M 1 Million Sq.ft. 10,000 $130.52B

Broadcast.com
$22.4M ($16.4M) 28,000 Sq.ft. 250 $4.92B
Ebay $47.4M $2.4M 22,000 Sq.ft. 130 $21.26B
Amazon.com $610M ($124.5M) 28,000 Sq.ft. 1,600 $30.61B
Yahoo $203.3M $25.6M 171,000 Sq.ft. 673 $37.93B

GM $161.3B $2.8B 2.2 Million Sq.ft. 600,000 $57.47B

Wendy's $1.95B $123.4M 5,391restaurants 10,600 $3.49B
Sears $41.32B $1.1B 69 Million Sq.ft. 296,000 $16.61B
CVS $15.3B $382.8M 4,056 drugstores 90,000 $16.80B
Boeing $56.2B $1.1B 4.3 Million Sq.ft. 230,000 $37.17B
 Misguided Model #7
Convenience and Efficiency are King
 Business to Consumer Market
 E-commerce via the Internet would grow spectacularly because consumers
want convenience and Internet shopping provides the ultimate in
convenience.

 Caveat
 How about behavioral motives for shopping?

 Business to Business Market

 E-commerce via the Internet will be virtually the only way
 businesses deal with each other because of the cost effectiveness and
efficiency of the technology.

 Caveat
 Non-rational motives also exist in the B-to-B market.
 Misguided Model #8

The Pure-Play Advantage

 In the world of E-commerce, new start-ups
have a huge advantage over firms with
established conventional marketing channels
because they can avoid channel conflict.

 Conventional channels of existing companies

become “baggage” when they attempt to sell
via the Internet. The poster child is:

 Compaq Computer
 Misguided Model #9

Valuation by Publicity
 Publicity, promotion, and hype generated by the dot.com firm
its executives, investment bankers, and the media create a
“buzz.”

 Excitement and wild expectations about the firm would drive

up its stock price drastically

 IPO mania creates:

 Stock price of dot.com correlated to news releases.
 Positive spin must be fostered and maintained.
 Generating “news releases” becomes more important then
substantive progress.
 Misguided Model #10
Internet is a Whole New Culture

Unless you are:

 Under 30
 Have virtually no experience
 Untainted by having worked at a conventional
company
 Guaranteed substantial stock options
 Convinced you are a master of the Web universe

 You are not suitable to work for, provide consulting

to, or even mix socially with the Internet elite.
 What We’ve Learned
about B2C E-Commerce:
A Multi-Channel
Perspective
 Three Dimensions
Underlying
E-Commerce Channels
Technological Dimension
Economic Dimension
Behavioral Dimension
 Technological Dimension of

E-commerce Channels
 Information technology placed on pedestal and
worshipped
 “Internet changes everything”
 Transformational force to revolutionize
individual and institutional behavior
 If something could be done it would be done
 Technology drives channel strategy and
structure
 Everyone will do all their shopping on the Net
 Economic Dimension of
E-commerce Channels
 Efficiency and cost savings are key
 Physical Infrastructure (bricks and mortar)
replaced by electrons flowing through
cyberspace
 Disintermediation would be inevitable result
---efficiency of direct connection of buyers
and sellers via the Internet would make
middlemen superfluous
 Economics drives channel strategy and
structure
 Behavioral Dimension of
E-commerce Channels
 Technology and economics are
supply side dimensions (demand
adjusts to the will of supply)
 Behavior is a demand side
dimension (supply adjusts to the will
of demand)
 Behavior of consumers drives
channel strategy and structure
Customer Centric Marketing
Channels

All of the major areas of channel

management including strategy
formulation, channel design,
selection of channel members
and adaptation of channel
structure over time must be
derived from patterns of
consumer behavior
 Multichannel Strategy is the
Only Channel Strategy for
Most Firms
 Differentcustomer segments may
choose to buy via different channels
 The same customer segments may
choose to buy through different
channels in different circumstances
 Both of the above may change their
channel preferences over time
 Online Sales (2001)
Pure E-tailers vs. Multichannel Retailers
Product Market Size e-Tailers Multichannel
Apparel $1.1 bil. 19% 81%
Autos $1.9 bil. 37% 63%
Book s $1.4 bil. 74% 26%
Collectables $3.1 bil. 100% 0%
Computer hdw. & sfw. $6.6 bil. 18% 82%
Consumers Electronics $750 mil. 43% 57%
Dept. Store Products $1.0 bil. 47% 53%
Event Tick ets $800 mil. 3% 97%
Flowers, Cards & Gifts $540 mil. 20% 80%
Financial Brok erages $6.4 bil. 27% 73%
Food & Beverage $340 mil. 64% 36%
Home & Garden $400 mil. 24% 76%
Music & Videos $1.1 bil. 85% 15%
Toys $360 mil. 71% 29%
Travel $7.1 bil. 42% 58%

Source: (Business Week E-B:2 )

 Bricks and Mortar Retailers
Here To Stay
Online Retail Sales as Percentage of Total Retail
Sales
Category 1999 2001 2003
$ % $ % $ %
Personal Computers 3.8 19.3 6.4 28.9 10.2 40.4
Book s 1.3 4.5 2.7 8.6 4.9 14.3
Software 0.9 14.8 1.8 28.1 3.5 48.9
Apparel 0.8 0.5 2.4 1.4 6.7 3.7
Consumer Electronics 0.4 1.0 1.0 2.2 2.1 4.7
Music 0.3 2.3 1.0 9.2 2.6 14
Toys 0.3 1.3 0.7 2.8 1.6 5.6
Groceries 0.2 0.1 2.0 0.4 7.5 1.5
Source: Jupiter-Media Metrics
 Retailing becoming
“Threetailing”

Store Come in
Catalog Call in
Website Log on
 Threetailing Requires
Integrated Channel Strategy
“Left channel” has to know what the “right
channel is doing

Channel confluence instead of channel

conflict

Cross channel synergies should be the goal

 Integrated Multiple
Channels will be needed to
meet the demands of the
new breed of consumer
“channel surfers.”
 National Retail Federation
Study of Channel Surfing
 Integrating all three channels increases
customer spending
 50% of online shoppers who receive a
catalog look for or buy something they
first see in print
 Store shoppers who visit a retailer’s Web
site purchase 8% more frequently and
have 24% higher transaction amounts
compared with the average shopper
 Retailer Brand Equity = f(s,c,o)
Where:
s = customer satisfaction with store channel
c = customer satisfaction with catalog
o = customer satisfaction with online
 Conclusion:
The Winner Will be the
Channel Convergence (Multi-channel)
Paradigm

“Pure-play” Internet firms operating only in cyberspace had the

early advantage.

But long-term future belongs to the “bricks and mortar,”

“legacy, land-based firms.”

The “old economy” firms are leveraging their name

recognition, resources, and infrastructure and will overwhelm
the “new kids on the block.”