For many retailers, the great promise of the Web is that it will bring them closer to their customers. They hope to use the new medium to gather detailed data about consumers, so they can then make an informed sales pitch. Data may range from the very basic (a customer's age and address, for instance) to the very specific (the customer likes blue flower motifs). The greater the amount of information, the argument goes, the greater the cross-sell potential. For instance, knowing a customer has just purchased a home may provide a golden opportunity to sell everything from kitchen appliances to fertilizer, grass seed and a book about the history of the new community. We have already seen the beginnings of tailored marketing on the Internet. Through e-mail, for example, 1-800-Flowers, the flower delivery company, is able to remind a customer that it is time to send his or her mother a bouquet for her birthday.
Managers such as Terrence Murray, chief executive officer of the Fleet Financial Group, are excited about using the Internet to get to know customers as individuals. Knowing more about each consumer, Mr. Murray believes, will allow Fleet to "cross-sell" different products to the same customer in a way that has proved elusive until now.
"The problem is that we've been trying to sell customers the wrong products," says Mr. Murray. "But the data we can get from the Internet changes everything. If you know someone is 35 years old, has just had a kid and earns $50,000 a year, chances are he's not going to be interested in another credit card. But he may be interested in a mortgage."
This is an extension of the "relationship marketing" theory that became popular in the mid-1990's. Relationship marketing means retailers strive to learn a lot about their best customers, then reward their loyalty with special promotions and services. The Internet, because of the great amount of data it can generate, means retailers can take this a step further. They can get to know all their customers, then seek to sell them only the products their customers want when they want them.
Yet "tailored marketing" on the Internet is doomed to fail. Here's why: Customers don't want a large number of corporate relationships.
"It is not in the customer's interest to have a relationship with a Web store," says Phillip Kotler, an international management consultant and author of "Marketing Management" (Prentice Hall, 1996). "They are all trying to build bonding, but the customer is better off being disloyal." The fewer ties individuals have, the freer they are to seek out the best deal on the market. In the Darwinian world of the Internet, the rewards of relationship marketing may be too meager to keep shoppers from looking elsewhere.
Annoyance factors also inhibit a consumer from getting too close to a corporation. We've seen this in the failure of many attempts at relationship marketing in the bricks-and- mortar world. In the 1990's, retailers flooded shoppers with smart cards and value cards in the mistaken belief we would all welcome the rewards.
Instead, most of us got fed up with carrying around so much stuff all the time. The benefits often took too long to achieve, and meant there was one more thing to monitor. For three years, for instance, I purchased shoes at the children's footwear store, Stride-Rite, receiving a stamp for every pair. I invariably forgot my card, and had to ask for a new one. At the end of three years, pulling together five separate collections of stamps, I got a free pair of sneakers.
My main sentiment was relief, not that I had saved $35, but that I had finally rid myself of all those cards. Unfortunately, my wallet is still stuffed with others that were issued to encourage my "loyalty" to various stores and chains.
While I feel I cannot throw them out, they do not influence my buying patterns. Rewards are supposed to work better on the Internet, because the computer keeps track of everything. We don't have to worry about carrying around our smart cards, or asking vendors to stamp them when we make a purchase. Yet tailored marketing on the Internet will not be annoyance-free.
The annoyance level will rise as more companies get in on the act. While a customer may welcome one reminder from a flower company about her mother's birthday, 30 reminders from 30 vendors will probably just make the customer mad. As the volume grows, junk e-mail may prove as ineffective as junk mail, which elicits a response from just a small fraction of its target audience.
While big-ticket items with huge loyalty awards - such as frequent flyer mileage - have been shown to influence consumer behavior, very few retailers fit into this category. Some buyers may stick to a certain vendor to get that free box of fax paper, but most will probably make their decision based on current price and value.
It is important to remember, too, that even the most successful players in the relationship marketing game - the airlines - have not been able to parlay the extra customer loyalty into big profits. Since everyone is doing it, any advantage to be had in offering frequent flyer mileage was wiped out long ago.
Staples Inc., the office supply store, is very conscious of the limits of tailored marketing. The chain, which launched a sweeping Internet sales initiative earlier this year, is keen not to repeat on the Web the mistakes it made in its bricks-and-mortar stores in the late 1980's and early 1990's. "We started out in 1986 as a quasi membership club," says Jeffrey L. Levitan, senior vice president of Staples.com. "People would be issued an identification card so we could keep track of who you were and what you bought.
"The maintenance costs of this system, though, were too high. Another negative was that people thought you had to be a member to shop in the store. We also came to realize that the most valuable information was to organize buying patterns into 'clusters,' rather than focusing on individuals. It's hard to build corporate strategy around the habits of a single person."
In designing its new Web site, Staples has drawn on lessons from its past to avoid bringing customers closer than they want. "We have a system that lets you anticipate when you might run out of fax paper and send yourself an e-mail," says Mr. Levitan. "But we won't do it for you. We want to avoid anything that smacks of Big Brother."
CUSTOMERS LESS 'STICKY' THAN RETAILERS BELIEVE
Investors in Internet stocks have built a cult around market share. One thing highly valued retailers such as America Online and Amazon.com have going for them is the number of customers they serve. A common argument is that these companies were in the game early enough to win a large segment of the market, and that latecomers will have a hard time breaking their stranglehold. Yet accumulating a lot of customers today will not guarantee that the customers will stick around tomorrow. In fact, customer "stickiness" on the Internet is likely to diminish over the next few years.
Today, hassle factors often work in retailers' favor, discouraging Internet consumers from changing allegiances. Many people tell me they shop at Amazon.com rather than Barnesandnoble.com in part because they already have an account set up at Amazon. The bookseller knows the customer's credit card number, shipping address and other details - data that takes time to enter on another site.
The hassle factor of switching plays an even bigger role on sites where customers set up an ongoing "shopping list." Online grocers, for instance, allow customers to list the supplies they need on a regular basis, products such as cereal, bread and bottled water. Setting up such lists can easily take an hour, so shoppers think long and hard before switching to a competitor.
This does not mean online vendors can feel complacent. As technology improves, the time it takes to set up such lists should shrink. Even more important, customers may be eager to switch if offered strong financial incentives. Consider the example of the telephone companies in the 1990's: Many will give an individual $100 in cash in addition to discount plans to customers willing to change carriers. If Barnesandnoble.com begins to offer $100 in free books to set up an account there, Amazon.com's customers could begin to slide out the metaphorical door.
Retailers may fool themselves into believing their customers will remain loyal because they enjoy being part of a community. Once, this was probably true. As Amazon.com shoppers, early Internet adopters felt they were part of a technologically savvy elite. Mass usage of the Web is changing that culture rapidly. Even Jeffrey P. Bezos, founder and chairman of Amazon.com, no longer thinks this kind of sentiment counts for much. "We on the Internet should be terrified of customers because they are loyal to us right up to the point that someone else offers a better service," he said recently in a speech in Washington, D.C. "The power shifts to the consumer online."
Such nervousness has probably fueled Mr. Bezos' forays into virtual music, discount pharmacies, auction houses and grocery stores. He is hedging his bets because he is not sure Amazon.com's book customers are as sticky as investors once believed.
PREDICTING THE FUTURE GETS A BIT TRICKY
On the Internet, vendors run historic data through computer programs to forecast consumer behavior. The trouble is, spending patterns of today may have little to do with what a shopper purchased yesterday. Web vendors can often seem more like Blind Brother than Big Brother. For example, one of the most vaunted customer profile systems now used on the Internet is the individualized book recommendation list at Amazon.com. Amazon.com collects data on customer purchases and uses them to make projections about what other books might be of interest.
Many of the recommendations are obvious. If someone just purchased a book by a certain author, the computer reasons, the customer may be interested in another book by the same author. Others are subtle, predicting tastes by grouping the consumer with like-minded customers. The system often works, but sometimes misses the mark completely.
I frequently purchase books for work through Amazon.com. In preparing for an interview with a particular author, I ordered most of his past writings through Amazon. Nine months later, Amazon.com still believes I have a deep interest in the subject matter, and has recommended the author's new book. The Amazon.com computer thinks it knows me in a way it does not.
Computers cannot anticipate our needs in the way an old-fashioned salesperson could. Decades ago, local vendors could truly use knowledge about a customer to guide them to the right purchases. For instance, a woman whose husband had been laid off might walk into a shoe shop in a small town. A salesman would know through the grapevine that the woman's financial circumstances had changed. Even if the woman had always purchased the most expensive shoes in the store, he would anticipate that her needs had changed, and direct her to a less expensive pair.
But wait, you may say. It is unfair to compare the Internet with a small-town vendor. We should compare the Internet to the offhand service at big chain retailers, where most of us now shop, and where service is dismal.
While this is true up to a point, the value of face-to-face contact cannot be underestimated. "The Web is a difficult interface," says John Little, a professor specializing in e-commerce at the Massachusetts Institute of Technology. "It's not terribly warm."
PRICE PLUS VALUE
When Mr. Murray of Fleet Financial told me about his vision for cross-selling on the Internet, I asked him about the impact of pricing. Even if Fleet correctly guessed that I was in the market for a mortgage, I told Mr. Murray, I would not necessarily take the bank up on its offer. Rather, I would run a quick search to get the lowest mortgage rate I could. Mr. Murray conceded that some customers would do this, but insisted others would be interested in maintaining a relationship with Fleet.
Those loyal few are more likely to shrink than expand in number as the Web makes price research easier. Market transparency has the potential to destroy entry barriers to online retailers and undermine brand loyalty. Bargain hunting on the Internet is ballooning, in fact, as "bots" and auction sites gain in popularity.
Bots such as Junglee.com, mySimon.com and Pricescan.com post the prices of retailers that have signed up with the service to help customers choose the cheapest price on particular items. These bots are capable of conducting a tremendous amount of price research on specific items within just a few minutes. A recent search for John Grisham's "The Testament" on Pricescan, for instance, showed the book was being offered for $23.51 at Barnes & Noble's online store, a penny cheaper than the Amazon.com quote. The best bargain was at the Compaq Computer Corporation's shopping.com, an online retailer, where it was listed for $17.47.
Auction houses are also gaining popularity. Forrester Research Inc. predicts online auctions will be a $19 billion market by the year 2003. The biggest one, eBay Inc., has 6.5 million visitors a month and, in May, had a market capitalization of about $23 billion, about three times that of the Kmart Corporation.
The auction houses have gained such a foothold, in fact, that traditional stores have embraced the concept. The Web site for Lands' End Inc. has been experimenting with such reverse (or "Dutch") auction transactions for two years. Every Saturday, it puts a limited quantity of an item, say down jackets, on sale for 25 percent off, but warns customers that it will continue to cut the price during the week. Consumers have to weigh the value of the discount against the probability that the item will sell out. They then decide when to bid.
So far, retailers have comforted themselves with the knowledge that price does not count for everything. Most consumers will also consider value, service, delivery schedules and other factors in making a purchasing decision. Through branding, a company convinces a consumer that it can provide superior value. This is what creates customer loyalty.
Yet greater market visibility on the Web means retailers will be under far greater pressure to provide better value all the time. That is because bots plan to build comparisons for service and quality as well as price. MySimon, for instance, has plans to extend its research capability to give consumers a better sense of value. "We are moving into the next generation of bots, which will not focus exclusively on price, but on quality, terms of sale and other factors," says Michael Yang, chairman and co-founder of mySimon Inc.
Frictionless Commerce Inc. is also creating an online system that will provide automated comparison shopping to consumers for a small fee. "Our technology allows the kind of comparison that says: 'These two computers are about the same price; one has greater memory but longer delivery time. Which do you prefer?'" says Alexander F. Kleiner 3d, president of Frictionless Commerce.
These kinds of systems are likely to make consumers even more fickle. In the bricks-and-mortar world, retailers can take advantage of some amount of customer ignorance. When in doubt, buyers are more likely to stick with the retailers and products they know. Circuit City Stores Inc., the discount electronics chain, once conducted a study that concluded shoppers would only forgo a purchase if they thought they could find the item for $25 less at another place. On the Web, that kind of cushion disappears.
As retailers accept that consumers are bent on price and value comparisons, a number are moving to provide that service. Staples' Web site has begun to furnish comparison information that lines up high-priced items such as fax machines attribute by attribute and price by price. The company plans to expand this service substantially over the next few months.
The J.C. Penney Company is also investing heavily in advice sections to aid consumers in their choices online. The store has a Web fashion center, for instance, that matches skin tone, hair color and other information volunteered by the consumer to create recommendations. The company plans to expand such services in other areas, such as interior decorating.
A company using a similar strategy is Insite Marketing Technology. The new company is creating software to improve retailers' ability to provide information to customers. The idea is being used at the CompUSA Web site, where a customer can get help from a virtual sales advisor. The advisor asks buyers to prioritize their requirements for a laptop, for instance, including specifications for disk drive, weight, battery life and other factors. The advisor then makes recommendations based on the information. Similar questionnaires are used by a number of automobile sales sites.
While recommendation sites share some aspects of tailored marketing, there are key distinctions between them. First, the consumer's current, not historical, requirements drive the recommendations. Second, the shopper, not the retailer, is in the driver's seat. Contact is made only at the customer's bidding.
POWER SHIFTS FROM RETAILERS TO CUSTOMERS
It is easy to see why retailers prefer the tailored marketing approach. Under tailored marketing, companies, not customers, decide when and how they will contact customers and which products will be showcased on a specific day. The success of tailored marketing would mean a shift of power to retailers. What is actually working in the marketplace is far more aggravating to businesses. With perfect or near-perfect information flowing to them, consumers are likely to turn to a multitude of providers, switching allegiances depending on the price, quality and service available at a given moment.
In such a world, companies will have an increasingly difficult time expanding margins. Every time they try to boost prices, they stand to be undercut by competitors. "We have to accept that in such a world, we won't win every time," says Michael Ponder, who heads the Internet initiative at J.C. Penney. "We'll try to always offer the best product, service and value possible, but at times someone else will get the sale. That's the reality of the Internet." In such a world, how much information companies have about individual buyers is not likely to make much difference.
Web Superstores vs. Specialty Retailers
One uncertainty on the Internet is what kind of site will rule the day: broad-based vendors that can provide products from dozens of different categories, or specialist players. It is a hot question, with Amazon.com moving well away from its expertise in books to tackle music, toys and groceries.
In theory, broad-based should dominate. In the bricks-and-mortar world, retailers are restricted by the size of their store, but on the Web, which has unlimited shelf space, of- fering more of one product category does not necessarily mean selling less of another. Amazon.com could, conceivably, carry not just every book in print, but also every music recording or film video.
Right now, confusion favors broad-based players. According to a study by Zona Research Inc., most people using the Web still do not know where to go to buy certain items. This helps explain the growing use of portals such as Yahoo! and Excite that help people get where they want to go. Online retailers also have strong economic incentives to become more broad-based. Amazon.com, for instance, has spent so much money to gain customers that it now needs to sell them a variety of products, not just books, for the investment to be worthwhile.
Yet, in the long run, specialty vendors may hold an advantage. "I can"t help but think Borders and Barnes & Noble smile every time Amazon announces it"s getting into a new category," says Michael May, an Internet analyst with Jupiter Computer Communications. "It"s been easy for Amazon to position itself as the largest bookstore in the world. As it moves into other areas, that message gets diluted, and shoppers may very well begin to turn to competitors with the assumption that they know more about books."
Jeffrey F. Rayport, an associate professor at the Harvard Business School, predicts the Internet may go the way of the American shopping mall. "When malls first started, they tended to be grouped around big department stores," says Mr. Rayport. "As time went on, they increasingly broke down into specialist shops, because it was easier for consumers to find what they wanted that way. The question on the Internet is: 'Do these stores get smarter or dumber the more products they take on?" I think they get dumber."
The kind of expertise that specialty stores provide can command a premium on the Web. Brien Curran, who runs an auction site for sports memorabilia, says his buyers will pay up to 35 percent more for a specific item at his online store than what they might pay at the large online auction house eBay. "They pay a premium for two reasons," says Mr. Curran. "First, because I guarantee my merchandise. Second, because it"s easier to find what they want on my site. They don"t have to sort through all the other products to find something."
Many Web specialty stores will probably be extensions of bricks-and-mortar businesses. These companies are learning to leverage their distribution channels and customer service expertise to provide value, and are becoming fierce competitors in cyberspace.
The online site for Bloomingdale"s, a division of Federated Department Stores, for example, now allows customers to order what they want on the Web and pick up the items the same day at a physical store. Staples, the office supply chain, can usually provide next-day delivery on online orders. Amazon.com, which does not have physical warehouses and distribution channels, can take two weeks to deliver items to customers.
As in the physical world, the Internet in the long run will probably include a mix of specialty and broad-based players, each offering different advantages to the customer. "If a customer is mainly interested in saving money, the broad-based retailers have a place," says Jill Frankle, an Internet analyst at the International Data Corporation. "They will be the Wal-Marts of the Web. But if customers are primarily interested in saving time, the specialty players will have an edge. There"s less stuff to cut through, and they may be able to offer better information and service to the shopper."
Reprint No. 99405
Victoria Griffith, Griffgor@aol.com
Victoria Griffith writes about technology and management for the Financial Times and other publications. She has an MA in international politics from the Johns Hopkins School of Advanced International Studies. Ms. Griffith is based in Boston.