The advantages and disadvantages of online businesses

Introduction

The topic of online shopping has been of particular interest to practitioners, academics and marketing strategists and lot of research has already gone into determining whether these online companies are significantly different than brisk-and-mortar companies and if there are any systematic differences in consumer choice behavior between online and regular shopping (Eatock et al.,2002). There are some exceptional examples of online companies like Google, Yahoo and Amazon which have grown to become major global brands in their own right. These companies are purely online companies while there are others like Tesco.com who have hugely successful online operations but their online operations only supports their regular operation. This research does a feasibility analysis of a company going online and analyzes the effectiveness of the business model of online companies citing relevant examples.

Analysis and Discussion

Advantages of online operations

• Reach – Online companies can cater to a wider range of audience as compared to their offline counterparts. Eg. Companies like Amazon and eBay have a global reach.

• Low Cost – the cost of spreading the message, advertising and in general the administration costs are lesser than regular companies and far more lesser when online companies reach economy of scale.

• Ease of shopping – Provides customers with a hassle free shopping experience whereby customers can sit at their home and shop at the click of their mouse.

• Choice – Gives customers more choice to choose from. Eg. Barnes and Noble has ten thousand books in its store and million in its online store

Disadvantages

• Ease price comparison – Because customers can compare prices easily (now with price comparison sites like confused.com, moneysupermarket.com etc), it makes companies compete on price rather than product differentiation and other factors which means online companies have lesser margins.

• Security and reliability issues – With Internet and credit card fraud on the rise, people are becoming more and more cautious and reluctant of giving their bank details online.

• Information Overload – At times people get lost on the internet because there is too much information which makes them delay or refrain their purchasing decision.

• ‘Squeezing the tomato’ (Gallauher, 1999) syndrome – People still like to have a look and try products like clothes etc before buying it.

• Trust – Because customers do not deal with the actual person but with an internet process, trust is of the major issues.

• Shipping costs – Convenience comes at a cost and most often than not, people have to pay for their shipping if they don’t buy stuff above a certain price limit. Eg. Customers have to buy something greater than £5 in TescoDirect to have it delivered free of cost.

Disadvantages on online companies can be overcome but only if they view the customer experience from the eyes of their customer.

Online businesses

Illustrations are given of three types of online companies which are different in their operations, eBay, is purely an online auction company, Barnes and Noble is a book seller which has both online and offline operations, easyJet is a low cost carrier which follows a Web-based distribution strategy.

easyJet

easyJet is a low-cost airline which has made the Internet the core of its business. Its business model is based on cost efficiencies and by hacking cost and overheads at every possible stage it ensures a built-in business advantage by selling online and thereby cutting away the intermediaries like travel agents etc. Presently 85% of its sales are online and the company aims to sell all the tickets online by the end of this year and be the only ‘Web-only’ airline. (Web 1) Another noteworthy feature is the ease of online booking and security of its site. The passenger’s online experience reinforces confidence in the booking process. (Lynch, 2005) Underlying the use of internet is easyJet’s business philosophy of efficiency and cost cutting and its business model of reaching to the mass market which couldn’t have been done without the use of Internet. The internet helps it lower its distribution cost, reach mass audiences, give an indication of customer preferences and passenger demand helping in pricing and staying ahead of competition.(Ind et al.,2002) The result of efficient and effective use of internet by easyJet has propelled it into a rapidly growing airline based on sound competitive business principles with an innovative business model. easyJet has revolutionized the way Internet can be used as the most effective business tool.

E-Bay

E-Bay is a purely online company which sells and auctions nearly everything on the internet. Through the internet medium, it has completely transformed the concept of auctions into e-marketplaces which were once limited to garage sales and flea markets. (Light, 2001) The internet makes the auctions global making it reach a wider audiences (it has about 29.7 million registered users today (Web 2)). E-Bay’s business model is based again on low cost and maximum reach by automating the traditional methods of selling. It adopts a unique culture of rating buyers and sellers to encourage trust among its customers making them feel more confident transacting with a person they don’t know. This also ensures reliability of its brand which helps overcome the transaction security issue discussed earlier. E-Bay’s profits have soared to 400% and revenues have doubled in 2006 as compared to 2005. (Web 3) The success is not only on the revolutionary concept of e-auctioning but also on the way it handles its internet operations.

Barnes & Noble

Barnes and Noble is a US based book store which sells books both in its regular stores and online. It has a $62 billion worldwide market and its internet site brings more than 70% of its revenues.(Web 3) Barnes and Nobles success can be attributed to the way its online shoppers can look inside the books (table of contents, abstract and in some cases even read the first chapter of the book they are looking to buy). The internet also offers buyers a greater variety of selection which is not the case with book stores which are limited by space. According to a Goldman Sachs report on Internet retailing, book selling is third among the top dozen or so products ranked for online success. Books are ideal to sell on the Web because you don’t need to see them in person, try them on, or check out their freshness. (Kotler, 2002) Another unique feature of Barnes and Noble is its online search facility which is subdivided into titles, authors, year of publication and industry etc which makes customers aware of the latest issues. Its Website also offers chat facility with chat groups dedicated to particular genres.

Feasibility Study

Success of the online businesses highlighted above should be generalized because every online business is not successful. Before considering to go online, a company has to do a feasibility analysis which should answer some key questions like:

• What are the goals and objectives of the company and why does it want to go online?
• What does the company want to achieve by going online?
• Who are and will be the companies target customers and what benefit will they gain from the company going online?
• Does the company want to add new products, does it want to reach a wider audience or both?
• What are the companies technological strengths ?
• What is the distribution system available through online market?
• Who are the companies online competitors?
• What is the online selling strategy the company is going to adopt? :
• What are the risks of extending the business online?

Businesses have to ask these questions and should have definitive questions to the above questions before they launch their online operations.

References

Books and Journals

Danneels, Erwin (2003), “Tight-Loose Coupling With Customers: The Enactment of Customer Orientation,” Strategic Management Journal, Vol. 24, 559-576.

Eatock, J., Paul, R. J. and Serrano, A. (2002) ‘Developing a Theory to Explain the Insights Gained Concerning Information Systems and Business Process Behaviour: The ASSESS-IT Project’, Information Sytems Frontiers 4: 303–16.

Gallaugher, J. (1999) ‘Challenging the New Conventional Wisdom of Net Commerce Strategies’, Communications of the ACM 42 (July): 27–9.

Ind, N. and Riondino, M. C. (2001) ‘Branding on the Web: A Real Revolution?’, Brand Management 9 (September): 8–19.

Kotler, P. and Bliemel, F. (2002) Marketing Management, Stuttgart: Schäffer-Poeschel Verlag.

Light, D. A. (2001) ‘Sure, You Can Trust Us’, MIT SloanManagement Review 43: 17.

Lynch,R (2005) ‘Corporate Strategy’, London, FT Prentice Hall

Merrilees, B. and Fry, M.-L. (2002) ‘Corporate Branding: A Framework for E-retailers’, Corporate Reputation Review 5: 213–25. of Multiple Store Environment Cues on Perceived Merchandise Value and PatronageIntentions,” Journal of Marketing, Vo. 66 (April), 120-141.

Websites

(Web 1) How to put the money where the mouse is (online) (cited on 10 March) Available from http://web.ebscohost.com/ehost/pdf?vid=5&hid=7&sid=99f6ca5c-0b7f-4219-9937-6f274bcdd66a@sessionmgr3>

(Web 2) A Taxonomy of Internet Commerce (online) (cited on 10 March) Available from (http://www.firstmonday.dk/issues/issue3_10/bambury/index.html

(Web 3) Global online companies Available from

http://www.users.globalnet.co.uk/~wwcoins/popcompanies.htm>