June 1996

Root Page of Article: Viewing the Web as a Marketplace, by Gina O'Connor and Bob O'Keefe

Strategic Drivers

Drive Toward Cost Reduction and Competitiveness through Direct Distribution. Many companies have entered online marketing so that they can "leapfrog" the channel of distribution. The Web market is (at present) relatively unbiased--anyone with Internet access and a share of a Web server can set up shop. Slotting fees (where manufacturers pay to get their products into retail stores and onto shelves) are not required. Companies can offer their products and services at a cheaper rate to consumers by avoiding the problems of dealing with distributors. Costs of communication, training, and positioning the product to the distribution channel are a considerable addition to overall costs, and are frequently passed to consumers. These cost reductions allow Web retailers to increase their profit margins. (It must be noted, however, that new sorts of costs are incurred. Computer hardware and software, network access, and Web skills require some level of investment. At present, however, these are minimal in comparison to conventional distribution and communication costs.)

Reducing reliance on Channel Partners. Aside from the issue of cost, a very real threat to a firm's strategic positioning occurs when it must rely on intermediaries to represent, promote and handle its products in the marketplace. Necessity requires this for most small companies, who cannot afford to send salespeople to every physical retail store or conduct store audits to ensure that the product is properly merchandised. Now, however, the Web venue allows the manufacturer to retain control over the product until it reaches the purchaser.

Efficient Use of Advertising Dollars. Given the heavy advertising costs many small companies incur reaching local markets, online marketing is a dream. For as little as $30 a month, a company can have its Web pages hosted by an Internet Service Provider (ISP). Advertising a new virtual shop may simply involve getting listed in Yahoo, the Mckinley, and other online directories. Compare this cost to approximately $1,000 for a half-page print advertisement in a local newspaper, or as much as $50,000 for a similar advertisement in a nationally recognized paper. Direct Access: Responsiveness and Learning About Markets. The Web takes direct marketing one stage further--companies can have complete control of their catalog and marketing without being reliant on printers or postal services. Further, in a technology where they can observe the visitors to their catalog, online marketers can track which products are gaining the attention of most shoppers, which ones are being shopped but not bought, which ones are not comprehended, and which ones are purchased outright. This allows the retailer to vary the product mix, and to change and update the catalog's text to better match customer needs and inquiries, in a real time environment.

Physical Distribution Opportunities. Where products and services can be distributed over the Web, the reduction in distribution costs allows companies to lower transaction costs (possibly passing some savings onto the consumer) and provide better service. The obvious example here is software retail, which is rapidly moving towards net-based distribution. The vendor does not have to produce and mail the disks containing the software, and the consumer does not have to struggle with decompression and physical installation of the code. ^

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