Internet Retailing: A Peek at the Future

What do customers really want from online retailers? How do online retailers retain those customers? Will a technology now used by 2 percent of the U.S. population replace e-mail? How are consumers using technology to personalize their shopping experiences? How much of the retail market will the Internet capture?

These were some of the questions that more than 1,400 online retail executives discussed and debated during a two-day summit in Las Vegas in September. The 10th annual Shop.org summit was the world’s largest gathering of online and multichannel retail executives. Shop.org is an association of online retail executives, many from some of the largest and most successful Internet retail sites and from some of the largest retailers with online operations.

Speakers at the event identified a number of trends and issues that retailers—including jewelry retailers—should follow as they work to build an online presence. The following overview summarizes those key trends and issues.

WHAT DO ONLINE CONSUMERS WANT?

Patti Freeman Evans, an analyst with Jupiter Research, which provides research and analysis on the impact of the Internet and emerging consumer technologies, and Chuck Davis, president and chief executive officer of Shopzilla.com (formerly BizRate), an online shopping search site, each presented research that examines what they say consumers “really want” from their online shopping experiences.

  • Simplicity, clarity, efficiency. Evans said a Jupiter Research consumer survey reveals that it’s important for online retailers to make their sites simple, clear, and efficient. The top three factors identified by consumers as most important in making a shopping Web site easy to use were: “products organized in logical manner” (32 percent), “ability to navigate by category” (31 percent), and “useful search tools” (30 percent).
    Evans stressed the importance of organizing products and product categories in a way that makes sense to consumers and suggested using consumers to test sites. “I challenge you to watch how someone uses your Web sites,” she told her audience.

  • Shipping and handling. In the BizRate research study, half of respondents say they want to know their shipping and handling costs early in the process. “They want to know the shipping costs upfront,” Davis said.
    Fast, efficient, and, if possible, free shipping score high on consumers’ wish lists. “The faster you get the product out, the more engaged you will be with the customer,” Evans said.
    According to the BizRate research, 56 percent of online buyers consider free shipping an important factor when deciding whether to make a purchase from an online merchant. Sixty percent of Web merchants offer free shipping.

  • No pressure. Consumers, according to the research, don’t like to be pressured into buying. They want the ability to purchase items without having to register on the site. They want to organize, store, and retrieve items in their shopping carts easily—even over long periods of time. They also like large, high-quality pictures.

  • Price. Price is a huge factor in drawing people online. The BizRate research shows that 92 percent of consumers compare prices (including tax and shipping) and 85 percent try to find the lowest price when online. But Evans and Davis stress that shoppers are most concerned about value. “Value is what we need to focus on,” Davis said. “I think people look at the lowest price as a benchmark.”
    Evans told the audience not to confuse low price with the lowest price.

  • Security. The Jupiter Research survey shows that 24 percent of visitors to retail sites do not buy online. The biggest reason is online security fears (59 percent). The BizRate research indicates that those fears are somewhat justified: It found that merchant fraud and identity theft have inched up in 2005 compared with 2004.
    Davis and Evans say it’s important to address security concerns because the increasing availability of broadband will attract more first-time Internet users. “In the next five years, the largest percentage of online consumers will be people who have never purchased a product before.”
    The same research shows that consumers would feel more comfortable buying online if retailers provided better assurances that their purchases will be secure and communicated this effectively.

CUSTOMER ‘LOCK-IN’

The biggest challenge facing online retailers isn’t acquiring customers but keeping them, said Donna Hoffman, co-director of Vanderbilt University’s Sloan Center for Internet Retailing. The first step in keeping customers is “locking” them in.

Lock-in occurs when a customer makes an “investment” in a Web site. Investment can be tangible, such as paying a fee to join or providing personal information, or intangible, such as spending time to become familiar with a site. Investments of time include setup cost (the time a consumer spends during the first visit to learn the Web site) and ongoing cost (the time a consumer spends to learn more about the site during subsequent visits). Such investment makes consumers more likely to focus on immediate benefits rather than pay the price of learning to use a competitor’s Web site, even though switching may result in savings in tangible and intangible costs in the long run.

There is a learning component to lock-in, Hoffman said. “The more experience a consumer gains from using a Web site, the less effort is required to keep on using it—this leads to lock-in.”

Hoffman said it’s important to understand the differences between lock-in and loyalty. Lock-in is the tendency to refrain from searching and switching because of an initial investment, while loyalty results from attitudes that lead to a behavioral pattern. Loyalty is broader than lock-in because it represents a choice by the consumer to repatronize a site in the future.

“Lock-in can lead to loyalty, so clearly it makes sense to develop lock-in,” Hoffman said. To do so, she added, Web sites must allow consumers to build up human capital and virtual capital. “Human capital is the knowledge, skill, or expertise embodied in people and acquired through investments in formal or informal education, training, or learning by doing,” she said.

“Visitors learn how to navigate through the site, gain knowledge of what services and products are offered, and figure out the rules to use the site most efficiently,” she continued. “Through the process, visitors gain human capital and build their preferences toward a specific range of Web sites.”

She cited the auction site eBay as an example of a site that creates human capital, because buyers and sellers participate in its creation through learning by doing.

Many Web sites mimic large players like eBay and Amazon.com because online consumers know those sites well and can transfer the skills learned on those to other sites. “It’s no accident that many sites ape Amazon.com,” she said, adding, “Copy, copy, copy (legally, legally, legally).”

Virtual capital is a nontransferable store of information that people own and use as long as they stay with a certain site. For example, Netflix allows users to build their own personal database that is not transferable to any other Web site. Amazon.com and eBay allow consumers to rate their transaction experience; therefore sellers and buyers build reputations by earning higher scores.

ONLINE CONSUMER TRENDS

Online technology is becoming more mobile, more personalized, and, at the same time, more of a shared experience. In addition, a broader range of consumers are obtaining access to newer technology, such as broadband, that enhances the user experience. This technology and its increasingly widespread application are not only driving the growth of online shopping but also changing how people shop online. Throughout the Shop.org conference, speakers discussed this changing technological landscape and its potential impact on online retailing. Some of the trends identified are:

  • RSS. Known also as Rich Site Summary or Really Simple Syndication, RSS is a method of delivering Web content to subscribers. Users subscribe to the sites from which they want to receive updates, and feeds are done on a regular basis. It’s a technology that may someday replace e-mail, said Carrie Johnson, Forrester Research vice president and research director, even though only 2 percent of the population use it now. “It’s not going to be anytime soon,” Johnson said. “Over time it will replace e-mail marketing.”
    The most common application of RSS is for news feeds, but it’s also being used by retailers to provide feeds for promotions, price changes, and loyalty-program updates to a group that actually wants the information—unlike e-mail, which is pushed to consumers. For example, Johnson said Apple uses RSS to send product updates and iTunes downloads, and Lowe’s uses it for home-improvement tips.

  • Virtual Reality. The increasing availability of broadband, better and less expensive computers, and improvements in Web retailing are among the innovations that will allow Web retailers to create Web environments that better reproduce the retail store environment through the use of animation and other rich graphics, said Geoff Ramsey, CEO of eMarketer, an e-business market research provider. This includes reproducing a virtual layout of the store online and allowing Web users to virtually try on clothes.

  • Local Search. Google is beta testing a search engine that will be dedicated to local searches (local.google.com), and Ramsey is expecting it to do well. Web users can type in a specific product or service in one box. In a separate box users place the location of the search. Users can also further limit their search by selecting the search area by mile. For example, listing “jewelry” and “Philadelphia” plus a one-mile radius of the city produced the names of several jewelers, along with Web site links and links to other similar listings, as well as a map with markers indicating store locations.

  • The rise of the online generation. The young are different in their online activities and how they purchase online, said Mary Brett Whitfield, senior vice president of Retail Forward Inc., a management consulting and market research firm that specializes in retail intelligence and strategies. For example, people ages 18 to 24 buy furniture and shoes at a much larger percentage than older users. In addition, they are much more likely to publish a blog and read the blogs of others as well as download music videos and participate in chat rooms.