CS155a: E-CommerceLecture 10: October 9, 2001B2C E-Commerce, ContinuedAcknowledgement: H. ChiangFirst-Generation B2C• Main Attraction: Lower Retail Prices• “B2C Pure Plays” could eliminate intermediaries, storefront costs, some distribution costs, etc.• Archetype: www.amazon.comBasic Problems Encountered Immediately• “Customer-Acquisition Costs” are huge.• Service is technically commoditizable, and there are no significant network effects.• Customers’ switching costs are tiny.(Lock-in to online book-buying is high. Lock-in to Amazon is low. Recall Netscape and IE.)• Competition is fierce in almost all segments. Few e-tailers are profitable.• Investors have run out of money and patience.Internet CustomerAcquisition CostsCustomer acquisition cost = total spent on advertising and marketing divided by the total number of new customers obtained– Amazon.com → $29– DLJ Direct → $185– E*Trade → $257– Various E-Commerce Sites → $34E-Tailing is Difficult in Low-Margin Businesses• Toys (e-Toys.com)– Typical online order contributes $11 to gross revenues.– Warehouse, marketing, website, and other fixedoverhead is high.– A pure-play e-tailer needs to capture at least 5% of the toy market to reach profitability.• Groceries (Webvan.com, Peapod.com)– Typical online order contributes $9 to gross revenue (fulfillment costs are very high).– Steady customer orders ~30 times/year.– McKinsey/Salomon-Smith-Barney’s estimate of the value of one steady customer: ~$900 over 4 years.Current Theories(after first shake-out)• High order frequency and large order size are more important than large customer base.• E-tailers should strive for average order sizes of >$50 and concentrate on high-margin product categories (>35%). [Traditional grocery margins: 2-3%.]• Concentrate on making transactions profitable, not on VC-supported market-share wars.• Combine e-tailing with B&M stores.“Multi-Channel” Retail(B2C w/ B&M)• Exploit multiple marketing and distribution channels simultaneously– B&M (“bricks and mortar”) stores: Customers browse on the web before going to the store.– Catalog sales, telephone, tv advertising,…• In 1999, multi-channel retailers (i.e., B&Ms or traditional catalog companies that also sell online) made up 62% of B2Ce-commerce. Mostly high-margin sales, e.g., computers, tickets, and financial service.• Projected to reach 85% in next 5 years. (Source: Boston Consulting Group)Advantages of Multi-Channel Retail• Leverage existing brands.• Biggest B&M retailers have huge clout. (Walmart’s annual sales are $138B, much more than alle-tailers’ combined.)• Profits from existing channels can subsidize e-tail start-up. No need to quit when VCs lose interest.• Use established distribution and fulfillment infrastructure (e.g., LL Bean, Land’s End,…).• Cross-marketing and cross-datamining.E-tailers are Adding“Offline” Channels• Alloy.com sold clothes and accessories, but it became a hit only after its catalog was launched.• Drugstore.com once dismissed B&M retailing, but it agreed to sell a 25% stake to Rite-Aid not long after rival Soma.com was bought by CVS.• Gateway sells computers through WWW and catalog, but it also has 164 stores across U.S. They carry little stock, but they allow customers to “get a feel for the product” before ordering it.Revenue Models forOnline Ads• “Number of Impressions” (How many times does the user cause the advertiser’s content to be displayed?)• “Click Through” (How many times does the user click on the ad to go to the advertiser’s site?)• “Pay-per-sale” (How many times does the user click through and then buy something?)Top Online Advertisers(By Impressions) Source: Nielsen/NetRatings (9/23/01)0 100 200 300 400 500 6001. Microsoft Corp2. Aol Time Warner Inc3. Bertelsmann Ag4. Yahoo! Inc5. Providian Financial Corp6. Nextcard Inc7. Classmates Online Inc8. Barnes & Noble Inc9. Ebay Inc10. Amazon.Com Inc11. Cablevision Systems Corp12. Cassava Enterprises Ltd13. Citigroup Inc14. Bank One Corp15. Sony Corp16. Zairmail Inc17. American Red Cross18. American Movie Classics Co19. Coolsavings.Com Inc20. Ediets.Com Inc21. Ameritrade Holding Corp22. Bonz i.Com Softw are23. Homestore.Com Inc24. Telefonica Sa25. Microgaming Jackpot NetworkImpressions (millions)Status as of4th Quarter 2000• 3% of all ads; radio twice as big• 55% of online ads are by dot coms• 79 companies place 1/2 of all online ads• Most ads run on 1 site for <3 weeks∗ Portals and Search Engines host more ad impressions than any other type of site (44%).∗ 63% of ad impressions have a “branding focus”Top 25 National AdvertisersRank 1999AdvertiserTotal U.S. ad spending in 1999Network TV Spot TVNetw ork radioNational spot radioInternet % of Total1General Motors Corp.4, 040, 374.00 887, 893 . 20 503,8 07. 40 5,963 . 20 28,189.50 25, 074. 10 0.62%2Procter & Gamble Co.2, 611, 766.60 621, 527 . 30 113,2 94. 70 10,265.90 10,838. 70 8, 039. 30 0. 31%3Philip Morris Cos.2, 201, 600.90 383, 215 . 50 200,8 73. 10 2,995 . 30 10,613.00 873 0.04%4Pfizer2, 142, 433.70 364, 704 . 20 59,059.30 11,805.10 1,425.90 1, 254. 20 0.06%5AT&T Corp.1, 950, 871.20 258, 716 . 10 100,9 87. 90 8,249 . 80 32,705.00 13, 644. 80 0.70%6DaimlerChrysler1, 804, 055.50 286, 520 . 60 664,8 80. 60 2,068 . 30 23,610.50 9, 958.30 0.55%7Ford Motor Co.1, 639, 761.50 364, 989 . 10 229,6 78. 40 4,959 . 40 16,981.00 13, 638. 50 0.83%8Se ars, Roebuck & Co.1, 505, 205.50 186, 855 . 70 48,573.40 12,343.00 7,859.90 1, 444. 40 0.10%9PepsiCo1, 315, 712.50 189, 049 . 90 62,371.00 0 5,454. 30 581.3 0.04%10Verizon Communications1, 312, 749.00 1,690.50 135,6 34. 90 0 74,497. 40 1, 876. 20 0.14%11Walt Disney Co.1, 304, 002.20 242, 015 . 30 128,3 53. 70 1,578 . 80 23,867.90 16, 360. 50 1.25%12Time Warner1, 202, 905.90 189, 959 . 60 97,659.40 1,999 . 20 35,172.00 7, 487.40 0.62%13Diageo1, 198, 445.20 269, 970 . 40 78,186.80 0 34,430. 10 80.7 0.01%14McDonald's Corp.1, 134, 802.30 296, 766 . 10 179,4 44. 60 36. 9 3,238.90 599. 6 0.05%15IBM Corp.1, 128, 462.30 105, 545 . 30 10,526.60 0 11,748. 40 32, 158. 80 2.85%16Intel Corp.1, 119, 330.40 77,448.20 2, 57 3. 00 0 7,391. 20 13, 464. 10 1.20%17WorldCom1, 108, 381.50 274, 400 . 00 21,760.20 0 5,030. 10 5, 581. 50
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