A perfect market
May 13th 2004
From The Economist print edition

Why websites matter

A company that neglects its website may be committing commercial suicide. A website is increasingly becoming the gateway to a company's brand, products and services—even if the firm does not sell online. A useless website suggests a useless company, and a rival is only a mouse-click away. But even the coolest website will be lost in cyberspace if people cannot find it, so companies have to ensure that they appear high up in internet search results.

For many users, a search site is now their point of entry to the internet. The best-known search engine has already entered the lexicon: people say they have “Googled” a company, a product or their plumber. The search business has also developed one of the most effective forms of advertising on the internet. And it is already the best way to reach some consumers: teenagers and young men spend more time online than watching television. All this means that search is turning into the internet's next big battleground as Google defends itself against challenges from Yahoo! and Microsoft.

The other way to get noticed online is to offer goods and services through one of the big sites that already get a lot of traffic. Ebay, Yahoo! and Amazon are becoming huge trading platforms for other companies. But to take part, a company's products have to stand up to intense price competition. People check online prices, compare them with those in their local high street and may well take a peek at what customers in other countries are paying. Even if websites are prevented from shipping their goods abroad, there are plenty of web-based entrepreneurs ready to oblige.

What is going on here is arbitrage between different sales channels, says Mohanbir Sawhney, professor of technology at the Kellogg School of Management in Chicago. For instance, someone might use the internet to research digital cameras, but visit a photographic shop for a hands-on demonstration. “I'll think about it,” they will tell the sales assistant. Back home, they will use a search engine to find the lowest price and buy online. In this way, consumers are “deconstructing the purchasing process”, says Professor Sawhney. They are unbundling product information from the transaction itself.

All about me

It is not only price transparency that makes internet consumers so powerful; it is also the way the net makes it easy for them to be fickle. If they do not like a website, they swiftly move on. “The web is the most selfish environment in the world,” says Daniel Rosensweig, chief operating officer of Yahoo! “People want to use the internet whenever they want, how they want and for whatever they want.”

Yahoo! is not alone in defining its strategy as working out what its customers (260m unique users every month) are looking for, and then trying to give it to them. The first thing they want is to become better informed about products and prices. “We operate our business on that belief,” says Jeff Bezos, Amazon's chief executive. Amazon became famous for books, but long ago branched out into selling lots of other things too; among its latest ventures are health products, jewellery and gourmet food. Apart from cheap and bulky items such as garden rakes, Mr Bezos thinks he can sell most things. And so do the millions of people who use eBay.

And yet nobody thinks real shops are finished, especially those operating in niche markets. Many bricks-and-mortar bookshops still make a good living, as do flea markets. But many record shops and travel agents could be in for a tougher time. Erik Blachford, the head of IAC's travel side and boss of Expedia, the biggest internet travel agent, thinks online travel bookings in America could quickly move from 20% of the market to more than half. Mr Bezos reckons online retailers might capture 10-15% of retail sales over the next decade. That would represent a massive shift in spending.

How will traditional shops respond? Michael Dell, the founder of Dell, which leads the personal-computer market by selling direct to the customer, has long thought many shops will turn into showrooms. There are already signs of change on the high street. The latest Apple and Sony stores are designed to display products, in the full expectation that many people will buy online. To some extent, the online and offline worlds may merge. Multi-channel selling could involve a combination of traditional shops, a printed catalogue, a home-shopping channel on TV, a phone-in order service and an e-commerce-enabled website. But often it is likely to be the website where customers will be encouraged to place their orders.

One of the biggest commercial advantages of the internet is a lowering of transaction costs, which usually translates directly into lower prices for the consumer. So, if the lowest prices can be found on the internet and people like the service they get, why would they buy anywhere else?

One reason may be convenience; another, concern about fraud, which poses the biggest threat to online trade. But as long as the internet continues to deliver price and product information quickly, cheaply and securely, e-commerce will continue to grow. Increasingly, companies will have to assume that customers will know exactly where to look for the best buy. This market has the potential to become as perfect as it gets.

Tip of the iceberg

And there is more. The commerce department's figures include the fees earned by internet auction sites, but not the value of goods that are sold: an astonishing $24 billion-worth of trade was done last year on eBay, the biggest online auctioneer. Nor, by definition, do they include the billions of dollars-worth of goods bought and sold by businesses connecting to each other over the internet. Some of these B2B services are proprietary; for example, Wal-Mart tells its suppliers that they must use its own system if they want to be part of its annual turnover of $250 billion.

So e-commerce is already very big, and it is going to get much bigger. But the actual value of transactions currently concluded online is dwarfed by the extraordinary influence the internet is exerting over purchases carried out in the offline world. That influence is becoming an integral part of e-commerce.

To start with, the internet is profoundly changing consumer behaviour. One in five customers walking into a Sears department store in America to buy an electrical appliance will have researched their purchase online—and most will know down to a dime what they intend to pay. More surprisingly, three out of four Americans start shopping for new cars online, even though most end up buying them from traditional dealers. The difference is that these customers come to the showroom armed with information about the car and the best available deals. Sometimes they even have computer print-outs identifying the particular vehicle from the dealer's stock that they want to buy.

Half of the 60m consumers in Europe who have an internet connection bought products offline after having investigated prices and details online, according to a study by Forrester, a research consultancy (see chart 1). Different countries have different habits. In Italy and Spain, for instance, people are twice as likely to buy offline as online after researching on the internet. But in Britain and Germany, the two most developed internet markets, the numbers are evenly split. Forrester says that people begin to shop online for simple, predictable products, such as DVDs, and then graduate to more complex items. Used-car sales are now one of the biggest online growth areas in America.

People seem to enjoy shopping on the internet, if high customer-satisfaction scores are any guide. Websites are doing ever more and cleverer things to serve and entertain their customers, and seem set to take a much bigger share of people's overall spending in the future.

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