Study Highlights Web’s Profit Potential; Indicates Challenging Future For Portals

Study Highlights Web’s Profit Potential; Indicates Challenging Future For Portals

Despite growing concern that e-commerce may turn out to be a “no-profit zone” for businesses, the Internet can in fact stimulate increased consumer spending and lead to greater customer loyalty, according to a new study of online consumers by Mercer Management Consulting. The study emphasizes that profits will be realized only by those companies able to create and maintain strong relationships with their customers.

“Although our study indicates profitability is possible on the Internet, simply being online is not enough,” says Richard Christner, a Mercer vice president. “We found that the potential benefits of the Internet are likely to elude companies that fail to create customer loyalty by anticipating changing customer priorities.” The study’s conclusions, based on a survey of 1,019 Internet users in the US who go online for their personal use, include:

As consumers become more experienced online, they are more likely to go directly to their favorite e-commerce sites rather than through a portal.

Hybrid “clicks and mortar” business designs, which combine elements of traditional and online businesses, may play a significant role in the future.

In certain categories, the Internet has spurred additional spending by consumers, the study shows. For example, 38 percent of online book purchases said they buy somewhat to significantly more books than they did prior to using the Internet; 31 percent of online investors buy somewhat to significantly more stocks — both in number and in dollar value of trades — than they did before. Widespread availability of broadband technology will further spur additional online spending, the study predicts.

Low prices, one of the threats to profitability on the Internet, did not seem to be the primary driver of demand. More than eight in ten (82 percent) users said the Internet is valuable because it provides information to make better decisions, while 75 percent cited the Internet’s timesaving benefits. Less than half (49 percent) of the online consumers in the study said the Internet is valuable because it saves them money.

However, the Internet hardly provides a guarantee of profitability. The Mercer study found that online booksellers have been able to develop greater customer loyalty than their offline counterparts, with 24 percent of online book purchasers always buying from their favorite site. Only eight percent of offline purchasers always buy from their favorite bookstore.

For online investments, the reverse is true: Fifteen percent of online investors are likely to switch online brokerages in the next 12 months, the study found, while only four percent of offline traders are likely to switch during the same period.

Given high customer acquisition costs on the Web, companies cannot afford frequent switching. For example, Mercer analysis shows that the average customer acquisition cost for online retail stores is $34. Assuming gross product margins of 10 percent, that means a store would have to generate $340 from each customer just to cover its fixed marketing and acquisition costs.

“The Internet provides special opportunities to create strong and ‘sticky’ relationships with customers,” says Timothy Byrne, a Mercer vice president. “But the ease of clicking to another site and the transparent pricing of the Internet also make customers fickle.”

Although the Internet represents a tremendous opportunity for customer- focused e-businesses, some high-flying companies may be ready for a fall. The Mercer study found that consumers, as they gain experience on the Internet, are more likely to bypass portals (such as Yahoo!) and Internet service providers (such as America Online) and, in many categories, go directly to e-commerce sites. For example, 61 percent of users with two or more years of experience on the Internet went directly to investment tracking sites versus 35 percent of users with less than one year of experience. “This suggests that the ‘online shopping mall’ concept may become irrelevant as soon as users can easily navigate the Internet,” Christner says.

In another significant finding, the Mercer study concluded that consumers are likely to be receptive to “clicks and mortar” business designs, given their propensity to research a product online and buy it offline in may categories. For example, more than twice as many people research toy purchases online as buy toys online, and more than four times as many research home and garden products as buy them online.

“There is definitely an opportunity for traditional ‘incumbent’ businesses to win on the Internet if they move quickly and intelligently,” says Byrne. “The key will be managing the shift of 10 or 15 percent of their sales from their ‘physical’ stores or channels to online channels.”

COPYRIGHT 1999 Millin Publishing, Inc.

COPYRIGHT 2000 Gale Group