The Wall Street Journal Interactive Edition

July 7, 1998


There's More to E-Commerce Than Just the Lowest Prices

JUST THE WORDS "on-line shopping" are enough to send shivers down the spine of many traditional retailers.

To many in the bricks-and-mortar retail world, electronic commerce is a nightmare that means goodbye to competing only with retailers down the street and hello to price wars with rivals world-wide. After all, a consumer armed with nothing more than a Web browser can skip around from site to site checking on prices and merchandise without ever leaving his chair. Making matters scarier for retailers: a host of comparison engines that allow consumers to type in items they're looking for and get back a list of how much the merchandise costs at different Web sites.

But while the Internet certainly poses new challenges for real-world retailers, and offers bargain hunters invaluable new tools, a spate of new research suggests that there's no reason for traditional retailers to consider themselves doomed. When it comes to on-line purchases, the new studies indicate, what really matters to many consumers is not just bottom-line pricing, but also useful information about the products offered for sale. Offer potential customers helpful information, and they likely won't begrudge you the fact that a rival's site offers a similar product for a couple of dollars less.

"The Internet isn't just used to check prices -- it also reduces the cost of getting information about the quality of products," says John Lynch, a professor of marketing at the Fuqua School of Business at Duke University. "When people have more than price to go on, they become much less price-sensitive."

Those findings come primarily from a recent experiment Mr. Lynch and Dan Ariely ran in which they created two dummy on-line wine stores -- thanks to the help of a local wine merchant, both sites took real money and delivered real wine -- and sent students on shopping expeditions to observe their buying decisions.

Two very different shopping experiences awaited the students. Sometimes students were presented with all of the offerings of both stores side-by-side on their computer screens. They could use the same tools at both stores to bring up listings of wine in alphabetical order, by price, or even by varietal. Also, the wines appeared with notes describing their characteristics, such as complexity and sweetness or dryness. A simple click of the mouse would bring up punchier descriptions -- letting the students know, for example, that a given wine was "soft and juicy, and even sports a hint of complex flavors like vanilla and jam," but was also "down to earth and fun."

Other times, students were able to look at only one site at a time. There were no descriptions of the wines on the first screen, and the more vivid discussions of the wines weren't available. Also, if students wanted to stop shopping at one site and check out the other, their shopping baskets were emptied and they had to start over if they returned to the first site.

The results: The students pressed into service as shoppers seemed most interested in information, not bargains. Mr. Lynch noted that "in cases where we created search engines that made it easier for consumers to compare equality, consumers paid a higher average price."

Also, they found, students were more satisfied with their purchases when they were offered more information -- and the more-satisfied customers, not surprisingly, were more likely to indicate that they wanted to keep buying on-line.

Mr. Lynch says part of his motivation for conducting the study came from watching traditional retailers take defensive tacks -- such as preventing comparison engines from gathering data from their sites -- in navigating the uncertain waters of electronic commerce. Other retailers, meanwhile, created Web sites that he calls "nothing more than inconvenient, slow catalogs" that proved under whelming to shoppers.

To Messrs. Lynch and Ariely, the lesson is that retailers shouldn't fear electronic commerce -- rather, they should fear poorly executed electronic-commerce strategies.

Lessons From the Vineyard

Mr. Lynch's conclusions come as no surprise to the founders of VirtualVineyards, a Palo Alto, Calif., company that's emerged as one of the largest Internet wine retailers. They've already wrestled with some of the thornier issues posed by on-line commerce.

Ron Olson, co-founder and chief operating officer of Virtual Vineyards, says he has considered trying to block some of the comparison engines. "But it's like arms races," he adds. "Once a weapon has been invented, it's difficult to un-invent it."

Instead, he says, Virtual Vineyards tries to focus on ways it can add value for its customers, such as stocking hard-to-find wines and working to create recommendation engines based on consumers' purchase histories.

Wine retailers, whether on-line entities like Virtual Vineyards or real-world shops, have one advantage that can shield them somewhat from the ravages of price competition: They offer specialized merchandise that may be unfamiliar to some consumers, meaning that additional information is valuable. The going can be tougher for retailers selling products that are more like commodities --such as compact disks, books or consumer electronics.

Even Mr. Lynch concedes that price-comparison engines can be hard on retailers selling those products. He, along with many other analysts, believes that there will be a split on-line, with the spread of electronic commerce drastically driving down the cost of commodity goods such as books and CDs, but having a lesser effect on more specialized merchandise.

Some early studies would seem to bear out that conclusion.

Last December, researchers at Ernst & Young LLP's Center for Business Innovation paid $199 on-line (plus $7 shipping) for a PalmPilot Personal, a popular electronic organizer. That represented a 22% savings over the $250(plus $12.50 tax) they paid for the cheapest one available from a traditional retailer in the Boston area.

Score one for the Internet. But the information superhighway didn't do as well for roses -- in February, the researchers bought a dozen roses from a Bostonflorist for $69, while two Internet retailers charged $84 and $79.90,respectively.

Making a Difference

But retailers selling commodity goods can also look for ways to differentiate their products from the rest of the herd.

"Our strategy is not to be the lowest-price seller of CDs on the Internet, because we're never going to win that one," says Jim Coane, president and chief operating officer of Internet music retailer N2K Inc. "Our strategy is about establishing a relationship with the consumer that conveys the message that we're here about the music."

That's not to say Mr. Coane is unaware of pricing -- he says he has a team of people who surf the Web every day to monitor competitors' prices. But in addition to trying to hold prices down, N2K tries to entice buyers with special offers, such as 99-cent shipping.

Mr. Coane says he sees the current wave of price competition as a sign of an emerging industry in which participants are struggling to win the battle for market share.

"On-line commerce players are working very aggressively to establish their brand on-line ... and to get consumers to overcome the barriers there are to buying on-line, such as giving a credit-card number," he says. "The reward is customer acquisition and if you ... support the customer, that leads to customer retention and that leads to high lifetime value."

Venky Harinarayan, founder and vice president of business strategy for comparison engine Junglee Corp., says Mr. Coane's scenario is already paying off for sector leaders, insulating them somewhat from the stark mathematics of price.

"Say a book is $10 at an unknown bookstore and it's $12.50 at [Internet bookstore] -- people still pick Amazon," he says. "But if Amazon is $20 and the other is $10, people say that's too much more."

A Fight for Share

Mary Meeker, an analyst at Morgan Stanley Dean Witter, agrees with Mr Coane that the most important task for Internet retailers today is to acquire customers. But she believes that consumers have barely seen the beginning of the on-line price wars because most large retailers have yet to really react to the threat posed by electronic rivals.

On-line retailing is so small as a percent of total retail sales that vendors don't have a real incentive to move onto the Internet yet, she says, adding that "the competition will get really intense when traditional retailers feel that the Internet is having an impact on their core businesses."

The battle among discount brokers may offer a preview of the furious price wars Ms. Meeker sees coming. Bricks-and-mortar discount brokers definitely feel the impact of on-line rivals and have responded. The result: Trades that once cost more than $50 can now be made on-line for as little as $5.

Numbers like those may leave retailers of all stripes worried about how much shrinking of margins they can endure in growing their market shares. But this too shall pass, some analysts think.

Keith Benjamin, an analyst at Bank America Robertson Stephens & Co., believe s that ultimately, even prices of commodities should stabilize and eventually rise as on-line winners and losers are sorted out. Just as America Online, the largest on-line service in the U.S., was able to increase membership fees earlier this year after its dominant market share was established, category leaders such as Amazon will ultimately be in a position to charge a premium for their brand, he says. "Over time," he says, "we'll see prices go up as the comfort factor keeps going up."