Lentis/Online Shopping

Introduction

Online shopping describes the exchange of goods or services conducted via the Internet. Today it accounts for 5.5% of developed GDPs. The advent of online shopping has redefined acceptable standards for interactions between retailers, whether internet or brick-and-mortar, and consumers. Online shopping broadly categorizes many types of transactions; this chapter explores emergent phenomena specifically in the changing business-to-consumer climate.

Early Adoption

Internet commerce began in the 1980s for business-to-business transactions, though consumer adoption stalled until the release of the Netscape Browser and the Secure Socket Layer (SSL) add-on in the mid 1990s. These allowed users to exchange payment information securely via encrypted channels.

Privacy and ethical data collection have long been a concern of Internet pioneers. Consumers, however, are less concerned, and privacy has not been a major barrier to adoption of online shopping. This may be because consumers fail to understand the importance of retailers’ privacy policies. According to a survey collected by Pew Research Center in 2014, a majority of internet users incorrectly believe that companies cannot share their private information.

Mass popularity of online shopping despite the privacy concerns of experts may also be explained by consumer willingness to forego privacy for the convenience of online systems. These results adhere to the Technology Acceptance Model (TAM), an accepted framework describing user adoption of online information systems in terms of Perceived Usefulness (PU) and Perceived Ease of Use (PEU).

Blockbuster’s bankruptcy in 2010 demonstrates consumer prioritization of convenience. Blockbuster, a leading video-rental company established in 1985, filed for bankruptcy soon after Netflix introduced its online video streaming service in 2007. By late 2009, Netflix expanded its streaming service to multiple gaming consoles and to Macintosh computers. This contributed to Blockbuster's historic revenue decline from 5 billion dollars in 2008 to bankruptcy in 2010.

Blockbuster was aware that consumer attitudes were changing; spontaneous trips to the video store were replaced by mail order movies. To adapt, Blockbuster planned to allocate 200 million dollars to its online presence and eliminate its high late fees. However, they revoked these changes only one year later and sealed their fate. Blockbuster’s bankruptcy clearly illustrates the necessity of an online presence for any retailer.

Participants

Online retailers, brick-and-mortar stores, and consumers are three main categories of participants that use internet retail technology to advance their interests. Online retailers aim to displace physical stores from the business-to-consumer marketplace and potentially take over their market share. Online retailers are not burdened by the costs associated with a physical store-front, so they are able to offer lower prices than brick-and mortar competition. They also appeal to consumers’ preference for convenience, by offering expedited shipping and personalized recommendations. Brick-and-mortar retailers attempt to stay competitive by providing similar services at competitive price points. Physical stores must also create new value propositions for their showrooms and focus on delivering a holistic experience. Consumers remain committed to getting the best quality goods for the lowest price. They leverage both the physical store experience and ability to easily scour online goods by price.

New Marketplace Dynamics

Spheres of Purchasing Influence

Online reviews are an important tool for both consumers and online retailers. With online shopping’s increased prevalence, informal word-of-mouth marketing has developed into a formal evaluation system; online reviews have become popular interfaces for disparate consumers to communicate globally and anonymously. It is estimated that 61% of consumers read online reviews to guide their purchasing and that consumers trust the validity of online reviews most when a mix of positive and negative reviews are present. “Conformity”, meaning that the perceived risk of buyer’s remorse is less if the majority opinion is heeded, is an established phenomenon among offline shoppers and has also been shown to affect online consumers’ decisions when reading reviews. Thus, in addition to a lack of negative reviews, a large proportion of negative reviews can also dissuade shoppers from purchasing.

Amazon, a leading online retailer valued at over $240 billion, has prioritized positive consumer perception of the reviews published on their website to great effect. Rather than invest in a costly editorial team to exhaustively screen and evaluate all reviews, Amazon uses its own customers’ ratings as a filter. The added benefit is that consumers trust other consumers’ ratings as well as their posted reviews. The “was this review helpful to you” yes or no option allows consumers to vote on reviews based on their utility, allowing Amazon to rank and display reviews to consumers based on their votes. Amazon has invested in several technical design changes to make this ranking system successful and well-adopted. These include limiting each individual to a single vote and preventing the web page from refreshing after each vote has been submitted to encourage consumers to evaluate multiple reviews. This feature of “reviewing reviews” allows Amazon to juxtapose the most helpful positive and negative reviews, thereby fulfilling the online shopper’s expectation of accessing mixed reviews.

The anonymity of the review process does complicate Amazon’s ability to remove fake reviews. This is a serious forthcoming given that Amazon sellers have been able to purchase fraudulent positive reviews of their products, thereby challenging the credibility of all online reviews. The retail giant publicizes its willingness to take legal action on this matter and aims to deter future untrustworthy reviewers by suing them.

Personalization vs. Privacy

Consumers expect personalized marketing and recommendations, but don’t like to share the information used to make these possible. Infosys found that 87% of consumers buy more from retailers using targeted advertisements, but only 26% were comfortable sharing their social profile with these retailers. A survey of 2000 consumers found that 60% customers want real-time offers and promotions but only 14% want to share real-time information. And a 2011 Customer Experience Impact Report from Oracle found that most consumers will pay more for an improved and personalized shopping “experience”.

Retailers have invested in personalized marketing to increase profitability. Target, for example, uses customer purchasing data to predict what types of coupons to send customers. Personalized coupons are intended to entice customers into the store, where they will hopefully spend much more than they had anticipated. Target acquires this data by tracking their own customers, and augments it with information they purchase from companies that accumulate this data. Controversially, Target developed an algorithm that uses this information to predict whether a female customer is pregnant. Expectant mothers are a primary target of personalized marketing because they are very busy, and likely to become loyal customers when they realize Target can provide an all-in-one shopping experience. The algorithm has been remarkably successful, predicting some pregnancies before mothers are even “showing”, and driving in-store revenue growth.

Target understood during the development of this algorithm that they were encroaching on sensitive customer privacies. Andrew Pole, a lead statistician at Target, included this concern describing the central question of the project: “If we wanted to figure out if a customer is pregnant, even if she didn’t want us to know, can you do that?” To conceal the sensitive information they have on consumers, retailers must deliver personalized service without revealing how much they know about customers. When Target first developed their pregnancy prediction algorithm, they sent expectant mothers books of maternity coupons. Mothers who suspected Target knew they were pregnant were less likely to use the coupons. To have the desired effect, Target has disguised its targeted coupons among other generic coupons.

A New Value Proposition

Though online shopping has disrupted the business-to-consumer marketplace, many consumers still find value in physical stores. Consumers enjoy the intangible experience of shopping; many prefer to see and touch a product before buying it, and most consumers value the advice given by store representatives before making a purchasing decision. This has lead to a phenomenon termed “showrooming” where consumers utilize in-store resources before purchasing a product for a presumably lower price online. Brick and mortar stores pay a heavy price for this behavior since they invest in customers but do not gather any revenue.

Showrooming has become commonplace; 73% of consumers have reported that they have “showroomed” in the last 6 months. Consumer electronics and appliances are the most affected by these practices, which have contributed to Best Buy’s decreasing profitability, and Target’s removal of Amazon Kindle products from its store. To combat showrooming, retailers have adopted numerous tactics. Some, like Best Buy, promise to match prices found online. Others have begun offering products exclusively in store that are unavailable online; and Target offers exclusive in-store discounts and promotions through its new Cartwheel app. The Cartwheel app encourages consumers to utilize both Target’s online shopping interface and its brick and mortar locations.

Not all brick and mortar stores can afford these programs. A common alternative approach is to deliver additional value to consumers by creating a pleasurable shopping experience. Recommendations by the retail council cite “being polite, genuinely caring and interested in helping, acknowledging and listening,” and “exciting store design ... consistently great product quality, making customers feel they’re special and that they always get a deal” as ways retail stores can improve their shopping experience. Stores also aim to create a positive shopping atmosphere by focusing on store design, background music, and smell. Research from the American Psychological Association found that pleasant music and scents encourage impulse purchases, and marketing research shows that music selection is critical to brand development.

Legal Interventions for Marketplace Fairness

Austan Goolsbee and Jonathan Zittrain, of the American bar foundation and Harvard law school respectively, described the need to give online retailers a competitive advantage in 1999 by not charging sales tax for online purchases; online shopping was not established as a conventional sales channel. However, Goolsbee and Zittrain concluded that this tax exemption should be a temporary measure, even at that time. Widespread adoption of online shopping and significant state budget deficits prompted the Marketplace Fairness Act. This act requires all online and offline sellers valued at over $1 million to collect interstate use and sales taxes from their consumers.

Consumers are generally displeased by this new intervention in the business-to-consumer marketplace because they will pay higher prices online. However, some have found a loophole to evade paying sales tax on online purchases. Amazon, eBay, and others are able to conglomerate offerings from multiple smaller vendors through their consumer interfaces that are not held to the same tax collection standards as large vendors. Customers can save by purchasing from these smaller merchants on Amazon or eBay, or by contacting the smaller merchants directly.

Though at first Amazon strongly opposed the Marketplace Fairness Act, it is now allied with major offline retailers like Walmart and Target in support of this legislation. This shift reflects Amazon’s changing value proposition over time as it became more established. The company now focuses the convenience of “one-click” shopping and free two-day shipping instead of its low prices to drive popularity. However, not all mid-sized online retailers have made the same shift in attitude;it remains to be seen how they will compete against larger online and offline retailers now that the business-to-consumer marketplace no longer affords them tax benefits.

Conclusion

Ethical standards for the business-to-consumer marketplace are clearly evolving when considering the nuances of online reviews, personalized marketing, showrooming, and tax legislation. This chapter has only considered these phenomena. Future work may include discussion about the divide in profitability expectations between established brick-and-mortar retailers and new exclusively online retailers. It may also be interesting to review how new funding and investment models have changed this marketplace, and how medium-sized online retailers are advancing their interests.