Convergence of business models.

• Author: Rogers, John W., Jr.

ABSTRACT

This article analyzes e-commerce business models and the costs they incur to build brand awareness and customer loyalty. In the new competitive environment of the Internet with lower availability of capital, these costs represent an important area of weakness for new e-commerce ventures. Some firms have been successful in addressing the issue with the technique of "viral marketing." This approach uses personal relationships and referrals to build affinity groups that support and promote new brands without the costly expenditure of traditional media advertising. The approach capitalizes on many of the same dynamics as direct selling and network marketing -- the leveraging of personal relationships and word of mouth recommendations to build customer awareness and loyalty. The article analyzes the parallels between the widely accepted business model of direct selling, particularly as it has been updated during the 1990s into network marketing, and the new model of e-commerce. It suggests opportunities for e-commerce to learn from and incorporate key features of this well-tested approach to building a brand through personal circles of influence.

Introduction

The collapse of the Nasdaq, beginning in the first quarter of 2000, and the subsequent failure of many dot com enterprises, has called into question the validity and substance of the business model that many of these firms used to launch what they trumpeted as the e-commerce revolution. It also raises the larger question of how businesses will realistically exploit the undeniable potential of Internet technology. Traditional retailers can profitably use the Internet as a new channel to build incremental volume.

Mass merchandisers like Walmart and Sears who operate across a broad product range, as well as focused marketers like the Pottery Barn, L. L. Bean and the Gap have all built powerful "click and mortar" business models that supplement and complement sales in stores and mail order. The Internet has also proven to be a powerful tool in supply chain management for firms selling to the corporate B2B market. But the heart of the e-commerce Revolution -- using on line sales to replace traditional marketing channels at a lower cost, with more customization and higher levels of customer convenience -- has not produced a business model that allows firms to translate Internet productivity into profits. Technology empowers consumers with a much broader range of information and gives firms access to more consumers at dramatically lower cost and higher frequency. But, until it generates profits as well as page views, the Internet will not realize its potential to improve lives. No profits, no progress. The quest for a viable e-commerce business model is in full swing.

This paper analyzes the current, first generation business models used in e-commerce, considering them from a micro-economic viewpoint. Why has the rapid growth of on line marketing -- approaching one trillion dollars in the United States and projected to double by 2004 -- generated little or no profit, even for the market leaders? It is necessary to look at the cost of attracting customers and, more importantly, of securing repeat business. The structure of the market, the experience of the first generation firms competing in this market, and the basic cost dynamics are key to uncovering the weakness of this dot com business model. By comparing the dot com experience with other industries where technology has taken off rapidly, and with other marketing plans, the paper seeks to shed light on other approaches to entrepreneurship and business building that may have relevance to e-commerce.

The market structure of the Internet economy approaches the economic model of perfect competition, characterized by low barriers to entry (and exit) with a consequent proliferation of firms and products, rapid diffusion of knowledge to both consumers and competitors, low product or service differentiation and brand loyalty. In this market structure, intense competition tends to strip profitability from even the most successful firms, and eventually to undermine their commitment to innovation as they struggle to make ends meet in the short run with fewer resources left over to plan for the long run.

A classic case in point is Amazon.com. Despite its market position and undisputed reputation for excellent customer service, Amazon has failed to achieve profitability and faces pressure to reassess its entire approach to business. A major challenge for all E-commerce firms is building brand recognition and translating this recognition into a stable and loyal customer base. So far, the expense of attracting and retaining customers has eaten away at more profit than most firms have been able to generate with rapid sales growth.

One promising response to this challenge lies in a business model established more than a generation ago in a similarly competitive business environment. This model of direct selling -- more recently known as network marketing -- is seldom taken seriously by professional marketers, but continues to deliver results and has shown remarkable ability to reinvent itself, to satisfy the needs of a new generation of consumers, and to accommodate new technologies and product concepts. From the door-to-door and home party approaches of the 1940s and 1950s to the sophisticated network marketing models of the early twenty-first century, the direct selling industry has evolved and prospered in the United States and has pioneered entry to international markets. Most importantly, this model offers some prospect of securing customer loyalty and defending profit margins against the ravages of competition in a market that is otherwise characterized by little differentiation and rapid migration of customers. The convergence of business models --...