Frictionless E Commerce Is Myth

FRICTIONLESS ECOMMERCE IS A MYTH.” DO YOU AGREE? WHAT ARE THE IMPLICATIONS FOR MARKETERS OF YOUR CONCLUSIONS?

E-commerce is the most rapidly expanding sector of the economy throughout the world so far this century. Its growth is exponential with the internet population taking less than a year to double in some countries while it has taken the world population just under 40 years to double in size (Reynolds 2002). E-commerce can be technically defined as a purchase for which the �order was placed online, not the payment itself or the delivery channel employed’ (Reynolds 2002). Its growth has been largely fuelled by the rapid growth in the internet population, �in 1995, only about 7 percent of the adult American population had Internet access, by 2005 that number had increased to 67%’ (Scott-Morton 2006). This familiarity with internet usage, coupled with a movement away from the relatively slow dial up connections to the far faster broad band which grew at an astonishing 34% in 2004 led to e-commerce becoming a viable and popular option for consumers to do their shopping. E-commerce has allowed totally new business enterprises to appear for example photo sharing and printing sites which allow consumers to share photos and which generate their revenues from printing (Scott Morton). Existing firms have also thrived in the new environment and have experience further growth and diversification for example online orders of groceries such as Tesco’s online.

E-commerce is opening up new sectors to firms to exploit such as online photo albums which generate their revenue through services such as printing or photo mugs as well as giving firms a far wider market on which to market their products. Other areas which do not sell consumers a product are also benefiting from the new technology, for example price comparison websites which allow consumers to contrast different products and the prices of the same products from different firms. This transparency is an example of one of the reduced transaction costs for consumers. Transaction costs are the costs incurred in trading goods or services apart from the actual money price. They are typically divided into three categories of �search and information costs, bargaining costs and policing and enforcing costs’ (Coase 1937). Search and information costs include those costs incurred by the consumer when determining whether the right good is available in the market and from which firm it would be most rational to buy the good from. Bargaining costs are those costs incurred whilst trying to come to an acceptable agreement as to how much should be paid for the item. Policing costs are the costs of making sure the other party sticks to their side of the bargain and the costs incurred where this does not turn out to be the case. According to some people all of these transaction costs have been so dramatically reduced by the internet that these costs are now negligible leading to e-commerce being cited as being now frictionless.

There are several aspects to e-commerce which could be described as frictionless. First the reduction in search costs caused by price comparison sites and the relative speed with which a consumer can navigate between web pages particularly when compared with the cost in time of traveling between shops within a shopping mall (Brynjolfsson). These are increasing currently because consumers are becoming more adept at using the sites and price comparison sites are become more sophisticated, giving consumers quickly a better indication of what the true value of the product should be (Reynolds). These lower search costs lead not only to lower but also more homogeneous pricing. This however does not necessarily lead to firms that achieve the lowest prices, achieving the greatest market share. Search costs by some firms have been so dramatically reduced that consumers now find that web experiences become �pleasurable’ (Mathwick). These web experiences which induce the optimal web experience known as flow (Hoffman and Novak 1996) could even be seen to have negative transaction cost as they provide the consumer with a positive externality since as well as purchasing the product, the product search has become a recreation activity (Bloch, Sherrell, and Ridgway 1986). These positive experiences have been found to be largely influenced by three factors, the navigational challenge inherent in online search activity, the skills available to address challenging tasks and the degree of decisional control perceived by the consumer. For marketers this means that the opportunities to improve their website are endless as they must seek to continually challenge their audience, an audience which like variety. Therefore marketers need only to improve their web design in order to attract more customers.

There are signs of friction in that firms which are popular and have gained loyalty from consumers are likely to achieve heterogeneity of trust because even where consumers see that there is a lower priced rival firm, they are likely to continue to use the firm which they trust to deliver their product or service in an efficient manner. Despite being a group of consumers who are thought of as being �highly price sensitive’(Brynjolfsson and Smith 2001), consumers searching a popular search engine evenbetter.com, 51% of these customers did not just choose the retailer with the cheapest prices, preferring perhaps the ease and efficiency of a site with which they were acquainted for example Amazon.com. This means that retailing prices on the internet are still able to have some variability with consumers being happy to pay an extra 10% premium in order to use a trusted site such as Amazon.com which consequently enjoys an 80% market share of online book sales within the UK (Brynjolfsson and Smith 2000). There are however occasions where firms have tried to reduce this price transparency by having hidden charges such as postage or by restricting the information shared with customers (obfuscation (Scott Morton) which can be hindering and is an obvious sign that the sector is not frictionless currently.

On the supply side there are elements that could be described as being frictionless. Firms’ menu costs are dramatically reduced by the internet. Their entire prices can be changed simply by entering a few numbers and so price changes can be much smaller online and more frequent (Brynjolfsson and Smith 2000). They could also be said to be frictionless because of the reduced costs involved in actually offering information to the consumer for example up and coming recording artists �are using web sites and online networking sites such as MySpace.com to connect with fans and distribute promotional copies of their songs’ (Brynjolfsson

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