NBA 600: Session 9E-Commerce and Online

Communities

18 February 2003

Daniel Huttenlocher

2

Today’s Class

Finish discussion of online retail from last week

Start topic of online communities– Several companies established to sell

community building software for the Web• Mainly gone or in other businesses now

– Yet online communities remain important aspect of businesses such as eBay, Amazon• Social, learning or sharing aspect

Summarize papers on Internet travel– Growth of business use – “relationship” accts.

3

User Experience is Everything

Online, the brand is the experience– Major part of the offering, e.g. Amazon’s focus– Contrast with kinds of offline brands that are

mainly about experience

No overall design to IBM site in late ’90’s– Hard to use, most common requests were help

button and search box – experience=confusion– Re-designed over 10 weeks, over 100 people

• Common layout, low download time, graphic design, navigability

– First week saw 84% drop in help button, 400% increase in sales (NYT 8/30/99)

4

AMZN Focus on Customer

Company attracts people with customer focus – not just in customer facing roles– Including software developers

Continuous testing in their usability lab– Entire experience, not just Web interaction– Tradeoff of new features versus clutter

Metrics to evaluate each change– Careful evaluation of how changes drive sales

Leading the customer carefully– E.g., with one-click addressing fears by making

clear it was easy to cancel

5

Customer Experience at AMZN

Discovery– Searching, browsing, recommendations,

relatedness, what you’ve done on site

Community– Reviewers, merchants, spending time making

site richer experience

Shopping– The bread and butter, has to be easy and fun

Order monitoring– Sale not over until customer happy with item(s)

• At least if want repeat business

6

Revisiting E-Commerce Failures

Some were just too early– Level of comfort with online shopping– E.g., much furniture bought offline not seen

• But Living.com didn’t make it

Some didn’t fit online model well– E.g., pet supplies

• Low value and high shipping cost items

Some built un-sustainable costs/debt– E.g., Webvan provided value beyond pricing

• FreshDirect giving online grocery a try in NYC

7

FreshDirect Online Grocer

Focus is on food, particularly perishables– Modeled on Dell: provide great choice and use

Internet to deliver that choice• With new manufacturing process for product

Better quality and selection of fresh foods– Prices 10-30% lower than Manhattan stores– Fixed $3.95 delivery fee, minimum $40 order

• Deliver only at night and on weekends

Direct from warehouse to customer– Many items prepared in the warehouse

Raised $120M; goal $225M/yr sales by ’04

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Summary of Online Retail

Importance of user experience on brand– Requires commitment across the company– Requires common site design, navigation

• But content needs to be accurate, so best under control of individual business group/team

Selection and convenience are big drivers of online commerce– Price secondary focus for successful firms– Perhaps getting less important for consumers

• Driver of choice both online and offline

Online community plays role too – next

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Online Community

People spending time adding value because they are having fun doing it– Interacting with others

• Shared interests, winning a game

– Audience for their work• Reviews, commentary, open source software

Feedback is critical– Mainly fun if you know you are reaching others

• Amazon has reviewer ratings• Ebay has buyer/seller ratings• Internet Chess club has player rankings

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Hard to Start a Community

Chicken-and-egg problem– Good content/value is attracted by a good

audience, which is attracted by good content

Helps to do something where people are “obsessive” or “expert”

• Collecting/trading• Book/music/video reviews• Gaming• Writing software• Health problems

Need to balance interests of experts or providers with beginners or consumers

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Community as Supplement

Amazon is a good example of supplement– Reviews add richness to the user experience

• Can be extremely helpful in making selections

– Reviewers can have immediate impact on shoppers’ decisions

– People rank reviews/reviewers even though they are only indirectly rewarded• Little “free riding” problem compared to what

economists would expect

In contrast newspaper or magazine site– Amateur reviews compete with professionals

• Less obvious means for feedback

12

Community as Addiction

Winning at games– Especially where tangible reward such as

money or property• Including virtual property

– Includes auctions/trading

Ebay a good example: users often refer to themselves as addicted– Buying things don’t need and weren’t looking

for beforehand– Beginners advised to use auto-bidding and

(hidden) “maximum price” • Avoid potentially costly bidding wars

13

Balance of Providers and Users

Ebay has historically had a naturally self-sustaining nature– Many of the participants are collectors which

makes them both buyers and sellers

As Ebay moves to more corporate sellers– Fewer sellers and more buyers– Potential for loss of balance (NYT 11/25/02)

Trading sites need more exact balance– Only one provider and customer per transaction

• In contrast reviews are “consumed” many times In fact should be, to give feedback

14

Community Trust

Ebay’s initial challenge– Building trust to trade with strangers online

• Focused on sense of community and “inherent goodness of people”

Means of running cheaters out of town – Reputation scores based on completed

transactions (+,0,-)• Number of positives minus negatives• About half of transactions result in ratings

High reputation scores– Ebay rewards its highest reputation sellers

• 85,000 points

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Maintaining Trust

Ebay says fraud less than 1/100th percent– But still moving beyond “community policing”– Highly visible case involved real world too

• Merchant who fled with over $200K also had shop and employees

Poor experiences more common than outright fraud– Sellers now being verified through credit card

or other information• Contract with Verisign

Works in sense that fraud outside higher– Case of fake cashiers check and used Mac’s

16

Value of Reputation

Resnick (UMich) study shows price effect– Controlled study with “matched pairs” of

vintage postcards• Done in conjunction with established seller who

had high reputation• Sold one of each pair as relatively new seller with

little reputation– High reputation seller received closing bids on

average 7.6% higher than unknown sellers

Perhaps surprisingly, a few negative scores had little effect– Treated similar to unknown with a few positives

and no negatives

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Epinions and Pure Community

Goal to provide “unbiased” reviews of products and services– Contributed by visitors to site– Rated for accuracy and value by other visitors– Want to be better than sites such as Amazon

by having more of a community• Not restricted to items on one site

Changed from advertising revenue model– Clearly not working by late 2000– Main revenue now from referrals to retailers

• Fee per referral and/or for listings

18

Online Travel Assignment

What transaction vs. relationship customers want– Transaction: price focused, own time cheap– Relationship: total cost focused

• Person time expensive, flexibility and convenience key

• Some claimed cost not important or secondary, but data did not support that view

One of largest controllable costs; managed travel Appetite for a lowering total cost

Mixed views on how/where technology could benefit relationship customers

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Where Technology Good or Bad

Compliance and pre-approval of travel– Easier to apply rules and get approvals, via

email and/or Web

Repeat travel– Store old itineraries, make simple to rebook

Availability of tools for own research and booking where desired– Some postulated that many business travelers

do this already, to double-check agents

Expert human assistance can’t be beat in case of problems en route

20

Evolution of Online Travel

Wide range of views– Little change– Continued dominance of corporate agencies

such as Amex but with help of new technology• Build on relationship and service expertise• Use Internet to provide more information direct

to traveler and to travel coordinator

– New entrants such as Expedia• Build on technology expertise to provide Internet

information wherever possible• Grow or buy relationship and service experts• Particularly for underserved smaller businesses

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“Hybrid” Travel Agent Model

Internet access as additional valuable means of information access

Continued telephone access to experts– In some ways similar to Dell.com, people

available for higher value tasks

Several argued easier for Amex to build or buy technology expertise than vice versa– Have relationships now, happy customers– But can’t be complacent

• AMEX actively developing technology, started in 1997 with Expedia as partner

• Online booking grew from 5.8 to 13.5% Q1-Q3 ‘02