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Decision Support Systems 27 2000 383–393 www.elsevier.comrlocaterdsw Marketing on the Internet — who can benefit from an online marketing approach? a,) b c Melody Y. Kiang , T.S. Raghu , Kevin Huei-Min Shang a Infbrmation Systems Department, College of Business Administration, California State Uni˝ersity, Long Beach, CA 90840, USA cchool of Accountancy and Information Management, College of Business, Arizona State Uni˝ersity, Tempe, AZ, USA Operations and Decision Technologies, Graduate School of Management, Uni˝ersity of California, Ir˝ine, CA, USA Accepted 25 October 1999 Abstract The research builds upon the literature in electronic commerce and past research in marketing with the objective of understanding factors that impact a product’s adaptability to online marketing. A review of marketing channel choice literature reveals a set of factors and channel choice functions that are considered important in making channel decisions. Using this as a basis, four major channel functions, namely, product customization, availability, logistics, and transaction complexity are considered relevant in understanding the implications for Internet marketing. By building upon previous research in the area of channel selection, we provide a means of classifying Internet marketing initiatives based on product characteristics. The classification scheme based on product characteristics can help analyze the significance of each factor on the success of a firm’s online marketing approach. Further, the classification scheme is used to discuss decision support implications. q2000 Elsevier Science B.V. All rights reserved. Keywords: Electronic commerce; Channel selection; Internet marketing; Product classification 1. Introduction they commit substantial capital investment on Inter- net marketing and risk the possibility of interfering The potential of the Internet as a commercial with their current channels. In this research, we medium and market has been documented in a vari- focus on the use of the Internet as a virtual storefront ety of publications 17,20 . Despite overwhelming statistics regarding Internet development, both suc- where products are sold directly to customers. We contend that product characteristics play a major role cessful and unsuccessful cases of Internet marketing in the successful marketing of a product on the have been reported 15,16 . There is no proven suc- cessful method that can help management evaluate Internet. We build a product characteristics based how beneficial Internet marketing could be before classification framework to study the implications of using the Internet as a marketing channel. Channel selection is a complex task for both ) Corresponding author. E-mail: firstname.lastname@example.org researchers and practitioners in marketing. Although 0167-9236r00r$ - see front matter q 2000 Elsevier Science B.V. All rights reserved. PII: S0167-9236 99 00062-7 384 M.Y. Kiang et al.rDecision Support Systems 27 2000 383–393 Internet marketing has boomed in recent years, most literature, the types of channels can be divided companies have used it mainly for advertising or broadly into direct and indirect marketing ap- promoting corporate images. Not many companies proaches. Most companies do not sell their products have fully utilized the power of Internet marketing as or services directly to the final users for three rea- a new channel for handling transactions on the Inter- sons: 1 lack of financial resources to carry out net. The existing research in channel design and direct marketing; 2 ▯. decreased cost-effectiveness selection has only considered the traditional chan- ▯e.g., selling gum or other low-price consumer goods nels, including direct and indirect marketing ap- directly ; 3 to focus on the core business 21 . wx proaches. There is no documented results or research Internet marketing shares some of the characteristics that provide a systematic method to guide evaluation, of both direct and indirect marketing forms. How- planning, and execution of the channel choice deci- ever, the extant literature in channel selection only sion when it comes to Internet marketing. The re- classifies products into direct or indirect marketing search done in Ref. 30 provides a comprehensive and cannot be applied directly to Internet marketing review of research in traditional channel selection choice. Several product and market factors determine ▯ and is used as the basis for building our model. In channel choice these are summarized in column 2 of this paper, we extend and modify their work to Table 1 . 30 . These factors can be classified based include the new transactionrdistribution channel, In- on the function performed by the channel in fulfill- ternet marketing. ing customers’ requirements. The classification In this study, we first identify the product factors scheme of Ref. 30 groups the factors into eight that may impact the selection of transaction chan- channel functions and provides their implications for nels. This is done through a thorough review of the channel choice see Table 1, column 1 . Although literature in both traditional marketing channel selec- the Internet is an entirely new channel, it has many tion and the new online marketing approach and of the same characteristics as those of conventional identification of the key benefits of Internet market- channels. We believe studying the factors considered ing. Product factors that have impacted the success- significant in conventional channel selection can also ful capitalization of Internet marketing are added to help in analyzing the characteristics of Internet mar- the current list of factors identified by previous keting. However, there are factors that either were marketing research. considered less important in conventional channel The rest of the paper is organized as follows. A literature or are unique to online marketing that need summary of the review is presented in Section 2. To to be added to the analysis indicated in bold letters better understand the type of products or services in Table 1, column 2 .. selling on the Internet, Section 3 gives the classifica- In Section 2.2, we identify the key advantages of tion of retailing on the Internet. Here, the findings Internet marketing recognized by companies partici- from Section 2 are used as the basis for building the pating in Internet marketing. The findings are then classification grid. Section 3 also discusses the deci- used as the basis for extending the channel selection sion support implications of the classification. Sec- theory to encompass online marketing. tion 4 concludes the research with a summary of contributions and a direction for future research. 2.2. The ad˝antages of internet marketing 2. Literature review Marketing activity occurs through three types of channels: distribution, transaction, and communica- tion channels 28 . Although this study focuses on 2.1. Current research in channel selection using the Internet as a new transaction andror distri- bution channel, there are substantial interactions and Marketing channel decisions are among the most overlap among the activities performed by the three critical decisions facing management. In marketing types of channels. Therefore, we need to consider the M.Y. Kiang et al.rDecision Support Systems 27 2000 383–393 385 Table 1 Channel choice functions adapted from Rangan et al. 30 wx . Customer’s Product-market factor Reference Marketing implications requirement of identified in the channel functions literature ▯1 Product Searching time, technical, w3,22,26,36 Use direct marketing if high, indirect if low. information complexity, rate of Internet can be used as a communication technology channel in either case. If product complexity is high, Internet is well suited. ▯2 Product Adjustment, w3,8,36 Use direct marketing if high, indirect if low. customization customization, customer Internet is ideal if factors associated importance, product with customization are highly critical for novelty, ease of value market success, added, specialty goods a ▯3 Product Product criticality, w8,26 Use direct sales if Important, indirect if quality significance of purchase Unimportant. assurance These factors are not critical in choosing Internet as a channel. b ▯4 Lot size Purchasing effort, unit w7,22,26,36 Use direct if Large, indirect if Small. value, extent of usage, If demand volatility is high, Internet can order size, gross be chosen as the channel. c margin demand volatility ▯5 Assortment Assortment, one-stop w7,8 Use direct if Nonessential, indirect if shopping, market Essential. decentralization Use the Internet if market decentralization is not essential. Other factors are not critical in choosing Internet as a channel. ▯6 Availability Frequency of usage, time w3,7,26,36 Use direct if Not critical, indirect if Critical. of consumption Use the Internet if these factors are critical replacement rate, to product success. frequency of purchase, convenient location ▯. w x 7 After-sales Waiting time, need for 7,26 Use direct if Not critical, indirect if service service Critical. For a digital product where need for service is critical, Internet is well suited. ▯. w x 8 Logistics Need for special 6,36 Use direct if Complex, indirect if Simple. equipment, Use the Internet if digital products or if transportation logistics factors are simple. convenience ▯. w x 9 Transaction Order complexity 2,35 Use the Internet if transaction complexity complexity is high to reduce time and error in transactions processing. aNew factors are boldfaced. b Due to the ubiquitous nature of Internet Commerce, the authentication of a company is used as the surrogate for quality assurance of the product. Therefore, companies with established reputation brand name tend to do well in electronic commerce 9,11,29 . w x cThe main reason that prevents potential customers from using the Internet is security concerns. As Internet marketing matures, we expect to see transactions of various lot sizes to occur on the Internet. Theoretically, the lot size just needs to be large enough to ensure the covedage of its delivery cost. This is true for companies that provide digital products. Also for companies that have established distribution channels other than the Internet can use the established channel to provide after-sales services. effect of Internet marketing on all aspects of market- of Internet marketing. The extant literature in Elec- ing activities to be able to recognize the true benefits tronic Commerce has documented various advan- 386 M.Y. Kiang et al.rDecision Support Systems 27 2000 383–393 tages for companies to sell directly on the Internet. to Internet marketing. The four new factors are: 1 ▯. These advantages can be classified into those three ease of value addition to the product 32,37 ; 2 ▯. channels based on the functions performed: specialty of goods 14,19,24 ; 3 order complexity ﬂ As a communication channel: information ex- w2 ; and 4 convenient location 27,34 . Three of the change between sellers and buyers. four factors can be grouped into one of the eight - For accessing, organizing, and communicat- channel functions proposed by Rangan et al. 30 wx ing information. ▯These are boldfaced in Table 1 . We have also - To improve interactivity and perceptual expe- added a new channel function in Table 1, namely rience 28 . transaction complexity, an issue that was not consid- - To gather information about customers via ered in traditional channel selection literature. Using surveys and contests for new product develop- the Internet to handle transactions can help prevent ment and introduction, relationship building and human errors, and thus reduce transaction costs espe- personalization 10,15,18,25 . cially for complex transactions, such as those that ﬂ As a transaction channel: sales activities. traditionally require trained personnel or experts e.g., . - To improve visibility and reach a much big- travel agents and stockbrokers . ger customer base 23 . When analyzing the importance of each channel - To improve revenues by exploiting cross-sell- function to online marketing, we based the analysis ing opportunities 13 . on the advantages of Internet marketing identified in - To streamline transaction processing, thereby Section 2.2. We separate the marketing process into reducing task complexity, paperwork and trans- three channels and only focus on the advantages that action costs 2,23,25,31 . have direct impact on the online transaction and - To customize promotion and sales to individ- distribution processes. Product information, which is ual customers and improve flexibility 18 .x a function of the communication channel, should not ﬂ As a distribution channel: physical exchange of be a factor to consider when selecting the transaction productsrservices. channel. Companies can take advantage of the Inter- - To eliminate huge inventories, storage costs, net as a communication channel for exchanging and utilities, and space rental, etc. 4 . communicating information with customers but not - To shorten supply chain and reduce commis- for directly placing orders and making transactions. sion and operating costs 12 . In other words, the Internet can be used very well for The ability to serve as both a transaction and information but not necessarily for marketing. On the physical distribution medium for certain goods is a other hand, the instant communication feature of the unique feature of Internet marketing. Companies in- Internet allows the companies to quickly respond to volved in online ticketing and reservation, digital market changes and customer preferences and to products, financial services, tele-medicine, etc., can customize its promotion and goods to individual best realize such advantages. customers in a more timely fashion. Moreover, be- Using the Internet as a distribution channel cannot cause the Internet access is not limited by any physi- only reduce the delivery cost substantially, but also cal boundary and is available 24 h a day, it allows ensure instant delivery of productsrservices. Thus, companies to provide convenient access to a broader we extend the traditional dichotomy of direct or customer base. The logistics function is expanded indirect marketing to include the Internet as an alter- here to include the consideration of distributing digi- native channel for transactionrdistribution. The last tal or informational products or services that is perti- column of Table 1 briefly describes the decision nent to the success of Internet marketing. Thus, it choices involved in choosing one of the three chan- appears that product information, product quality nels for product marketing. assurance, lot size, assortment, and after-sales ser- To summarize, we make four new additions to the vice functions are less important factors to consider traditional factors that affect channel choice. These in Internet marketing. Therefore, we utilize product new factors are found to be important for Internet customization, availability, logistics, and transaction transaction based on a review of several cases related complexity as the basis for building our framework M.Y. Kiang et al.rDecision Support Systems 27 2000 383–393 387 to evaluate the suitability of marketing the products 28 further categorized the products or services along or services on the Internet. three dimensions that are more relevant in the con- text of the Internet: cost and frequency of purchase, value proposition, and degree of differentiation. r 3. Classification of productsrserrices selling on These three dimensions constitute eight different Internet combinations. Peterson et al. 28 suggested that when products To help understand the effect of each channel are expensive and infrequently purchased, an Internet function to Internet marketing, we first need to pro- marketer is more likely to carry such a product. vide the classification of products or services selling However, the traditional retailer is favored when on the Internet. There is a broad range of products there is a need to personally inspect the product prior and services marketed on the Internet that range to purchase. When the value proposition is intangible from consumable goods to durable goods. Services or informational digital products , the Internet mar- marketed on the Internet also range from online keter is favored. newspapers to business-wide consultation. The clas- Peterson et al. 28 provide a classification of sification criteria of different products or services are Internet products or services based on product char- still controversial. The traditional method is to clas- acteristics and likely consumer decision sequences, sify products by their tangibility, nature and needs, and the implications of the Internet for consumer wx and buying behavior 21 . This kind of classification marketing. However, no justification is provided for may be suitable for a traditional marketing environ- selecting the three dimensions used in their classifi- ment but does not seem as appropriate in categoriz- cation. In this research, we have reviewed the mar- ing products or services on the e-market. According keting channel choice literature and have identified a to Ref. 28 , a better way to group products or set of factors and channel choice functions that have services on the Internet is by separating them into been considered important in making channel deci- search or experience goods. Search goods are goods sions. We have arrived at four major channel func- that can be evaluated using external information, tions that we believe are relevant to Internet market- whereas, experience goods have to be personally ing: product customization, availability, logistics, and evaluated. If a product is a search good, it is more transaction complexity. Three of the four channel suitable and likely to be marketed on the Internet. On functions match well with the three dimensions sug- the other hand, if a product is an experience good, gested in Peterson et al. 28 as follows. The produc- then marketing this product on the Internet is less tion customization function considers factors such as possible. This classification gives us a clear picture adjustment, customization, and customer importance of product suitability for marketing on the Internet that correspond well with the differentiation potential Table 2 Product and service classification grid adapted from Ref. 28 Dimension 1: Dimension 2: Dimension 3: Examples of products and services outlay and value proposition differentiation frequency of potential purchase Low outlay, Tangible High Wines, softdrinks, cigarettes frequently purchased or physical Low Milk, eggs goods Intangible or High Online newspapers and magazines informational Low Stock market quotes High outlay, Tangible or High Stereo systems, automobiles infrequently physical Low Precious metal ingot of purchase known weight and purity goods Intangible or High Software packages informational Low Automobile financing, insurance 388 M.Y. Kiang et al.rDecision Support Systems 27 2000 383–393 Table 3 Expanded product and service classification grid Logistics Product Transaction Availability Sample of cases Major productsrservices customization complexity Digital High High Critical GM financial service Installment, finance, Product calculator TechrDSS TechrDSS TechrDSS Direct Credit Personal financing, implications: implications: implications: options, credit report Profiling and Wizards and Server side customization Customization monitoring agents to push tools to assists tools to ensure products and users in uninterrupted services. placing orders. service Intelligent Using past agents for transactions to customized guide present setting of users transactions. options. Personalized tracking mechanisms to monitor customer preferences Secure Tax, William Tax services Certified Public Account. Brooks and Company Not critical TravelBids, Expedia, Online auction or sales Travelocity.com of travel-related products, online ticketing Southwest Airlines, Online travel, United Airlines, reservations American Airlines, etc. Compaq Business consulting services Dartnell Software, services, Consulting Low Critical ESPN, CNN, Business Online news Week, Golf Digest magazines AudioNet News, CDs, live audio Canadian Insurance Online insurance Electronic News News You First Personal Health Assessment Not critical Intuit.com, Soleau Online software Software ordering Dell Computer, Software, services IBM, Cisco, Micron Headbone Interactive Software, games Internet.net, Software Onsale.com, Insight, Adobe System, OfficeMax Low High Critical First Commerce Bank Online banking M.Y. Kiang et al.rDecision Support Systems 27 2000 383–393 389 Table 3 continued Logistics Product Transaction Availability Sample of cases Major productsrservices customization complexity TechrDSS Not critical Prudential Securities, Insurance implications: InsurePoint Embedder user FIC Insurance Groups, Online brokerage configurable E Trade.com services design for products. Data mining to cluster customers for targetting advertising and promotions. Low Critical Not critical Physical High High Critical Sharper Image Small appliances, gifts products TechrDSS TechrDSS TechrDSS Not critical Chrysler, Toyota Automobile implications: implications: implications: Computer hardware Multimedia Supply chain Wizards and tools for partnerships tools to enhancing to enhance enhance user perceptionr relations and experience in experience. DSS to placing orders. Exploiting increase e-business efficiency to improve of partnersr logistics customers. through supply Interorganiztion- chain relations. tional systems Logistics to share management logistics tools. information for better decision making. IBM, Dell Computer Micron, Gateway 2000, Internet.net Onsale.com, Insight Computer hardware Microage Appliances Cisco Network hardware OfficeMax High-end office equipment Low Critical Virtual Vineyard Wines TechrDSS 1-800-Flowers Flowers implications: Automated order processing tools to optimize logistics. 390 M.Y. Kiang et al.rDecision Support Systems 27 2000 383–393 Table 3 continued Logistics Product Transaction Availability Sample of cases Major productsrservices customization complexity Godiva Chocolate Amazon, Barnes and Books Noble’s, Rosewell Books Cyberspace Computer books Playboy Magazines Levi’s Apparel Cdnow!, N2K CDs Wal-mart Specialty items Not critical Low High Critical Monitor Medical Online medicine ordering TechrDSS Not Critical implications: Grouping and profiling customers for advertising and promotions. Low Critical Wal-Mart Wines, cigarettes, food Office-Max Low price stationary BargainFinder failure Shopping mall Downtown Anywhere Mall failure IBm World Avenue Cybermall failure Not critical dimension. As Peterson et al. 28 stated, Internet-re- product or service is suited for marketing on the lated marketing can result in extreme price competi- Internet. The Internet can ease transaction process- wx tion when products or services are incapable of ing, especially for handling complex orders 2 , significant differentiation. The availability function thereby reducing paperwork, increasing efficiency looks at the frequency of usage, time of consump- w23 , replacing professionals tasks 31 , hence, reduc- wx tion, and replacement rate, and is related to the first ing the transaction cost 25 . One example is the dimension which ranges from low-cost, frequently purchasing of custom made blinds. The order needs purchased goods to high-cost, infrequently purchased to specify all detailed measurements, color code, goods. The logistics function has been redefined to style, brand, etc., for each blind ordered. It can take focus on the difference between the logistics of an operator over 30 min to process one average size digital vs. physical products. This function is the house order with 15 to 20 windows. By using the same as the tangibility dimension discussed in Ref. Internet to place an order, it cannot only save the w28 . Thus, our classification scheme provides justifi- processing time hence, save the operator cost but cation for Peterson et al. 28 framework based on also reduce the chance of human error and customer traditional marketing channels literature. dispute. For business-to-business transactions, short- We further refine the classification scheme by ening the processing time also means the seller can incorporating the transaction complexity as an addi- maintain a lower inventory level and reduce other tional dimension. We believe this is a critical dimen- related overhead for handling excessive inventory. sion, especially in the context of e-business, where it Thus, transaction complexity should in itself be con- deserves careful examination to determine whether a sidered as an important dimension in making channel M.Y. Kiang et al.rDecision Support Systems 27 2000 383–393 391 choice decisions. Based upon the above discussion, 4. Conclusion we have expanded Table 2 to include a transaction complexity dimension see Table 3 . The rapid development of online computing tech- We collected an informal list of companies that nology makes it imperative for businesses to seri- market their products or services on the Internet ously consider the Internet to avoid losing competi- ranging from online bookstores to insurance compa- tive advantage. A Web site gives direct contact nies. Some companies provide physical products as between the organization and the consumer. How- well as intangible informational services. A sample ever, product characteristics play an important role in of these companies appears in Table 3 based on the whether the organization benefits from utilizing the classification scheme presented in this section. We Web as a means of direct sales 33 . The research would like to add here that the list of companies builds upon the literature in both electronic com- presented here is for illustrative purposes only, and is merce and past research in marketing with the objec- not intended to be an exhaustive compilation of tive of understanding what factors have the most companies doing business online. impact on a product’s adaptability to online market- ing. 3.1. Decision support implications Table 3 links the product and service character- istics of Table 1 to the company cases collected. While our research provides a decision support Among the four functions, logistics has the dominant framework for channel choice in online marketing, effect on the channel selection decision because digi- important decision support issues need to be tackled tal products can take advantage of using the Internet once a channel choice has been made. We believe for both transaction and delivery processes. The our classification framework helps us understand the second important function is the product customiza- decision support needs in using the Internet as a tion potential of the products or services, and that is marketing channel. For instance, high product cus- followed by the transaction complexity and the im- tomization requires extensive profiling and cus- portance of product availability. Consider some im- tomization tools to identify and target individual plications of Table 3, where most successful online customers. Highly sophisticated tracking tools to marketing companies belong to either companies that monitor changing customer preferences are neces- provide digital products or services or physical prod- sary to maintain the flexibility of the online market- ucts with high customization potential. This outcome ing channel. When both product customization and matches well with Peterson’s prediction. One obser- transaction complexity are high, wizards and tools vation from Table 3 is that the effect of product ▯that may utilize past orders as a guide are needed availability seems to be less important for Internet to assist customers in placing orders. When product marketing. Both types of products or services e.g., customization is low, one would still need tools that frequently vs. infrequently purchased goods were can broadly cluster customers for target marketing. observed in our sample of online businesses. As Customer clustering could be based on a combina- Internet marketing matures, we expect to see transac- tion of demographics and past interactions. If a tions of various price ranges and sizes to occur. physical product is being marketed online, sophisti- For digital products or services with low product cated multimedia tools could be used to enhance user customization and low transaction complexity, the experience and knowledge about the products 1 . In Internet may not provide a new competitive advan- addition, supply chain management would be critical tage to the company. For tangible goods, the most to keep inventories low. When a physical product important factor that determines the suitability of has high customization needs, forging strategic sup- Internet marketing is the potential of product cus- ply chain relations and building of decision support tomization. With a high potential of product cus- tools to optimize manufacturing and delivery effi- tomization, if convenient location is also important, ciency are critical. A summary of decision support then products with low transaction complexity, such and technology issues is presented in Table 3 under as wines and chocolates, still have a high possibility columns 1 to 4. to do well on the Internet. For products with high 392 M.Y. Kiang et al.rDecision Support Systems 27 2000 383–393 transaction complexity, both low and high availabil- chance of survival on the Internet, and to reduce the ity products can sell well on the Internet; for exam- uncertainty involved in expensive capital investment. ple, the online banking and tax preparation services ▯3 For companies that have already participated in on the Internet. When both the transaction complex- the online commerce, the key factors identified in ity is low and the product availability is not critical, our model will help the companies to reevaluate their we do not recommend using the Internet as a new projects and correct or avoid potential mistakes done channel for handling transactions based on the cur- by their predecessors. For example, a company that rent infrastructure. 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