NBA 600: Session 9 ECommerce and Online Communities 18 February 2003

1
NBA 600 Session 9E-Commerce and Online
Communities18 February 2003

• Daniel Huttenlocher

2
Todays 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. Amazons focus
• Contrast with kinds of offline brands that are
  mainly about experience
  
• No overall design to IBM site in late 90s
• Hard to use, most common requests were help
  button and search box experienceconfusion
  
• 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 youve 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 didnt make it
• Some didnt 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

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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

8
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 dont need and werent 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

• Ebays 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

15
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 Macs

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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

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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 cant 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

21
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 cant 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