Internet Based Commerce vs Traditional Retail Store - Research Paper Example

 Internet Based Commerce Vs Traditional Retail Store Executive Summary The internet has changed the face of marketing, as well as shopping in the form of product and service offerings being made available at value added prices. However this does not occur without the additional factors of consumer trust and confidence playing a role within the purchasing and decision making processes. The belief of a instant business being made available online, without the accompanying market research and traditional marketing, sales and support structures in place, have proven to be the demise of a number of business models and ventures within the online business world. The traditional retail store continues to function, albeit in a difficult economic climate, and although the pressure of the online retailer is certainly forthcoming, strategic and customer oriented initiatives will most likely ensure the survival of the traditional retail outlet. Furthermore the retail sector, as a physical venue is often times unsuitable for certain personality types and those lacking specific traits with respect to sales and customer service, however these traits are not necessarily required within the online business model, and therefore offers the entrepreneur access to a retail business, via the online route. Each of the business models, briefly analyzed here have presented their own advantages and disadvantages in a variety of areas within the business. Each model comes with potential pitfalls, and possible success stories; however an underlying theme of specific market research as well as sound management of the business in question with reference to marketing and customer care appears to be crucial to both options. Which option is best would largely be determined by the specific entrepreneur and his or her personality and traits as well as the access to financing. Table of Contents Executive Summary 4 Introduction 6 Analysis of Literature 6 Analysis of Primary Research: Interviews 8 Factors for Consideration – Retail Store 9 Factors for Consideration – Online Store 10 Which Business Model Is Better? 13 Conclusion 13 References 14 Introduction The choices in establishing retail organizations have certainly advanced with the numerous opportunities becoming available via the internet, amongst others. Specific to this analysis the opportunities, as well as the threats will be analysed in a traditional so called "brick and mortar" store and that of an online or ecommerce solution. Each of these options have factors that may work both for and against the entrepreneur, and within the analysis it is aimed to realize which is the better choice in terms of a start up business plan for the entrepreneur. It is furthermore necessary to identify the various factors that may lead to the potential success in either of the possibilities, and which might lend itself to a more successful approach for the entrepreneur. The basic analysis of the different factors affecting the retail and web based business will be analysed in the view of current views and opinions, on both an academic literature as well as current sentiment, obtained via interviews of business owners and people directly involved within the retail sector, both online and physical stores. Within this analysis and research phase the best practices, as well as the potential pitfalls will be highlighted and discussed where relevant. With the abovementioned introduction in mind it becomes necessary to define the exact scope and extent of the research and analysis herein undertaken. To this end the "guiding" research and analysis statement is presented as follows: To analyse the key differences in establishing a retail store, either on a physical or online basis, whilst taking influencing factors into account which may impact upon the success or failure of the venture being undertaken. Analysis of Literature The literature analysed herein has been viewed from two different perspectives, being that of the academic side, as well as that of industry stakeholders that offer insight into the world of the retail sector, thereby offering a more realistic or real life scenario for the purpose of this study. There are countless examples of companies that have intended to expand onto the internet with respect to their customer products and services options, however there are also a large number of typical failings within this area too. Plant (2000) specifically provides that the concept of establishing the online or ecommerce solution is an "excellent conceptual strategy" however the execution thereof is often "fraught with problems". This arises due to a number of factors that are not taken into account, and largely stem from inadequate marketing intelligence, research and resultant application. A specific case study provided by the author is that of Information Neighbourhood, who attempted to provide an online grocery service, however the lack of research into internet users, and the amount thereof, resulted in a shift from their starting base in Tampa, Florida to New Jersey. The second attempt failed due to "inadequate marketing support" (p. 55). This case study may be seen in the light of the company possibly thinking that the internet or ecommerce model is merely a "plug 'n play" mechanism that does not require the traditional marketing research and support structures; which as discussed was certainly an ill fated approach to the online business model. The author furthermore highlights a number of operational issues that were not taken into account, and therefore resulted in failure too. Therefore in analysis of the case studies provided by Plant (2000), some of the biggest failings within the online retail have been realized as stemming from the lack of sound marketing support, both within the research and marketing application aspects, as well as an insufficient operational management plan, within the delivery process of the product to the client. These may well seem to be basic business considerations, however it appears that those wishing to implement an online solution within the retail sector need to approach the process more holistically, and arguably more realistically too. This process is certainly not about just setting up a website and hoping for the best, additional factors for consideration are discussed below that are specifically relevant to the online or ecommerce business model. The above does not necessarily mean that success is not and cannot be achieved via the online business model. One merely has to consider the example and structure of the well known Amazon.com. Although the level of success achieved by this organization may be attributed to the length of operation as well as specific business model aspects that have been implemented within this organization. The physical retail business sector is certainly not much different than that of the internet based business with regards to specific elements and aspects that require attention, and implementation. Ranging from research of the targeted demographic, to the physical business plan and the need for financing, Harrington & Mintzer (2006) provides a number of other factors that require specific attention. These include "location, products with respect to their marketability, suppliers and distribution, employees, stock management, pricing policies" and so on. Although these items are possibly relevant to both the online and physical retailer, some of these will be more relevant to the physical retailer than that of the online retailer. This is further impacted by what Engle (2007) provides as specific traits and characteristics of the entrepreneur, which are indeed required to operate successfully within the retail business. These traits may or may not be required of the online entrepreneur, who although is dealing with customer service issues, is not directly exposed to the customer, as compared to that of the physical retail scenario. These traits provided by Engle include, but not limited to "organization, leadership, personality, flexibility, creativity and perseverance" as desirable attributes in the making of a successful entrepreneurial retailer. Hence in deciding exactly which option is the best route for the would be entrepreneur, there are a large of number of factors and conditions that will come into play when deciding which is the best for that specific individual. These include issues such as the abovementioned personality and traits, financing, geographic location, business skills and so forth. Arguably the online option may well be the easiest and quickest to set up, however in order to approach the business on a sustainable, as well as a successful basis the underlying marketing and operational issues will have to be addressed where applicable, regardless of route chosen. To this end the following processes and requirements when considering which type of business to establish will have to be taken into account. The analysis of these "tips" when opening each of the respective types of business may well form the basis for the entrepreneur to make a sound business judgement and decision in choosing his or her desired route, being that of the ecommerce solution or a physical retail store. Analysis of Primary Research: Interviews The interview phase of the research was centered around a local business owner, within the wheels and tires sector of the automotive trade. The interview was conducted over a thirty minute period with the owner of the shop and several relevant questions were presented to the individual concerned, including whether the recent economic condition has had any significant impact upon the company. The history around the retail type store provides that the company was initially started as a hobby, which has subsequently grown into a sustainable and thriving business. The immediate business environment within which the interviewee operates provides that there were a number of retailers within the wheel and tires niche, as well as online stores, however consumers were not willing to wait for their orders, and utilized the local shops for their tire and wheel needs. However with improved supply and delivery of the online option and product, there are more and more e-commerce solutions within this specific market that are entering the marketplace and thereby increasing competition. 1. What is or was the motivation to start the business, and what continues to drive the business? From a very young age, I enjoyed working on cars, with my father and so therefore had an early interest and development within the automotive industry. After graduating from college I remained within this sector and established a small tire company, serving the immediate Mountain View Community. There was an element of competition, however due to the nature of my shop, which was more racing and performance based, more support was received by the local community that were involved with racing, and wished to upgrade their current equipment and tires. 2. What makes your customers order most of the parts such as tires or wheels with your shop instead shopping online? Well most of my customers are loyal, however by the nature of the specific products that we offer we have found that pictures, such as catalogs and online are not good enough for this type of client. Most customers that want to order wheels, they want to touch, feel and see the products first hand. Additionally the customers want to know about specific performance and safety aspects of the tires and wheels. Some customers are willing to go the extra $10 or $20 in price for quality and personal service and products that are available immediately. One of the key issues with tires is the immediate availability and usage of the tires, as well as the fitment of the product to the vehicle, which is certainly not an easy task that one might be able to do quickly, without the right machinery and equipment 3. Do you feel threatened with online shop being so easy to access and most people consider online shop a ballpark for pricing? Business is never easy and there always has been a great challenged behind it. I do feel the pressure from my customers that try to get a price match with online shop, but in the end I have to explain to them that the shop need profit to make it running and keep operated. A lot of the online shop is based on the warehouse and have limited labor and minimum labor wage requirements. The retail shop is different, we have a rent to be paid every single month, we have workers that need to be paid every week, everyday running and operational costs and expenses. Some of these costs I believe are higher than running an ecommerce shop. I have to make my customer understand that some of this cost is not cheap and it needs to came from somewhere in the profit zone. Using the internet shop as an example, cutomers often look at the unit price and fail to consider the shipping and fitment charges, when calculated these prices are not so far from our retail prices. However the consumer only considers the unit price, and are often times after the best deal available. After this dialogue it is clearer that the retail shop certainly has more obligations, inclusive of the customer service and communication aspects. There appear to be higher financial commitments and possibly a stricter regulatory environment, that all require consideration. Factors for Consideration – Retail Store Assuming that the entrepreneur will be starting from scratch, in other words not purchasing an existing or going concern, the individual stands to benefit from making his or her own decisions from the very beginning, and will therefore be able to plan and implement their specific strategies, without having to worry about existing policies and practices within the company. Additionally Harrington & Mintzer (2006) provides that the establishment of a retail store goes "beyond the business plan, need for capital, and other aspects of business in general" in that decisions upon location, products, suppliers, employees, business hours, advertising and promotion and consumer convenience cannot be ignored during this setup phase. In addition to this many of these factors and aspects require ongoing and specific attention as the business continues to grow, whilst seeking to maximize their offers and sales to their customers. This extends to the customer relations and services aspect, as one will want to encourage an ongoing relationship with customers, in order to maximize word of mouth advertising, within the immediate community – which is often considered as some of the best advertising that any business could wish for. The establishment phase of the business being the primary or starting point for the entrepreneur, and forms the basis for a solid foundation for the retail store. However the retail sector within which the entrepreneur chooses to enter requires industry specific information and expertise in dealing with that specific and related commodity, if the entrepreneur and their sales team wishes to add value to the end user and customer. Without the necessary knowledge and expertise of a specific product or industry may result in the loss of credibility amongst the target market, which in turn will directly affect the business' turnover and profitability. Harrington & Mintzer further provide that the distinction between selling to customers and business to business selling will impact upon a number of the aforementioned factors, in that the business oriented retailer may not necessarily require a retail store front, and operating from a "warehouse" type premises is often utilized by the business to business retailer. Suppliers, supplier management and relationships are another essential element within the retail sector, as these stakeholders will have a direct impact upon stock levels and inventory management. One may bear witness to the importance of supplier management as displayed by many of the large corporations today, in that suppliers are expected to meet specific quality and operational issues of the large corporations, due to their specific social responsibility and sustainability initiatives. Although this may not be entirely relevant to the smaller startup company, factors of ethical and sustainable suppliers are essential in the view of establishing and maintaining an ongoing relationship with these suppliers. The management and relationship issues with suppliers require additional effort and attention, specifically referring to bill payments, problem solving and so forth (Engle p. 120, 2007). Once the store has undergone the basic planning phase and elements of financing and a supplier has been addressed, the physical layout of the store requires necessary attention, in order to once again maximize the customer experience within the store in question. A number of possibilities exist in so far as layout is concerned, with Engle providing example layouts such as that of geometric, diagonal, staggered and straight layouts, amongst others. This will further allow for the categorization and organization of the products and services of the retailer. An example would be for instance a clothing retailer that caters to both sexes, as well as a children's section. Each of these sections will be grouped separately, and will also be arranged in accordance with sizes and perhaps even categories, such as formal, smart casual, informal and within the respective category of male, female and children's sections. This may seem to be a basic strategy, however consider if the retailer does not organize their store accordingly, and the resultant confusion and downright inconvenience the shopper will experience by having to sort through hundreds of items for their relevant size and choice. This would certainly not be conducive to a convenient, well laid out and attractive shop design and shopping experience for the customer. The specific item of staffing will further impact upon the retail store, as the employees will be interacting with the customer. This implies the necessity for sales training, customer care and service, as well as specific product knowledge. The employees are nothing short of ambassadors for their retail store, and these representatives can provide either positive or negative results in so far as the turnover of the store is concerned, as well as the overall experience the customer has within the store in question. Therefore product training, sales training, and customer care training are some of the most important efforts that will be required. This will extend into so called "back of house" elements too, such as that of inventory or stock management, basic accounting and reporting and so forth. These are all crucial elements within any business dealing with inventory, customers and basically within a sales and service environment. Factors for Consideration – Online Store "Online retail sales in the U.S. are expected to grow about $20 billion to $30 billion each year for the next five years, reaching somewhere between $215 billion and $335 billion by 2012, according to two recently released reports on e-commerce" (Rosencrance 2008). This opening statement certainly provides motivation in understanding the growth and potential within the online retail industry. The establishment of an online store involves a lot more than merely deciding upon a suitable domain name, hosting and specific ecommerce software that will allow the establishment of such an opportunity. Although at face value the costs thereto associated, and specifically relevant to the aforementioned issues is a lot less prohibitive than that of the traditional retail store, many people fail within their online efforts due to a number of factors that are specific to the ecommerce "world". Some of the immediate problems, as highlighted within the literature analysis provide that a more extensive approach to the research phase is perhaps one of the most important and often overlooked task by many an online marketer. There are specific research options and perspectives available to the online entrepreneur, which need to be incorporated at the planning phase, long before the decision is made regarding their online ecommerce concern. This is amplified by known "problems" that plague the online entrepreneur, and include one of the most important items of trust. Fazlollahi (2002) provides relevant insight into this all important aspect of conducting business online. The author provides that the social-psychological perspectives of transacting online is affected by inter alia the trust propensity of the consumer (p. 128), which may not be relevant with the physical retail store, as they are essentially face to face with their chosen product supplier. By purchasing over the internet, the consumer has to impart valuable personal information, such as their credit card details and so on, items which have been the subject of many adverse happenings on the internet, such as identify theft and fraud. To this end specific and significant measures are not really an option to the online business, but rather a necessity; these measures would include adequate privacy policies, secure transaction processing environments and so forth. This will go toward establishing the trust aspect of the online consumer, and can be further cemented via subscription to specific online business bureaus and "rating agencies", such as Shopping.com's store rating, Bizrate.com's customer certified, and Yahoo's top service merchant rating services. The following screenshot has been obtained from the perfumespot.com and serves as an example of efforts and initiatives required to ensure the customer's security when using the site, and thereby aims to establish the level of confidence and trust from the consumer's perspective. Figure 1: Examples of Trust building rating and security measures online (theperfumespot.com) Although the basics of security and trust are crucial to the success of the online venture, additional aspects that are also relevant to the retail store become apparent within this business model albeit in some parts from differing perspectives. This would include items such as site functionality and design, which would be directly "responsible" for the end user's level of interaction with the website. One needs to bear in mind that the sales person is no longer involved within the transaction process, and hence the ease of use, as well as issues such as copywriting on the site become essential within the user's experience on the site in question. In order to ensure ease of use the site should have areas clearly indicated as far as terms of use, privacy and security and product categorisation, similar to that of the above described retail layout. The consumer will want to access areas of specific interest easily, and arguably more quickly without having to wade through piles of information or web pages to access what they are searching for. A suitably designed site, together with search functionality may aid in solving these issues. Besides the aesthetics and appeal of the site in question, one has to ensure that the hosting provider, or the account which the entrepreneur has with the hosting provider is sufficient to cater for the amount of traffic that may be attempting to access the site. This is specifically relevant for heavy traffic sites, which need to have sufficient and adequate server capabilities to handle large amounts of traffic. Equipment such as dedicated servers may be required in order to host the site in the event of a large volume website / online store. This is not to say though that the site will automatically start getting visitors, as the additional tasks of marketing and advertising will be required to generate interest in the site. More relevant to the online store, as well as the online world in general is the issue of search engine optimization (SEO), which in a nutshell is specifically relevant to the site structure in making it easily accessible to the search engine spiders that index the millions of websites on the internet. Although this issue may become somewhat complicated, the use of SEO tricks, practices and so forth can provide the site owner with an upper hand over competitors that ignore or do little in this area of online development. One needs to further bear in mind that of the three major search engines, being that of Google, Yahoo and Bing, there are different factors that will add weight to the SEO efforts of the online business. However generally speaking in so far as SEO as well as the potential that it holds in providing traffic, and therefore customers, Enge, Spencer, Fishkin, Stricchiola and Batelle (2009) provide that "search traffic is among the best quality available on the Web, primarily because a search user has expressed a specific goal through her query, and when this matches a product or brand the web store carries, conversion rates are often extremely high" (p. 91); which one may argue is the primary goal of the overall SEO concept and activity. These SEO activities will often times be guided by specific research into commercially valuable keywords, which are specific so called "buying" keywords that the online shopper will use when searching for a product or service online. These keywords are often specific to a product or product range and an example in line with the retail clothing store, mentioned above may be drawn here in the following analysis. The term "Jeans" is a generic keyword, that people may be searching for online, however the term "mens jeans" or even "levi 501 jeans" becomes more specific and are more related to a consumer's choice when searching for a specific product; these terms can extend further to searches such as "mens black jeans" or "calvin klein mens jeans" of which each term has a different number of searches per month, as well as different competing search engine results (Google Adwords: Keyword Tool). These are examples are highlighted here to stress the importance of the SEO function, as well as how the issue of a search engine and the search engine placement of the site in question can in fact affect the online business; it is furthermore a lot more complicated than finding good keywords and is an ongoing marketing activity that must be included within the business strategies of the online retailer. This adds to the marketing and advertising costs and efforts of the online business, which are not necessarily factors that affect the traditional retail store. This is also well worth implementing consider there are in excess of 4,500 searches on the internet every second of every day (Enge et al p. 1). The additional aspects of stick management, premises and so forth will also affect the online retailer, as well as the required relationships with suppliers and customers. However the online business model opens the door to another opportunity being that of the private label or the drop shipping business model, within which instance online website owners may offer products and services under the guise of their own website, and a third party is responsible for the fulfilment of any orders from the initial website mentioned (Boone 2007). This will substantially reduce facilities and location overhead costs, which may or may not be transferred to the marketing budget of the company. Which Business Model Is Better? Although the title of this section may well represent an open ended question, each of the relevant business models herein described offer both advantages and disadvantages within their respective areas of operation. Where the online retailer may save on specific setup and related costs, their site design and additional market research and advertising may make up for the potential savings being realized. It may further be stated that an advantage of the online retail solution may not necessarily require the mentioned characteristics and traits required of a person within a physical retail environment, as they are not continually exposed to the customer on a face to face basis. Hence one may state that it would surely come down to personal preference, as well as funding in terms of choosing which of the options is best for the entrepreneur concerned, and both options should be fully explored to measure and assess the opportunities available within the respective avenues of retail. Conclusion The use of either the web based or online ecommerce model or that of the traditional retail store both have advantages and disadvantages, as well as their respective features and benefits that may be applicable within various different sectors. The issue of financing further impacts upon the suitability of the choice of which route the entrepreneur may consider, whilst specific personality type and traits add to this decision-making process. Although the geographic reach of the online model may extend beyond that of the physical retail store, this reach is impacted by the distribution costs, and hence creates additional factors for consideration, with regards to the markup of the products being sold. This is said due to the fact that if the online retailer wishes to remain competitive they would have to reduce markups to take the shipping costs into account in presentation of their offer, and remaining within competitive levels with the locally situated retailer. The fact that each option has its own pros and cons when analyzing the various factors that come into play suggest that the issue of personal choice, including personality, financing and the actual product itself will determine the ultimate suitability of which business model is the better suited for the entrepreneur who is starting out. References BOONE, L., J. (2007). Drop shipping for sellers. [North Carolina], Lulu. ENGE, E., SPENCER, S., FISHKIN, R., STRICCHIOLA, J. C., & BATTELLE, J. (2009). The Art of Seo / Eric Enge, Stephan Spencer, Rand Fishkin and Jessie C. Stricchiola ; foreword by John Batelle. Sebastopol, Calif, Oreilly & Associates Inc. ENGLE, J. (2007). How to open & operate a financially successful retail business: with companion CD-ROM. Ocala, Fla, Atlantic Pub. FAZLOLLAHI, B. (2002). Strategies for ecommerce success. Hershey, Pa, IRM Press. http://www.lib.sfu.ca/cgi-bin/validate/books24x7.cgi?isbn=193177708X. GOOGLE ADWORDS. (Online). Google Adwords Keyword Tool. Accessed online on March 13, 2010 via https://adwords.google.com/select/KeywordToolExternal HARRINGTON, J. B., & MINTZER, R. (2006). The everything start your own business book: from financing to making your first sale, all you need to get your business off the ground. The everything series. Avon, Mass, Adams Media. PLANT, R. T. (2000). eCommerce: formulation of strategy. Upper Saddle River, NJ, Financial Times/Prentice Hall. PRACTICALECOMMERCE.COM (Online). Practical Ecommerce: Insights for Online Merchants. Entire website accessed on March 14, 2010 via http://www.practicalecommerce.com/ ROSENCRANCE, L. (2008 – Online). E-commerce sales to boom for next 5 years. ComputerWorld Management. Accessed online on March 12, 2010 via http://www.computerworld.com/s/article/9061108/E_commerce_sales_to_boom_for_next_5_years_?taxonomyId=14&intsrc=kc_top THE PERFUME SPOT (Online). The Perfume Spot: Brand Name Real Fragrances at Unreal Prices! Corporate website and shopping portal. Accessed online on March 14, 2010 via http://www.theperfumespot.com/ Read More