Finding Sustainable Profitability in Electronic Commerce

The author argues that to sustain a competitive advantage, Web retailers must align their strategies with the product characteristics and buying practices of customers in their market segment. He divides the dot-com retail market into four segments on the basis of the type of good sold and describes the strategies needed to succeed in each.

In the first segment, undifferentiated commodity products, such as barrels of oil, have no brand image, and consumers care little about the seller's identity. It is a buyer's market in which sellers compete on price and delivery. Competitive advantage goes to the low-cost provider with economies of scale, low overhead, low-cost production and efficient distribution. Since entry barriers are low, many competitors will enter these markets and even the slimmest profit margins will be difficult to maintain.

In the second segment, quasi-commodity products, such as books and toys, are differentiated by their features, functions, and product niche. The quasi-commodity market segment has attracted many dot-com retailers, including Amazon.com and eToys. However, product brands and characteristics in this segment confer no advantage to the e-commerce retailer, since customers can use search technology to find the identical product at the lowest price. First movers can gain competitive advantage by branding their Web site using site-specific loyalty programs, virtual communities, and timely delivery. Late entrants will encounter extreme difficulty, especially if they are established brick-and-mortar operations unwilling to cannibalize their current business model.

In the third segment, "look and feel" goods, such as clothes, homes and furniture, are differentiated by their quality and reliability. Customers want to experience them in person before making a purchase. Here, branded products enjoy the advantage since customers already trust them. Vertically integrated makers of branded products who control product creation and distribution will be able to charge higher prices than dot-com retailers who resell unbranded products. Dot-coms that don't create the products they sell will be forced to compete on price and will find margins difficult to maintain.

In the fourth segment, "look and feel" goods with variable quality, such as fresh produce and original artwork, each individual product differs from every other one. Even if they recognize the brand, customers want to experience these products to ascertain their quality before buying, particularly if the product is expensive. Dot-coms that establish a reputation for quality and sell low-priced goods to repeat customers have the best chance of success. Companies selling expensive goods will need to engage trusted intermediaries or establish return policies to mitigate the customer's risk. This market segment is the most difficult to enter, but will confer the highest profits to Web retailers that "crack the code."