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Every important invention, from the refrigerator to therailroad, has caused economic pain for some. The refrigeratordecimated an entire industry built around harvesting ice from theNorthern states; the railroad spelled the end for many laketransportation companies. The late economist Joseph Schumpeterpointed to the inevitable "creative destruction" left inthe wake of these revolutionary inventions.
As the next millennium approaches, yet another groundbreakinginvention has left some businesses startlingly vulnerable: theInternet. With the Web dominating the future of commerce,traditional businesses will need to struggle to adapt, transformand compete against their swift-footed Internet competitors -- orpossibly face their death.
"The biggest challenge facing small businesses in the newdigital age is not technology but a combination of inertia and alack of marketing clout," says Geoffrey Ramsey, a statisticsanalyst at eMarketer, a New York City company that tracks Internetmarketing trends, research news and statistics online.
"Small businesses, defined as those with fewer than 100employees, represent 98 percent of all business enterprises. Yetsmall businesses are way behind when it comes to getting online andsetting up a cybershop," Ramsey says.
This inertia, coupled with the relative ease with which firmscan go global simply by building a Web site, may spell the end forsome traditional businesses, which typically tie up financialcapital in floor inventories, storefronts on expensive real estateand complicated delivery systems. The difference in overhead costsbetween traditional businesses and pared-down Net-based enterprisesis one of the areas that online firms seek to exploit.
But it's not just the difference in costs that gives onlinefirms an advantage. Many also save time--the most precious resourceto today's consumers. According to a recent AC Nielson survey,Americans average 159 shopping trips per year, which translates toabout 60 hours of travel time according to eMarketer. "Giventhe time pressures of balancing work, household duties, child careand social activities, it's not hard to see why the Internet,with its convenience advantages, will increasingly become the smartway to shop," Ramsey notes. Understanding how people choose tobalance their time and money is critical for small businessesseeking to understand the impact of the Net on their companies inthe coming years.
Even if your company is one of the rare businesses thatdoesn't need a Web site, you still must assess yourvulnerabilities to Web-based competition if you want an accurateprognosis for your business's long-term survival. Here are thecompelling statistics:
- According to the National Retail Federation, 26 percent ofretailers had an Internet site in 1998, up from 20 percent in 1997and only 8 percent in 1996.
- EMarketer predicts a continuing explosion in the number ofInternet users worldwide: They will nearly quintuple over the nextfive years, from 44.4 million in 1997 to 228 million in 2002. Thisrepresents an average annual growth rate of 103 percent. In theUnited States alone, Ramsey sees the number of Internet usersgrowing from 28 million in 1997 to 85 million in 2002, a 61 percentaverage annual growth rate.
- Consumer purchases over the Internet will rise from $4.5billion in 1998 to $35.3 billion by 2002, according toeMarketer.
Clearly, this is the direction markets are going. It all boilsdown to one indisputable fact: Your competition is everywhere. Yes,everywhere. From sleek Web-based enterprises to smarttraditional businesses that have built a strong presence on theNet, from businesses down the street to companies across the globe,competitors are eyeing your customers like never before.
To determine whether your company is likely to face aggressivecompetition from online firms in the coming millennium, considerthe following questions and tips on how to shield yourself fromcompetitors and provide more opportunities for your business byrethinking your Web-site strategies.
1. Is your company giving away a lot of free informationthat must be covered by overhead expenses? Can other companies"piggyback" on your investment?
Some traditional stores have showroom floors where customers cansee and experience what they're buying. A stereo store is agood example. Customers can gain a lot of "free"information by sitting in a plushly built sound room and listeningto dozens of different stereo speakers. But part of thespeakers' price must cover the overhead expense of theshowroom. Ironically, then, this information is free to thecustomer only if the customer decides not to buy thespeakers. Other examples include sporting-goods stores, furniturestores and photography stores. The customer can swing a golf club,sit in an armchair or look through a camera at a nearby mall--andthen order the identical goods at a lower price over theInternet.
Internet suppliers' lower overhead costs and typically slimmargins mean businesses can pass the savings on to the buyer. Theonly edges that traditional stores have are convenience, lack ofshipping expenses, the promise of better service and, perhaps,customer loyalty.
"Commodities are the products most at risk here,particularly when the customer feels little or no loyalty towardthe store [selling them]," says Maria LaTour Kadison, a senioranalyst at Forrester Research in Cambridge, Massachusetts. Expectcustomers' loyalty to fade in direct proportion to the savingsthey can get by shopping on the Web.
The challenge for businesses selling these types of products isto find a way to get customers to pay for information or services.One solution that may come of age in the next century is to chargeindividuals for the information they now get for free. For example,if traditional stereo stores collapse, sound room centers mightbecome a viable business of the future, allowing people to learnabout and fully appreciate the products they want before buyingthem over the Internet. That way, the cost of the information ispaid for by the people who benefit from it.
Kadison offers an option that is more practical in today'senvironment. "Traditional firms can meet the challenge byimproving and emphasizing friendly customer service andhand-holding where necessary to create customer loyalty," shesays. "The Internet, by nature, is much more impersonal, andtraditional firms can capitalize on this."
2. Will customers wait for your product?
Part of the Internet's attraction is that companies can belocated in rural, low-rent areas to cut their products' prices.But remember, the Internet doesn't always save peopletime. For consumers who need an item quickly, this method of buyingposes a serious risk: shipping delays. This, in addition to theidea of shipping costs (even if the product itself is lower-priced)can drive people to the store rather than to the computer. If youhave a splitting headache at 3 a.m., it's a no-brainer todecide whether to order aspirin over the Web for 30 percent insavings or to drive to the nearest convenience store. In addition,Kadison points out, companies that sell perishables, such asfresh-baked goods, or other items that don't ship wellshouldn't be afraid of Internet competitors.
So immediate gratification does play a role. Saving time isrelatively more important for inexpensive products, while savingmoney is relatively more important for expensive ones. Thus, storeswith high-priced commodity items are most at risk, particularlythose selling products that customers are willing to wait a fewdays for.
3. Does it somehow enhance a product's value to besold through your business, and does this extra value exceed thesavings from shopping on the Internet?
A firm that sells a product with no identifying personal stampon it is deeply threatened by Internet competition. Travel agenciesclearly face this challenge, as do insurance companies and banks.The commodities they sell--plane tickets, insurance plans andchecking accounts--are typically offered in packages identical tothose available from other agents or sellers; the consumer is mostconcerned with price and will switch from one seller to another tosave money.
"What traditional travel agencies need to do is establish aniche market and compete on things other than price," Kadisonsays. "The Internet will force companies to focus on creatingmore value."
For example, it will no longer be enough for travel agencies tosell tickets over the phone. Increasingly, they'll be called onto handle complicated transactions or create bookings that requireadvance planning, or knowledge of the carriers or sponsoringhotels.
Anne Baskett, owner of Daly Travel Services Inc. in SanFrancisco, has already seen a change in her business. "Duringthe last six months, simple ticketing for airline fares through ouragency has dropped by 3 to 4 percent," she says. Baskettsuspects her company is losing individuals who don't flyfrequently and who haven't built up relationships with travelagents. "The whole process of buying tickets through theInternet has become more robotic, but more user-friendly,"Baskett says. "By the millennium, I think we'll be out ofsimple ticketing altogether and only doing servicetransactions."
Baskett is upbeat about the future, though. "We have tochange with the times, and that means becoming more technical andmore customer-friendly," she says. "At the same time, weneed to [help simplify] complicated transactions and think moreabout savings for the customer."
Some businesses already have a strong personal stamp, and thesewill succeed in spite of Internet competitors. Artists, specialtyshops selling hard-to-find items, and skilled carpenters havelittle to fear, because their products aren't standardized andare strongly identified with the businesses' owners.
Here's another key point that might make you nervous: YourWeb competitor might steal away your customers by selling a productyou don't even consider a substitute. Take coffee shops, forexample. Most coffee shop owners think about their competition onterms of neighboring coffee shops. But remember the product beingsold: coffee. The reason customers pay $2.50 for a cup of coffee isfor the value added by the shop, which typically includes theambiance and friendly conversation. But some people might trade offthat experience for price, say, if they could make that same cup ofcoffee in their homes for 20 cents.
Adam Teitelbaum, 39, owner of Adam's Organic Coffees in SanFrancisco, sells his specialty coffees by advertising over theInternet and is rated one of the "top coffee Web sites"by Infoseek, an Internet search engine. "E-commerce is here tostay," Teitelbaum says, although he admits, "It willprobably never completely replace the ritual of going out forcoffee." The relatively low cost of displaying information onthe Web gives Teitelbaum a chance to educate customers about theadvantages of organic coffees, something he says would be tooexpensive to do at a retail outlet. Currently, the company doesabout 5 to 7 percent of its sales over the Internet, Teitelbaumestimates, but he's convinced that sales will continue to grow."I'm now investing in a secure server that will allowpeople to directly order my coffee through the Web site," headds.
The bottom line is that human behavior changes when costschange--remember how we thought watching tapes on the VCR couldnever replace going out to the movies?--and the value that yourbusiness adds to the product must beat the savings that can be hadfrom ordering online. Competitors that you never dreamed wouldaffect your business are now a potential threat.
4. Is your product information itself? If so, how easily canit be guarded or replicated?
Some companies used to make money by selling information thatconsumers had difficulty accessing. That's quickly changing.For example, in the past, few people had access to the wealth offinancial information that is now available to anyone over theInternet, and stockbrokers were able to capitalize on that. Now, agrowing number of individual investors are buying and sellingstocks over the Internet, using companies such as Ameritrade, andbypassing their brokers altogether.
It's not enough anymore for a broker to pass alonginformation; the information must be analyzed and distilled so itsaves consumers the time required to do it themselves. Companieswhose stock in trade is information that's simple to acquireand understand are in serious trouble.
On the other hand, some products are difficult to understand oruse without a business's on-site help. Ordering an automobilemuffler from an Internet firm might save some money, but mostcustomers don't want to learn how to install it, or do itthemselves. Those companies that deal with products that involvespecialized help and information are better protected from Webcompetitors.
Craig Richardson has published articles in The WallStreet Journal and other economics journals, and is an assistantprofessor of economics at Salem College in Winston-Salem, NorthCarolina.
Your Ally, Not Your Enemy
After carefully analyzing your business, whether you don'tfeel the heat of Internet competitors breathing down your neck, oryou do--and we've put you in a panic--it's a good idea tore-evaluate your marketing strategy on a regular basis. A businessunaffected by the Web even six months ago may now be in competitionwith a company that has found a way to do business better online.And even if most of your products or services can't be providedonline, as with car repair, tailoring or painting, a Web presencecan get your name out there and offer information to people who mayeventually become customers. (See "No Fear," below.)
"Smaller businesses should band together and create localsites for greater visibility," advises Kate Doyle, formeranalyst for Jupiter Communications. "The companies shouldcomplement one another, rather than go head to head against eachother."
And don't lose sight of what's most important on a Website: content. "You can have the best Web-site designers andinvest money in fabulous technology. But if you don't build amarketing plan for your customers to visit--and come back time andtime again--you will ultimately fail," says eMarketer'sRamsey.
Tom Williams, 65, owner of Venture Press, a publishing company,and PubMart, a how-to Web site for BIZ Experiencesial publishers, bothlocated in Coral Springs, Florida, has sold books for years throughtraditional bookstore outlets, which he describes as "death onthe small publisher." The growth of desktop publishersoffering services through the Web during the past few years puteven more pressure on his firm.
Williams took a hard look at the cost of a Web site and realizedit made sense. With the advent of his site last April, he'sbeen able to more directly reach niche markets and retain most ofhis sales. He says he is now "well into the black" withthis investment.
Yet there is a saving grace for BIZ Experiencess who feeluncomfortable because of their lack of a Web site. As Kadisonobserves, the Internet's greatest asset is also its greatestliability. The ease of entry into the Internet market means yourgreatest hurdle will be getting traffic to your store, consideringmost users visit fewer than 10 Web sites on a daily basis,according to eMarketer. In addition, many companies forget thattheir sites must be maintained and that monthly expenses add upquickly. "The Internet isn't as easy as it looks,"Kadison says.
"Make no mistake," Ramsey adds, "the Internet isa very different way of doing business. Small businesses that arequick to try, learn and adapt will be the most successful. By goingthrough the inevitable failures, these companies will learn whatworks and what doesn't, and they'll have a much richerunderstanding of the Web and how net users shop and buyonline."
The coming millennium will indeed be transformative in terms ofhow we shop and what we buy. By reacting positively to the inherentdestructive qualities of change, small, traditional businesses canharness the wave of innovation rather than be crushed beneathit.
Did You Know...?
- Average Online expenditure by individual Internet buyers was$227 in 1998 and is projected to be $427 in 2002.
- The number of people who made at least one purchase on theInternet in a given year leapt from 6.8 million in 1997 to 16.8million in 1998. It is projected to climb to 63.7 million by2002.
source: emarketer
No Fear
Mari Trosclair, 43, owner of by word of mouth catering in thetiny coastal town of Oriental, North Carolina (population: 800),has good reason not to worry about Internet competition. She'sin a remote location, and her mouth-watering cuisine and exemplaryservice have a signature quality that is known for miles around. Inaddition, her menu is unique for her area. (Unlike Trosclair, hercompetitors aren't shipping in grilled swordfish from NewJersey.)
But her business's location was making it difficult to relayinformation to a multitude of people. So Trosclair decided todevelop a Web site for her company. "I use it as one leg onthe table of my marketing/advertising plan," she says."If someone sees my card or Yellow Pages ad, they also see myWeb site address. At the Web site, they're able to get muchmore information than they ever could in a print ad."
She contends that not being afraid of competition from the Netdoesn't have to mean not participating in it. Indeed, as amarketing strategy, it's only helped business.
"The information and skills someone needs to go intobusiness are out there," says Trosclair. "The factorsthat make a difference in real competition--the management team,people skills, capitalization and product, can't be stolen frommy Web page."
Contact Sources
Adam's Organic Coffees, (800)339-ADAM, http://www.adamsorganiccoffees.com
by word of mouth catering, (877) 274-5685, bywom@coastalnet.com
Daly Travel Services Inc., (415) 989-0170, travel.daly@worldnet.att.net
eMarketer, (212) 677-7137, http://www.emarketer.com
Forrester Research, (617) 497-7090, http://www.forrester.com
PubMart, http://www.pubmart.com
