WHITE PAPER ON THE VIABILITY OF
THE INTERNET FOR BUSINESSES

PUBLISHED APRIL 29, 1998

"I’ve used the Internet to get stock quotes and weather, but how can my business use it?"

Since its inception in the 1960s, the Internet has evolved from a communications medium reserved for elite researchers and scientists to a highly sophisticated commercial marketing medium. The events preceding the actual development of the Internet as we know it today are well documented – from the primitive communication networks designed for only a handful in the 1960s to the development of an industry-wide standard for computer communications in the 1980s to public use in the 1990s. However, the events that should concern your business today have all occurred in the past 3-4 years as the average consumer has accepted this radically new media. Much of what we read in the press regarding the Internet focuses on the technology side of the equation: advances in software and hardware, Java, Applets, infrastructure capacity, operational support, etc. But an equal component of a successful Internet presence, one that has largely been ignored, is developing strategic marketing plans for Web site development – translating business needs into an on-line strategy. When television gained prominence as an advertising medium in the late 1940s, marketers did not spend time analyzing the development of the vacuum tube – they studied how businesses could take advantage of the opportunities presented by the new medium. To better understand how the Internet has caused a sweeping change in how companies today approach their marketing efforts, including pricing, promotion and distribution, this analysis will focus on the opportunities that arise from the Internet as a marketing medium for today’s businesses.

Before discussing how to create a successful Internet presence, we need to make a case for even considering the Internet in the first place. There are still many skeptics who are cautious of investing in the Internet and have valid concerns for its future. The best way to establish the Internet’s ability to solve business problems is to look at current fundamental business trends that are occurring despite the Internet. Once you link these trends to your own business’ needs, it will become clear how the Internet can be an invaluable business tool.

NEW AND EMERGING BUSINESS FUNDAMENTALS.
There are many business experts and consultants that articulate current and future changes in the marketplace. They use phrases like "the new economy" and "the post-industrial era." When you sift out the peripheral ideas, concepts and buzzwords, patterns develop and you begin to see various themes emerge:

• Lag times - the time between customer need and fulfillment - have drastically reduced. Customers now demand products and services when they need and/or want them and will gravitate toward those companies that provide the closest to instantaneous delivery. The pace of life has increased - we rush to and from work, rush to run errands, rush to get to the store, only to stop dead in our tracks to wait in line. Everything has increased in speed except the retail environment, which will become increasingly unacceptable to consumers given today’s technological capabilities.
  
• Customer loyalty, attractive for steady and predictable revenue, has trended downward in recent years. There are several reasons for this such as a wide range of alternative products and services, commoditization of products and services, a greater sense of entitlement among consumers, and lack of time. As a result, businesses need to find creative ways to recapture that loyalty. This can be accomplished by creating distinct competitive advantages by appealing to consumers’ desire for convenience and creating more perceived product and service value. Competing solely on price will not create sustainable competitiveness any longer.
  
• Even though inflation has remained at all-time lows, product or service value has declined overall. Why? Because rather than raise prices on goods or services, which would surely drive away customers, companies have decided to keep prices constant while cutting back on product or service attributes. Airline ticket prices have remained affordable over the years, but have you noticed how steak dinners turned into ham sandwiches turned into pretzels? The overall stability of prices has disguised an overall decline in value.
  
• Why have automated teller machines and voice response units been such overwhelming successes? They provide 24-hour access to information instantaneously. Customers today desire information on demand, and the scope of this demand is not just limited to account balances. Instant access to news, weather, company information and products and services has created a thriving attribute customers consider when evaluating product and service alternatives.
  
• In the industrial economy, there were two manufacturing models: production of low-cost, standardized goods (ballpoint pens), or production of high-cost, customized goods (tailored suits), but not both simultaneously. In this technologically advanced era, companies are proving that a hybrid of the two industrial models is possible: mass customization. Gateway computers takes customized orders via the Internet and fulfills them every day on a mass level. This has raised the bar of competition to the point that IBM is now entering that market.

These trends are reshaping, and in many industries have already reshaped, competitive environments. They have prompted cutting-edge organizations to reinvent their industries.

THE INTERNET’S ROLE.
Does the Internet address all of these new business fundamentals? Absolutely. The Internet’s attractiveness stems from its flexible, low cost, global reach. True, most businesses will not achieve global sales merely by existing on the Internet, but they will evenly reach a large North American market and by doing so could see some efficiencies of scale as the Internet penetrates a greater percentage of worldwide households.

Every type of business, large or small, can participate in this new technology. There is always pressure to protect margins, and the Internet’s cost structure is so minute (a sole proprietorship can pay as little as $100/month) as compared to traditional marketing channels that it simply can not be ignored.

Virtually all Internet sites utilize text, graphics, and some form of two-way communication, which is satisfactory for some businesses. But the technology is there to do so much more: sites can utilize database technology so that customers can scan current inventories before picking up the phone and wasting their, and your, time. There are input mechanisms that allow customers to request the assembly of their own, personalized product by making selections among various attributes. These mechanisms allow your business to drastically reduce lag times and possibly stimulate more impulsive behavior.

All of these uses not only add to your company’s value chain, they create distinctiveness. You name the business, and the Internet has a low cost solution - low enough to make it possible to offer price incentives or greater loyalty program benefits for purchases made via the Internet. It is worth the investment now to ensure a place in the market in the near future. If you do not do it, your competition will.

The Internet still has a long way to go before reaching widespread profitability. But according to most business experts, those who have neglected to devise a strategy to enter the on-line market will find themselves lost in the new economy. Companies have the opportunity now to position themselves as leaders in the Internet marketplace and avoid playing "catch-up" when it might be too late. We will focus more closely on the Internet’s ability to provide solutions to the emerging business trends later in this analysis.

THE DOWNSIDE.
As with any new device, there are risks associated with the Internet. Bob Metcalfe, founder of 3Com, stated not too long ago what he perceives to be the biggest threats to the Internet. Here are a few of them:

• Financing: Investors will tire of investing in companies that lose money (according to a survey conducted by ActiveMedia in June 1996, only 31% of 1,100 Web-based businesses reported being profitable).
• Measurement: Advertisers will only invest significant dollars when they have tangible user data.
• Security: Major security breaches will occur which undermine user confidence.
• Compatibility: Fights for control for standards will tear the Web.
• Capacity: The Internet will become chronically overloaded, and the current flat-rate usage business models of vendors will not provide enough investment dollars to appropriately expand capacity.

According to investment banker Morgan Stanley, it is possible that a few of these concerns might become reality, but not to the point where they bring down the Internet. At worst they will only delay its rate of growth.

ASSESSING THE WEB.
Given the new functionality that the Internet presents, and given the threats to the medium, we need to assess the opportunities and challenges it presents today. First, however, we need to consider the evolution of the Internet over the previous few years to help predict where the medium will go next. Only the previous few years are considered since this period comprises the commercial phase of the Internet’s history. The Internet has existed for decades, but not until CERN physicist Tim Berners-Lee developed the World Wide Web in Geneva, Switzerland in 1992 did the average consumer gain access to the Internet. The World Wide Web provided a user-friendly interface between the computer novice and the Internet.

Search the Internet for information on just how big it is and you will find a different answer from each resource. The trouble is, no one really agrees on what networks comprise the Internet. There are the charter networks, such as CSNET, BITNET, and Usenet, and current Internet Service Providers (ISP) like America On-Line and MindSpring. But what about corporate Intranets? They are on the Internet, but are protected by firewalls that let their users access the Internet but do not allow for the reverse. According to Matrix Information & Directory Services (MIDS), an Internet measurement organization, the "consumer" Internet is made up of both the Internet and corporate Intranets. This measurement is what marketers should be concerned with since all of these users are reachable, but not necessarily accessible.

MIDS estimates that there are currently 57 million users on the consumer Internet worldwide (chart). At its current growth rate, which MIDS fully expects could sustain, the estimated number of users in the year 2000 is 377 million.

Morgan Stanley estimates that there will be 150 million users by the year 2000, while Killen & Associates, a market research firm, puts that number closer to 250 million. Even though all of these numbers differ by as much as 227 million users, the underlying assumption is the same: the Internet will continue to boom in terms of consumer usage.

WEB OUTLOOK.
Now that everyone agrees that the Internet will experience continued growth, we can focus on issues important to marketers today: what will the Web develop into, and how can your business take advantage of the trends? By studying how the Web has been utilized since its birth by both businesses and PC users, and by understanding what forces allowed the rapid transformation of the Web thus far, we can better predict the future transformation of the Web. When the public first began to utilize the World Wide Web in 1992, its main function was as an information source. The Web was a brand new, virtually untapped resource where companies could create an informational presence, but without any real tangible value-added benefit to the consumer. But the consumer did not mind much because the technology was so novel that its mere existence was exciting enough.

As the commercial sector became more aware of the Web’s potential as a significant source of revenue and cost avoidance, the types of sites became much more sophisticated. In addition to containing company and product information, Web sites began to be utilized as a two-way communication channel between the customer and the company, as well as a distribution channel for selling products and services. Thus, the application of the Internet from a consumer’s perspective can be grouped into two phases: the Internet as an information resource in the early 1990s, to the Internet as a communications and distribution medium in the mid to late 1990s. What will be the next phase? Many experts believe that full-scale electronic commerce is the next big wave on the horizon and business should start preparing accordingly.

LEADING INDICATORS.
When the television was first introduced, a leading indicator of its potential was user acceptance, or penetration into US households. It took 75 years for the telephone to penetrate 75% of the U.S. market, but only 6 years for television, partly due to the fact that for the telephone, a brand new infrastructure was necessary for its use, which slowed its growth rate. For television (before cable), there was no need for a new infrastructure. In this respect, the television and the Internet are similar: the infrastructure for the Internet is already in place.

Computer costs seem to be the only barrier preventing such a rapid infiltration of the Internet, but this barrier is slowly breaking down. The introduction of sub-$1000 home computers is providing opportunity for more consumers to join the on-line world. According to International Data Corp, these lower priced computers have fueled an increase in U.S. household penetration by 3% to 43% at the end of 1997, compared to the end of 1996.

By drawing parallels to television, therefore, a key leading indicator of the growth of the Internet is the growth in users over time, or market penetration. As indicated earlier, the Internet has grown at an approximately 80% compounded rate since 1990, and is expected to grow even faster into the next millenium.

Where there is demand, there is supply: the demand comes from consumers seeking to connect to the Internet, and the supply comes from Internet "hosts." Since the average PC user does not have the capability of connecting directly to the Internet, an intermediary, or host, is necessary to provide access to the Internet. As the number of hosts increases (see chart), the number of Internet users grows exponentially since each host can have thousands of users. For instance, America On-Line is an Internet host with millions of subscribers, as are some major corporations, government organizations, and educational institutions. Since 1982, the number of hosts has doubled every year.

PHASE III.
The Internet will grow - this much we do know. The easy prediction is that we will one day be able to purchase virtually any good or service over the Internet in a secure manner. According to a U.S. government report by The President’s Information Infrastructure Task Force (IITF), sales over the Internet reached about $200 million in 1995 and could total several billions of dollars by the turn of the century.

But what about the convergence of television, the Internet, cable TV and the telephone? Not even top executives in the technology field can shed some light on how and when these communication mediums will intersect. Therefore, it is difficult to predict exactly what the Internet will develop into, but it is safe to say that we are about to enter an age of rapid dissemination of products, services and information facilitated by technology and shared by businesses and individuals alike.

Businesses and consumers agree that commerce will take place via the Internet. In fact, Dell Computer is already conducting $1 billion in sales per year, and is forecasting the Internet will generate half its sales by the year 2000.

But true Internet sales should not be the only motivation for an Internet presence. Nor should expense reduction. If you embrace the Web because it can reduce expenses or boost profit (both of which are highly desirable), you are still thinking too short term and missing the big picture.

Equally important as the Internet's product distribution capabilities is its value as a communication tool - not only between you and your customers, but among the Internet community. This is the softer side of the Internet. The Internet will increasingly be a place to congregate, and your organization has to be visible and attractive in Cyberspace to avoid extinction.

The key variable for business wishing to create a successful Internet presence, therefore, is Web site content. Content is the means by which organizations differentiate themselves in the Internet marketplace.

The Internet is essentially a marketing medium and should therefore be geared toward enticing consumers. The basic question is how do we attract customers to our Web site, keep them once they are there, and have them return with some predictable frequency?

SHIFTING PARADIGM.
According to Drs. Donna L. Hoffman and Thomas P. Novack at Vanderbilt University, noted Internet marketing researchers, the one critical aspect of Internet marketing that all businesses must understand is the Internet’s shifting paradigm from traditional media channels. Traditional media view marketing as a one-to-many process whereby a firm communicates its message through a medium to a large group of consumers. The Internet presents a different model in which a many-to-many process exists, and more importantly, consumers can actually interact with the media, unlike television or radio. What does this mean to marketers? It means that consumers actively choose whether or not to access a company’s Web site and, according to Hoffman and Novack, "exercise unprecedented control over the management of the content they interact with." This creates the necessity of creating a Web site with the consumer’s interests in mind.

Agency.com (www.agency.com), an on-line marketing firm, advocates a similar paradigm shift. Kyle Shannon, the company’s co-founder, suggests that instead of viewing a Web site as a series of "pages" for a particular group of "users," the media should be viewed as a "venue" for a particular group of "participants." This adds another dimension to the media and removes the artificial barriers Mr. Shannon claims have transferred from print media and software development to the Internet. This radically new media deserves a radically new way of thinking.

PARTICIPANT DATA.
Some tactics, however, we can borrow from traditional marketing concepts. The first step, on a very broad scale, in developing a Web venue is understanding who is currently on the Internet. By profiling current participants, businesses can design Web venues that will target these groups.

The second step is to determine, of the population that currently uses the Internet, who has the greatest propensity to purchase your product.

The third step is determining what this participant profile values in a Web venue. Do they prefer speed to graphics? Do they want to be entertained or do they simply want the products/services/information they are seeking?

Inherent in all of this is the assumption that your business’s products and services appeal to a consumer segment that utilizes the Internet. In other words, if your target market is the elderly, chances are there are better ways to use your investment dollars than the Internet in terms of distribution. However, it is worth mentioning that given the cost efficiency of the Internet, even if your target audience is not a primary user of the Internet, it may be of value to utilize the Internet for publicity. This may effectively reach an intermediary audience (the elderly’s children, for instance) that may be more likely to communicate to your target audience.

Hard Data
Much research has been done to address step 1: figuring out who is currently on the Internet. According to a survey of over 19,000 Internet participants performed by the Georgia Institute of Technology’s Graphic, Visualization, and Usability Center (GVU, www.cc.gatech.edu/ gvu/user_surveys/), the demographics of the Internet community are as follows (it is understood that respondents to an Internet survey are more likely to be heavy users):

Average age: 35 years

Gender: 69% male 31% female

Marital status: 45% married 37% single

Household income: $58,000

These are just a few of the basic demographic variables detailed in the study. Equally, if not more, important to Internet marketers are other questions regarding the nature of Internet utilization. In other words, knowing the average age of the Internet participant does not tell you as much as how long that person is logged on, or what that person is utilizing the Internet for. The GVU survey also addresses these issues.

According to the survey, about 43% of all respondents use the Web for a specific task 1-4 times per day, with an equal amount using it more often. In addition, 29% use the Web between 10 and 20 hours per week, while 22% use the Web more than 20 hours per week. Even more significant is that these numbers are dramatically on the rise. Between April 1995 (GVU’s 3^rd survey) and October 1996 (GVU’s 7^th survey), the number of participants who spent more than 10 hours per week on the Web nearly doubled.

Soft Data
The GVU data provides a good overview of the typical Internet participant, especially for companies creating marketing strategies based on demographics. But most marketing educators will tell you that creating marketing strategies based on these criteria is not the most accurate and effective variable. Lifestyle characteristics, such as attitudes, behaviors, and interests are better predictors of purchase behavior.

Dr. Naveen Donthu at Georgia State University performed research on how such consumer characteristics interact with the Internet shopping experience. He came up with 10 psychographic measurements to help characterize Internet shoppers and compared them to Internet participants who are not shoppers.

The study of 790 Internet participants uncovered some interesting results that are summarized as follows:

Compared to Internet non-shoppers, Internet shoppers tend to…

• seek more convenience
• be more innovative
• show less adversity to risk
• more impulsive on the Internet
• be as brand conscious
• be as price conscious
• seek more variety
• have a more positive attitude toward shopping
• have a more positive attitude toward direct marketing
• have a more positive attitude toward advertising

This information has implications for any marketer seeking to develop an Internet marketing strategy. For instance, the fact that Internet shoppers are more receptive to direct marketing means that one of your businesses’ marketing tactics can be to provide promotional information through e-mail. More on other tactics later.

The studies referenced here represent the most sophisticated marketing research on the Internet participant/shopper. Marketers always desire more detailed information, however, preferably related to their own good or service. Hoffman and Novack present a few options for finding out the characteristics of the actual consumers who visit a particular venue. One option is for consumer information such as demographic and psychographic information to be collected, independent of the consumer’s navigation patterns, and sold to companies. That way when a particular consumer visits your venue, you can link that activity with that consumer’s profile.

Another option is for the consumer to control his or her own information and sell it themselves to interested parties. The benefit of this, Hoffman and Novack maintain, is it includes the customer, which serves to facilitate the development of the Internet market, creating an alliance between consumer and company.

MARKETING TACTICS.
Now for the punch line: how to create an environment that will give your company an advantage in its quest to succeed on the Internet. This is a different challenge for different businesses. Some companies, like Amazon.com (www.amazon.com), are exclusively Internet-driven businesses; that is, they do business only via the Internet. For the majority of business, however, the Internet represents only a small piece of the corporate puzzle.

But there is one commonality among all types of businesses who want an Internet presence, and that is that no matter what type of business you engage in, and no matter what type of product or service you are offering, a well-designed Web venue offering something of value to the customer will work across the board. Here are some tactics that will not only attract potential customers, but make them want to stay at and return to your venue:

1. Create Flow
According to Hoffman and Novack, "flow" can be described as "the process of optimal experience." Flow, they maintain, "involves a merging of actions and awareness, with concentration so intense there is little attention left over to consider anything else."

Before we address how you can facilitate flow, it is important to understand the positive outcome of flow. Hoffman and Novack posit that there are five main positive outcomes as a result of flow:

1. Consumers who experience flow will be more likely to retain what they perceive in Cyberspace, i.e., they will make more informed decisions, exhibit greater recall, and be more likely to engage in word-of-mouth.
2. Consumers who experience flow will have greater perceived behavioral controls which leads to greater confidence on the part of the consumer.

Consumers who experience flow

1. will be more exploratory in nature which will result in increased risk taking.
2. Consumers who experience flow will exhibit a more positive mood and satisfaction.
3. Flow increases the probability that the Internet, and hopefully your Web venue, will be used again in the future and will also translate into longer duration time spent on the Internet.

Flow, as defined by Hoffman and Novack, is driven by the control that consumers have over their activities at the Web venue, their ability to focus their attention at the venue, and their level of enjoyment at the venue. Consequently, marketers should seek to maximize each of these items, which presents opportunities and challenges when developing a Web venue.

Balancing Control Characteristics
Balancing the challenges of your Web venue with the skills of your target consumers is a key ingredient in the design of your venue. If your target customer is a corporate client, chances are you can create a more challenging venue than if your target customer is the mature market. In other words, every one has different "surfing" skills, and you need to develop a Web venue that creates a fit with these skills.

Hoffman and Novack explain that if a venue is too challenging, consumers will become anxious and exit the venue. Likewise, if a venue is not challenging enough, consumers will become bored and also exit the venue. The way to avoid these issues is to compare your target segment’s characteristics to the characteristics of an Internet shopper presented earlier. If they match up well, chances are you can create a more challenging venue and set the stage for flow. If your target segment is far different than the segment likely to shop on the Internet, than you should probably create a venue that is basic enough that it will not scare off a potential customer.

Focused Attention and Enjoyment
One of the most important attributes of a well-designed Web venue is the venue’s ability to grasp the consumer’s attention. The variables that your business can control are ease of use and mapping. These variables are interconnected. This means that the Web venue should be constructed such that the process in which the participant engages are natural from a human perspective. For instance, NetMarket (www.netmarket.com), a Web-based consumer goods retailer, first welcomes the participant to its venue, then presents several categories of product to choose from (i.e. cameras and electronics, appliances, etc.). Next, the consumer can choose from subcategories until the product that the consumer is seeking is displayed. Once a suitable item is found, the participant simply points and clicks to place the item in the electronic "shopping cart," and then either pays for the product or continues shopping.

The point is that this sequence follows what has developed over many decades as the norm in shopping: a consumer "walks" into a store, finds the area of the store containing the general product category, takes the product off the "shelf," and takes it to the "register." The key here is to keep the on-line shopping process in continuity with the traditional shopping process with which most consumers are accustomed.

Other factors that lead to attention and enjoyment on the part of the consumer are the Web venues graphical content, or vividness, and the Web venue’s interactivity. A colorful, graphically advanced Web venue can play a critical role in determining the participant’s enjoyment, and thus the participant’s time at the venue. Also important is the level of interactivity. Interactivity is what separates the Internet from traditional media channels and should therefore be exploited by involving the customer as much as possible – some Web venues provide a toll-free number to place orders, others provide a way for the consumer to interact with the machine and place an order. The latter is what will separate the successful ventures from the rest.

2. Prepare for success
If your organization utilizes the Internet to accept purchase orders or promote services, be prepared to fulfill them. According to one Internet manager, one of the biggest mistakes that companies make in developing an Internet strategy is failure to create a fulfillment strategy. The inability to serve on your organization’s promise will only alienate customers and eliminate any positive word-of-mouth.

3. Links and search engines
According to the GVU survey, just about as many people find out about Web venues through search engines (Yahoo, Lycos, etc.) as they do through other Web pages (86% and 85%, respectively). This is powerful information that demonstrates that links on the venue that the participant is viewing at any given moment are a dominant influence on where that participant will go next.

A tactic, therefore, would be to get your company’s link on as many pages as possible. If you’re a candy company, make your link available on the Chocolate Manufacturers Association Web venue as well as local trade publications.

A more obvious tactic is to register your Web venue with all of the commercial search engines. Since different participants utilize different search engines, you will want to register with as many as you can. This is a quick and easy process and one in which, as the data suggests, your business must pursue.

4. Don’t put all your faith in graphics
Consumers on the Internet want two things: content (as indicated in GVU’s 1997 survey, participants are utilizing the Web increasingly for task-oriented activities such as shopping) and content fast (the GVU survey reveals that the number one problem among Web participants - 66% - is speed). Excessive graphics where plain text would serve the same purpose can hinder both and should be used at an appropriate level.

As pointed out earlier, vividness is a key ingredient in the flow process; thus, graphics should be used at an appropriate level, but the graphics that are used should be of high quality.

This doesn’t mean that there aren’t cases where graphics should be a primary concern. Graphic artists and businesses in the entertainment business, for instance, would probably want to rely on graphics to showcase their company’s talents.

5. Look at market research data
Donthu’s study reveals a great deal of critical information for your company. For instance, knowing that Internet shoppers tend to be just as price conscious as Internet non-shoppers suggests that price could be a primary promotional attribute for products and services available on your venue. The fact that Internet shoppers are more impulsive than Internet non-shoppers suggests that you should position the products you want to move quickly earlier in your Web venue.

By understanding the profile of consumers with the greatest propensity to buy over the Internet, you can design a more effective Web venue that appeals to this segment.

6. Look at market research data over time
The most important item to note is that life on the Internet is in a state of perpetual change with hardware, software, advertising, and retail companies vying for sustainable positions in this growing market. What this means is that how and when the Internet will reach full scale electronic commerce is still largely unknown, and all of this has an impact on the behavior of consumers on the Internet by serving to slow Internet growth, or spur Internet growth.

Also in a state of perpetual change are the demographics and psychographics of the consumer Internet. As consumers change, your marketing strategy will have to change accordingly, so keep on top of market research studies identifying the Internet consumer who is most likely to purchase your product.