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February 2001, Volume 69, Number 2 |
E-CommerceE-Service and the Bottom Line
JEFF BEZOS, THE CHIEF EXECUTIVE of Amazon. com, insists that the keys to a successful Web site are ease of use, huge selection, efficient customer service, the development of a virtual community, and personalized service. Few would argue with Bezos about his marketing strategies. But what do the numbers say about all those customer goodies? Stanford Business School's Mohan Venkatachalam and two colleagues recently completed a study that examined the relationship between marketing strategies and the financials at e-commerce firms. Working with assistant professor of accounting Shivaram Rajgopal and associate professor of strategy and e-commerce Suresh Kotha at the University of Washington Business School, Venkatachalam used online quality evaluations of Web sites generated by a rating service to identify 47 Web sites that delivered a superior online consumer experience. The service rated such things as ease of navigation, customer confidence, product selection, virtual community building, and price leadership to generate scores for Web sites. Venkatachalam and his colleagues discovered that, on average, for every 1 percent increase in a Web site score, there was a 1.66 percent increase in traffic to the site and a 0.84 percent increase in revenues. The results seemed to validate the strategies extolled by Bezos and others in the online world. However, building a terrific site that Web shoppers love to visit is a costly venture. Venkatachalam, an assistant professor of accounting, also found that a 1 percent increase in the quality score was associated with almost the same increase in operating expenses and a 2 percent decrease in net income.
The researchers also analyzed whether the stock market would view the investment in quality online experiences for Web users as a long-run advantage. To do that, they gauged the relationship between a Web site's quality score and the online company's market-to-book ratio—which represents the total value of the company's outstanding stocks divided by the value of assets minus liabilities on the firm's books. They found that investors showed no confidence that pouring money into superior online quality would provide an edge in the future. There was no association between the customer-experience scores and market-to-book ratios. "Thus, offering a high-quality online experience does not appear to be cost beneficial, at least in the short run," Venkatachalam says. Investors, it would seem, are looking for hard profits, a conjecture that is all the more likely to hold true since the ongoing market skepticism about dot.coms, he says. Moreover, investors may fear that even a hot new Web site might eventually be replicated and overtaken by a well-capitalized competitor from the storefront world. After sizing up the financials, the researchers' second aim was to look at the relative advantage enjoyed by pure e-commerce firms over their offline "click-and-mortar" competitors-existing companies such as department stores that also do business on the Web. Indeed, Amazon.com so revolutionized the book industry, for example, that brick-and-mortar companies were afraid of being upstaged by Internet startups. The researchers looked for differences in the Web site quality scores of pure Internet firms when compared to those of click-and-mortar counterparts. Although on average pure Internet firms provided a better online customer experience than the average click-and-mortar firm, that advantage was seen in only 6 of the 19 industries Venkatachalam and his colleagues examined. The industries in which pure Internet companies excelled were furniture, toys, banking, mortgages, computer goods, and gifts. "Our study suggests that superior online experience can give pure Internet firms only a short-term competitive edge in the battle for the domination of e-commerce," he says. —BARBARA BUELL Does the Quality of Online Customer Experience Affect the Performance of E-Commerce Firms? Shivaram Rajgopal, Mohan Venkatachalam, and Suresh Kotha, GSB Research Paper #1666, September 2000
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