What's New In Marketing

E-marketing strategy Part 2

Introduction

In last month's article we looked at approaches to developing an e-marketing strategy and factors to consider for situation analysis and objective setting. In this month's article we outline eight key decisions that marketers face when developing an e-marketing strategy. It will be evident that many of these decisions are similar to those for marketing strategy. However, we will highlight 'e-specific' issues. There are a lot of issues to cover, so without more ado, let's examine the 8 e-strategy decisions.

Decision 1. Target market strategies
The first key decision involves the evaluation and selection of appropriate segments and the development of appropriate offers. In an Internet context, organisations typically target those customer groupings with the highest propensity to access, choose and buy online (See WNIM 5 and 6 for approach and data sources). Segments for targeting online are selected which are most attractive in terms of growth and profitability. Resources are never sufficient to develop comparable quality content and services for all segments. Some examples of customer segments that are often targeted online include:

the most profitable customers - using the Internet to provide tailored offers to the top 20 per cent of customers by profit may result in more repeat business and cross-sales;
larger companies (B2B) - an extranet could be produced to service these customers, and increase their loyalty (e.g. Dell Premier Pages services);
smaller companies(B2B) -larger companies are traditionally serviced through sales representatives and account managers, but smaller companies may not warrant the expense of account managers. However, the Internet can be used to reach smaller companies more cost effectively.
particular members of the buying unit (B2B) - the site should provide detailed information for different interests which supports the buying decision, for example, technical documentation for users of products, information on savings from e-procurement for IS or purchasing managers and information to establish the credibility of the company for decision makers.
customers who are difficult to reach using other media - an insurance company looking to target younger drivers could use the Web as a 'vehicle' for this;
customers who are brand loyal - services to appeal to brand loyalists can be provided to support them in their role as advocates of a brand;
customers who are not brand loyal - conversely, incentives, promotion and a good level of service quality could be provided by the web site to try and move such customers up the ladder of loyalty.

Decision 2. Positioning and differentiation strategies.
Deise et al. (2000) have suggested that, in an online context, retailers can position their products relative to competitor offerings according to four main variables: product quality, service quality, price and fulfillment time. They suggest it is useful to review these as an equation of how they combine to influence customer perceptions of value or brand.

                                                                            Product quality * Service quality
       Customer value (brand perception) =   ---------------------------------------
                                                                                  Price * Fulfillment time

These positioning options have much in common with Porter's competitive strategies of cost leadership, product differentiation and innovation

The aim of positioning is to develop a perceived differential advantage over rivals' products. In an e-marketing context the differential advantage and positioning can be clarified and communicated by developing an online value proposition (OVP). This is similar to a unique selling proposition, but is developed for e-commerce services. For maximum effectiveness the OVP should clarify:

A clear differentiation of the online proposition compared to the companies conventional offline proposition.
A clear differentiation of the online proposition from competitors based on cost, product innovation or service quality.
Target market segment(s) that the proposition will appeal to.
How the proposition will be communicated to site visitors and in all marketing communications.
How the proposition is delivered across different parts of the buying process
How the proposition will be delivered and supported by resources - is the proposition genuine?

Decision 3. Resourcing - Internet marketing priorities
Internet marketing priorities have been summarised by Gulati and Garino (2000) as 'Getting the Right Mix of Bricks and Clicks'. These expressions have been used to refer to traditional 'bricks and mortar' enterprises with a physical presence, but limited Internet presence. In the UK, an example of a 'Bricks and Mortar' store would be the bookseller Waterstones (www.waterstones.co.uk), that when it ventured online would become 'Clicks and Mortar'.

Kumar (1999) suggests that a company should decide whether the Internet will primarily complement the company's other channels or primarily replace other channels. Clearly, if it is believed that the Internet will primarily replace other channels, then it is important to invest in the resources, promotion and infrastructure to achieve this. This is a key decision as the company is essentially deciding whether the Internet is 'just another communications and/or sales channel' or whether it will fundamentally change the way it interacts with its customers and channel partners.

Kumar (1999) suggests that replacement is most likely to happen when:

customer access to the Internet is high;
the Internet can offer a better value proposition than other media (see the section on this topic later in this chapter);
the product can be delivered over the Internet (it can be argued that this condition is not essential for replacement, so it is not shown in the figure);
the product can be standardised (the user does not usually need to view to purchase).

Only if all three conditions are met will there be primarily a replacement effect. The fewer the conditions met, the more likely is it that there will be a complementary effect.

Decision 4. CRM focus and financial control

A further strategic decision is the balance on investment on customer acquisition and retention. Many startup companies have invested primarily on customer acquisition. This is resulted in a cost of customer acquisition of hundreds of pounds, euros or dollars which was impossible to recoup without effective retention strategies. For existing companies, there is a decision whether to focus expenditure on strategies for customer acquisition, customer retention or to use a balanced approach.

Agrawal et al. (2001) suggest that the success of retail or media e-commerce sites can be modelled and controlled using a scorecard based on these performance drivers:

Attraction. Size of visitors base, visitor acquisition cost and visitor advertising revenue (for media sites).
Conversion. Customer base, customer acquisition costs, customer conversion rate, number of transactions per customer, revenue per transaction, revenue per customer, customer gross income, customer maintenance cost, customer operating income, customer churn rate, customer operating income before marketing spending.
Retention. This uses similar measures as for conversion customers.

A survey performed by these authors showed that:

'companies were successful at luring visitors to their sites, but not at getting these visitors to buy or at turning occasional buyers into frequent ones'

Agrawal et al. (2001) have performed a further analysis where they modeled the theoretical change in net present value contributed by an e-commerce site in response to a 10% change in these performance drivers:

Attraction

Visitor acquisition cost - 0.74 % change in NPV
Visitor growth - 3.09 % change in NPV
Conversion
Customer conversion rate - 0.84 % change in NPV
Revenue per customer - 2.32 % change in NPV
Retention
Cost of repeat customer - 0.69 % change in NPV
Revenue per repeat customer - 5.78 % change in NPV
Repeat customer churn rate - 6.65 % change in NPV
Repeat customer conversion rate - 9.49 % change in NPV

This modeling highlights the importance of on-site marketing communications and the quality of service delivery in converting browsers to buyers and buyers into repeat buyers.

Decision 5. Market and product development strategies
E-commerce also offers opportunities to expand the scope of a business into new markets and products. As for decision 1 the decision is a balance between fear of the do-nothing option and fear of poor return on investment for strategies that fail. The Ansoff matrix is still useful as a means for marketers to discuss market and product development using electronic technologies. It highlights these options:

Market penetration. Digital channels can be used to sell more existing products into existing markets. This is a relatively conservative use of the Internet.
Market development. Here online channels are used to sell into new markets, taking advantage of the low cost of advertising internationally without the necessity for a supporting sales infrastructure. This is a relatively conservative use of the Internet, but is a great opportunity for SMEs to increase exports at a low cost, but it does require overcoming the barriers to exporting.
Product development. New digital products or services can be developed that can be delivered by the Internet. These are typically information products, for example online trade magazine Construction Weekly has diversified to a B2B portal Construction Plus (www.constructionplus.com) which has new revenue streams. This is innovative use of the Internet.
Diversification. In this sector, new products are developed which are sold into new markets. For example Construction Plus is now international while formerly it had a UK customer-base.

Decision 6. Business and revenue models including the marketing mix
A further aspect of Internet strategy formulation is review of opportunities from new business and revenue models. A business model is a summary of how a company will generate revenue, its target customers, core product offering, value-added services and partnership arrangements.

Evaluating new models is important since, if companies do not innovate, then competitors and new entrants will and companies will find it difficult to regain the initiative. Equally, if inappropriate business or distribution models are chosen, then companies may make substantial losses.

One example of how companies can review and revise their business model is provided by Dell Computer. Dell gained early mover advantage in the mid 1990s when it became one of the first companies to offer PCs for sale online. Its sales of PCs and peripherals grew from mid 1990s with online sales of $1 million per day to 2000 sales of $50 million per day. Based on this success it has looked at new business models it can use in combination with its powerful brand to provide new services to its existing customer base and also to generate revenue through new customers. In September 2000, Dell announced plans to become a supplier of IT consulting services through linking with enterprise resource planning specialists such as software suppliers, systems integrators and business consulting firms. This venture will enable the facility of Dell's Premier Pages to be integrated into the procurement component of ERP systems such as SAP and Baan, thus avoiding the need for rekeying and reducing costs.

In a separate initiative, Dell launched a B2B marketplace aimed at discounted office goods and services procurements including PCs, peripherals, software, stationery and travel. However, this strategic option did not prove sustainable.

The marketing mix also provides a useful framework for developing e-marketing strategy. E-commerce provides many new opportunities for the marketer to vary the marketing mix. E-commerce also has far-reaching implications for the relative importance of different elements of the mix for many markets regardless of whether an organization is involved directly in e-commerce. We explore the implications of the Internet on the marketing mix in next months article.

Decision 7 Organisational restructuring required.
Organisational structure decisions form two main questions. First, is how should internal structures be changed to deliver e-marketing and second how should the structure of links with other organisations be changed to achieve e-marketing objectives? Such decisions should balance the benefits of the changes against the disruption to business operations caused by the changes. There are four basic options for internal structuring of e-marketing:

No formal structure for e-commerce. Examples: Many small businesses.
An individual, committee or small department manages and co-ordinates e-commerce. Example: Derbyshire Building Society (www.derbyshire.co.uk).
A separate business unit with independent budgets. Example: RS Components Internet Trading Company (www.rswww.com)
A separate operating company. Example Prudential and Egg (www.egg.com).

Gulati and Garino (2000) identify a continuum of approaches from integration to separation for delivering e-marketing through working with outside partners. The choices are:

In-house division. (Integration). Example RS Components Internet Trading Channel (www.rswww.com)
Joint venture. (Mixed). The company creates an online presence in association with another player. Waterstones ultimately chose this approach by partnering with Amazon.
Strategic Partnership. (Mixed). This may also be achieved through purchase of existing dot-coms, for example, in the UK, Great Universal Stores acquired e-tailer Jungle.com for its strength in selling technology products and strong brand while John Lewis purchased Buy.coms UK operations.
Spin-off. (Separation). Example: Egg bank is a spin-off from Prudential financial services company.

Decision 8. Channel structure modifications.
Strategies to take advantage in changes in marketplace structure should also be developed. These options are

Disintermediation (sell-direct)
Create new online intermediary (countermediation)
Partner with new online or existing intermediaries
Do-nothing!

To achieve strategic Internet marketing goals, B2B organisations also have to plan for technology integration with customers and suppliers systems. However, an even more vexing questions is how to manage the channel conflicts involved with these channel structure changes.

Summary
Strategy formulation will involve defining a company's commitment to the Internet; setting an appropriate value proposition for customers of the web site; and identifying the role of the Internet in exploiting new markets, marketplaces and distribution channels and in delivering new products and services. In summary:

Decision 1. Target market strategies.
Decision 2. Positioning and differentiation strategies.
Decision 3. Resourcing - Internet marketing priorities.
Decision 4. CRM focus and financial control
Decision 5. Market and product development strategies.
Decision 6. Business and revenue models including the marketing mix.
Decision 7 Organisational restructuring required.
Decision 8. Channel structure modifications.

Next month in E-marketing Insights
Next month we conclude our exploration of E-marketing strategy by looking at the options the Internet presents to vary the marketing mix.

References
Agrawal, V., Arjona, V. and Lemmens, R. (2001) E-performance: the path to rational exuberance. Mckinsey Quarterly, No 1. 31-43.
Chaffey, D. (2002) E-business and e-commerce management. Financial Times/Prentice Hall. Harlow, UK.
The eight key decisions are based on more detailed coverage in this book.
Deise, M., Nowikow, C., King, P., Wright, A. (2000) Executive's guide to e-business. From tactics to strategy. John Wiley and Sons, New York, NY.
Gulati, R. and Garino, J. (2000)Getting the Right Mix of Bricks and Clicks for your Company. Harvard Business Review. May-June 2000, p107-114.
Kumar, N. (1999) 'Internet distribution strategies: dilemmas for the incumbent', Financial Times, Special Issue on Mastering Information Management, No 7. Electronic Commerce
Porter, M. (2001) Strategy and the Internet. Harvard Business Review. March 2001, 62-78.
Smith, P.R. and Chaffey, D. (2001) eMarketing eXcellence: at the heart of eBusiness. Butterworth Heinemann, Oxford, UK.

Links

Marketing Online (www.marketing-online.co.uk) provides a range of links for resources on strategy and CRM development.
McKinsey Quarterly (www.mckinseyquarterly.com). Regular articles on strategic approaches to e-marketing.

E-marketing Insights article archive

WNIM 1 - E-mail marketing Part 1 (outbound)
WNIM 2 - E-mail marketing Part 2 (inbound)
WNIM 3 - Improving e-marketing effectiveness Part 1 (overview)
WNIM 4 - Improving e-marketing effectiveness Part 2 (conversion marketing)
WNIM 5 - Is Internet marketing Dead Part 1 (Internet access and usage)
WNIM 6 - e-Strategy Part 1

About the author
Dr Dave Chaffey is workshop leader of a range of one-day CIM training workshops on e-marketing available from www.cimtraining.com. Dave is also an examiner of the CIM E-marketing Professional Development Award. The content of this article is a summary of the approach presented in two books E-business and e-commerce management and Internet Marketing both published by FT/Prentice Hall. Dave is also author of eMarketing eXcellence (with Paul Smith). Please send all comments on the article to dave.chaffey@marketing-insights.co.uk.