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Wooing The Newbies


Business Week e.biz -- Special Report: E-Tailing

Wooing the Newbies

As the masses hit the Net, e-merchants will have to do more hand-holding

What with plunging stock prices, cash shortages, and massive consolidation, e-tailers have plenty of headaches these days. But one thing should cheer them up: Web shopping is rapidly spreading to the masses. The number of households shopping online will nearly double, to 38 million, in the next two years, predicts market watcher Forrester Research Inc. "The Internet has reached the least common denominator," crows Mark H. Goldstein, president and chief executive of BlueLight.com, a free Internet service provider and shopping site majority-owned by Kmart Corp. "It's completely mass-market now."

Even if Goldstein's right, e-tailers' joy may be short-lived. Getting newbies to click the buy button may be a far more complicated and costly proposition than online merchants ever expected. These folks may be averse to surfing new sites, concerned about security, or have less cash for online purchases. For many, just one thing matters, says David Pecaut, senior vice-president of market researcher Boston Consulting Group: "What does this mean to me in my daily life?"

E-tailers, however, have little choice but to court the new shoppers. Nabbing even a small piece of these new millions of customers may mean the difference between life and death for e-tailers struggling to build revenues. "At the end of the day, this is a business of scale," says America Online Inc. President Robert W. Pittman. "We're more profitable with each incremental subscriber."

Already, the demographic profile of the Web is expanding beyond the mostly male, high-income, highly educated techies of the Internet frontier. New users over the last year--which BCG dubs "the first of the masses"--are almost evenly split between men and women. Half have incomes below $50,000, vs. about 35% of the first wave of online users. And 35% have only high school degrees or less, compared with 17% of the Internet pioneers. Research firm Jupiter Communications Inc. figures 42% of the U.S. population will be online by the end of the year, up from 14% in 1996.Stark choice. That shift is sure to force e-merchants to adjust not only how they approach Web buyers but also what they sell. With a more diverse group of consumers, online merchants must make a stark choice, says Jupiter analyst Ken Cassar: Either become a much broader e-tailer, as Amazon.com is doing, or stick to a narrow, defendable niche.

As women catch up with men in online buying power within the next two years, female-dominated categories such as apparel should become much bigger pieces of the online pie, predicts Cassar. He expects online apparel and accessories to account for less than 1% of the categories' total sales this year, but grow to 4% by 2003.

The new masses may well use the Web differently, too. Research shows that even those who first adopted the Net, the presumed risk-takers, were quick to settle on a limited number of Web sites. "If early adopters are settling at that pace, imagine what vast Middle America is going to do," says John Hagel III, leader of McKinsey & Co.'s e-commerce practice. "There's a huge imperative to be first to get that person to come to your site."

Once there, they could get hooked by convenience. David H. Morganlander, a radio advertising salesman in New York City, was simply curious when he got online a year ago, but now can't imagine life without it. He spends a couple hours a day on the Net, using it to buy everything from pizza to flu medicine. Most convenience seekers, however, will spend far less time on the Net, figures McKinsey. A group it calls the "simplifiers" uses the Web fewer than seven hours a month and accounts for 29% of active online users--but 50% of transactions. Many belong to dual-income households with children and want to locate, compare, and buy products quickly.

At the same time, with less disposable income, many newcomers are expected to be more price-sensitive than earlier Web shoppers. That's why J.C. Penney Co. is adding a liquidation area to its site. "The two biggest things our online customers want is price and then price," says George Stasick, Penney's director of Net commerce.

Priceline.com believes that it's perfectly positioned to serve the masses with a "name-your-own-price" system, which promises to save consumers 20% to 50% on everything from groceries to long-distance telephone service. "Many of the things on the Internet today are skewed to what I would consider to be just the convenience market or the high-demographic subset," says Priceline President Daniel H. Schulman. "When people can save 20% to 30% on their groceries, don't underestimate how powerful that is."

Of course, price and convenience won't matter if these customers can't find what they want. "Navigation and every aspect of how they shop online needs to be significantly simplified," says BCG's Pecaut. Increasingly, "visible" technology--such as one-click shopping--will be less crucial than "invisible" technology, such as a system that alerts a help desk if a consumer appears to be lost on the site, says Forrester research director James McQuivey.Simplicity. Consider the experience of Debbie Herbst, a 46-year-old hairdresser in Beaver Dam, Wis. She got online in November so she could e-mail her daughter in another part of the state. Since then, she has shopped online--to buy clothing for her 22-year-old son--with his help. When she tried, on her own, to buy a book from Amazon.com--considered one of the easiest sites--"I got mixed up, and it was taking too long." Herbst gave up.

While newcomers demand simplicity, serving them won't be simple or cheap. Early Net shoppers were willing to put up with poor service, out-of-stock items, and clumsy return policies, says Jeanne P. Jackson, the new CEO of Wal-Mart.com: "They wanted to be cool for having shopped online." As the Net becomes more mainstream, she says, easy access to customer service, hassle-free returns, and speedy refunds will become more important. Many e-commerce companies have underestimated the cost of this kind of service, says McKinsey's Hagel.

When it comes to the masses, "click-and-mortar" retailers such as Wal-Mart and Gap may have a leg up on virtual rivals. By cementing brand loyalty via multiple channels--stores, catalogs, and the Net--they can produce two or three times the annual sales volume per customer of a single channel, figures David C. Court, director of McKinsey's North American marketing practice. That's why Sears, Roebuck & Co. heavily promotes its Web site--which sells tools, appliances, parts, and (soon) consumer electronics--in weekly circulars and TV ads. Says Dennis J. Honan, vice-president of Sears Online: "More and more of our customers are using the Internet as a research tool and then coming into our stores to purchase."

Moreover, the next wave of Internet users likely will favor the traditional brands. "Established store retailers have huge opportunities," says Andy Johnson, president of e-commerce at cataloger Fingerhut Cos. "They have first shot at the customers." If e-merchants thought the battle for customers was tough before, just wait until they face a real mass market.By Wendy ZellnerReturn to top


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