In business there is never only one way to do anything.
If your product or service is in the latter category, you might think that you have nothing to gain from the Net. But, in our opinion, you would be wrong.
The Internet will affect your business whether you jump on the Web or not. What changes will the Internet bring to your business and your life? The future is always fuzzy, but here are some predictions.
You won’t be surprised to learn that the Encyclopaedia Britannica, published since 1768, will no longer be available in a paper version. From now on the encyclopedia will only be available online or on CD-ROM.
The companies that publish “yellow pages” telephone directories ought to be concerned. The fingers that used to go walking though those directories are now moving to the keyboard.
“Information at your fingertips,” said Microsoft in its early advertising efforts. And it’s true. The plumber, the electrician, the veterinarian, and the auto dealer can be more quickly found and evaluated on an electronic directory than on a paper one.
What will happen to the $12 billion that companies spend annually on yellow-pages advertising? Good question. We’d be concerned if we made our living publishing or selling space in a paper directory.
Paper directories are doomed because of the interactivity of the Internet. The user can manipulate a single computer database in literally thousands of ways.
Furthermore, the database can be updated daily, even hourly. A typical “yellow pages” directory comes out once a year and is out-of-date the day it lands on your doorstep.
Even some great paper institutions are going to have trouble competing in the future. The 116-year-old full Oxford English Dictionary could cease to exist after it goes online on a subscription basis. The dictionary, which runs to twenty volumes and costs $2,900, is a dinosaur in the Internet age.
Mailboxes across the county are stuffed with countless catalogs every day. According to one estimate, 17.6 billion catalogs were mailed in the U.S. last year. That’s sixty-four catalogs for every man, woman, and child.
That may change. Catalogs of all types will find themselves under severe electronic competition. There are a number of reasons why a Web catalog is superior to a paper one.
An electronic catalog can be interactive. You can sort by types, by sizes, by colors, by prices, by weights, and so on. Think Amazon.com, for example. You can sort by author, by title, by subject, by category. In contrast, a paper catalog of books is so impractical that few are printed and distributed, except for narrow selections.
Furthermore, an electronic catalog is much less expensive to distribute. Once the material is composed in an electronic format, the cost of distribution is essentially zero. Manufacturing a paper catalog, however, can be costly. Just to print those 17.6 billion mail-order missiles requires 3.35 million tons of paper.
So what do you do if you’re L.L. Bean? Good question.
Sales have been essentially flat at L.L. Bean for the last few years. That puts pressure on the bottom line because the company prints and mails catalogs thirty times a year. And printing and mailing costs continue to rise.
So L.L. Bean opens up a Website to sell the same merchandise found in the catalog. Is this a good idea or not?
Yes and no. In general, when you broaden the scope of a brand, you weaken the brand. In the long run, multiple distribution channels substantially increase costs and do not do much to increase sales.
A fully functioning Website with computer hardware and service people backed by a programming staff is not an inexpensive proposition.
To get the company moving again, L.L. Bean is opening a chain of retail stores, in addition to its nine factory outlet stores. Outlets are one thing, they help you get rid of leftovers. When you open retail stores, however, you are competing directly with yourself, never a good idea.
A better solution for L.L. Bean and other catalog companies is to shift the entire operation to the Web. Don’t try to maintain two expensive distribution channels for a brand whose market is limited.
You can’t do this overnight. You need transition time. We would gradually reduce the number of catalogs mailed and shift some of the savings into publicity and advertising programs for the Website. You need a way to drive prospects to your site.
One of the major advantages of ordering products from a computer rather than from a catalog is the interactivity of the Website. You know instantly whether or not the product is in stock in the color and size you want.
This, of course, is only a theoretical advantage. Many sites have yet to integrate their warehousing operations with their order-entry systems. When you call to order from a catalog, inevitably at least one of the items you want is out of stock or back-ordered.
Should every catalog company shift to the Web? Of course not. There is never only one way to do anything. For certain products in certain categories, the better strategy might be to remain a catalog-only company. As catalog mailings taper off, the remaining companies in the field will find that their individual catalogs have become more productive.
Many companies will rethink their use of expensive brochures, which are virtually out-of-date the day they come off the press. It’s a lot more efficient to let a prospect stroll through your Website to look at the same information.
If something catches the prospect’s eye, they can always print out the page using one of the many inexpensive color printers now on the market.
One way to promote a seminar, for example, is to send out inexpensive mass mailings (postcards maybe) and then invite prospects to get all the details on your Website.
Annual reports of corporations are another category of printed brochure that is headed for extinction. It may take a while, however, for the Securities and Exchange Commission to change the regulations that govern their use.
A big chunk of newspapers’ revenues comes from their classified advertising. This is a category that will come under immense pressure from the Web. Houses, apartments, and job listings, in particular.
Take the help-wanted category, for example. The first Website to tackle this category was Monster.com, which today leads the Web in online job listings.
Monster.com boasts 800,000 job ads and a database of 16 million resumes. What’s more, Monster.com is profitable, having racked up twelve consecutive profitable quarters. In a recent quarter, the site generated $33 million in operating profit on $129 million in revenue.
Long term, the Internet will seriously erode classified advertising, a major source of local newspaper revenues. What should the Daily Bugle do about this?
In retrospect the answer is easy. Open a job-listing Website before Monster.com came on the scene. Who knows more about the help-wanted market than the newspaper industry? The companies that spend money today with Monster.com have been their customers for years.
That’s the way it often is. The people who know the most about a given market or industry are often the least likely to see change coming. The motto of many major corporations is: “Hear no change. See no change. Speak no change.”
The words “Letter Carrier” used to be prominently displayed on postal service uniforms. No more. Today the average letter carrier doesn’t carry very many letters. That business has gone electronic, either to phone, facsimile, or e-mail.
In a recent year, more than four trillion e-mail messages were sent, more than forty times the 99.7 billion pieces of first-class mail delivered by the postal service.
The largest segment of first-class mail today is bills, invoices, and financial statements. The sending and paying of bills alone accounts for $17 billion, or almost 30 percent of the postal service’s revenue. That segment is going to be especially vulnerable to the Internet.
Look at what happens when a company bills a customer for a product or service the customer has ordered—for example, a telephone company’s monthly phone bill.
The telephone company’s mainframe computer prints out an invoice, which is stuffed into an envelope, and first-class postage is applied. After the postal service delivers the bill, the customer writes a check, puts it in the return envelope, and adds a first-class postage stamp. After the postal service delivers the envelope, the phone company opens the envelope and deposits the check in its bank account. (So far the roundtrip postage alone has cost sixty-eight cents, minus the postal service’s small discount for presorted first-class mail.)
What happens next is the interesting part. The bank’s computers make an upward adjustment in the amount of money in the phone company’s account and a downward adjustment in the amount of money in the customer’s account. (This, of course, is the case when both the seller and buyer use the same bank. Otherwise some transactions between banks are necessary.)
All that paperwork, all that postage, all that human effort just to shift a number in a computer from Column A to Column B.
People forget that money, for the most part, is not steel engravings printed on paper. It’s not even gold in a vault. Money is electronic bits of information stored on computers around the world. To shift money from one account to another, you shift the bits.
The sending and paying of bills online is an idea whose time has come. We foresee a constant rise in electronic banking and a constant decline in the number of pieces of first-class mail sent and received. This is a trend that can’t be stopped.
If you think that can’t happen soon, look at the phenomenal rise in e-mail, which is increasing at the rate of almost 50 percent a year. Can e-banking be far behind?
According to a recent report issued by the General Accounting Office, “The Postal Service may be nearing the end of an era.”
Because money is nothing more than bits on a computer, the entire financial services industry is headed for the Internet.
It just makes sense to have your bank account in your bedroom or office, where you can check invoices, pay bills, shift funds, and borrow money, all by manipulating bits on a bank’s computer.
The computer revolutionized the banking industry once before with the introduction of the automated teller machine. What the ATM has started, the computer (in combination with the Internet) will finish. There’s no reason why banking and most financial transactions, including insurance and stock brokerage, should not be handled on the Internet.
Shifting financial transactions to the Internet can result in substantial savings. It costs, on average, one-tenth as much for a bank to handle a financial transaction on the Web as it does on an ATM machine. And one-fortieth as much on the Web as with a teller in the bank itself.
That’s the tip of the financial iceberg. The real savings will come from invoicing and bill paying. About seventy billion checks are issued in the United States every year. (That’s 260 checks for every person.) Much of this paper blizzard can be easily moved to the Net, saving money and improving the record keeping of both businesses and individuals.
One concern, of course, is the inability of your computer to deal out real money the way an ATM machine does. But this might not turn out to be much of a problem. Paper money is declining in importance as more people shift to credit, debit, and check cards for the bulk of their purchases.
You can spend a week on the road (and we have) without using paper money, with the exception of small bills for tips, taxis, and newspapers. And even taxicab companies are starting to take credit cards.
It will probably be some time before bell-men at hotels or porters at airports swipe credit cards. (With credit cards, they would have to declare all of their tip income on their tax returns.)
The Internet will greatly stimulate business for all of the parcel delivery companies. UPS (United Parcel Service) might want to consider changing its name to IPS (Internet Parcel Service).
As a result of the increases in parcel volume, you can expect delivery prices to hold steady or even decline.
The weak link in the system is the front door of the customer. With so many DINK (double income, no kids) families in the country, many customers will not be home when the delivery person arrives.
Some companies are already working on this problem. Smartbox, for example, is a locked, reinforced box that comes in various sizes and sits outside your home. To allow access to all delivery services, the device will be wired to the Internet. When the box owner makes an online purchase, special software will create and transmit a code for each order. A delivery driver can punch in the code on a keypad to unlock the box and make the delivery.
Will most products be bought in cyberspace? Probably not. But the Internet will drastically change the focus of most retailers.
Some retailers are worried. Home Depot, which is on the verge of selling its own products over the Internet, is rapping the knuckles of suppliers that have similar dreams. The retailer recently sent a letter to all of its vendors telling them to think twice before selling their tools and equipment directly to consumers through their Websites.
“We think it is shortsighted for vendors to ignore the added value that our retail stores contribute to the sales of their products,” stated the Home Depot letter.
The company is worried that their vendors will sell products on the Web at prices lower than Home Depot. And they should be worried. The Internet is inherently a less expensive way to distribute a product or service.
The retail price game causes many problems for manufacturers. Retailers often demand exclusivity in their territories so they can advertise “the lowest price in town.” Manufacturers go along with these demands by producing a bewildering variety of models, colors, and sizes. (Mattress and bedding makers are notorious in this respect.)
Wal-Mart and the mass merchandisers are known for demanding special sizes so they can get bigger discounts and customers can’t as easily compare prices with the same products at other retail stores. Then there are special purchases, end-of-product runs, obsolete products, manufacturers’ seconds, and a host of other strategies for generating low prices on the retail floor. There are also gray-market products brought in from other countries. (Which is why you might see a Mach 3 razor in Costco with the package printed in French.)
The Internet will change the nature of retailing by pulling the plug on many of these “price” promotions. If all the customer really wants is the absolute lowest price, then the place to shop is the Net.
Instead of reading a lot of different ads or driving from store to store, a prospect can sit down at a keyboard and quickly compare prices on a similar item from a large number of sources.
Furthermore, you can also use an “agent” to help you. Agent companies like ClickTheButton, DealPilot, and RUSure have developed software that will scan various shopping sites for price and delivery data, then sort the information (most often by price).
DealTime.com, for example, advertises that it helps you find “exactly what you want, at the price you want, wherever you want.” BookPricer.com will help you find “the lowest price for any book in under 30 seconds.”
Speaking of books, Amazon.com was discounting bestsellers by up to 40 percent. Booksamillion.com knocks 46 percent off bestsellers. (Some publishers don’t give their own authors that big a discount. We should know.)
Then there’s Buy.com with the tag line “The lowest prices on Earth.” The company is ruthlessly committed to being the price leader, even if this means losing money on every sale. Its technology searches competitors’ sites to make sure Buy.com has the lowest prices on the Web. Recently the Palm III Organizer sold for $249 on Buy.com, $330 at CompUSA, and $369 at the manufacturer’s own Website.
Buy.com was the fastest-growing company in U.S. history. Unfortunately, it hasn’t figured out how to make money. In a recent year the company did $788 million in sales, yet managed to lose $133 million. Will Buy.com become Bankrupt.com?
And look at the personal computer market. With Dell and Gateway doing a big business on the Web, physical retailers selling PCs have been under pressure.
CompUSA, the only physical retailer devoted mainly to personal computers, closed 14 of its 211 superstores. The Good Guys, which operates eighty consumer electronics stores in the West, announced that it was leaving the PC business altogether.
Bear with us. Physical retailing has nothing to fear from the Internet. But it has to change its current emphasis on low price. It has to find a new focus.
Just as the rise of national brands put pressure on Sears to change its strategy, the rise of the Internet will put pressure on retailers to change their strategies, too.
What retail strategies will work in the shadow of the Internet? We believe the successful retailer of the future will need to play a service game, not a price game. What you might call the Nordstrom approach. (There’s no way a physical retailer can compete with an Internet retailer on price.)
The successful outernet retailer of the future will have to emphasize the twin aspects of the physical experience: Touch and Time, or what we have been calling “T ‘n’ T.”
The Touch aspect of the T ‘n’ T strategy involves the ability of the prospect to hold, feel, taste, smell, handle, and try the product, not just see and read about it. (After all, you can see the product in full color on the Internet.)
Many retailers will have to make their stores a lot more “touch” friendly. Too many products are locked in glass cabinets or entombed in packaging that greatly discourages handling.
In this connection, Saturn’s success in creating a more customer-friendly environment is a good pattern for many traditional retailers to adopt.
The Sharper Image also places a high value on the touch aspect of its stores. Customers are encouraged to touch and try the variety of electronic devices in the store.
The Sephora cosmetic chain is another example of the future of retailing. With its attractive environment, helpful staff, and complete lines, Sephora provides everything a cosmetic buyer might want—except low prices. If you want the absolute lowest cosmetic price, you’ll have to go to the Net.
Motion-picture exhibitors have gone through this same process as they have upgraded their facilities to compete with HBO, Showtime, and free movies on television. Now you will find smaller theaters, larger, more comfortable seats, multiplex screens. Even the popcorn is getting better.
Price isn’t everything. You can drink beer cheaper at home, but every night the bars in our neighborhood are filled with twentysomethings spending their bundles on Bud Light.
The Time aspect of the T ‘n’ T strategy seems obvious. Unlike on the Net, you save time when you buy from a physical retailer because you don’t have to wait for FedEx or UPS to deliver your purchase.
Yet, the time half of an effective T ‘n’ T strategy is more subtle than that. In theory you don’t wait for your purchases when you buy at retail. But in practice the prospect is often frustrated because the store is out of stock. “Come back next week when our new shipment will be in.”
The customer of the future will not tolerate a physical retailer with frequent out-of-stock problems. Many of these problems, of course, stem from the retailer’s emphasis on low price, which leads to special deals and special purchases. Abandoning a low-price strategy means that a retailer can concentrate on keeping its inventory up-to-date and complete.
Not counting supermarkets, convenience stores, and similar establishments, roughly half the prospects walk out of a general retail store without buying anything. The major reason is that the store didn’t have in stock what the customer wanted.
Most business will probably not be conducted over the Web. But the Internet revolution will force every business to adjust its strategy. From a price game to a service game. T ‘n’ T, if you will.
Search engines like Yahoo! are busy adding functions when they should be battening down the hatches for the rough water ahead. Search engines (or portals) are going to be less important in the future than they were in the past.
Think of it this way. People get to know the Internet brands they want to do business with. When they do, they will go straight to the site instead of making a detour through a search engine. If we want to buy a book, we go to Amazon.com. We don’t go to Yahoo! to find out who on the Net sells books.
This view of the future is consistent with one’s own personal experience in the real world. Let’s say you move to a new community. You might pick up the yellow pages (paper search engine) every time you go out shopping. After you become familiar with the stores in your new community, you make most of your trips without first consulting the yellow pages.
Yahoo! is the welcome wagon on the Internet. Great for the new arrival, but less important for the experienced Internet user.
In many ways, the Internet and the telephone are similar. Both are information and communications media, but the percentages are different.
If the Internet is 80 percent information and 20 percent communications, the telephone is the opposite. Twenty percent information and 80 percent communications.
The information segment of the telephone medium is a large business in itself even though it accounts for only 20 percent or so of all phone calls. The visible symbol of this information segment, of course, is the yellow pages. “Let your fingers do the walking.”
That will change. The Internet will become a direct competitor to the telephone. (Fortunately for the phone companies, most people will continue to use phone lines to connect to the Internet.)
On the communications side, e-mail will replace many phone and fax calls. On the information side, the Net will become an electronic yellow pages.
What television did to radio, the Internet will do to the telephone. TV virtually wiped out entertainment on radio. The Internet will do the same for information on the telephone. Forget 777-FILM and the ten minutes it takes to get playing times for your favorite movie.
For many people the change couldn’t come too soon. How many hours have you spent punching in numbers trying to reach someone in Corporate America to help you? The automated call-routing systems used by most national companies are a disgrace.
First they answer your call with a variety of options. After punching in an endless series of numbers, you get the following message: “All of our representatives are currently helping other customers; the next available agent will be with you shortly.”
By removing the human interface, the Internet promises to greatly speed up the information functions formerly handled on the phone.
Airline reservations, movie tickets, reservations for rock concerts and sporting events, and restaurant hours and reservations are just some of the information-related transactions that will be moving from the phone to the Net.
In spite of our rosy predictions, the Internet faces two speed bumps in the near future.
One is the Internet bubble itself. Just because two guys under thirty start a Website with $30 million in venture-capital funds doesn’t automatically make the site worth $3 billion. The bubble has burst.
In spite of its enormous acceptance, it’s going to be difficult to make money on the Net. The Internet is a high-volume, low-margin medium. In other words, a price game. Investors didn’t truly understand the nature of this medium. While the Internet is wildly popular, it will not be wildly profitable. And profit is what Wall Street ultimately seeks.
The Internet will survive and prosper. But many Internet companies will not.
The second speed bump along the way is the tax issue. Currently there is a moratorium on state and federal taxes.
That will change. The 46 states, 4,831 cities, and 1,151 counties that impose sales taxes are not going to give the Internet a free ride forever. Sooner or later they are going to want their cut.
The computer we recently purchased on the Net would have cost $111.72 more (to cover taxes) if bought locally. Sooner or later, the governor, the mayor, or the county tax commissioner is going to want to get his or her hands on that $111.72. You can count on it.
What’s next? What will come after the Internet? What will be the technological revolution of the first decade of the next millennium? Who knows?
Whatever the future brings, you can be sure of one thing: It will be a destabilizing development. It will change the way you manage your business and the way you build your brands.