In Web Retailing, Pay Attention to Where Your Consumers Reside

Conventional wisdom suggests that the power of the Internet enables online retailers to dispense with traditional purchase dynamics when pursuing borderless commerce.   However, two recent studies published by The Wharton School of Business challenge this view suggesting that old economy factors continue to play a vital role in driving online retailing.  The papers looked at the effect of location and physical factors (e.g., consumer proximity, product availability etc.) on Web retailers seeking to reach potential buyers who reside in an area where their purchasing needs and decisions make them a minority.

The first paper, “Traditional and IS-enabled Customer Acquisition for an Internet Retailer: Why New Buyer Acquisition Varies by Geography and by Method”  compares the effectiveness of traditional marketing tools for reaching customers (e.g.,  advertising, referrals) with Internet-specific tactics such as key word search and social media.  The researchers used zip code-level sales data from a large Internet retailer to study how the proximity of customers to one another, retail coverage and convenience affected the performance of each customer acquisition program.

Surprisingly, the results indicated that offline word-of-mouth effects had an especially significant impact on Internet customers, while online word-of-mouth is, on average, less effective.  The key difference was that it was more powerful to communicate trust (critical for word of mouth effects, brand building) through offline means than through an online environment.  Put another way, shoppers living in different cities with different physical store environments etc are less likely to build trust online and therefore leverage influences like referrals.  Since Web retailing offers considerable marketing flexibility, this suggests that marketers ought to consider different acquisition strategies that are customized for local market conditions (i.e. by zip code versus region), customer needs & physical proximity.   The paper goes on to add “…traditional marketing efforts are still important to firms in the new economy and provide some evidence that geo-targeting will be vital to the success of Internet retailers, especially those with limited resources.”

The second paper “Preference Minorities and the Internet: Why Online Demand Is Greater in Areas where Target Consumers Are in the Minority,” also studied Internet retailing but in the context of the physical world.  The researchers investigated the optimal strategy to acquire customers whose shopping needs might be different (i.e. preference minorities) than the majority of the people in a given geographic area. For example, young parents living in a zip code populated mostly by elderly people would find fewer offerings in local stores because the retailers need to devote the bulk of their shelf space and inventory to meeting the demands of the majority of their customers (i.e. the elderly).

The results show that the best way to target preference minority customers in specific geographic areas is through online-based strategy.   This makes intuitive sense as traditional local retailers will more likely cater to the preference majority customer needs and demand through shelf space, inventory, service etc. The study also found that online sales of “niche” brands respond more strongly to the presence of preference minorities than local online sales of “popular” brands do. This is because in geographies where it’s already relatively difficult to find a good offline assortment of popular brands, it will be even more difficult to find a good assortment of niche brands.

In general, where your target market is the preference majority in a given area, a judicious mix of on and offline retail strategies is the best approach.  However, where your target market is the preference minority, web-only retailing is likely the right strategy. 

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