Internet Marketing and Branded Products Requiring Hands-On Assessment

September 1, 1998

FOR MORE INFORMATION, CONTACT: Barbara Buell, [email protected], 650 723-1771.

Internet Marketing and Branded Products Requiring Hands-On Assessment

STANFORD GRADUATE SCHOOL OF BUSINESS -- Marketing mavens everywhere agree that the lower marketing and distribution costs of the Internet are triggering fierce price competition. Indeed, Internet-based bookseller Amazon.com created a successful business by parlaying lower costs into deep discounts for customers. Yet when Barnes & Noble moved in with its own virtual bookstore, Amazon was forced to slash prices and reported a $5.8 million loss for 1996.

So, is it ever possible for firms to raise prices and increase profits by using the Internet as a complementary channel of distribution? To Business School faculty members Rajiv Lal, professor of marketing and management science, and Miklos Sarvary, assistant professor of marketing, the answer is yes. In a complex economic model that factors in consumer behavior and the costs of making a shopping trip, Lal and Sarvary found that the monopoly pricing associated with quality name-brand products can be sustained in certain cases. More surprisingly, they show that the Internet can actually discourage consumers from searching or window shopping for competing products.

Certain types of branded products, which require "experience," or hands-on assessment by shoppers, should benefit greatly through marketing on the Internet, they say. Such products would include clothing, which must be tried on, or fabric, which must be checked for texture. Others might include fresh flowers or produce, possibly even wine. Essentially, they suggest, consumers who already have experience with a certain product, perhaps Gap jeans, might decide simply to order the jeans on the Internet rather than engage in a costly trip to the mall, where they might come across well-merchandised competing products. From a consumer's point of view, it is cheaper to dispense with the search for goods and buy the familiar brand on the Internet. After all, the store visit not only requires the cost of transportation but also the use of valuable time.

When there is no access to the Internet, consumers need to undertake their shopping trips anyway. The additional cost of moving from one store to another is negligible, and consumers may be tempted to buy another brand when they can touch and feel it. However, when the Net is available, consumers have the option of not undertaking a trip altogether. Because of savings in search costs and time, consumers are likely to order the brand-name goods they know. They are unlikely to search the Net for unknown competing products because there is no way to check the fit, fabric, flavor, or freshness.

In this way, Lal and Sarvary conclude, brand-name producers may be able to sustain their pricing and expand their brands by advertising related products on the Net. As in catalog shopping, sellers can communicate detailed information about price and product design or content. But unlike catalogs, which are extremely costly, the Net is a cheap communication medium that anyone can reach.

FOR MORE INFORMATION, CONTACT Barbara Buell at [email protected] or 650 723-3157.