How online business challenges old ideas

Written on 19 March, 2008 by Jonathan Crossfield
Categories MarketingSmall Business

Online business and E-commerce has been with us for well over a decade. Yet, there is still a lot of resistance to the inevitable changes to classic business models that E-commerce brings.

For most businesses moving online, their business model did not change beyond adding postage and packing to their existing products. But is this enough? Do consumers want more from online business?

Online purchasing behaviour

Postage is a major issue for online consumers when deciding on a purchase. If your online business does no more than add postage to products that are readily available in the local shopping centre, you risk turning customers away. Overall price, not convenience, is the number one reason people choose to buy online, so you must stay competitive with your bricks-and-mortar competition.

There is no doubt online customers behave differently to offline customers. E-commerce success stories like eBayiTunes and Amazon developed and refined their business models around the unique challenges of shopping online. Many of these business models would never work in the real world, but online they thrive, due to a strong understanding of online purchasing behaviour and the different motivations of an E-commerce customer.

If Amazon had merely retained a traditional bookstore model and simply added postage to every order, it probably would not be the powerhouse it is today. Amazon developed a pricing model that makes it far more attractive to buy from them than from a traditional store by understanding how an international market allowed for bulk stock discounts and how free postage offers can close a sale. Amazon works by selling a lot of product with a reduced profit margin to a wide audience. Because Amazon understands online buyer behaviour, their website is finely tuned to maximise sales to the widest possible market.

But not all businesses have been so quick to adjust to the particular challenges of E-commerce.

Traditional business versus the web

The most obvious example of a classic business model being threatened by online trends is the music industry. Throughout the Nineties, they fought lengthy and costly court battles with web entities such as Napster to protect the copyright of their products.

But what the Napster episode revealed was that consumers wanted to access music online, and it wasn’t just about the music being free. During Napster’s heyday, there was no legitimate source for online music purchases, and this led people to illicit sources to find the tracks they wanted.

Many consumers turned to Napster and other online sources because the catalogue was immense. A local music store can only stock so many CDs, but online, virtually every piece of music ever recorded may be available in a form available for download. For those consumers unable to find tracks by a more obscure artist, or wanting music that has been deleted from normal distribution, resorting to online methods may be the only way.

It was only a few years ago that the music industry realised that downloaded music was never going away. By finally understanding what the consumer wanted, Apple liaised with some of the major record labels to release iTunes – the first major online music store. iTunes was, and is, a huge success, proving immediately that consumers weren’t downloading because the music was free, they were downloading because it was convenient. By giving them better quality official downloads at a reasonable price, the music industry harnessed a whole new revenue stream.

The evolution of the music industry still has a long way to go, but record companies are slowly adjusting to new business models that recognise the uniquely different opportunities offered by the internet.

Future challenges

With bands such as Radiohead and Nine Inch Nails taking the distribution of their latest albums entirely online, expect more businesses to move away from traditional sales models.

Radiohead released their album ‘In Rainbows’ by inviting consumers to pay what they felt was reasonable to access the download. About 50% of downloaders opted to pay nothing, but the experiment demonstrated that Radiohead still received more income from the album than they would through a traditional record deal. It also meant far more people were exposed to the album than would normally be the case.

Nine Inch Nails took the idea a step further with the release of ‘Ghosts I-IV’. Made available online through the official website, a fan can choose either a $5 download in a choice of formats, a $10 package of the download with a CD mailed out in April or a $300 limited edition CD and book. The first part of the album, ‘Ghosts I’, is also available as a free download.

‘Ghosts I-IV’ is also licenced under a Creative Commons Licence, instead of the traditional Copyright, allowing anyone to use, edit, adjust, remix or otherwise be creative with the music without needing to acquire legal permission first. This has resulted in YouTube planning to hold a ‘Ghosts Film Festival’ showcasing amateur videos that use the tracks. This kind of viral publicity is more valuable than any traditional advertising campaign.

What Radiohead and Nine Inch Nails realised is that the music is merely the acquisition point to generate further sales. By getting their music into as many iPods as possible, they increase live performance attendance, t shirt sales, back catalogue sales, merchandise, dvds, etc.

Know your market

The most innovative and successful online businesses are those that take the time to analyse internet shopping trends and adjust their business models. Those businesses that remain stuck to traditional ideas of business may find the internet leaves them behind.

By taking the time to think how the internet changes the landscape within your market and the unique opportunities it offers your customers, you could perhaps identify the original concept or niche idea that could rocket your business into the future.