David Bell, Professor of Marketing at Wharton, gave an excellent seminar (download David Bell's presentation) last evening on the most important factors in internet retailing. He summarized four of his recent papers in this space and most of his research stems from Wharton's startups specifically diapers.com and Netgrocer.com. His online customer acquisition lessons are summarized below.
1. Social Contagion states that communication and observation affects online demand evolution. Traditional brick and mortar retailers are limited by their small trading areas. It is more likely for you to visit your nearest grocery store whereas the internet is unlimited but this also means that you don't know where your customer is located. One of the main findings of social contagion (as seen in image on left) is that your new customers will be located near your existing customers. Communication and observation are key in social contagion. This is where word of mouth and visual differentiation are key. For example, Warby Parker, a Wharton startup, makes prescription glasses for $95 compared to the average competitor price of $500. They have visually differentiated themselves from the competition by making their frames a distinct color (blue, orange, turquoise and more) and a classic vintage-inspired shape (thicker frames). As for word of mouth they donate a pair of glasses to someone in need every time you buy a pair.
2. Spatial Structure follows a pattern of proximity and similarity. This finding states that social and demographic proximity and similarity can drive online sales. For example, an interpersonal property or similarity such as ethnicity could drive sales of an online product that started in Chicago and then moved to LA and then Springfield through word of mouth. Internet retailers first grow through physical proximity and later through similarity among distant locations. Thus internet retailers should target sparse locations with geographically diverse demand. For example, target zip codes that are not close to each other and not socially or demographically similar but have a good number of target customers.
3. Preference Isolation brings shoppers online and explains geographic breakdown of online brand demand. The image on the right explains this concept. Consider 2 markets for diapers- Market 1 with 200 people of which 100 have babies (50% penetration) and Market 2 with 2000 people of which 100 have babies (5% penetration). Market 2 is the preference (in this case diapers) minority and the market that an online retailer should target. The primary reason for internet retailers to target Market 2 is that the brick and mortar stores in Market 1 will stock 50% of their shelf space with various diaper brands (pampers, huggies and even niche brands such as 7th generation) so it is easy for people in this market to access these diapers but Market 2 is going to allocate only 5% of their shelf space thus carrying the top selling brand only (say Pampers) so customers are more likely to look online for the other brands especially niche brands thus driving online sales.
4. Acquisition Modes vary in efficacy according to location characteristics. Different acquisition methods (magazines, online WOM, offline WOM, online search) get you different customers and are complementary as seen from the image on the right. Word-of-mouth (WOM) acquisitions benefit from physical proximity among targets (offline WOM—contagion; online WOM—connectivity). Use magazines for sparsely populated markets and WOM for densely populated markets.
Many other factors such as taxes, shipping cost and type of product matter in customer acquisition in internet retailing but have not been studied in this research.
I wrote a post on Web Trends in March 2011 and renting (as opposed to owning) on the web is one of the six trends of Web 2.0. After visiting a few conferences and following a few startups it definitely seems to be a trend so I decided to put together a list of different industries that rent their products/services.
Home rentals - Airbnb: a startup that connects you to people renting their homes across the world. It provides a sense of community that a hotel cannot and saves you money at rates much lower than hotels. Owners renting their place can define their daily rates and get more value from their property by renting their homes for days, weeks or months based on their preferences. The reviews, pictures and comments help craft the experience for renters to decide what kind of place would best suit their needs.
Baby equipment rentals- Travel Babees: Helps mothers and fathers rent baby equipment such as strollers, cribs, car seats, etc. which are really make traveling hassle free.
Vacation home rentals - VRBO: Vacation rental owners who self-manage their second homes provide a comfortable stay near vacation hot spots that range from the beach to the mountains to visitors and tourists.
Car rentals- Getaround: A startup that won Techcrunch Disrupt Winner, 2011. Getaround connects you to people renting their cars in your city. You can choose from Teslas to Hondas for an hour or more while Getaround takes care of the insurance.
Furniture and Electronic rentals - Rent-a-Center: Hassle free rentals on furniture, appliances and computers for as long as you want.
Event and Venue rentals- SFStation for Venue rentals and Abbey for Event rentals in San Francisco: Hosting and renting for events ranging from weddings to corporate events. You can find one in your city too.
Parking Space rental-ParkingSpots.com: Commercial Owners and Homeowners can rent out their parking spots to make some extra money.
Book Rentals - BookSwim: Aims to be the Netflix of book rentals. You can rent and return books of all kinds without the hassle of late fees, due dates and prepaid mailing boxes. Ebook lending will soon takeover this space.
Movie Rentals- Netflix: Netflix rents movies for a fixed monthly subscription and is one of the most successful business rental models in any industry.
Video Game rentals- Gamefly: With the video game industry making so many games on so many different consoles (PS3, Wii, etc.) a video game rental service makes sense.
High end fashion rentals- RentTheRunway: Customers rent dresses from top-name designers such as Diane von Furstenberg and Hervé Léger. Rentals are $50 to $200 for a four-night loan and are shipped directly to the customer's doorstep.
Wedding/Prom/Special Occasion rentals - Men's Wearhouse for Men and American Tuxedo for Women: As most of these occasions occur once in a lifetime rentals in this case make sense as you may use it only once.
Office Space rentals - Regus: For small businesses and individual working spaces with office equipment. Gold membership gives you unlimited access to Regus' network of 1100 business lounges and cafés across the globe.
Medical Equipment rentals- RentItToday.com: You can rent everything from wheelchairs to hospital beds for your home or hospital.
Dear readers, if I missed a product/service rental please let me know so that I can add it to this list.