The Ripple Effect of E-Commerce
An Interview with Bill Sheldon

Q: The impact of e-commerce on traditional business models is the hot topic in the press right now. Bill, as an expert in developing "clicks and mortar" strategies for Fortune 500 companies, what are the ripple effects of e-commerce on sales and marketing?
A: As you know, the growth of e-commerce is clearly moving into the business-to-business phase. We see three fundamental areas where e-commerce has an impact on companies' sales and marketing: The first is the products they sell. The second is how they sell those products. And the third is the pricing. At its simplest level, those are really the three key impacts that e-commerce is going to have on traditional sales, marketing, and distribution strategies within the business-to-business space.

Q: Let's tackle the first. How are companies seeing an impact on their products?
A: Clearly in the business-to-business marketplace we're not talking about books and Amazon.com. We're talking about more complicated products. What we've seen over time is that companies are quickly migrating products of all different complexities to the e-commerce channel. Let's take financial services, for instance. Charles Schwab is a great case example. Schwab became a market leader by selling complex financial services and financial products over the phone. Now they've become the market share leader by selling the same products over the Web. Moving forward, companies are working to take the complexity out of their products to enable their sale over electronic channels. For example, new markets are being established for the sale of financial derivatives. So one of the most complicated financial products in existence is now being traded over the Web. Companies are working hard to remove the complexity and to build configurability into their products so they can make them available over the Web.

The challenge for most business-to-business companies is that they come from a bricks and mortar mentality. These companies have traditionally relied on field sales reps who spend lots of time with the customer to simplify complex products. The fact of the matter is that, in many instances, customers now prefer to buy products without going through face-to-face salespeople, and in some cases without even going through the phone. So traditional bricks and mortar companies are having a tough time because they've sold complex products that have required a sales force to act as a simplifier of last resort. Now they must take those products and simplify them in some form or another in order to make them fully or partially sellable over the Web.

Q: What makes a product ready to sell over the Web?
A: That's a great question. There are three things to consider: the risk to the buyer, the complexity of the product, and your customers' acceptance of the e-channel.

When we talk about risk to the buyer, it's based on his or her relationship with the company. Historically companies have used their face-to-face sales force, business partners, or even telephone sales people to educate and provide a comfort level for the buyer. Now companies are developing ways to transfer that relationship and responsibility to the Web.

They are substituting technology for the techniques sales people and business partners have used in the past to add value and gain trust. For instance, companies are employing product configurators to eliminate the possibility of configuration errors; they are educating customers by providing rich information on their web sites; and they are providing guarantees for quality and service. These are just some of a number of ways to reduce the elements of risk for the purchaser when he or she buys a complex product. All of these strategies allow the company to transfer the customer's trust and relationship from a person to a Web site.

The second aspect is about simplifying the product. We've already covered some of this, but it boils down to removing the complexity and reducing the number of models. For instance, many companies in the high tech industry are rationalizing their offerings to make them simpler, both from a product line viewpoint, as well as a process viewpoint.

Third is that customers are more sophisticated today. Over the past few years they've become more comfortable using new channels. When you look at channel adoption rates, corporate customers are following the trend of consumers and migrating to the e-channel as a channel of choice for self-service.

The important thing to remember among all the hype is that not all products will be sold over the Web. Smart companies are building strategies to determine which products will still require face-to-face and business partner support.

Q: Which products require human involvement? Are there any general product characteristics that require a sales person?
A: It's really quite simple. The more customized the product or solution needs to be to a customer's particular situation, the less likely you're going to be able to sell it over the Web.

Q: Now that we've covered products, tell me about the impact of e-commerce on channels and explain how that works.
A: E-commerce is the growth channel. Traditional bricks and mortar companies are scrambling to figure out how to incorporate "e" into their go-to-market model and their sales and distribution systems. Historically, these companies have changed their market model much slower than the rate of change in customer buying behavior. Now, everyone is trying to catch up to their customers. The tough question for companies is: "How do we integrate e-commerce into our existing channels?" They are struggling with channel conflict with their face-to-face sales force and business partners. Although e-commerce is a growth channel-and it's where the activity is going to be in the future-companies must look at their overall channel strategy. They need to ask: "How can we design a channel strategy that will support the growth in the Web?"

The answer is not just the Web alone, it's really about integrating Tele and Web. Despite ease of purchasing on the web, customers, particularly in B2B, still require a lot of human intervention. Smart companies see this as an opportunity to combine the strengths of call centers and the Internet. The real leaders are developing TeleWeb capabilities that provide a direct and seamless customer experience. There are several good examples in the high-tech industry. CDW, a catalog-based reseller of computer products, comes to mind. CDW quickly migrated their product catalog to the Web, but they found that connecting with a person on the phone gives them significant cross-sell and up-sell opportunities. Now they try to drive as many of their transactions as possible into their call centers.

What companies like CDW know is that customers surf across channels in the purchase process, and each channel plays a role in the sale. So while CDW purposely pushes customers to the Web for a lot of the lower value pre-sales and post-sales activities-pricing, configurations, availability-they still want to drive the transaction the closing of the transaction into the call center because of the opportunity to cross-sell and up-sell. This gives the customer comfort, because they are placing the order with a real person, and it gives the reps in the call center the opportunity to sell more products.

The economics of this arrangement are fairly straightforward. Take a fully loaded tele-sales representative who is making $50,000 a year or $25.00 an hour, (10 minutes of his time is a $5.00 cost.) If he can up-sell the customer for an additional $15 or $20 worth of products, the company has recouped the cost of the telerep's time.

In addition to getting call centers and the Web to work together, companies need to integrate their TeleWeb channel with their other channels. Companies need to ask: Which products will I sell, through which channels, to which customers? Key questions that must be addressed include:

How do we position the TeleWeb channel so that we don't disintermediate our other channels?
How we use TeleWeb to leverage our sales force?
How do we get our valuable face-to-face and business partner resources to focus on acquisition, larger opportunities, and new customer development?

We've found that companies that really understand the impact of e-commerce and how to leverage it are offloading simple transactions from their sales force to their call centers and to the Web. They are making their tele-sales resources more productive by allowing customers to self-serve on the Web. And they deploy their face-to-face and business partners against higher cost, more difficult acquisition.

Q: The last ripple effect of e-commerce is on pricing. What are the changes for the marketplace?
A: Simply put, there are two primary issues: pricing transparency and pricing complexity. Pricing transparency means that prices are now visible on the Web across geographic areas, across products, and across companies. Customers are able to do much more price comparison, and they are much more knowledgeable. There is going to be a lot of downward price pressure as customers gain access to pricing information that was hidden before. So companies are trying to use extranets to lock out and hide prices, but basically customers now have more access to pricing information, and this is going to create downward pricing pressure.

The second issue is pricing complexity. As aggregators, exchanges, auctions, and eMarkets emerge, companies will have to participate in a number of different marketplaces to reach all the customers they want to reach. They've got to have strategies for participating in those marketplaces. They now have to manage pricing across multiple touch points and multiple buying situations. This will make the pricing aspect of how they go to market on the Web much more complicated.

There are actually two strategies to deal with these issues. Some companies use different pricing schemes for each channel and customer type. In this strategy, pricing can get very complex.

Another alternative is to make the decision that pricing is going to be the same across all channels. In this case, companies tell their customers: regardless of what channel you go to you will get the exact same price.

So, there is a continuum from simplified pricing that is transparent and standardized across all channels to a model where dynamic pricing is established based on the channel and the complexity of the situation. Neither strategy is right or wrong, but they have very different implications.

Q: Where do companies start? We've covered the impact of e-commerce on products, channels, and pricing. Once they understand those issues, what do they have to do to effectively incorporate the Web into their sales and marketing strategy?
A: First, they have to figure out where e-commerce is going to play in their overall market strategy. It will not play everywhere. But it will play in certain places, both as an end-to-end channel and as an enabler channel. When we talk about e-commerce as an end-to-end channel, examples include extranets, free markets, and e-commerce sites like Amazon.com. Essentially, these are places where the whole customer buying experience can take place online. When we talk about e-commerce as an enabler, we're talking about companies like CDW and Schwab-companies that use e-commerce to support other channels. In these cases, customers need other channels in addition to the Web, and there could be greater value to the vendor to also insert another channel in the process.

Second, companies are going to have to launch a systematic product simplification effort so that certain products are easier to sell over a channel like the Web. This simplification effort begins in the labs and must continue all the way forward through manufacturing.

Third, they are going to have to figure out how to operationally integrate the Web into their traditional channels of distribution. For example, the hot area is TeleWeb. What's going to happen is the Web is going to be linked to the telephone and to call centers. (We have a separate Q&A on that topic, and it can be downloaded from our Web site.) Integration is a hot issue not just with internal channels, but also with third party portals. What is the Web's role and what does your presence need to be in third-party portals?

Fourth, companies have to rethink and rework their pricing strategy. Now there's potential conflict among traditional channels, direct channels selling your product over the Web, and third-party portals like free markets that are controlling and making price more transparent. Companies have to dramatically alter and redesign their pricing strategies.

Finally, companies have to develop a new economic model. They have to determine what will be the impact of investing in e-commerce. In most cases, companies have to put investments in e-commerce on top of their investments in traditional channels. This is crucial in an environment where we're going to see lower prices or increased price pressure. So that equation doesn't balance until you really figure out what the trade-offs are between e-commerce and traditional channels and volume and price.

About Bill Sheldon
Bill Sheldon is an Oxford Consulting vice president and the resident expert on the design and implementation of sales and marketing performance measurement and management systems. Bill also has significant experience in the use of the telechannel and e-commerce in overall go-to-market strategy, with a focus on the integration of the telechannel and the Web into the "direct" channel.

Bill has led high-profile projects in go-to-market system design, performance management, channel economic analysis and channel capacity planning. Bill works across several industries, including high-tech, financial services and travel. Some of his clients have included IBM, GE, Baltimore Gas & Electric, Boeing, Ritz-Carlton, Marriott, Prudential, and First Union. Bill previously has served as a CFO and CIO and developed his systems and financial expertise in management positions at Andersen Consulting and IBM. He has a BA from the University of Virginia and an MBA from American University.

For more information, contact Bill Sheldon at 1-888-GO-TO-MKT.