Electronic Commerce and the Threat of Brand X

By Bill Burnham

Online players are spending vast sums to establish brand identities, but new Internet technology could thwart their efforts.

A powerful yet troubling aspect of electronic commerce is the medium's ability to assemble a huge array of providers for a particular good or service, presenting a wealth of options to progressively more demanding buyers.

Looking for ways to stand out in an increasingly crowded online field, providers are concentrating on building brand awareness. They are intent on capturing share in what promises to be a rapidly growing and vibrant marketplace. From staid Fortune 500 firms to scrappy Internet start-ups, players are investing tremendous amounts of time and capital to build their Internet and EC brands. For example, companies within the online trading industry will spend over a quarter of a billion dollars over the next 12 months on advertising, much of it on amorphous branding strategies.

But lost in the rush to replicate the branding strategies that worked so well in the TV world is the fact that the Internet is not TV. It is not a passive experience in which viewers are programmed with branded messages, but rather an interactive experience in which users control and dictate not just the content, but the pace and tenor of the interaction.

Indeed, the Internet has the potential to throw the traditional 20th century model of commerce on its head by empowering the demand side -- which is to say consumers -- with tools and technologies that quickly and efficiently sort through hundreds of potential purchase options without the help of a brand. The impact of this change could be sweeping, especially on those industries, such as financial services, that have traditionally been able to corral consumers in tightly defined geographic markets.

The upshot is that strategists primarily must emphasize cost and service in online campaigns. For while brands will remain important, they will only serve to steer consumers to a handful of largely comparable providers.

Consumer Overload

While online players cannot be accused of ignoring price and service considerations, branding often seems to be the primary emphasis in expansion campaigns. It seems as though almost every company worth its Internet site is placing big bets on the supply side, launching major advertising campaigns to build brand awareness and brand equity. Indeed, companies such as Amazon.com, E*Trade, and Ameritrade have all introduced major advertising campaigns, often throwing businesses that would otherwise be profitable deep into the red.

Though draining, such campaigns admittedly are essential. Whereas two years ago there were only a handful of companies selling goods over the Internet, today there are often hundreds of firms selling goods within a single product category. This proliferation has created a classic situation of supplier overload, which occurs when there are so many choices that consumers don't have the time to compare and contrast amongst their different options.

To see a classic example of supplier overload, just walk into any supermarket and go to the coffee aisle. When average consumers confront this aisle, they may see 40 different types of coffee. Rather than examine all 40 coffees, most consumers simply scan the aisle for brands they recognize and take things from there.

In much the same way, consumers seeking a specific good over the Internet often scan for brands, the only readily available basis for comparison across the hundreds of potential options. Sure, they could visit each Internet site, check to see if the desired product is available, read the company's return policies, research its customer service record, etc. But they don't have time for such in-depth research. Instead, most consumers simply select the brand they recognize and believe most closely approximates their specific requirements.

Not Your Average Medium

This would be where things end if it wasn't for the fact that the Internet is inherently different from traditional commercial mediums. Perhaps the most important difference is that the Internet is the first commercial medium in which the demand side, i.e. the consumer, has the potential to wield as much power and control over the commercial process as the supply side traditionally did.

The sources of this new-found control are a group of demand-side technologies that are enabling consumers to quickly initiate the kind of in-depth competitive comparisons and analyses that historically have been impossible to conduct efficiently. Examples include intelligent agents, collaborative filtering and distributed databases. Intelligent agents are autonomous software programs that accomplish actions of behalf of the user with minimal intervention. Collaborative filtering is a specific type of neural network technology that automatically matches consumers with like tastes. Distributed database technology uses complex algorithms to rapidly catalog vast amounts of unstructured information.

While a technical explanation of these technologies is beyond the scope of this article, what is important about these technologies is that each of them in some way eases the process of rapidly comparing competing commercial offers. Ultimately, by enabling such competitive comparisons, these technologies increase price transparency and thus create a far more efficient market -- a great outcome from the consumer's perspective, but not necessarily the best outcome for a supplier.

BargainFinder

While it is tempting to dismiss intelligent agents and other demand side tools as futuristic, the fact of the matter is that early examples of these tools are already appearing. Even more importantly, these early examples are significantly impacting many parts of the EC industry.

One such prototype is BargainFinder. The Internet site provides a painfully straightforward service: allowing users to quickly compare prices charged for particular albums by major Internet-based record stores. Because of its ability to autonomously find the best deal for a specific record album, BargainFinder is considered to be an example of intelligent agent technology.

How does BargainFinder work? Users simply enter the name of the album and the artist they are looking for, and the site then searches each of the major record stores on the Internet to determine if they have the album and, if so, at what price. The site then generates a list of all the stores, whether or not they have the album in stock, and what price they are charging. By clicking on an icon, the user is taken directly to the Internet site of the store from which he wishes to make the purchase.

Worried that BargainFinder would reduce them to commodity suppliers, with only the stores with the lowest prices winning business, most of the major Internet record stores hurriedly barred BargainFinder, depriving it of the ability to "shop" at their site.

Eventually, a number of the smaller outlets reversed course and let BargainFinder "shop" them. Why? Because these stores needed the business, any business, and they figured that anyone using the BargainFinder site had a high potential to make a purchase. By playing ball with BargainFinder, these stores risked losing potential business to others. But if they didn't play ball, chances were that they would never even get the chance to compete for that business in the first place. In a world without BargainFinder, moreover, these stores were almost certain to lose business to larger, branded competitors.

Understandably, many of the larger record stores continue to block BargainFinder. After all, it devalues the huge investments that they have made in their brands. However, it may be impossible to block future generations of intelligent agents. BargainFinder essentially is a rough-hewn demo created merely to demonstrate the potential of intelligent agent technology on the Internet. As a demonstration project, the technology behind BargainFinder is relatively simplistic, and thus it is easy for the large, branded sites to thwart it.

Technology that would make BargainFinder a stealthy intelligent agent, with automated inquiries indistinguishable from those of average Internet record store customers, is already available. Indeed, future versions of such technology will not only operate in secret; they will also be able to compare products and services across a much wider range of criteria. For example, it is not hard to imagine that in addition to album title and artist's name, future versions of BargainFinder will let consumers compare additional purchase criteria, such as shipping costs, delivery times, Better Business Bureau ratings, credit bureau ratings, etc.

Should this powerful technology be deployed -- and there's no reason why it won't be at some point in the near future -- the large record stores will face a situation in which the value of their brands will be seriously devalued almost overnight. That's not to say that brands will become irrelevant. But it does strongly suggest that for certain goods, brands will become a secondary factor in many purchase decisions.

The suspects most likely to fall prey to intelligent agents are so-called "known goods." These are well-known products and services that customers can typically buy sight unseen because they have a high degree of confidence that they know what they are getting. Examples of known goods are books, albums, wines and auto parts.

For the businesses selling known goods on the Internet, it is inevitable that intelligent agents will create a highly intense competitive environment requiring the devotion of incremental investment dollars to operational improvements, not branding. Of course, having a brand won't hurt, but price, product selection, fulfillment, and customer service will come to play more important roles in purchase decisions than brands.

Impact on Financial Services

How much will the development of this intelligent agent technology impact the financial services industry? Quite a bit.

At the outset, financial services firms have at least one thing going for them: customers must have some degree of trust in the provider before they will purchase a product. After all, who is going to trust their life savings to a firm that they have never heard of? Therefore, because trust is an essential element of most financial services sales, brands will likely continue to play a role in customer selections.

However, this does not mean that financial services firms will be able to completely escape the impact of intelligent agents. Quite to the contrary. The financial services industry is perhaps one of the most fertile grounds for the application of intelligent agent and other demand side technology, thanks to the fact that almost all financial services firms sell the exact same set of highly comparable products. You can dress it up all kinds of ways, but at its heart a 3-month CD is still a 3-month CD, no matter who is selling it. About the only real difference between competing products is, unfortunately, price.

It is in such situations where intelligent agents excel. Mindful of this, some of the most savvy technology firms have already begun to build potentially powerful intelligent agent sites on the Internet. Intuit's Quicken.com and Microsoft's Investor are perhaps the best known examples, but America On-Line's Personal Finance Center and Yahoo!'s Yahoo! Finance are also potential contenders. These sites plan to use the power of the Internet along with demand side technologies to create powerful intelligent agents that help consumers purchase the financial services products they want at the best possible price.

The one site that is perhaps furthest along with this vision is Intuit's Quicken.com, which has applied demand side technology to three specific product groups: mutual funds, insurance, and mortgages. For its mutual fund service, Intuit can search through its database of thousands of mutual funds and find selections meeting a detailed list of investment criteria specified by a customer. For insurance products, Intuit educates consumers about insurance, helps them apply for policies and then enables them to make purchases from a group of preferred providers. Intuit also recently launched a similar effort in the mortgage arena, where it helps educate consumers about the home buying process, walks them through the mortgage application process, and then provides a list of potential mortgage originators to choose from.

In all three cases, when it comes time to purchase a product, the customer can choose from several financial services providers, each of which offers largely the same product. As it happens, the only readily apparent differentiation between the offers is price.

While the natural inclination of most financial services firms is to avoid such arrangements, the reality is that many firms fear that if they do not participate, their competitors will. In essence, financial services firms face the same dilemma besetting the record stores: they are damned if they do participate and damned if they don't.

This Catch-22 situation dictates that, like it or not, financial service firms will have to learn to live with intelligent agents. They will have to focus foremost on cost and service when it comes to selling, for while brands will remain important, they will only serve to guide consumers to a handful of largely comparable competitors.

A Way Out?

There is another way to approach the problem. Rather than simply submitting to becoming commodity suppliers to intelligent agent sites, financial services firms can embrace this business model and attempt to create their own intelligent agent sites.

While this sounds like a great option, the chief handicap preventing most financial service firms from embracing this vision is that by definition the intelligent agent role forces a financial services firm to focus on retailing and distribution at the expense of manufacturing. After all, what kind of service would a firm provide if its agent technology searched through only its own product offerings?

Thus there is a way out, but it requires firms to essentially abandon product manufacturing operations and whole-heartedly embrace the role of retailer. They must be as eager to offer competing products as they are to offer internally manufactured product. While in theory it should not be that difficult to separate the manufacturing and distribution arms of most financial service organizations, in reality, it is the rare firm that will be able to manage the huge operational and organizational issues created by such a fracture.

In any case, those companies that continue to treat electronic commerce as merely an extension of existing commercial mediums are in for a rude surprise. With the rise of demand side technologies, it appears that EC will not only devalue the brands which many organizations so jealously guard, but will ultimately force financial service firms to seriously contemplate the division of their operations into separate manufacturing and distribution arms.

Adapting to these changes will no doubt be a difficult undertaking. But then again, no one ever said that EC was going to be easy.

Mr. Burnham is a senior analyst for electronic commerce at Piper Jaffray.

Copyright © 2003 by Banking Strategies, published by BAI.

back to top