North American companies are investing heavily to establish
powerful ’cyberbrands’ on the Internet, according to online business
European companies have to act quickly or they will be priced out of the
global market. ’UK businesses have got to wake up. There is no time to
waste,’ says Peter Matthews, managing director of Nucleus Design.
His concerns are borne out by ’The Internet Retailing Report’ from
Morgan Stanley. By 2000, the company suggests a ’conservative’ usership
of 150 million people contributing retail sales worth dollars 35bn
(pounds 21m), with business-to-business sales worth dollars 70bn to
dollars 90bn (pounds 42.4bn to pounds 54.5bn). Although European usage
has grown by 222% in two years and Asia by 550%, the two regions still
only account for 22% and 6% respectively. North America accounts for
two-thirds of users.
The greater maturity of the American market has combined with a greater
willingness to make longer term investments to give US companies an
invaluable head start. ’The UK is only two years behind,’ says Matthews,
’but that’s a long way in a market developing so very rapidly.’
’The US has built up unrivalled levels of technical virtuosity in the
cybereconomy,’ agrees Michael Page, director of interactive services at
Acxiom. Security has played a major part, with help from the US State
Department, which has used the argument of state security to prevent
128-bit encryption keys - the highest level of security technology -
being exported. The Supreme Court recently reversed that decision,
allowing companies here to process online orders more rapidly and give
European consumers a greater perception of security.
’America provides an excellent test market,’ says Myer Berlow, senior
vice-president of interactive marketing at America On Line, the largest
online service in the world. ’Europeans can learn from our mistakes and
replicate our successes. But you will have to do so quickly. We have
moved on from the second stage of viewing the Net as an advertising
medium. It has reached the third stage of being a transactional
’Shopping-related activities are becoming increasingly popular online,’
says the Morgan Stanley report. ’A recent CommerceNet survey indicated
that approximately 73% of Web-using respondents spent part of their
online time searching for information about specific products or
services. Of this group, 53% went on to make an actual purchase (either
online or offline) and 15% actually made a purchase online.’
The most potent demonstration of the Internet’s business potential is
the book selling site Amazon. Launched in July 1995 from the garage of
Jeff Bezos, it achieved sales of dollars 27.9m (pounds 4.8m) in the
second quarter of this year.
It offers more than 2.5 million titles, many at substantial discounts,
thanks to its highly automated structure and low overheads. Only the
top-selling 700 titles are held in stock (where they have a turnover 20
times higher than those stocked by America’s leading conventional book
Although it exists only within the cybereconomy, Amazon’s level of brand
awareness and loyalty ’should create a barrier to entry for
competitors’, according to Morgan Stanley. In less than 30 months,
Amazon has achieved a market valuation of dollars 400m (pounds 242.4m)
and recently tied up an exclusive advertising deal with the Yahoo search
engine worth dollars 50m (pounds 30.3m) over three years.
Similar commitment is shown by US companies such as 1-800-Flowers,
Preview Travel and sharedealers Charles Schwab. Having set up the
spin-off brand Eschwab, the company is achieving an online trading
turnover of more than dollars 100bn (pounds 60.6bn).
Self-selected audience groups for individual Web sites allow precisely
targeted campaigns using many different online advertising techniques.
But advertisers wishing to reach larger groups are already witnessing an
escalation in costs to levels only US companies appear ready to
’The Internet has become a great leveller, but it also offers big
opportunities to large companies,’ says Matthews. ’Major brand owners
can cost-effectively reach global audiences, or segment their product
offers and customise them to appeal to specific audiences.
Micro-marketing on a global scale is here and now. It is possible to
present the same product or service in different ways without
duplicating the infrastructure cost.’
Charles Schwab’s rebranding strategy is just one approach to the
Internet branding dilemma faced by many prospective participants.
’Convenience and choice are critical elements in giving Internet users
reasons to buy, but cost is the most important,’ says Matthews.
’Companies are faced with the choice of using their existing brand and
cannibalising some conventional sales with cheaper online offers, or
setting up a new brand and piggybacking on existing fulfilment
’Prices may be lower but the amount of savings you make by selling
online gives the margins that other brands can only dream about,’ says
Early success will belong to areas of business, he says, where existing
distribution channels add little value to the core proposition.
’The market for goods and services that have the best potential for Web
retailing are: insurance/financial services; computer software/hardware;
travel; books; magazines; music/video; flowers/gifts and autos,’ says
Morgan Stanley. ’Specific retail categories that we believe may take
longer to develop (or may never develop) include groceries/food;
apparel; sporting goods; tools/home repair; and toys.’
’Unencumbered cherry-pickers without the baggage of a retail network
simply cannot be stopped in some sectors,’ says James Mackenzie,
associate director of Interfocus. ’Some consumers need the safety net of
a high-street brand identity, but Amazon and others have demonstrated
how brand values can be built exclusively in cyberspace.
’The critical thing is that having searched the product category they
require, the customer should recognise the brand that they will select
from the list of possible sites. Smart brand builders will make the core
proposition central to their name; a name like ’musicCDtomorrow’ can be
Financial services are a good example of the potential of
The same insurance product could be positioned as a conservative
middle-aged choice to one sector and, to another, as an in-touch
lifestyle product for 20-somethings.
IDC, the market research company, is forecasting that electronic
insurance sales will rise from nothing in 1996 to between dollars 18bn
and dollars 19bn (pounds 10.9bn and pounds 11.5bn) by the year 2000. In
another study, management consultancy Booz Allen & Hamilton also
predicts radical savings of between 58% and 71% for companies operating
online insurance services over the lifetime of a consumer. This
indicates better value for online consumers and bigger profits for
However, many European financial institutions appear to have been caught
napping by their cyber rivals.
A recent banking report by Ernst & Young estimates that transactions
costs 64p in a typical branch bank, compared with 32p by telephone, 27p
through an ATM and just 0.5p via the Net. Yet British banks appear
unprepared to exploit the cost savings or the potential for
Called to account
If banks don’t reap the rewards, others will. Jim McCormick, of First
Manhattan Consulting, says: ’Banks ought to win this business. They have
the customers, the distribution and the products. But the competition is
picking off customers.’
When the company measured profitability of retail banking customers,
profit margins averaged dollars 750 (pounds 454) for the top 20%, while
the next 10% averaged less than dollars 50 (pounds 30). These customers
are precisely the ones that the non-bank competitors are
Security First Network Bank, the first exclusively virtual bank, branded
itself from the start to address security concerns. Citibank, which has
offered online banking since 1985, now has 350,000 Direct Access users
worldwide. Chase Manhattan is up there too, emphasising free use and
convenience. None of these banks charge.
UK retail banks are still rubbing their eyes. NatWest’s Web site is
little more than an advertisement for its retail network. Barclays
offers a Barclays-brand PC banking service, but there is a pounds 30
set-up fee and a pounds 15 annual charge. The Royal Bank of Scotland
charges pounds 1.50 monthly.
Such charges are viewed with exasperation by potential early adopters,
who are good targets for trusted organisations unencumbered by the
overheads of a retail banking network. The market is ripe for firms such
as Sainsbury’s (Sainsbury’s Bank) and Tesco (Tesco Personal Finance) to
move in, along with major US institutions such as Citibank.
Equally significant are the plans that BSkyB, HSBC, Midland, BT and
Matsushita have for digital TV, launching next spring. Their service,
British Interactive Broadcasting, will offer a number of Internet
services, one of which will be home banking. The details of the service
and cost structure have yet to be finalised, but it has great
’Strong brand-name recognition should be a critical success variable,’
says Morgan Stanley. ’We expect this branding element to result in a
couple of companies in each sector dominating mind share and profits,
while the rest struggle, with varying degrees of success.’
It is difficult to guess whether the cyberbranding battle will be won by
new brands created on the Web or traditional brands moving in. Morgan
Stanley says: ’The winners will be a combination of both sets, with
success being determined by the best brand names accompanied by great
infrastructure, economies of scale and quality of experience.
’Those that don’t create a significant Web presence within two years may
have a tough go of it when they get there.’
This feature and links to the companies mentioned can be found at
Make the Net work for you
Morgan Stanley’s criteria for successful retailing on the Internet:
- Pursuing a viable market opportunity.
- Having a low-cost structure with economies of scale.
- Superior database/fulfilment/distribution capabilities.
- Knowing how to leverage technology while maintaining creativity.
- Creating a sense of community/membership among customers.
- Understanding how to increase profits as well as revenue.
- Providing a broad selection, competitive prices and great service,
plus ease of use and speedy delivery.
Cyberbrands to watch
Computer software CNET Shareware shareware.com
Computer hardware Dell Computer dell.com
Business electronics Cisco cisco.com
Brokering E*Trade etrade.com
Books Amazon amazon.com
Travel Travelocity travelocity
Cars Auto-By-Tel autobytel.com
Magazines Electronic Newsstand enews.com
Shipping Federal Express fedex.com
Clothing LL Bean llbean.com
This article was first published on Marketing