BUAD 307





04--Firm level factors affecting online sales potential

PowerPoint Narration

At the firm level, some will be better able to efficiently and effectively sell on the Internet than others.  These are some considerations:

  1. Firm reputation/credibility.  Since the customer is buying a product without the opportunity to expect it, and since the customer will need to have a certain confidence that the merchandise ordered will actually arrive, firms with stronger reputations will be more likely to receive orders.
  2. Volumes soldOne way to limit the labor costs of online sales is to automate the process as much as possible.  For example, rather than having people go around in a warehouse to pick up and assemble different parts of an order, an automatic conveyor belt that will pick up the different products of a customer’s order at different “stations” will do much of the work that the customer does in a traditional store.  The up-front investment in automation is heavy, however, and thus, this investment needs to be spread over a large number of units. As with conventional retail chains, those that buy large quantities have greater bargaining power to get prices down.  This allows for greater margins and/or greater quantities sold at prices lower than what certain competitors can match.  Firms shipping more packages can also negotiate lower shipping costs per unit.
  3. Ability to sell multiple items together.  It is useful to be able to spread the costs of packaging and shipping across a number of different items.  The more different but complementary items that an online vendor carries, the more likely it is that customer orders will tend to include a number of different items.
  4. Synergy with traditional retail store operations (“bricks-and-clicks”).  Well known retail chains—e.g., Staples, Costco, and Nordstrom’s—tend an established reputation as discussed above and are thus more likely to be trusted.  Having retail locations also makes it easier to accept returns, and the combined sales of online and brick-and-mortar outlets make for a greater bargaining power.
  5. Location for minimization of sales taxes.  Some states either do not collect sales taxes or have a small population so that sales within the state are modest.  The rules of taxation of items sold out-of-state through Internet orders are complex.  An increasing number of online merchants, including Amazon, have now agreed to collect sales taxes on shipments to California and a number of other states.  There are, however, still some online merchants that manage to avoid collecting sales tax on merchandise shipped to certain other states.  Internationally, there may also be opportunities to avoid sales and duties—sometimes legally and sometimes not. 
  6. Location for low labor and land costs.  With ready access to shippers such as UPS and Federal Express in most of the Continental U.S., there is no significant advantage in being located in a major city.  Small towns often have much lower real estate costs.  Firms can also locate in areas where wage levels tend to be lower (e.g., because of high levels of unemployment or other economic depressors).
  7. Potential for repeat sales to the same customer.  Just as in traditional brick-and-mortar sales, it is often more cost effective to sell to existing customers than constantly trying to reach new ones.  This is true online as well.  In addition, based on knowing what the customer has bought in the past, it is possible to identify other customers who have bought these same items and identify additional common purchases among these relatively similar individuals.  This process, known as collaborative filtering, is discussed below.


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