Marketers must grasp the Net or face oblivion

Back in the dark ages of Internet time, about a year ago, it was widely assumed that the high cost of telephone calls in the UK would stifle the growth of the Internet compared to the US, where local calls are free. Now we know that Internet service providers’ ability to cream off a slice of users’ telephone costs is sending the UK Internet market ballistic.

Starting with Dixons Freeserve and followed by more free access offers from Tesco, Toys R Us and BT (and many more, no doubt), the Internet is reaching consumer critical mass at an unprecedented, break-neck speed. Dixons alone claims 1 million users. Tesco and BT aren’t in business to be niche players. Already, 15 per cent of BT’s local telephone call revenues come from Internet use.

So the Internet is real already. But a real what?

The biggest, and by a long chalk the most fundamental, effect of the Internet is that it revolutionises transaction and interaction costs – the costs of “the searching, co-ordinating and monitoring that people and companies do when they exchange goods, services or ideas”, as McKinsey put it in a research project two years ago.

That sounds mindnumbingly dull. But consider the numbers. McKinsey estimates that interaction costs account for over a third of all economic activity in advanced industrial countries, and for more than 50 per cent of all labour costs. And, it says, today’s unprecedented changes in these economics of interaction are precipitating “an upheaval of equal proportions” to the industrial revolution.

One of the first areas to feel this upheaval is sales, marketing and distribution. These now typically account for 30 per cent or more of the final cost of the product or service concerned, and are ripe for re-engineering. Another recent McKinsey study, for example, suggests that early adopters of e-commerce can shave ten-20 per cent from their total costs (and therefore, potentially, their prices).

Take the extreme, noddy example of the CD. Why spend a fortune pressing, packing, packaging, transporting, storing it (in expensive prime retail sites), and selling it (paying expensive staff to transact the business for you in shops), when you can shortcircuit the entire caboodle by downloading the music over the Internet, and getting the customer to take on most of the administration (such as filling in credit card details) himself?

Similar interaction cost savings also apply to the real world of material things – for example, using the Internet to share stock information to eliminate waste from supply chains so that the right goods get to the right places at the right time in the right condition. Or obviating the need to raise orders, invoices, statements and so on, by sharing data electronically. Sexy it isn’t. Big money, it is. Used properly, it means big price differences, and big marketing advantage.

But Internet critical mass doesn’t stop at changing costs within existing business structures. It also changes these structures.

One effect is the breakdown of traditional industrial divisions of labour. When BT sets up a ClickFree site and puts alliance partner ValueDirect on that site, it gets a commission kick-back from every electrical item its alliance partner sells. A poke in the eye for the likes of Dixons, of course. But it makes you wonder what sort of beast BT is, in this context. Media owner? Retailer? Media retailer?

The Internet also threatens to upset traditional relations between buyers and sellers. Another noddy example: a specialist golf Web site gets all its enthusiasts together and says: “Let’s form a buying club. Let’s bypass the retailer, go directly to our favourite specialist suppliers, and get a massive discount.”

As McKinsey consultant Kenneth Berryman remarks, in the context of ten-20 per cent cost cuts, “a battle between buyers, sellers and intermediaries to capture this value seems inevitable”. Three types of market are emerging, he adds: “Those controlled by sellers, those controlled by buyers, and those controlled by neutral third parties.” And a key challenge for sellers is to “co-opt or prevent the formation of buyer-controlled markets capable of driving down margins”. Which is a whole new marketing ball game.

Meanwhile, the Internet also blurs internal functional boundaries. A good Website will do the following things: advertising, sending selling messages; PR, making press releases available, talking about the company, providing answers to frequently asked questions; provide information to investors, such as results and corporate statements; publish a product catalogue; take orders from customers choosing from that catalogue; process payments, taking credit card details, for example; deliver goods (if they are in digital form); receive messages, through an e-mail “get in touch” facility; handle customer service queries and issues; entertain and amuse; organise communities, chat groups, events.

In other words, it combines the functions of advertising, PR, investor relations, community relations, order processing, sales, logistics and distribution, customer service and more. And that’s not counting business-to-business specific applications such as publishing product specifications, organising online bids and auctions and organising supply chains.

Two practical issues follow from this analysis. Who, within the organisation is best charged with making sure all these Web-based processes happen as they should? And how do we ensure all these Web interactions mesh seamlessly with traditional ones – face-to-face customer service, phone contact, invoices and letters, and so on.

But the strategic issue is even more challenging. Precisely because this vast array of once-separate processes all funnel into one Website, as IBM board member and Lotus president Jeff Papows comments in his excellent new book Enterprise.Com: “The time will come – sooner rather than later when an enterprise’s primary connection to the outside world will be its Web- site and its collaborative and messaging-reliant extensions.”

Which means the Internet is not just another media channel, but the medium through which increasingly, the lifeblood of the business passes. This transforms the role of marketing – and marketers – who must rise to the challenge of new industrial divisions of labour, new types of market, and the blurring of functional divisions.

After all, if marketers are not there to manage “the enterprise’s connections to the outside world” to best effect, then what are they for?

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