Net commerce rewrites the marketing rulebook

Traditional marketing principles are under threat as Internet businesses put consumers in control of the whole buy-and-sell relationship, says Alan Mitchell

It seems that when people are faced with a new technology they use it to solve old problems in new ways before seeing what fresh opportunities it creates. The Internet is no exception. Companies are using the Net to do all sorts of familiar things better: to target communications and gather data more effectively, cut transaction costs, recast distribution channels, and so on.

This focus on the familiar is understandable, since the opportunities are enormous. For example, last week BT revealed that it hopes to save $1bn (£620m) simply by transferring purchasing processes to the Net – and slashing the average cost of making an order from $80 (£50) to $8 (£5). And Harrods went from being a one store, one country operator to a “global” player overnight by letting customers order items like hampers over the Net from wherever they live.

British Airways meanwhile hopes to cut out middlemen travel agents (and their commission) by selling at least half of its tickets direct on its Website.

When suppliers go “direct” in this way, they not only grab extra margin for themselves, but also (potentially, at least) establish a closer relationship with their customers, thereby shift ing the balance of power between retailers and manufacturers.

Revolutionary as all this seems, it is just the beginning.

The Net is not only re-energising old businesses, it is creating entirely new ones, represented by brands whose raison d’être is to upend the status quo. What data capture and targeting, cost cutting, disintermediation and globalisation all have in common is that they increase traditional marketers’ control over the marketing process. In stark contrast, many new Net beasts will add value to their businesses, not by making existing marketing processes more efficient or effective, but by handing over the control of these processes from marketers to customers.

The first step in this process is already underway with the emergence of genuinely independent intermediaries. I say “genuinely independent” because virtually all existing intermediaries – from traditional retailers, through travel agents to so-called independent financial advisers – are not independent at all. They are either sales channels for suppliers, and controlled by them through devices such as commission, or are sellers in their own right (like retailers).

The new Net-based intermediaries, however, make their money not only by helping sellers sell to buyers, but by also helping buyers buy from sellers. They are not on either party’s “side”. Instead, their role is to connect the two more efficiently through new forms of market. Two recent examples include an electronic Covent Garden for the buying and selling of fruit and vegetables and AccessPaper.com, which aims to slash the cost of buying and selling paper – from about five per cent to 0.75 per cent of the value of the transaction – by creating an electronic forum for paper buyers to meet paper sellers.

Organisations like Bright (which launches formally soon), meanwhile, aim to create global “intellectual property” trading forums by bringing people with particular knowledge together in online communities to share ideas and – through a special e-payment mechanism – to trade information and advice. Similarly, auctioneers like e-bay and QXL are creating fresh ways for buyers to connect with sellers. Some forecasts suggest that soon over a half of all Net-based business-to-business transactions will be auction driven.

Even more intriguing are reverse auctioneers like Priceline.com, which create a forum where would-be sellers bid against each other for buyers’ custom. Inforocket.com even hopes to revolutionise information markets by letting information buyers state how much they are willing to pay for an answer to a question, whereupon information sellers bid for the business.

These new market clearing mechanisms could have a devastating effect on traditional marketers as control over pricing, whether direct or indirect, slips through their fingers. Just as companies have no control over the price of their financial stock trades, it’s possible that in tomorrow’s commercial stock exchanges they will have little control over the price of their commercial product.

So what’s the next step? To create the consumer equivalent of the pension fund, which aggregates millions of small transactions which are individually weightless but together form a single heavyweight buyer within a market. Woolwich Motorbase is one example of this bulk buying concept. It uses a fleet car buyer to source its cars, thereby undercutting traditional manufacturer controlled sales channels.

Mercata, the brainchild of Microsoft co-founder Paul Allen, is a consumer buying trade union or buying club. Its sole aim is to organise consumers into single buying units “to drive the product price down through their collective purchasing power”.

Add to these market experiments the range of new sites that aim to offer consumers more, better, comparative information about brands, products and companies, and what we have is a veritable sea change.

Traditional marketing and brand management is about control. The brand manager is the ultimate control freak, specifying every detail about what his brand offers, how it is presented, to whom, when, and so on. Indeed, as John Hagel, a McKinsey consultant advising a range of infomediary launches in the US notes, despite endless rhetoric about being consumer-focused, traditional brands are “producer centric” entities to their very core. They revolve around the producer: they exist to communicate the attributes and qualities of the producer or the product to the consumer.

In future, Hagel says, the real powerbrands will be “consumer-centric” brands: brands which express and communicate the attributes and qualities of specific groups of buyers to potential sellers – brands which give control to the buyer. If he is right, we are on the verge of a revolution in how markets operate – and therefore, how marketing works.

Even as the Net promises to help traditional brands and companies do the old things better and more cheaply, so at the same time it threatens to sideline their business models, thereby triggering a war between two utterly different lines of business evolution.

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