How Does Electronic Commerce Add Value to the Bottom-Line?

Studies have found that heterogeneity in customer purchasing characteristics leads to important profit implications therefore estimating profitability at the transaction level is important.

Although there is useful research that focuses on customer profitability analysis (CPA) it can be argued that behaviour and subsequent profitability may be influenced directly by the transaction. The estimation of customer lifetime value (LTV) is fuzzy and seems to be based on a deterministic view of customer transactional history excluding values relating to ecommerce opportunities or social networking.

An offer on the internet or via email may influence the customers intention to purchase and transaction profitability (TP). The sale of one travel product may influence a chain of others which in turn may influence customer propensity to purchase incremental products. For example conference delegates whose room and board is being paid for by the company will spend more on extras that others. Alternatively when they book to stay with their family on a leisure trip, the ratio between spend and cost may be different. A customer taking advantage of an exceptional low cost airline offer may spend more on accommodation and thus generate more profit at the hotel level.

A return to travel providers controlling the prices of their products has meant that intermediaries are only viable where they add value to the transaction but the impact of this business on TP is unclear. Price is the product attribute which influences consumers to include a product in their evoked set. This is the first part of the selection process where thousands of travel products are quickly evaluated for further research. The evoked set represents a small number of deals which consumers consider worth further investigating before deciding what and where to purchase. Thus being part of the evoked set increases the sales opportunity significantly.

As rate parity (where price is the same on all channels) has been seen to increase consumer trust, previous studies highlighted the cost advantage of direct online sales and encouraged hotels to bypass intermediaries (disintermediation). However, although the Internet has enabled e-commerce and provided small and medium sized (SME) businesses with the potential to sell their products on a level playing field with multi-national companies, SME do not have the resources to purchase the tools required to develop highly effective, direct, online selling strategies neither do they have opportunities to generate a return of investment due to the more limited range of sales possible.

Social networking has allowed the consumer voice to be more widely heard and positive online comments have become a significant lever to move a product from evoked set to being purchased. This type of customer online activity does not generate cost and can place an SME in a more advantageous position without using additional (limited) resources.

A new approach to evaluating transaction profitability is required in order to recognise the true contribution of information and communication technology to the bottomline. I will be researching this area in the next few months. If you would like to be involved in this study, do drop me an email soon.