Traditional and IS-Enabled Customer Acquisition

on the Internet

Choi J.; Bell D.R.; Lodish L.M.; Management science v.58 no.4 , pp.754-769 , 2012

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20081351 Fahad 20123373 신정연

• Why Wal-Mart didn’t have to worry about the online mall (e.g. Amazon) 5 years ago.

• Today, however, half of Wal-Mart customers say they’ve shopped at both merchants.

• Because the discounter’s traditional customers are getting more tech-savvy.

• In last fiscal year, Amazon posted 41% revenue growth vs 8% at Wal-Mart.

• So, Wal-Mart has increased its investment in its online business.

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Introduction (Case)

Basic concept

• Customer benefits from using online retailers include – Lower prices – Greater convenience

• Convenience is determined by – Time distance: Shipping time proximity of an

Internet purchase to a customer – Travel distance: physical travel distance from the

customer’s location to the nearest offline stores

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Basic concept

• Target customer density – Interdependency among target customers

induced through density creates a synergistic effect

– generates offline & online shopping demand – amplifies customer’s propensity to communicate

or observe each other’s behavior → additional effect on offline and online WOM

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Spatiotemporal evolution of Netgrocer.com buyers in Pennsylvania

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Basic concept

• What is WOM(Word of mouth)? – Oral or written form of promotion in which

satisfied customers tell other people how much they like a business, product, service, or event.

• Advantages of WOM – Effectiveness of recommendation – Big effect with low price – Encourages better products and services – Strengthen brand image

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Basic concept

• WOM is – 7 times as effective as

magazine advertising – Twice as effective as

radio advertising – Engendered by “benefit matching”

• Benefit matching: the recipient of a WOM recommendation experiences a positive fit with the information conveyed and the product or service recommended.

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Data and Measures

• Zip Code-level Cumulative numbers of new buyers at Childcorp.com – Childcorp.com is leading internet retailer selling a

large selection of children’s necessities – ask shoppers from childcorp.com “How did you

hear about our website?”

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Data and Measures

– Answers are classified into the four mutually exclusive categories

• Offline WOM: personal referrals from acquaintances and accidental referrals from unacquainted people in local regions

• Online WOM: referrals through online message boards, blogs and online communities

• Online search: paid and organic keyword search from search engines

• Magazine advertising: ads in an affiliated magazine targeted at the customer group

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Data and Measures

– Model zip code-level counts of new buyers acquired through each of the four processes

– Why zip code-level? • Practical in terms of data requirements and

managerially useful as many retailers collect sales information at the zip code level

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Data and Measures

• Focal variables: – Target customer density – Location-based convenience benefits

• Control variables: – Online price benefit – Magazine circulation – High-speed internet access – Geodemographic characteristics

• Spatial clustering of zip codes

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< Summary statistics for model covariates > 12

Empirical model

• 𝑦𝑘,𝑧 𝑚 ~𝑃𝑃𝑃𝑃𝑃𝑃𝑃(λ𝑘,𝑧 𝑚 ) • 𝑦𝑘,𝑧 𝑚 : the number of new buyers

acquired by process k in zip code z in regional cluster m

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Empirical model • λ𝑘,𝑧(𝑚)is modeled as a function of

– target customer density – location-based benefits – the number of target customers – a set of control variables that capture observed

heterogeneity – unobserved baseline by regional cluster – zip code-level measurement error

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< Parameter estimates from the model >

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Empirical findings • Target customer density

– Target customer density has positive and

significant effect on total new buyer acquisitions and on all four acquisition modes.

– The effect of target customer density is large for WOM acquisition compared to independent acquisitions.

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Variable Offline WOM

Online WOM

Online search

Magazine ads

Total buyers

𝜑 (Target customer density)

0.071 0.064 0.034 0.033 0.048

Empirical findings

– As the firm penetrates locations with a higher target density, WOM will be the most effective acquisition mode.

– Conversely, as the firm penetrates into rather sparse areas of lower target density, online search and magazine advertising acquisitions will be more effective.

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Empirical findings • Location-based convenience benefits and

Offline vs Online WOM acquisitions – Fast shipping has an positive and significant

effect on online demand. – Fast shipping is more effective in generating new

buyers through offline WOM than online WOM.

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Time distance

Offline WOM

Online WOM

Total buyers

1-day 1.189 0.733 0.889

2-day 0.555 0.308 0.431

3-day 0.326 0.218 0.290

Empirical findings

– Offline WOM acquisitions are more sensitive to offline travel distance.

– The greater the expected distance a shopper in a given location must travel to an offline store, the greater the online demand.

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Travel distance

Offline WOM

Online WOM

Total buyers

1-day -0.076 -0.044 -0.074

2-day 0.268 0.179 0.230

3-day 0.126 0.073 0.098

Empirical findings

• Control variables – The effect of saving on sales tax

• Positive and statistically significant for WOM buyers and for search buyers

• But, no effect on acquisitions through magazine advertising

– Magazine circulation • Increases in buyers via online search and

magazine advertising

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Empirical findings

• Control variables – Geodemographic control variables

• Online demand is higher in zip codes with higher population growth rates, more college educated and wealthy individuals, etc.

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Empirical findings

• New managerial insights – IS-enabled methods of acquisition are

important in the new Internet retail economy, but traditional methods remain vital in a complementary manner.

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Conclusion

• Acquisitions in general and WOM acquisitions in particular benefit from physical proximity among target customers.

• Location-based benefits enhance offline WOM acquisitions more than they enhance online WOM acquisitions.

• Acquisition modes are complementary and gains from geotargeting are possible.

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References • Choi, J., S. K. Hui, D. R. Bell 2010. Spatio-temporal analysis of

imitation behavior across new buyers at online grocery retailer. J. Marketing Res. 47(1) 75-89.

• Anderson, E. T., N. M. Fong, D. I. Simester, C. E. Tucker. 2010 How sales taxes affect customer and firm behavior: The role of search on the Internet. J. Marketing Res. 47(2) 229-239

• http://en.wikipedia.org/wiki/Word-of-mouth_marketing • http://www.ehow.com/info_8430120_advantages-wordofmouth-

marketing.html • http://www.businessweek.com/articles/2012-03-29/why-wal-mart-

is-worried-about-amazon

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