For traditional retailers, location, location, location is an all-too-familiar mantra, with stores made or broken by factors such as traffic flow, demographics and parking. But what about the brave, new and often perilous world of Internet retailing, where the physical location of a store is meaningless? How, when customers and competitors are geographically dispersed, does an online retailer's customer base evolve?
A recent study by Wharton marketing professor David R. Bell offers some intriguing answers. In his research paper, "Social Contagion and Trial on the Internet: Evidence from Online Grocery Retailing," Bell studied the effect of word-of-mouth or other "social contagion" factors on consumer willingness to try an online retailer. The study, co-authored by Wharton PhD candidate Sangyoung Song, used data provided by Netgrocer.com that spanned nearly 30,000 U.S. zip codes over the first 45 months of the online grocer's business life.
Bell's study found a significant "neighborhood effect," with a 50% increase in the base rate of consumers trying an online retailer's services once they talked about or otherwise observed its use locally. "The unique market context of the Internet retailer raises important and so far unstudied questions, especially the fundamental issue of the role existing customers play in recruiting or influencing potential customers," says Bell. "Our study addresses a new and important phenomenon: the space-time evolution of trial decisions for an online retailer, and we find that it's not the location of the store relative to the customers that's important, it's the location of the existing customer relative to potential customers."
The State of Online Retailing
The long-term prospects for online retailing are strong, industry experts say. Internet retail sales jumped 51% to $114 billion in 2003, while online retailers collectively raised operating margins to 21%, according to a new study by Forrester Research.
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