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| Chapter 1.4. |
| Barriers and Opportunities for Growth in Business-to-Consumer Electronic Commerce |
| Brenda J. Cude |
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About the author: Cude (bcude@arches.uga.edu) is Professor and Head of the Department of Housing and Consumer Economics, The University of Georgia, Athens, GA. |
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Abstract |
| Introduction |
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Sales via electronic commerce have grown substantially in recent years and experts project continued growth in the future (U.S. Department of Commerce, 2000) http://www.esa.doc.gov/de2k2.htm. However, the vast majority of online sales are business-to-business, not business-to-consumer. According to a summary prepared by The Industry Standard, forecasts for 2003 of the dollar value of transactions conducted electronically between U.S. businesses range from $634 billion to $2.8 trillion. This wide disparity is due to a combination of differences in methodologies and definitions (Lawrence, 2000). In March 2000, the U.S. Bureau of the Census (http://www.census.gov/mrts/www/current.html) released the first official measure of e-retail, an important subset of business-to-consumer e-commerce. The Bureau found that during the second quarter of 2001, online sales by retail establishments totaled $7.5 billion, or 0.9 percent of all retail sales (U.S. Bureau of the Census, 2001). |
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Figure 1: Estimated Quarterly U.S. Retail E-commerce Sales (4th Quarter 99-3rd Quarter 01) Billions of dollars |
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This chapter answers several questions. Which consumers are shopping online and what are they buying? What factors may inhibit the growth of business-to-consumer e-commerce in the future and how might they be mitigated? |
| The Current Status of Business-to-Consumer E-Commerce | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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To buy online, consumers must be online. Estimates of the proportion of the U.S. population that is online vary, but by most accounts more than 50% of the U.S. population aged 16 and older who have access to the Internet either at home or at work go online every day (Pew Internet and American Life Project Survey, 2000). http://www.pewinternet.org/reports/chart.asp?img=6_daily_activities.jpg |
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On average, as shown in Table 1, Web users are online six times a week, visiting 18 unique sites in just under three and one-half hours. Individual online sessions average just over 30 minutes and consumers spend less than a minute per Web page (Nielsen/NetRatings, 2001). |
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Table 1 |
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Source: Nielsen/NetRatings Audience Measurement Service |
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Various reports indicate that the U.S. online population increasingly looks more like the country as a whole (McCarthy, 2001; Thomas, 2000; Weiss, 2001):
And, U.S. consumers are not the only ones online. For example, a greater proportion of Korean (67%) and Italian consumers (65%) are online than American consumers (Fetto, 2000). More than 60% of all U.S. adults with Internet access have made an online purchase (Pastore, 2001b). Yet there are differences among consumers by gender, age, race, and socioeconomic status. Men are more likely than women to go online to buy stocks, compare products, buy products, and bid at auctions. Women are more likely to send e-mail, play games, get coupons, and get information on health, jobs, and religion (Weiss, 2001). Younger consumers are more likely than older ones to buy online; only 9% of consumers age 55 to 64 have made personal purchases online (McCarthy, 2001). Whites are still more likely to buy online than minorities but minorities are equally likely to have banked online, made a travel reservation, and bought and sold stocks. This difference may not, however, be a racial one. Instead it may reflect a difference between new and experienced users; 36% of African-Americans are online today compared to only 23% in 1998 (Thomas, 2000). Consumers who are time-pressured and have higher incomes and educations are more likely to see the Web as a place to gather information or to buy big-ticket items. Consumers with lower incomes and educations more often use the Internet for entertainment (Weiss, 2001). Consumers who are more active buyers in the brick-and-mortar marketplace are also more likely to buy online. For example, 36% of online consumers say they have been to a brick-and-mortar bookstore in the last month, compared to only 16% of off-line consumers (Schlosberg, 2001). What are U.S. consumers buying online? As shown in Table 2, the greatest proportion of online purchases in the fourth quarter of 2001 were books, CDs, clothing, toys or games, and computer software (Pastore, 2001a). |
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Table 2 |
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Table 3, which identifies the top e-tailers in March 2001, reflects the popularity of books, CDs, clothing, and travel online purchases. Two product categories, travel and clothing and apparel, accounted for more than one-half of the growth in online purchases between Spring 2000 and 2001 (Pastore, 2001b). |
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Table 3 |
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However, American consumers' purchases are not necessarily typical. Only 4% of U.S. shoppers buy food online compared to 32% of shoppers in Hong Kong and 17% in Australia (Fetto, 2000). In the U.S., the grocery industry is considered "a tremendous opportunity ... but also a substantial challenge." (BCG, 2001). U.S. consumers often go online for purchase-related information but complete their purchases offline. For example, 28% of consumers say they researched a travel reservation online but completed it offline. Nineteen percent researched a car purchase online and 18% researched a clothing purchase online but completed the transactions offline (Mathews, 1999). More than 60% of potential online consumer shopping is abandoned before completed (Pastore, 2001b), usually either to compare shopping costs or to look for a lower price on the product itself (Crockett, 2001). Online buying also follows a different time schedule than offline buying. While brick-and- mortar sales peak in November, online sales are year-round. Brick-and-mortar sales are slow during the week and peak on Saturdays, while online sales peak on Wednesdays. And, 58% of Americans visit retail sites at work compared to 52% who shop from home (Weiss, 2001). Are online consumers becoming socially isolated? Contrary to popular belief, recent studies reveal that Americans who use the Internet visit friends and family just as often as those who do not use the Internet (Weiss, 2001). |
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| Factors That Inhibit the Growth of Business-to-Consumer E-Commerce | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Several factors have been described as inhibiting the potential growth of business-to-consumer e-commerce. Four of the major ones are discussed here: access, taxes, fraud, and privacy. Access Increasingly, the issue of access to the Internet is not about which consumers have computers and online connections but the quality of their hardware and service. Nationally, more than one-half of all U.S. households have a computer and more than 80% of those households have access to the Internet (U.S. GAO, 2001). However, the vast majority of Internet users (88% by one estimate) have a "narrowband" connection to the Internet -- a connection that is low-speed and low-capacity. Broadband users are more likely to have household incomes of at least $75,000 and broadband service is more prevalent in large metropolitan areas and wealthy areas (U.S. GAO, 2001). Income is likely to continue to have a critical influence on access. While recent years have seen steep annual declines in computer costs (U.S. Department of Commerce, 2000), the average monthly cost for telecommunication subscriptions was $122 in 2000 and rising (Lieberman, 2001). Adding $18 monthly for a narrowband Internet service (or $40 for a high-speed connection) to a typical consumer's other monthly subscriptions (basic cable or satellite, $36; single-line telephone, $14; cell phone, $32) represents a significant cost burden for many lower- and middle-income consumers. However, commercial deployment of the Internet is a relatively recent event. Internet service providers have experimented with a variety of plans, including some that do not charge consumers. As the U.S. GAO (2001, p. 7) concluded in a recent report, "The challenge for policymakers over the long-run will be to determine whether any continuing disparities in the availability and use of the Internet among different groups of Americans threaten to deepen the socioeconomic divisions within our society." Time costs also influence consumers' use of e-commerce. One frustration for consumers is the time involved to retrieve packages when no one is at home. Fewer than 25% of business-to-consumer shipments fit in mailboxes and the number of deliveries is expected to double by the year 2003 (Borrus, 2000; Hirschman, 2000). Several systems are being tested to allow secure delivery of bulky packages when no one is at home. But until affordable convenient solutions are identified, delivery dilemmas will continue to frustrate consumers. |
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| Taxes
Whether and how to tax Internet sales has been a subject of much debate. Many online vendors currently choose not to collect sales taxes because of the many different rates charged by the over 7,000 state and local tax jurisdictions. Retailers are not required to collect sales taxes unless they have a physical presence (or nexus) in a state. In fact, some retailers have set up a separate business for their online enterprise to avoid collecting sales taxes (Geewax, 2000). If the vendor does not collect sales tax the consumer is expected to report the purchase and pay a "use" tax in their home state. Much of the interest in the sales tax issue is generated by lost revenues. The GAO estimates that states would lose about $2.5 billion in 2003 if Internet sales taxes go uncollected (Squitieri, 2001). The Institute for State Studies (http://www.statestudies.org/states.html) provides estimates by state; larger states such as New York, California, and Texas, are projected to lose the most. Some experts argue, however, that estimates of lost tax revenues are usually high because they do not take into account various offsetting costs of collecting taxes, such as enforcement (Goolsbee & Zittrain, 2000). And, according to one analysis (Goolsbee, 1998), applying sales tax to the Internet would reduce the number of online shoppers by 24%. A proposed legislative solution is to require the states to agree to one national rate or one rate per state and to agree to uniform definitions. For example, 13 states do not tax clothing. In six of these states a handkerchief is an article of clothing and is not taxable; in six other states it is not clothing and is taxable (the thirteenth state leaves the issue open) (Phillips, 2001). With uniform definitions and one rate per state (or a national sales tax rate), businesses would be required to collect sales taxes on almost all Internet (and catalog) purchases (Squitieri, 2001). |
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| The 33 states (shown in the adjacent figure) participating in the Streamlined Sales Tax Project are working to create uniform definitions of what is taxable and what is not and to simplify sales tax rates by having all state and local governments use common tax bases. Each of the 33 participating states have enacted enabling legislation or their governor has issued an executive order or similar authorization ("Streamlined Sales Tax Project," 2001). In the meantime, in Fall 2001 Congress extended until November 2003 its moratorium (Internet Tax Nondiscrimination Act, PL 107-75) on Internet access and multiple and discriminatory Internet taxes. |  |
| Cyberfraud
How can consumers know that there is a legitimate business behind the web sites they see? Can they be certain that regulators are up to the task of enforcing laws in online transactions? Are existing laws adequate to protect consumers when they do business online, not only in the U.S. but also in a global marketplace (FTC, 1998)? In the first six months of 1999, the National Consumers League Internet hotline received complaints that reflected losses of $2 million from online fraud (Castelan, 1999-2000). One estimate of the average loss per person to online fraud in 2000 is $410 (Emling, 2001). State and federal agencies have stepped up efforts to identify and combat Internet fraud and to educate consumers to protect themselves. For example, the Federal Trade Commission regularly conducts "Surf Days" in which staff and sometimes volunteers scan the Web to identify Web sites with dubious claims. The Commission also created Consumer Sentinel, the largest database of consumer fraud complaints in North America. Law enforcement officials in the U.S. and Canada have free access to the data through a secure, searchable Web site, and can now easily coordinate enforcement efforts aimed at the most common frauds (FTC, 1998). Privacy In a 2001 poll of 2,365 adults nationwide, consumers were asked, "How concerned are you about threats to your personal privacy on the Internet?" Twenty-four percent of respondents said they were very concerned and 49% were somewhat concerned (Simpson, 2001). This result is typical; numerous surveys in recent years have found high levels of concern among consumers about online privacy. However, surveys also indicate that consumers do not always adopt practices that are consistent with their expressed concerns. In the same poll as mentioned above, only 4% of consumers said they always read the privacy policies of Web sites; 16% said they frequently do. Only 5% always have concerns about privacy that stop them from buying online; 9% frequently do (Simpson, 2001). In a 2000 poll of 2,117 adults, consumers indicated their greatest concern was "firms or people you don't know getting personal information"; 84% of respondents expressed this concern. Yet only 27% said they would never give personal details online (Miller, 2000). Only seven in 1,000 consumers set their browser to block cookies (Kessler, 2000); 24% have given false information to protect privacy (Miller, 2000). As of this writing, a legislative solution to consumers' privacy concerns appears unlikely. In the meantime, the industry has responded to consumer concerns in two ways. First, there are several self-regulation programs. TRUSTe is perhaps the best known; others include the Better Business Bureau's BBB Online, PricewaterhouseCooper's BetterWeb, and the American Institute of Certified Public Accountant's CPA WebTrust. Each requires sites that display the seal of the program to keep promises to give consumers notice about how their information is used, control of their information, enough security to prevent leaks, and a forum to settle disputes. However, some consumer advocates are skeptical of the value of the programs since they are industry-financed and none has ever revoked a seal for failure to comply (Kessler, 2000). Microsoft has proposed P3P (Platform for Privacy Preferences) as a solution to consumers' privacy concerns. Simply, implementation of P3P would require:
P3P would then block one's personal computer from sending personal information to a Web site if the site's policy does not match the consumer's personal privacy policy preferences (Jesdanun, 2001; Simpson, 2001). Some are skeptical about how well social and business practices can be translated into machine-based decisions and others wonder how likely widespread industry acceptance will be. |
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| The Internet As A Perfect Consumer Market | |
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Economists typically describe perfect competition as including many sellers who can freely enter and exit the market with limited costs. In this ideal market, buyers have complete information. The Internet has the potential, at least in theory, to become the perfect market place. Pitt, Berthon, Zinkhan, and Watson (2001) have identified several reasons that consumers are often impotent in the brick-and-mortar market place. These include:
The Internet has the potential to overcome many of these situations. Clearly the Internet provides consumers access to a vast array of information. The question is how much of that information is good, reliable, and unbiased. For example, shopping agents known as shopbots search the Web and compare all of the prices a consumer could possibly pay for an item. Travelocity and MySimon are relatively well known shopbots; a comprehensive list is posted at Botspot.com (http://www.botspot.com/). However, shopbots have biases which may or may not be known to consumers. Shopbots (Baig, 1999; Quick, 1998; Weise, 2000; White, 2000):
Even with their limitations, shopbots offer enormous potential to consumers to shift the balance of power in the marketplace by increasing consumers' knowledge. However, while search engines are widely used, shopbots are not. Some think that consumer reluctance is based largely on the fact that there is no counterpart in the brick-and-mortar marketplace; shopbots are simply too unfamiliar (White, 2000). However, in other ways the Internet is realizing its potential to shift the balance of power more in favor of consumers. Web sites such as untied.com and walmartsucks.com allows consumers to have a real impact on a company. Untied.com was created by a disgruntled United passenger; the site is "the place that allows frustrated former United passengers a chance to speak out" (www.untied.com). Visitors to the site can post complaints, responses received from United to complaints, and learn about other consumers' experiences with the company. A site such as passengerrights.com makes it much easier to consumers to register complaints, not only with a merchant but also with the appropriate government agencies. This site lets consumers research their rights related to travel and guides them through the complaint process. It removes many of the barriers that make consumers reluctant to complain in the brick-and-mortar marketplace. And sites such as Half.com (formerly deja.com) and epinions.com give consumers access to the technical expertise needed to evaluate complex and technical products and services effectively. For example, Half.com aggregates consumers' evaluations and provides the reasons for their evaluations. Armed with such information, an online consumer can thus make a much more informed purchase than is typical in the brick-and-mortar marketplace (Pitt et al., 2000). Consumers can use Gomez.com to make decisions about the quality of Web sites. Gomez.com ranks e-tailers in 32 industries including brokers, insurance marketplaces, mortgage lenders, drugstores, toy and pet supply dealers, and auto sales. Gomez gives each site a score based on their analysts' experience testing the site. Using their own experiences, the analysts have developed 30 to 50 yes or no questions that measure success in each of five categories: ease-of-use, customer confidence, on-site resources, relationship resources, and overall cost. The analysts' evaluations are entered into a computer program, which generates a score for different types of consumers (Lankford, 2001). For example, there are scores for four different types of investors: Hyper-Active Trader, Serious Investor, Life Goal Planner, and One-Stop Shopper. |
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| Opportunities for Extension | |
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While the barriers to business-to-consumer e-commerce may be significant, they are worth addressing. The Internet has the potential to create a worldwide market in which consumers have equal power with sellers. That possibility cannot be ignored. It appears that Extension still has much to do if it is to play a leadership role in educating consumers about e-commerce. While 12 states (California, Georgia, Idaho, Iowa, Kentucky, Massachusetts, Minnesota, Montana, Nebraska, North Dakota, Texas, and Wisconsin) have 4-H Computer Technology Teams that guide youth to become computer savvy, a search of state Cooperative Extension sites uncovered little educational programming aimed at adult online consumers. Iowa State University's "Technology Tips" are an excellent example of comprehensive information for Web users; topics include: Connecting to the Internet, Child Safety on the Internet, and Computer Viruses. The University of Nebraska offers a set of glossaries on Internet, Web, computer, and e-mail terminology. But the only educational materials aimed at adult online consumers discovered were the University of Illinois' "Potentials and Perils of Online Shopping," the University of Kentucky's "How Private Is Your Ride on the Internet?," and Iowa State University's "Online Shopping and Security." Online educational materials for adult consumers are needed on such topics as:
Cooperative Extension can play an important role in filling these voids. |
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