Wharton Professor David Bell at a WCNY Speaker Series Event
What you do in the virtual world — how you search for information, what you shop for, what you read — is influenced by where you live. This is one of the interesting take-aways from Wharton Marketing Professor David Bell’s new book, Location Is (Still) Everything.
As part of the Wharton Club of New York Speaker Series, on September 18, David Bell, discussed his book with about 40 alumni. “It’s not about the location of your physical store, but the location of your customers relative to the options they have,” Bell said. “There are still three things that matter in retail: ‘location, location and location.’ You can’t treat online and real worlds separately.”
Bell asked audience members if they knew why Jeff Bezos chose books for his online launch of Amazon in 1994. What did they think is the No. 1 category sold in catalogs? It was apparel. One might think that catalogs are like the Internet, so why not take what does well there and throw it online? Books as a category was No. 25 in catalog sales. The reason that Bezos didn’t choose clothes was that he realized that clothes have nondigital attributes, meaning customers have to touch, feel and sample them. Bezos wanted to sell things that had only digital attributes, meaning everything about the items can be communicated in this new medium. So if one buys a book online, it won’t be a different topic; it won’t be by a different author; and it won’t be shorter or longer.
Bell spoke a lot about how the Internet removes friction, which he defined as impediments to getting what is wanted. Bell who hails from New Zealand explained, “Imagine it is 1987, and you want to watch the Rugby World Cup finals.
What is the process by which I search for the best price for a big-screen television? You get in your car, drive across town and discover the store’s price is $1,000. What is the next decision now that you have sunk costs? You might think, if I drive 10 minutes to a second store, I might get it for $900. So you do this kind of expected costs versus benefit. There’s a fellow named George Joseph Stigler who won the Nobel Prize for computing the mathematical formula for the optimal amount of search. The Internet comes along, and removes that friction with applications like Milo.com developed by Wharton undergrad, Jack Abraham. Not only search friction, but also the frictions of standing in line, the store being open only 12 hours per day and others.”
Tom Molar, husband of Kea Molnar, WG’11, asked, “Has anyone calculated the consumer waste of irrational purchasing, encouraged by the lack of friction? If there is a certain amount of friction, you have to think before you buy. Now you don’t have to think. So has anyone looked at the waste to you or consumers in general from taking too many Uber rides, because you don’t see the price, or grab that product online because it’s so easy to buy?”
Bell responded, “That’s a great question. A fellow professor wrote an essay, Always Leave Home Without It — the idea is that if you don’t have a credit card with you, then you’ll be less likely to order dessert, or purchase a larger model of any item.
“Another professor at UPenn goes on CNN at Christmas, saying, ‘Don’t buy anybody gifts.’ His theory is that, when Uncle John pays $500 for an iPad for his nephew who values it only at $400, dead weight is created. So he extrapolated that several billion dollars are wasted each year. Then he asks, ‘Who in the family gives the optimal Christmas present?’ Yes, the grandmother who gives a little envelope with cash.”
Nora Ostrovskaya, WG’99, asked about friction created online, when customers can’t obtain their purchases immediately, they might have to return it, or it may not work properly. Bell agreed, saying that’s why e-commerce is only 8% of commerce in the U.S. and 10% in the U.K.
Bell’s insights about the influence of location on online purchasing decisions are encapsulated in an acronym GRAVITY. “You need to have an acronym for a popular book,” he explained. Each letter here denotes a factor that relates the online and offline worlds, and influences customers’ online behavior:
Geography: Where your customers live is crucial in understanding their online behavior. Geography isn’t something random — it has a specific structure. How cities develop and how people with similar demographic information and interests share the same geography is a matter of importance. Understanding this helps in establishing a good foundation toward predicting customers’ online decisions.
Resistance: This notion talks about how the Internet has helped consumers overcome certain frictions, such as
geographical friction (there exists a physical distance between the consumer and the product). For e-commerce companies, geographical friction is more than just prolonged shipping time or delayed delivery. It is possible that customers want to buy online products originating only from neighboring countries, as adjusting to their language and demography is easier, and their tastes are also somewhat similar.
Adjacency: Word of mouth is the best marketing medium. Consumer base grows in pockets, and what people are saying about your product impacts this growth. When a friend talks about a product, this is more likely to influence your customer than any online search. And if an influential customer is talking about your offerings, the adjacency effect gets doubled.
Vicinity: The Internet brings together people from diverse locations but similar interests into the same online vicinity. Bell explained this through the “spatial long tail” concept. Initially, 80% of product acceptance comes from geographically proximate places, while the remaining 20% comes from the vicinity. Later, this ratio changes to 50-50. So, e-commerce may start in any location, but gradually, it will gain traction from people with shared preferences, even if they are spatially diverse.
Isolation: Isolation occurs in geographies with limited offline stores or with stores that are underserving. This encourages people to shop online. For example, Jeff Bezos’ first Amazon customer lived 50 miles away from a physical bookstore.
Topography: Here, Bell highlighted the coexistence of the online and offline worlds. Thanks to this ever-evolving landscape, the two worlds are merging together. The tremendous success of social media is an apt example that explains how we are sharing our real-world experiences with the virtual world — and so are smartphones. Today, if we own a smartphone, we can carry the virtual anywhere with us. It is this connection between the online and offline worlds that e-commerce brands can leverage.
You: Here, Bell dropped the ball in his readers’ court and let them decide how they will leverage the above principles to grow their e-commerce brands.
Bell concluded, “When you go into the online space, you have to remember that people still live and make choices in the real world.