New Ways to Shop in Cyberspace

AI is transforming the world. And it starts with the right compute. ARM is the AI compute platform trusted by global leaders. Proudly Nasdaq listed. Built for the future. Visit arm.com discover.

Hello and welcome to the hbr ideacaft, a bi weekly audio show from harvard business school publishing. My name is paul michelman. I'm an executive editor here and I'll be your host. In today's first segment, HBR IdeaCast producer Steve Singer talks with Harvard Business Review senior editor Paul Hemp to discuss a new trend in electronic commerce. As people spend increasing quantities of time and money in virtual worlds, companies are beginning to build virtual storefronts, selling virtual goods to online denizens as well as real goods to their real world counterparts. Sound confusing? It is, but Paul Hemp will help us make sense of this trend and provide some insights as to how shopping as a social experience might evolve. And in our brief second segment, we share some ideas on how to help your company stay customer focused. So join us now as we delve into the new world of online shopping. First up, a new direction in E commerce.

Hello, I'm Steve Singer and I'm here today with Paul Hemp, who's a senior editor at Harvard Business Review. Paul's latest article in the October edition of HBR is on an evolving form of online commerce. In a previous HBR article as well as an earlier HBR IdeaCast, Paul explored how some companies are finding new ways to market themselves and make money in cyberspace by reaching out to avatars. Avatars are 3D representations of oneself that live and interact with others in online worlds such as Second Life and World of Warcraft. As these online worlds evolve, they are beginning to more closely mimic real physical worlds and are allowing the people and their avatars who spend time there to be exposed to some new forms of commerce. Paul, would you tell us about some of the new ways of online shopping?

Sure, Steve. I should say first of all that it is evolving and I think we're not there yet, but I think that e commerce is poised for what may turn out to be a fundamental shift in the way people make purchases online. And that shift is from basically making online purchases which are transaction based events involving a single consumer, and interacting with a two dimensional webpage, a shift from that to going shopping. Online shopping in its real world sense, that is a social experience involving groups of people, not just a single person, and interacting not with a two dimensional webpage, but in a three dimensional web space. And it's the addition of this social aspect to the commercial transactions of making purchases that I think could really change the way we think about online retailing.

And is this happening in the virtual world space or is it happening outside of that space?

3D virtual worlds, whether they be games like World of Warcraft or social virtual worlds like Second Life, are becoming increasingly realistic and sophisticated in the environments they set up in which people. People either play games or simply interact with one another.

And.

And we are beginning to see the incursion of real world commerce into these virtual worlds and virtual economies. And in a place like Second Life, for example. And this is what I think is one of the milestones that signals this shift in the way retailing is done online. Earlier this year, the clothing chain American Peril, the Los Angeles based clothing chain, opened an outlet in Second Life, the virtual world of Second Life, and sold. Began selling clothes for people's avatars, that is their online representations of themselves in the world of Second Life and real world clothes as well. So there was this blending of the virtual commerce and real commerce. But, and this is significant in a store setting in which people can go together or avatars can go together and have a social as well as a buying experience.

So I can go into the American Apparel store in Second Life with my friends and try on a pair of jeans.

You can actually buy them. That's as a sign that this is not yet totally evolved. Curiously, the technology does not allow you to try them on before buying them. You have to buy them off the rack and then put them on. But you can do that from an array of products that are in that virtual store. And you can also, again, somewhat clunkily, because we're still in an early stage of this, click on a product in the store and buy a real world version of that article for yourself.

Okay, so I think you said this earlier. It's an amalgamation of what we know now as e commerce and kind of this emerging world of the 3D space.

Right. And what makes it distinctive. The reason I think this signals something special is because when we say in the real world, I'm going shopping, that usually has is an incomplete sentence. It's usually I'm going shopping. With whom? With friends, with my brother. It's a social as well as a commercial experience, that one in which you look over the items, try things on, talk about what might look good on me or your shopping partner. Maybe you don't end up buying anything at all, but during that experience, you've been part of the retailer's brand experience. And so there is this activity which is inherent in Human experience going back to bazaars and markets for thousands of years in which people go to buy together. And so there is a commercial aspect, but there's also this social aspect. And up till now that hasn't existed in online retailing.

Is there a mall equivalent in cyberspace? Paul?

There actually are mall equivalents, but. And this is a sign of the potential, but not the realization of that potential, at least for real life real world retailers. The stores in those malls, for example, in Second Life are virtual stores that sell virtual clothes to residents of Second Life, their avatars. And actually a wide array of some highly regarded designs come out of those stores. But those are stores that are creations within the economy of Second Life, of the Second Life residence. There is no real world component to those sales. The sales are actually made in the currency of Second Life Linden dollars. And the creators of those clothing and the vendors of those items of clothing can actually cash those Linden dollars in for real US Dollars or Euros or whatever real world currency. But they aren't retailers with brands in the real world. They're retailers with brands that are well known within the world of Second Life, but they're not real world retailers. What is changing now is real world retailers like American Apparel, like Adidas, which is slated to open a store in Second Life this fall, like a number of others that are talking about exploring this space. In this case, we'll have real world retailers coming in selling both virtual clothes or, or allowing users to residents to try out products and giving retailers the chance to see how consumers react to those products. That is virtual consumers, but with the aim of both building their real world brand and ultimately generating real world business. But again, we need to emphasize that the purchase of real world items online is not new. We go to Land's End and it's actually a pretty sophisticated experience. You can build yourself a little avatar and truck, try put clothes on that person and try different sorts of things. But it's not in a 3D environment. It's just you and the website buying.

That clothing and you're not interacting with.

Anybody else, not interacting with anybody else. But potentially a lands End, a customer service person who might be helping you, but it's not your friends, it's not your family who you're going with, talking about the items, talking about other things perhaps. And it's that element that I think represents a potentially major shift in the way we buy things. Not only online, but buy things anywhere. Because up till now, if you wanted that social experience of going to the mall, you had to go To a real world mall. Very soon we will be able to go with our friends in the form of their avatars to virtual malls and shop and buy things there with the same sort of experience that we have in the real world. I should emphasize just quickly that we're clearly some ways away from a shopping experience of the kind we know in the real world. Apart from the fact that it's virtual and not. The products aren't very well represented. As we said earlier, you can't try them on at the moment. It's almost more symbolic than actual. And yet I think technology's going so fast, changing so fast, that before long we may find our shopping experiences take place in virtual worlds as often as they take place in real world malls.

So are we going to have food courts in the virtual malls?

Well, you can already buy and consume food in these virtual worlds, but obviously it doesn't ease the growlings in the real user's stomach. But it's probably more for items in which there is a social element to the product itself, like clothing, like music. One can easily envision, and there's some equivalence, almost like this now, of items not being merely a website where you go and download tunes, but a 3D place where you go with your avatar and fellow avatars to listen to, try out, you know, sample various music, possibly even dance to the music, Talk about what you like and what you don't like before buying it. And it would become a very, again, a social as well as transactional experience. American apparel is part of that. Trying to create some verisimilitude in their world. Actually has experimented with avatar clerks who are controlled by real world people who will answer questions and interact with second life residents as they look at the clothing.

Are those avatars, Paul, selling only to customers in the second life space, or are they actually helping customers buy things that will be sent to their homes?

The latter is also true. And again, there's a certain merging of those two realities because the second life clothing are approximations of the real world clothing. So the questions one might have about a particular piece of clothing might be the same, whether it's virtual or real. But yes, those clerks. And again, it's just. They've just experimented with it. It's not a regular routine at the moment. But yes, those clerks would obviously be able to help customers with questions about the real world versions of those same clothes.

How long do you think it'll be before clerks will be able to answer the lifelong question, does this make me look fat?

We wonder whether the mores of virtual worlds will dictate that the clerks adopt that phony smile and say, you look just lovely. There may be a different set of social norms that evolve in virtual worlds that obviously would come when your avatar is a direct representation of you, the real person where that question was applied or the answer to that question would apply to both the avatar and the real world user behind the avatar. Another interesting wrinkle on this is a theme that I explored in an earlier article in Harvard Business Review on avatar based marketing. And that notion is is summed up in the question, when a marketer is selling to an avatar, is that a different sort of experience than selling to the real world creator of that avatar that is in a virtual world, do avatars represent what you might call a universe of shadow consumers whose preferences and needs, while reflecting the preferences and needs of the user who has created the avatar? Is there a slight twist given the fact that these avatars are in fact alter identities of the user and often related to what we were talking about a minute ago? Do not represent, do not look like the physical creator, are in fact creations, usually positive creations that enhance the appearance or the features of the user behind them. And I think there is a lot to be investigated in that area of whether marketing to avatars is somehow different, perhaps subtly, but different in kind from marketing to the real world users who have created those avatars.

Well, this has been really interesting. Paul, thank you very much for your time today.

Thank you Steve.

Pleasure to learn more about Paul Hem's thoughts on virtual commerce, you can order a copy of his recent Harvard Business Review article, Are you ready for etailing 2.0 by visiting harvardbusinessonline.org. Next up in our Ideas and brief segment, how to make better use of your customer data. The cry for customer focus is more urgent than ever as companies seek to differentiate themselves and spur profitable growth in an increasingly commoditized world. But major customer oriented initiatives have yielded lukewarm results, leaving a bitter taste in executives mouths. The Secret to Real Customer Focus Collect data on every customer transaction, then analyze its implications. When Royal bank of Canada surveyed 2,000 plus customers, it found they wanted much more than just access and convenience. They wanted their bank to value them as individuals regardless of when and where they did business. The bank's response? Shift resources from building new branches toward managing 10 million customer relationships. Also reorganize your business around customers, not products sharing customer information across your organization. When Continental Airlines examined revenue generated by each passenger across flights, it realized a flight previously considered unprofitable and thus expendable might be a key connection between airports used by a large pool of highly profitable customers. Truly customer focused companies leave rivals far behind. Royal bank of Canada, for instance, grew dividends from 68 cents a share in 1996 to $1.75 in 2003 by driving high value customer growth 20% and average customer profitability 13%. Next, the idea and practice to organize your firm's people, processes and structures around your customers. Follow these steps. Create a company wide repository containing customer transaction data from various parts of your enterprise. Have each unit contribute data to the repository. Make the customer not account or purchase or product or location your fundamental unit of data analysis. To overcome political boundaries, have a neutral entity such as IT control data pooling. Next, share insights from customer data across your organization. Use expert analysts to interpret customer data for your business units who can use that information to serve their markets more profitably. For example, Royal bank of Canada learned that 60% of the product packages that combined a checking account, credit card and ATM based bill paying were unprofitable. Instead of discontinuing the product or raising its fee, the bank pinpointed the problem's source. Bank employees had to enter ATM bill paying transactions manually. Using input from the marketing, analytics, product management and finance groups, the bank added low cost telephone and online bill paying to the package. Customers snapped up these options, making 90% of the packages profitable. Next, anticipate and shape future customer interactions. Use your data to determine which customers might switch to a competitor, buy a new offering, or pose an unacceptable credit risk. Create models predicting customer behavior, then design interventions to alter that behavior. Telecom provider SBC learned that its DSL customers were least likely to switch their local phone service from SBC to another vendor. Using Propensity to Buy models generated from its information pool, SBC identified potential customers most likely to purchase DSL and therefore most likely to keep SBC as their local phone provider. Product managers then targeted only this customer segment, thus increasing profitability while significantly reducing marketing costs. Finally, weave customer focus into your workforce's everyday behavior. Give employees autonomy and technical tools to make customer focused decisions. Employees at Harrah's Entertainment know that customers spend more when they stay at Harrah's hotels rather than just visiting its casinos. By tracking their customers casino expenditures, they can book rooms to optimize profitability. Highly profitable casino customers get rooms for free. Unprofitable ones pay premium rates. Profit per available room jumped 30% during 1999-2003, generating an additional $20 million a year. We hope you've enjoyed this edition of the HBR IdeaCast. If you have any comments or ideas you'd like to share about our program, please send them to my attention. That's Paul Michelman at this address, ideacastbsp. Harvard. Edu. And if you'd like to catch up on our previous ideacasts, please visit us at our new home on the net, www.hbrideacast.org. thank you, and we hope you'll join us again soon for our next IDEAC.