ECR ACADEMIC REPORT: ECR IN THE THIRD MILLENIUM

THE CATEGORY MANAGEMENT PROCESS IN THE VIRTUAL RETAIL ENVIRONMENT

Katherine C. Pramataris, Georgios I. Doukidis

ELTRUN, Athens University of Economics and Business 76 Patission Str., 104 34, Athens, Greece gjd@aueb.gr, k.pramatari@aueb.gr tel/ fax: +30 1 8203663 http://www.eltrun.aueb.gr

1. Internet as a New Market Channel

In the recent years we have witnessed a tremendous growth of the Internet and the World Wide Web. IDC's Project Atlas, probably the largest study yet carried out internationally on Internet usage, demonstrates the web's extensive diffusion around the globe. Along with some fairly familiar points on usage there are a few surprises: 75% of respondents in the United States purchase online from home.
A quarter of respondents in less developed countries, including India and China also purchase online

from home. In addition, according to the Internet Economy Indicators, an on-going study of the Internet at the University of Texas, the growth of the Internet economy continues to surpass expectations. Going beyond simple e-commerce, the Internet economy comprises four somewhat overlapping layers: infrastructure, application sales, intermediaries and eCommerce. The latter, eCommerce, which jumped 127% from Q1 1998 to Q1 1999, was the layer that showed the strongest growth. These numbers indicate the great potential behind on-line shopping and Internet as a new market channel, a potential that is driven both by user dynamics and by advancements in technology. The emerging virtual retail environment, in particular, facilitated by the technological capabilities of the new medium, offers advantages other channels cannot easily replicate. To name but a few, it facilitates the instantaneous exchange of up-to-date information about products, services, and market transactions, as well as the efficient collection of information about customer communities specific needs, interests, and demographics. Furthermore, it enables the direct contact with both suppliers and customers, the provision of advanced customer service, the application of one-to-one marketing techniques etc. The questions regarding this, still unexplored in many aspects, business area are numerous: What will be the role of the new market channel in the day-to-day business? How can it be used to establish relationships with consumers? What will be the new practices and how will existing practices be transformed in the virtual environment? In this chapter we wont try to give an answer to all these questions, but focus on the interface between an electronic store or e-shop and its end-customers or shoppers, while examining the application of the Category Management process in the new environment. More specifically, well have a look into the

different characteristics of virtual retail sites, as compared to the traditional market environment and to other types of sites, and see how these transform the Category Management process in virtual retailing.

2. The Characteristics of Virtual Retail Sites

Online markets are significantly different in a number of aspects from the structure of classical or physical markets. Their typology, client potential, price competition and client-producer interactions are considerably different from the same phenomena encountered in classical markets, where physical presence of the products and parties involved, distribution and transportation, advertisements and clearance of transactions play a role they do not yet have and to an extend never can achieve in online markets. Web as a virtual hypermedia environment incorporating interactivity with people and computers represents a revolution in marketing. Virtual retailing in particular, through the possibility it offers to consumers for integrated transactions, has additional implications for marketers, advertisers and category managers. These include: Interaction and response to a banner-ad can be directly translated into sales: most of the banner-ads referring to products or services lead the user to a product- or service-specific site, usually called Internet Presence Site (IPS), where they may purchase the product/service or not. Contrary to that, banner-ads within an electronic store can take the user directly to that section of the store, where the product can be added to the e-basket and bought immediately. A parallelism to that can be found in the traditional business environment between outdoor and in-store posters. The e-shop environment can facilitate consumers through all the stages of the buying process: according to the classical consumer buying process, as described in most marketing textbooks, consumers progress through the rational stages of problem/need recognition, information search, evaluation of alternatives, purchase decision and post-purchase behavior. The e-shop environment can offer an integrated service to consumers by helping them identify new needs, through advertisement, look for the required information, through advanced search facilities, evaluate different alternatives, through the availability of a variety of products, complete the buy, through on-line basket and payment facilities, and finally offer after-sales support, via e-mail and on-line customer service. Consumer demographics information can be directly available, allowing for personalized service and one-on-one marketing communication: In order to complete an on-line purchase, consumers have to provide their personal information, usually including demographics data. In many e-shops, this step takes place up-front, when a consumer enters the shop for the first time. Thus, as of the first or the second visit, the consumer demographics information is readily available, allowing for personalized service and targeted advertising. This possibility can also be enhanced by the exploitation of information on past consumer buys and navigation habits. Advertising effectiveness can be directly compared to sales effectiveness, based on on-line sales data: In the traditional business environment, the effect of an advertisement campaign is usually read some months afterwards, when sales and market share data become available. In the e-shop environment, this information is readily available, allowing for immediate evaluation of a promotional action and, thus, for fast response. Advertising of a product in the e-shop can be initiated by the e-shop owner, i.e. the virtual retailer, by the product supplier/manufacturer, or both: Since advertising in the e-shop, in one or more of the forms described above, has the potential to increase product sales, this has benefits for both the retailer and the product supplier. Benefits may mean higher sales and store visits, profit increase, inventory decrease or elimination etc. This fact can lead either the virtual retailer or the product supplier or both in co-operation to promote products in one way or another. An e-shop offers many possibilities for advertising, from banner-ads to special presentation in-store, discount offers, lotteries etc.: When comparing an e-shop to other types of sites, which only offer banner space, one can argue that an e-shop offers many more possibilities for advertisement than the

mere banner-ad. These include: a) special presentation of a product in the products-section, i.e. in a more prominent position, as a picture with special animation effects etc.; b) discount offers, combined with the products inclusion in the special-offers section of the e-shop or a weekly special-offers e-mail to customers; c) contests and lotteries, played on-line and contributing to building a brands image and/or sales, etc. The above comparison between a virtual retail site and other types of sites is summarized in Table 1 below. Feature Click-through a banner add takes the user to Support is offered to consumers Consumer demographics and other information Advertising effectiveness Advertising of a product is financed / sponsored by The possibilities for advertising Virtual Retail Site the product sales section, where the product can be purchased Throughout the buying process Other Types of Sites another site, usually an IPS only at initial stages (need recognition, information search, evaluation of alternatives) may not be available, if the user does not have to register with the site is only measured via click-through rate the product supplier only are limited to banner-ads

is directly available as the user has to complete a purchase by registering can be associated to sales effectiveness the product supplier or the virtual retailer are many, from banners to special product position on-shelf, discount offers, lotteries etc.

Table 1. Comparison between Virtual Retail and Other Types of Sites

The above list is not meant to be complete, but to indicate some of the points that imply changes to the marketing and Category Management practices, both when comparing them to the more traditional forms applied at physical stores, but also when comparing e-shops and other types of Web sites.

3. Applying the Category Management Process in Virtual Retailing

Given the characteristics of the virtual retail sites, as presented above, would someone expect that Category Management process remains the same in the virtual retail environment as is applied in the traditional retail business? The answer is both positive and negative. The positive part of the answer is based on the fact that the virtual consumer still starts from the category level before drilling down in order to identify and select individual products. It is thus necessary that categories are managed as strategic business units that best meet consumer needs and enhance consumer value. What may be different, though, is the grouping and structure of the categories, as the consumer may not look, for example, for bicycles but for lifestyle accessories and equipment. Apart from this fact, which is not necessarily linked to on-line sales, there are certain elements of virtual retailing that may well transform the Category Management process in the digital market. Among others, these are: a. The storage of data in one common data warehouse and the subsequent integration of information to a much great extent. The trend in retailing information systems is the storage of all data available in a common data warehouse, including product data, sales data generated by point-of-sale scanning equipment, customer data derived from loyalty card programs, etc. In virtual retailing this fact is not merely a trend but a necessity, with all transactions, communication with the customer and shopping experience
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taking place on-line. This fact results in greater information maturity and integration, which can further support decision making and Category Management processes. b. The availability of extensive information on consumer behavior, including basket spending, product and service preferences, navigation habits etc. A virtual store has a much deeper knowledge of its customers and can keep track of them throughout their shopping process. Apart from basket spending, product preferences, service usage, etc. the virtual store can also monitor navigation habits, including frequency of visits, response to several events including promotions etc. While the cost of collecting these data in a traditional store is very high, in a virtual store environment this cost is minimized, based on the capabilities offered by technology. The possibility to dynamically apply the results of the Category Management process to the structure of the virtual store. Adjusting the shelf and store layout to a new product assortment, as resulting from a Category Management exercise, may take weeks or even months in a bricks-and-mortar store. The same exercise would require only few seconds or less in a virtual store, as everything is digitized. This fact leads to the transformation of the Category Management process into a continuous loop, where decisions stemming from data-based analyses are directly applicable and operational (see Figure 1). The possibility to apply personalization and customization techniques. Last but not least, the virtual nature of electronic retailing may support as many different shelf and store layouts as are the individual consumers, which, of course, cannot be the case in the traditional world. Using consumer demographics, preferences and other information, the virtual store may be transformed to match each consumers profile or, alternatively, the consumer may explicitly customize the store to match his/her specific needs.

c.

d.

The above facts are summarized in Table 2 below, showing the differences between the application of the Category Management process in the traditional and the virtual retail environment.
Category Management Process Elements Data Integration Traditional Retail A major issue of any Category Management analysis effort. Data come from different sources, EAN codes seldom are clean for aggregation, and manufacturers and retailers may use different data representations. Sales data are available through scanning equipment at the point of sales. Household panel data may be retrieved through Card Loyalty programs. Consumer behavior information is estimated through field research. It is difficult to have all these data available at once and almost impossible to associate them with each other. Analyses-based decisions regarding the product assortment, promotion plan, pricing etc. need weeks and usually months to be applied and evaluated. Personalized techniques can hardly be applied, as the interface with the consumer is the store front, common to everyone. Virtual Retail In virtual retailing all transactions, communication with the customer and shopping experience take place on-line resulting in greater information maturity and integration. The on-line retail environment offers an integrated data framework, including sales data, consumer demographics, consumer shopping behavior, navigation data etc. All these data are stored in a central data warehouse and are available any moment for analysis purposes, even to external business partners via Internet. The virtual stores product assortment, shelf layout, promotions, prices etc may change on-line in few seconds; they can even change for some of the consumers only for testing and evaluation purposes. Each consumer sees a different interface instance which, based on the available information, may be personalized to match his/her needs and preferences.

Data Availability

Application of process results and evaluation

Personalization/ customization

Table 2. Category Management Process Elements in Traditional and Virtual Retail Environment

The aforementioned characteristics of the on-line shopping environment make the Category Management process more powerful and applicable in virtual than in traditional retailing. As depicted in Figure 1, the virtual stores database is updated on-line with product sales and corresponding consumer profile, preferences, response to promotions etc. These data are then used by the site administrator, manager, individual product suppliers etc. in order to analyze, either on-line or off-line, consumer behavior, product performance, promotion effectiveness etc. The objective of the analyses is to guide category management decisions, including decisions regarding the introduction of new products, the definition of the right product assortment and virtual-shelf layout, the promotion and pricing of products in the virtual store etc. Furthermore, the availability of consumer behavior information makes it possible to associate and adjust decisions to the different consumer profiles, allowing for personalized customer support and application of one-to-one marketing techniques. Up to that point, the steps described belong to what could be called the traditional Category Management process. What then makes the great difference is the step that closes the loop, i.e. the possibility to dynamically apply the category management decisions and adapt the store layout to match different consumer needs, as enabled by the technological capabilities of the new sales channel. For example, the way categories are grouped and segmented in the virtual store may be defined dynamically to match the individual consumer profile of each or a small group of site visitors. The same applies to product promotions, banner advertisements, special offers etc. Thus, different consumers may see a different store layout, advertisements, product offers etc. depending on their demographics, historical buys, preferences, navigation habits etc.
Introduce New Products

Define Assortment

DECIDE
New Products Analysis Module Define Prices

APPLY

Assortment Analysis Module

Define Promotions

Prices Analysis Module Virtual Store WWW Front

Promotions Analysis Module

ANALYZE

UPDATE

Data Warehouse

Figure 1. The Category Management process in the virtual store environment

Taking this process a step further, what would then be the implications of the Web shopping environment for the individual ECR strategies falling under the umbrella of Category Management, referring here to the strategies of Efficient Product Introduction, Efficient Assortment, and Efficient Pricing and Promotions?
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Table 3 gives an overview of the new possibilities, changes and limitations imposed by the characteristics of the new medium.
ECR Strategy Efficient Product Introductions Key possibilities/changes/limitations of Internet retailing Easy access to consumer preferences Online consumer research capabilities Easy, fast testing of new product concepts Less cost for new product introductions Efficient Store Assortment Greater availability of shelf space Virtual shelf that can be re-structured dynamically Dynamic category structure Personalized product catalogues Intelligent search product mechanisms Efficient Pricing and Promotions Interactive advertisement capabilities Possibility for personalized promotions and direct e-mailing Easy, on-line measurement of promotion effectiveness Automated price comparison and negotiation among different sites Consumer expectations for lower prices Table 3. Web shopping implications for Category Management ECR Strategies

4. Implications for ECR

Given the exponentially growing Internet market and the potential that this has for enhancing consumer value, companies cannot afford missing the game in the new market arena. The possibilities that technology offers them are many, but the challenges they have to face in an ever-changing business scenery are even more. The winners will be those that make the best use of technology to support key business processes and acquire valuable knowledge for their customers and consumers. Under this perspective, players in the retail sector need to seriously consider the possibilities that the Category Management process give them in an information-intensive Internet environment. Actually, it may be only in such an environment that category management practices can deliver real benefits, taking full advantage of the integrated and rich data framework that is available. These practices empower both suppliers and retailers with a better knowledge of their consumers and customers, enabling them increase their value offerings. In order to do so, managers need to seriously consider how to better implement these strategies and take advantage of Internet as a new communication and sales channel. Among others, they need to address the following questions: What is the right data and systems architecture to support the effective application of the Category Management process in virtual retailing? What knowledge can be acquired by analyzing the available information, what are the analyses that can extract this knowledge, and which decisions can be supported through this process? What information needs to be exchanged between business partners, i.e. manufacturers and retailers selling products over Internet, on a win-win basis in order to better serve the consumer?
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What would be their decisions if they were an innovative start-up operation, freed from legacy applications and system limitations?

The successful implementation of Internet retailing is based on the integration of front and back office operations and the efficient flow of products and goods across the value chain. Without this end-to-end integration, the on-line retail environment cannot deliver its service promise to the end consumer. However, it is the level of personalized service and the richness of the shopping experience that will determine the companies that will prevail in the communication with consumers. Category Management practices, as presented above, give them the required tools to compete and gain the respect and loyalty of their customers, the ultimate critical factor to succeed in the long run.

Further Readings
Pramataris, K.C., Papakiriakopoulos, D., Motsios, T. & Doukidis, G.I. (2000) A Multidimensional Approach to Product Advertisement in the Virtual Retail Environment. In Proceedings of 8th European Conference on Information Systems (ECIS 2000), 3-5 July 2000, Vienna, Austria. Pramataris, K.C., Vrechopoulos, A.P. & Doukidis G.I. (2000) The transformation of the promotion mix in the virtual retail environment: an initial framework and comparative study. Journal of New Product Development and Innovation Management, Special issue on retail, June/July 2000.

Acronyms
ECR IPS Efficient Consumer Response Internet Presence Site