Thursday, June 15, 2017

Physical Reality Shapes Digital Business Models

Physical constraints often shape digital markets. That’s an old story for access providers, where infrastructure costs fundamentally shape what is possible. Put simply, access providers need to provide greater capacity at lower costs. That is what fixed wireless is about; what 5G is about; what DOCSIS 3.1 is about (gigabit internet access using a hybrid fiber coax network).

It is a problem elsewhere, as well. Consider most forms of consumer online retail purchasing.

J.C. Penney CEO Marvin Ellison said an e-commerce company’s  "biggest challenge" going forward is that  the United States Postal Service, which presently is "the number one deliverer of U.S. e-commerce  today."

In addition to the sheer challenge of delivery, consumer behavior is shaped by costs.

It seems intuitively obvious that same-day delivery of online-purchased goods would increase rates of online buying. And that is what consumers suggested in a recent survey.

Some 52 percent of respondents to a survey  said they would specifically choose a retailer that offered same day delivery over those that didn’t provide same-day delivery.

Some 67 percent  of participants would spend more if it meant they would get same-day delivery.

A caveat is that, though the results seem intuitively correct, one tends to get more-realistic indications of consumer behavior when looking at what consumers have done, not what they claim they will do. One big caveat is that delivery costs were not part of the survey context.

In other words, it is highly likely that consumer preferences would have differed significantly if the same-day delivery also featured higher costs, either for products purchased or for delivery charges.

One example: the survey found 36 percent of respondents said they would pay £10 to £15 “for same-day delivery when in a pinch.” That makes sense. All of us would consider doing so, when time really was of the essence, for a particular purchase. Perhaps few  of us would routinely oat that sort of premium for same-day delivery.

So one way of characterizing the survey results is that, when consumers pay no premium, they will most likely choose retailers offering same-day delivery over retailers not offering that choice.

When a premium is charged, fewer will actually behave in the way their survey responses suggest. At the margin, same-day delivery with extra charges will generate some incremental activity.

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