We investigate how electronic commerce (EC) retailers, or e-tailers, manage transaction costs and generate customer value. We integrate information systems and marketing theories in a framework for transaction cost management based on four contingency factors: channel, customer, product and shopping occasion characteristics. We build the framework using archival case studies and validate it with customer interviews. We show that trying to minimize the entire cost of retail transactions is either unsustainable or devalues the customer shopping experience. Instead, looking at transactions as a series of atomic steps enables e-tailers to better understand and manage what really matters for consumers.
The information economy has created more informed and demanding consumers than ever before. Successful retailers are responding to the needs of these customers by improving the tradeoff between the customer benefits and transaction costs, thus creating superior customer value. This, in turn, enables retailers to attract and keep customers, increase sales and market share, improve profits and firm value [29], [36], [50], [51], [52] and [65].
A solution many retailers have explored in their search for increasing customer value is electronic commerce (EC) retailing, or e-tailing for short. From its early days, EC has been promoted as a way of reducing the monetary, energy, time and psychological transaction costs customers incur when shopping [2], [4] and [5]. EC technologies allow shoppers to search for products, receive personalized product recommendations, evaluate and order products online, over the Internet. Retailers that use these technologies, operating either exclusively online or using a mixed strategy to sell both online and offline, are generally known as EC retailers, or e-tailers. As customers find it more convenient and less costly to shop online [11], [49] and [60], e-tail sales are forecasted to reach $250 billion in the U.S. and $150 billion in Europe by 2008 [28].
However, during the tumultuous Internet boom and bust of the recent years, relatively few e-tailers have been able to create and appropriate enough customer value to remain in business. We are now witnessing a second, albeit quieter, EC revolution, with a surprising 40% of the over 200 public EC companies reporting fourth-quarter profits in 2003 [59] and traditional retailers profiting from blending online and offline operations [14]. In this paper we investigate some of the potential success factors for this revolution — namely successful management of retail transaction costs. We start with a review of prior literature, followed by our methodology explanation and data analysis. We then develop and validate a contingency framework for transaction cost management. We discuss our framework's applicability and propose a sample questionnaire for its implementation, and conclude with limitations and future research directions.
Our framework proposes a finer lens for analyzing how retailers can manage customer transaction costs to create customer value, online and offline. It provides a richer perspective on individual transaction costs in the retail transaction chain and shows how four interacting contingency factors – channel, customer, product and shopping occasion – affect each one of the individual costs and contribute to customer value creation. The takeaway from our framework is that the online channel may be more appropriate (i.e. have lower transaction costs) for performing some, but not all, retail transaction steps for some, but not all customers, products or shopping situations. If e-tailers were to look for a decreased overall transaction cost they would have a practical problem with quantifying and then minimizing the aggregate transaction cost. What they have to do instead, in order to create customer value, is to start with the individual transaction steps and then determine which ones are important for customers. This should happen before attempting to minimize the cost of each step, while being careful not to destroy any benefits such as enjoyment and socialization that may be associated with a seemingly high transaction cost. Purchase data analysis or customer surveys and questionnaires such as the one we suggested in Table 4 (see Table 4) can be used for this purpose. A successful retail strategy has to provide the right mix of technology-supported transaction steps for each customer. Our analysis shows that it is hard, if not impossible, to maximize customer value by statically decreasing each individual transaction cost. Retailers have to allow dynamic segmentation of customers by providing them the option to choose among a range of channels and associated transaction costs in each transaction step.
Our research is exploratory, in that it proposes a new way of understanding how availability of online technologies, customer preferences, product features and shopping occasion characteristics influences the transaction costs of retail customers. The framework we propose in this paper needs to be further tested to obtain additional proof of its applicability. Future research can also focus on understanding the nature of transaction costs in more detail. This paper focuses only on the impact of transaction costs on customer value; future studies should also investigate the mediating role of customer value on the link between transaction cost management and firm performance measures [51] such as market share, profits, and market value of the firm.
