Location is (Still) Everything: The Surprising Influence of
the Real World on How We Search, Shop, and Sell in the Virtual One
by David R. Bell ----- Last annotated on September
25, 2014
if you and I live under
different physical circumstances and in different physical environments, we
will use the virtual world very differently—even if we are very similar people
in terms of our ages, incomes, education levels, and so on. We’ll shop
differently, search differently, and won’t be equally attractive to sellers.
So if we want to make sense of
how we use the virtual world, we need to have a framework for understanding the
different influences of the real world on how we shop, search, and sell online.
Young, wealthy, and
well-educated citizens are the most active in the virtual world. Within a
country, individuals who live in rural areas, or those with lower educational
attainment and less income, tend to use the Internet less.
relationships that exist
between our physical-world locations and our virtual-world behaviors will be
robust.
The virtual world is flat in
terms of the opportunity that it delivers to all of us, but it is not flat in
the way that we use it. Because the way we use it to search, shop, and sell
depends on where we live in the real world, which is anything but flat.
Reilly’s law of retail
gravitation, which describes in simple terms how you and I as consumers decide
where to buy the goods and services that we consume.
In GEOGRAPHY I look at the key
principles that explain how we decide where to live and what influences the
kinds of goods and services that are available in our locations. Once we know
how the real world is organized and varies from one location to another, we
have a platform for understanding how the virtual world is used.
RESISTANCE shows how the real
world and the virtual world interact with each other—in the consumption of both
products and services as well as information and content. The real world often
places obstacles in the way of our getting what we want, and the virtual world
often helps us remove them.
ADJACENCY explains why it
matters who is next to whom. Specifically, this chapter examines how demand
patterns for virtual-world sellers spread systematically from one real-world
location to the next.
VICINITY demonstrates that
there is more to how things cluster in the virtual world than is explained by
adjacency alone. When groups are formed in the virtual world, whether around
the consumption of content or products, they are often made up of people who
live far apart. The twist, however, is that these people who live far apart do
share common real-world circumstances and preferences. This, in turn, drives
similarities in their behavior.
ISOLATION explains the
importance of the relationship we have with the people who live near us in the
real world and how that affects what we do in the virtual world. On average
(like it or not!), we are quite similar to our neighbors in many regards, but
in situations in which we have different tastes for products and information,
the virtual world liberates us in special ways.
TOPOGRAPHY concludes the book
and looks to the future by explaining how products, information, and people
move through and traverse the landscape of both the real and virtual worlds. I
consider what happens, for example, when the virtual world goes mobile, and how
the variation of real-world landscapes predicts the behavior of buyers and
sellers in the virtual world.
Spatial Long Tail (SLT). In
the SLT, initial sales arise from proximity among close neighborhoods in large
markets or “hot spots,” and later sales arise from similarity among distant but
comparable smaller neighborhoods. This concept shows that demand often comes
first from customers who are adjacent to each other, and then through customers
who are similar to each other, but live increasingly farther apart.
GE • OG • RA • PHY n. The
study of the physical features of the Earth and its atmosphere, and of human
activity as it affects and is affected by these.
Diapers.com offers exactly the
same prices, assortment, and convenience (one-day free shipping for orders over
$50) to both customers in our example. In other words, the virtual world is
completely flat, offering the same “package” to both real-world locations. Since
the real-world locations for Taylor and Paige are different, the relative
attractiveness of shopping at Diapers.com from their given location (Houston or
Philadelphia) depends on how it compares to their offline alternatives. Paige
in Pennsylvania does not pay taxes on diapers bought offline, whereas Taylor
from Texas does. Right now, neither shopper would have to pay taxes on her
online purchases.
There’s also a lot of evidence
that our preferences for individual brands are shaped by where we live. The
word “undifferentiated” is important. By this I mean products that are more or
less identical and indistinguishable from each other in blind taste tests or
similar comparisons. Assume that both brands spend about the same amount on
marketing. Then try to imagine why consumers in Los Angeles prefer brand A by a
factor of 2:1, while consumers in Philadelphia prefer brand B by a factor of
2:1. The answer to this question about undifferentiated products illustrates
the important way geography shapes our tastes. Just being first in a particular
market allows you to dominate that market for decades and decades, even as new
entrants come along.
Academics and consultants
refer to this persistence of brand loyalty as a first-mover advantage. The
choices made by these customers are not shaped by inherent preferences; rather,
their preferences have simply been shaped by where they live. Well, our
location shapes what we want, and because of that we adjust very quickly to our
new surroundings, but only partially. The “location of the past” stays with us,
exerting influence over us, for quite a long time!
So we have two strong, robust,
and perhaps surprising impacts of circumstances on preferences.
The first that is where you
live impacts how you use the Internet and its related technologies to buy goods
and services and to connect with others. This effect works through the force of
the offline options that you have. The second effect is more subtle, but nevertheless very powerful. The preferences you develop for the individual brands that you end up liking, buying, and consuming are also shaped by where you live.
There are at least three sets
of factors that shape our choice of where to call home.
First, there is the force of
inertia and family ties. Second, there are economic barriers and incentives. Individuals who share the same neighborhood are likely to have similar levels of income or wealth, and to share characteristics that drive income and wealth.
Third, there is the old saying that “birds of a feather flock together.” Homophily is not just determined by cultural, ethnic, and demographic factors either. Preferences—of all types—can be an equally strong basis for it. There is a statistical relationship between the propensity of a location’s citizens to shop online and for e-commerce sellers to base their businesses there. Knowing what goods and services are offered in a location helps us to infer something about the preferences of its residents.
So for now, let’s keep three
things separate: (1) economic factors, (2) cultural factors, and (3)
preferences for local goods and services. Zipf’s law is based on the fact that
the natural log of a number can be used to tell us something about the amount
of time needed to achieve growth in a quantity of interest. The quantity of
interest could be money, people (or population size), the number of bacteria in
a dish, and so on.
central place theory (CPT).
CPT argues that, in the real or offline world, consumers visit the nearest
“central places” that provide the goods and services that they need, and they
make these decisions so as to minimize travel distance. Two concepts underlie
CPT.
First and foremost: there is a
minimum (or threshold) market size that must exist before a particular good or
service will be supplied to a market.
Second, there is a maximum
distance (or range) that consumers are prepared to travel to procure a good or
service.
You can’t succeed in the
virtual world unless you understand where and how your potential customers are
situated in the real one.
RE • SIS • TANCE n. A force
that tends to oppose or retard motion.
Markets don’t always provide
us with exactly what we’d like to know to make an informed choice, or exactly
the right product for our needs and desires—let alone at the right price. We’ll
use some helpful jargon and refer to them as “frictions.” This term really gets
to the nature of these obstacles—they don’t absolutely prevent you from doing
things, but they do make your life more difficult.
The first is “search
friction,” or the inability to get the information that you and I would like to
have before making a decision. The real world has an important and pervasive
friction. You have to expend effort—incur search costs—in order to make better
decisions. This is how the Internet solves what I’ll call geographic friction
number one—you can live in Sioux City (a small market) but still have access to
New York City (big market) variety. The Internet liberates everyone by
aggregating people, independent of their location, and creating a large,
addressable market. So the Internet creates markets made up of “similar”
people, independent of where they actually live. So the Internet removes, or in
many settings at least substantially mitigates, the two most intransigent and
enduring market frictions. With it, you can find out the price of almost
anything without leaving your house, connect with almost anyone, and buy pretty
much whatever you like no matter where you live—so long as someone is willing
to deliver it to you. those of us who live in large cities tend, on
average, to be heavier consumers of local information. farther you have to
travel to reach particular offline stores, the more likely you are to shop
online. Research shows that the larger the city, the more local sites there are
that serve up content devoted to the people, places, and activities that define
it.
BOPS means “Buy Online, Pick
up in Store.” When a store offers BOPS, you can go online and check out, say, a
new espresso maker or a duvet, buy it, and then wander by the store and pick it
up from there. This phenomenon was coined the “delay premium,” and means that
you and I need to be paid more to have to wait longer than expected, compared
with how much we’d be willing to pay to shorten the wait time by the same
amount. So in some sense, BOPS gives you the best of both worlds (full
information before purchase and no waiting for delivery, although you do of
course have to stop by the store to pick the thing up).
Most of us like to try clothes
on before buying them. Clothes have tactile, or “touch and feel,” attributes
that are hard to communicate online. Traffic at the website was up because
shoppers could go online to get price and in-stock information before buying
(the Internet had reduced their search friction), but they still wanted to turn
on the coffee machine, sit on the sofa, or touch the duvet before buying. So
they didn’t actually buy what they wanted online. Having confirmed the price
and that the item was in stock, they went to the store to inspect the product.
Hence, sales at the store went up. Nevertheless, BOPS was a great success
because it led to—wait for it—ROPO (Research Online, Purchase Offline).
This is why sales of popular
items at Amazon.com will go down in zip codes contained in the trading of the
new store after it opens, but sales of niche items will not. They found that
goods with a high value-to-weight ratio were the most likely candidates to be
sold via e-commerce. For non-taste-dependent categories, distance doesn’t
matter at all; i.e., there is no statistically significant effect of distance
on consumers’ behavior. The theory underlying this finding is that the closer
that creators and users of content are to each other in the real world, the
likelier they are to have similar interests or tastes. Distance is a proxy for
cultural similarity.
The real world puts obstacles
in our way. Important information (e.g., about prices and product quality) can
be hard to come by or costly to obtain, and not all products and services are
offered in all locations. The virtual world helps us to overcome these search
and geographic frictions, often eliminating them entirely. However, the
Internet sometimes imposes frictions of its own—by making us wait for delivery
of things bought online, or by making us uneasy about buying products with
“touch and feel” components. So, the real and virtual worlds compete with and
complement each other.
You might begin your journey
searching in the virtual world, and end it by shopping in the real one.
Gravity still holds sway over
the way we consume content and information goods in the virtual world! Frictions frustrate in the real and virtual worlds—you’ll succeed in both when you identify and eliminate them.
AD • JA • CEN • CY n. The state
of being so near as to be touching. The state of being adjacent; contiguity.
Local stores with space
constraints and relatively limited trading areas are not motivated to carry
slow-moving items.
I need to point out an
important connection between this chapter (ADJACENCY) and the next one
(VICINITY). This one looks at what happens in the virtual world as a result of
proximate individuals sharing locations. The next one looks at what happens
when individuals share characteristics or preferences independent of the
locations that they live in. When we look at social contagion derived from
adjacency, we look at: who, where, how, and what.
Let’s say the “who” are the
friends and acquaintances one comes across locally; the “where” is the local
neighborhood; and the “how” is either via direct communication (a
person-to-person conversation) or observation. The “what” is the content. The
glue that holds everything together for our analysis is the real-world
location, the “where.” On average, it looks as though there is more positive
information contained in reviews on the Internet than negative information. Researchers
at Yale found that a negative review not only slows the sales of whatever is
being reviewed but also tends to reduce the flow of positive reviews. If we
take these findings into account and consider that there is more positive
information to begin with overall, then, in total, positive word of mouth will
be at least as effective as negative word of mouth, if not more so. When
reviewers reveal information about themselves, including their location,
readers become more willing to trust what’s written in their reviews. we
imagine that those living near us will have similar tastes and preferences as
ourselves.
the New York Times reported in
2012 that about one in three online reviews is fake—a number determined by the
data-mining expert Bing Liu. And one rather enterprising man, Todd Rutherford,
was exposed as making nearly $30,000 a month selling fake reviews online! And
that’s the important general point from the research that carries over to other
types of sites: you should be more trusting of those that have some kind of
verification mechanism built in. Sellers have an incentive to manufacture
positive reviews for their own products and negative reviews for their rivals. In
order for real-world conversations about a product to have an effect on
virtual-world buying behavior, the product itself has to deliver.
The manufacturers of the
energy drink Red Bull built upon this logic too. On college campuses in the
United States, popular students were given cases of Red Bull to distribute at
the parties they hosted. DJs at popular clubs were encouraged to drink Red Bull;
bar owners often left the empty cans visible to customers.
Starbucks and Dunkin’ Donuts
like to see customers take their coffee to go. The cups are visible to others.
In the study, over 300,000
leaflets (about one per resident) were dropped on the city from a plane. The
leaflet contained a message asking anyone who came across it to fill it out and
mail it back. About 7 percent of the leaflets (just under 20,000) were mailed
back to the experimenters, which is a pretty decent response rate. Of the responses,
55 percent were from physical diffusion—i.e., someone picked up a leaflet,
filled it in, and mailed it back. The remaining 45 percent of the responses
were from so-called social diffusion. This means that the respondent got the
leaflet from someone else first. So some people saw the leaflets and acted on
them directly, while others passed them along to friends, who complied with the
request. people who filled in the leaflets directly tended to live right
underneath the places where the drops had occurred, whereas the people who
learned about the leaflets socially tended to live farther from where the
leaflets had been dropped. So in the real world, proximity and social
transmission go hand in hand.
the total amount of influence
to be exerted on any one location by the adjacent neighboring locations is 100
percent exactly, and no more. Let’s say that zip code number 2 has four times
the population of zip code number 3. To reflect this, we could replace the ½,
½, entries that are currently in row 4 of figure 3.1 with ⅘, and ⅕. Physical
neighborhoods can be defined not only in terms of their characteristics but
also spatially and in relation to one another. Because people who live in
immediate neighborhood clusters are also likely to be similar to each other in
specific ways, it’s not that hard to imagine ideas, fads, and trends spreading
among them. The structure of our physical neighborhood helps determine how
information spreads through adjacent locations and how likely interaction among
individuals is to begin with.
Three things are critical.
First, physical population
density—the more people there are, the more opportunities there are for
incidental contact. Second, when there are more people in your neighborhood, there are more offline establishments where interaction can occur.
Third, the people themselves are important to consider.
Entire industries, starting
with the government census, are built up around collecting data about zip
codes. And just as important, everyone who shops or sells on the Internet
either gives out or receives zip code information in the form of billing and
shipping addresses. New customers popped up in areas adjacent to areas that
already had customers.
number 1 and 2, and people in
both of these zip codes have already started using Netgrocer.com, chances are it’s
only a matter of time before someone in zip code number 3 does as well. This
second effect—contagion resulting from adjacency—proved very robust in the case
of Netgrocer.com. First-time orders from new customers were more likely to show
up in a zip code when there had been previous orders by other customers in
contiguous zip codes. This effect persisted even after accounting for the
“birds of a feather” effect, or the tendency of co-located people, such as
those in the same zip code, to behave similarly. So holding all else constant,
as our economist friends might say (and it is important to do that), there are
very strong real-world contagion dynamics that create these demand-spreading
patterns for virtual-world sellers. In short, the trading area for Netgrocer.com
expanded systematically. Once a few customers sprouted up somewhere, their
neighbors soon joined them. This kind of contagion resulting from real-world
adjacency has shown up in the data of every virtual-world seller that I’ve
looked at.28 In chapter 4, VICINITY, I’ll look more closely at where customers
pop up to begin with, expand the idea of “proximity,” and also examine some of
the best ways to “seed” locations with new customers. Virtual-world businesses
benefit tremendously from real-world adjacencies among customers and
neighborhoods. Intelligent sellers understand this and do their best to
cultivate activity that leverages adjacencies. with the two great benefits of
adjacency—homophily and influence.
Homophily implies that people
who live next to each other share characteristics and circumstances, and so
make similar trade-offs, and can be drawn to use similar virtual-world products
and services. When they communicate and emulate, influence happens. Homophily
can be leveraged, but influence can be fanned. That’s why it’s critical for
virtual-world sellers to consider how to make their products and services
socially visible.
It was no accident that my
Soap.com boxes came in vibrant mixed colors like teal, orange, chocolate, and
magenta, with “Soap.com” written on them in white letters. If your workplace
“family” is bigger than your family at home, then your virtual-world seller
should encourage you to get your items shipped to your office as well. That
means more exposure—my Wharton colleagues have seen many of my orders over the
years!
In the virtual world, most
sellers have unlimited reach—through a whole country, or perhaps even the
entire world—yet their sales don’t occur just anywhere.
The patterns of demand that
emerge when a seller conquers an “unlimited market” have special properties.
They are rooted in adjacency, as new buyers spring up in areas contiguous with
ones that have buyers already.
Adjacency rules. You’ll
succeed when you seed it and let proximity power demand.
VI • CIN • I • TY n. The state
of being near in space or in relationship; proximity.
Homophily and influence result
from, and are made possible by, adjacency.
Why did Fischer argue the
Chicagoan and the Angeleno were more likely to meet? Even though the physical
distance from Chicago to Springfield is about one tenth of the distance to Los
Angeles, the social distance between Chicago and Springfield is much greater
than it is between Los Angeles and Chicago. just because locations are separated
whopping physical distances, it doesn’t mean that they won’t behave the same
way when it comes to adopting new products and services.
Also, thanks to the Internet,
a large physical distance between locations no longer precludes influence or
interaction flowing between them. They found that households living in
relatively close proximity to each other were more likely to own the same model
of car (and even the same color). The important principle uncovered in the
study is that demographic similarity (as well as geographic proximity) has a
big effect on car choice as well.
People pay attention not only
to what kind of cars are on the block, but also to what kind of cars people
like themselves are driving, regardless of where they saw the car. So there is
quite a bit of evidence indicating that similarity, more than distance alone,
matters a lot for choices and behaviors. basic concept of adjacency extends
beyond just individuals and neighborhoods to corporate entities as well. At the same time, two other forces pointed to
the fact that certifying companies were in the same vicinity as each other as
well.
First, individual companies
were more likely to obtain management standard certification (ISO 9000) when
other companies with similar trading patterns had already done so.
Second, companies sought
environmental certification (ISO 14000) when other early adopter companies in
“culturally similar” countries had already done so.
One of the most fundamental
things that the virtual world does is to allow the formation of groups and
markets that don’t (or can’t) exist in the physical world. This raises
interesting questions about how the virtual world is used and affects human
behavior. On the one hand, the Internet could lead to more diversity of
interests. On the other hand, for almost any kind of interest or activity,
there is now also access to a sufficient density of others who are just a
clique away.The authors show, mathematically, that as access to others
improves, “agents” (or individual consumers) tend to seek out similar types of
individuals in the virtual world and give up some of their local connections in
the real world. assume that you could somehow “seed,” or start one hundred
conversations about your show in order to try to get a bit of buzz humming along.
Would you rather have ten
different groups of people engaged in ten different chats about your show in
ten different locations, or one single group of people discussing it
intensively in one hundred different conversations? It turns out that if you want
to generate awareness about what you’re doing, it’s generally better to have
“width” rather than “depth,” holding the total volume of word of mouth
constant. In the virtual world, as in the real one, “spread” or dispersion of
information about your product, helps a lot.
A study conducted at MIT by
Catherine Tucker found that Facebook advertising by a brand that is targeted at
people who are “friends of people who are friends of that brand” has
click-through rates that are twice those for ads sent to a random sample of
people. friendship in the real world can, on average, be a reliable proxy for
response to stimuli in the virtual one. This is an extremely powerful insight
for sellers: physical-world relationships impact virtual-world responses to
marketing and advertising. After studying tens of thousands of users and their
interactions, the authors arrived at three pretty fascinating conclusions.
First, they found that there
is significant variation in the extent of influence that happens in
virtual-world networks, both in the capacity of one individual to influence
another in that network and in the susceptibility of an individual to fall
under the influence of others.
Second, we are each
influenced, on average, by about 20 percent of our friends. Third, and perhaps most interesting, the study found that patterns of influence in virtual-world social networks among users in the same vicinity, i.e., clusters of friends, are also driven and shaped by real-world factors.
Males tend to systematically
overstate their income and women tend to systematically understate their
weight.
So there are systematic
discrepancies between what people say they are and will do in the virtual
world, and what they actually are and are willing to do in the real world.
I focused on three key
factors: (1) the number of existing customers within a zip code, (2) the number
of existing customers across all the zip code’s geographic neighbors, and (3)
the number of customers across the zip code’s demographic neighbors.
First, there is a very strong
immediate neighbor effect.
Second, we found that sales
took off initially in what we came to term “hot spots” and spread out from
there.
Spatial Long Tail (SLT). when
we plotted the number of new customers in a histogram against the real-world
locations that generated them, we uncovered an intriguing phenomenon. In the
SLT the x-axis shows all the counties in the state of Pennsylvania, ranked from
those with the most customers to those with the least (going from left to
right, so that the resulting graph slopes downward). The y-axis just shows the
number of customers in each county. It starts with an observation about product
supply and availability, namely, that the Internet has dramatically reduced the
costs of offering variety—Amazon can carry millions of books whereas even a
very large physical store would struggle to carry more than, say, 100,000. If
you were running Amazon and selling millions of books, you could attempt the
following: At the end of the year, you could total the sales for each book and
rank the books from best- to worst-selling. If you did, you’d notice a pattern.
You’d have a few books that sold really well—books like Harry Potter and the
Bible. You’d also have hundreds of thousands of books that sold hardly at all,
perhaps just one or two copies.
If you drew a histogram of product sales, starting from the most popular product all the way down to the least popular product, you’d see that the total sales from all those rather slow sellers would actually add up to a pretty significant number. Specifically, if you drew a vertical line in the histogram with all the books with sales ranks of, say, 1 to 100,000 to the left of the line and those ranked 100,001 and higher to the right, you’d observe that books to the right of the line, i.e., those in the “tail,” might account for up to a quarter of all your profits!
The “head” of the diagram is
the popular stuff (the books that would actually make it onto a physical
bookstore shelf), and the “tail” is the niche or relatively unpopular stuff.
Customers in the head
locations were acquired largely via proximity effects. Adjacency among physical
locations facilitated the spreading of word of mouth and emulation as well.
Customers in the tail locations, on the other hand, were generated via
similarity. This is because there is an 80/20 weighting at the beginning of the
virtual-world sales process, in which 80 percent of the new customers initially
came from proximity effects, which eventually gave way to a 50/50 balance once
the business stabilized. But the best approach is to focus initially on
relatively well-populated areas and thereby take advantage of the proximity
effect. Then, as the rate of new-customer growth stabilizes, online sellers
should then alter their strategies to pick up new customers via the similarity
effect.
Given the opportunity, you
might end up “linking” only to others who are just like you!
Virtual-world influence comes
in a variety of real-world flavors too. If you want to have sway over others,
it helps to be younger, female, and an early member of the virtual-world
community.
The end result is the Spatial
Long Tail, in which the head is demand from customers connected through
“proximity,” and the tail is demand from customers connected by “similarity.” A
large pool of customers still comes from the “main” locations, but all the
smaller locations matter too, and collectively add up to a lot!
Value comes from
vicinity—you’ll succeed when you collect head and tail locations together.
I • SO • LA • TION n. The act
of isolating, the quality or condition of being isolated.
Now, there are two kinds of
real-world isolation that are important drivers of how we use the virtual
world.
We discussed the first one,
geographic isolation, RESISTANCE. general, the amount of “pull” a commercial
establishment like a store or restaurant has over you is a function of how
close it is and how “good” it is—in terms of offering you what you want.
The second
condition—preference isolation—is more subtle but just as powerful. What this
means in practical terms is that sellers in a particular location will tend to
cater to the tastes of the majority. adding certain “types” to a market creates
more variety for those types, but not necessarily for others. it’s probably
going to be hard to find any males or females that are isolated in their
gender-specific preferences. Second, preference minority status could be
attributable to having a characteristic that is temporary, such as being the
parent of a newborn child. we have two different and very interesting forces of
real-world friendship on virtual-world behavior. (Recall that the study was a
comparison of the effect of actions taken by one’s friends versus actions taken
by random others in the network.)
When portraying ourselves in
the virtual world, we seem to like to diverge from what others do and retain a
sense of individual expression—except when our choices will be publically
announced and our friends are all doing the same thing. It’s nice to express your
individuality unless you really have to swim against the tide of your friends
in a very public way! This suggests an interesting “balancing out” between the
real and virtual worlds, in the sense that one makes up for the other. In
locations where individuals were underserved by their local markets—online
sales were higher. In locations where they were less isolated, in the sense of
having greater access to offline apparel, online sales were significantly
lower. Niche products are bought by those with minority tastes, so
virtual-world sellers can cater to these individuals without fear of competing
head on with offline stores.
Researchers at MIT wanted to
understand what would happen when retailers in the real and virtual worlds
offered identical product assortments and prices. Would they have identical
patterns of sales? In particular, they were interested to see if there would be
differences in sales of products from the Long Tail—those desired by customers
with more niche or isolated preferences. So, it’s real-world (catalog) versus
virtual-world (website). The researchers found that even though the seller’s
offerings were identical in the two channels, the virtual-world channel of the
Internet saw higher levels of sales for products located in the “tail” of the
long-tail plot.
Unit sales of niche products
were 14.8 percent in the Internet channel, and dollar sales were 15.0 percent,
compared with only 12.7 percent for both metrics in the catalog channel. The
effects were highly statistically significant. Since prices and assortments
were identical, what could explain this discrepancy?
The big difference between the
two channels is that shoppers with niche preferences were more able to find
products in the “tail” on the Internet. This is because the virtual world of
the Internet comes replete with recommendations from customers and with the
ability to search. Regardless of their station in the real world, shoppers in
the virtual world are more able to get into the tail and discover niche items. If
you’re a seller and you can find customers who are isolated and who want niche
or long tail products as well, demand from them will be very high. Customers
will be happy, and also relatively price-insensitive—which is a winning
combination for sellers.
In RESISTANCE, we saw that the
benefit of buying online depends a lot on where a person lives. In this chapter we added another very
important condition: It’s not only where we live but who we live next to as
well that matters for our choices. If the majority of those who live next to
you are too different in characteristics or stage of life or preferences, then
you’ll be a preference minority and turn to the virtual world for liberation. On
average, we share characteristics with others in our locations, but that
doesn’t mean that our preferences will always coincide with those of our
neighbors.
In the real world, isolation
deflates and dictates that you’re not going to get what you want. Furthermore,
in the real world, product variety is targeted. There have to be sufficient
numbers of people needing a certain good or service, or it just doesn’t get
offered locally at all. So, for virtual-world sellers our status with respect
to local others is of critical importance. Virtual-world sellers have a more
difficult time competing with real-world sellers offering mainstream products. Instead,
they should focus on target locations in which potential customers form a
preference minority.
These customers have high
offline searching and shopping costs, and are therefore not price sensitive.
As a result, a
disproportionate amount of demand for a virtual-world seller comes from
“preference minority” locations
Isolation offline becomes
liberation online. You’ll succeed by identifying, serving, and investing in the
isolated.
TO • POG • RA • PHY n. The
arrangement of the natural and artificial physical features of an area.
The real-world population
keeps expanding, and the virtual-world one does too. Internet penetration is
about 35 percent on average, with the most-penetrated countries (these include
Germany, Japan, Korea, the United Kingdom, and the United States) at around 80
percent or above. is also interesting to note that Internet penetration
contributes to GDP, in the sense that countries with more connection to the
virtual world enjoy all kinds of efficiencies, cutting-edge business models,
and so on.
One of the most important
things shaping the topography of commerce in both worlds is the steady move by
shoppers and sellers from fixed Internet-connected devices (desktops and
laptops) to mobile ones (smartphones, feature phones, tablets, and so on). I’m
using “fixed” to mean desktops and laptops because while laptops are of course
movable, consumers typically don’t use them (literally) while moving about,
and, more important, a mobile device is more likely to be connected to just one
single user.
I want to share a little bit
of background research on what is known about browsing behavior in general.
Below the ads are the top
“organic links,” that is, the links to the sites that Google thinks will be the
most helpful to you. In contrast, for sponsored links, the basic idea is that
the link that shows up first is the link that Google thinks is the best fit for
you, after taking into account what a seller has bid for the terms so that its
link gets shown to you. how do you (and I) respond to these sponsored ad links?
the first link is typically the one most likely to be clicked on, the second
the second most likely, and so on. the seller with the highest rank in the paid
search process gets the best response or, in industry language for the most
common metric for measuring response, the best click-through rate (CTR). on a
fixed device like a laptop, one move up in the ranking delivers a 25 percent
lift in the CTR. If the chance that you click on the link ranked second is 10
percent then the chance that you click on the top link is 12.5 percent, or 25
percent more. Bear in mind of course that the cost to the seller goes up as
well—you have to bid more on the search terms if you want to come out on top. we
know there’s a “rank premium” of 25 percent on fixed devices. What about on
mobile devices? Is it the same, more, or less? The researchers found that
moving up one position in the ranking increased the click-through rate by 37
percent, a lift of about 50 percent over what happens on the fixed devices, for
exactly the same kinds of ads.
Going mobile increases your
virtual-world search friction, because you’re less likely to click on the
lower-ranked links and there’s a higher lift for the higher-ranked links. when
you’re searching for local stores and brands on your fixed Internet device, a
one-mile decrease between where you are and where the store is increases the CTR
by about 12 percent.
The researchers found that
searching on a mobile device doubles the “one mile premium.” using a mobile
device increases geographic friction, because it makes closer things even more
attractive to us. The increased rank premium or increase in search friction is
due to the size of the device. The screen is smaller, so lower-ranked results
are more difficult to access. the mobile Internet, relative to fixed Internet,
has five critical features that are going to dramatically alter searching,
shopping, and selling.
what are the five rules?
First, mobile has what Rob
calls “instant-on.” Wherever we are in the real world, we can be using our
“dead time” to participate in the virtual one:
Second, sensors on the device
allow us to take photos, share videos, and of course communicate location
information.
Third—and perhaps more
controversially—the mobile device is the domain of apps.
Fourth, at no time in human
history, have more people been connected to a device that is essentially a
distribution channel (for product and content) connected to a payment system. mobile
devices greatly amplify the power of word of mouth.
fifth and final point—show and
tell, as he did by turning up the heat on his family via iPhone and Nest, is a
compelling way to spread the word.
many of us are building our
own personal brands and being ever more public in various social forums. if
you’re an Internet seller and you want to enlist a celebrity to promote your
brand or business, it’s best to find someone with a highly engaged fan base. Such
fans have a strong affinity with the celebrity and are highly connected to him
or her.
The researchers used some
clever mathematics to tease out two different types of motivation and to
measure them from the data.
The first kind of motivation
is extrinsic. Extrinsic motivations are related to ego. We feel good about
ourselves because people want to follow us!
The second kind of motivation
is intrinsic. This kind of motivation is far more altruistic—our goal is
primarily to help others through the sharing of our insights and information.
the researchers discovered two
very interesting things.
First, certain kinds of
execution improved the CTRs. Specifically, ads that were more “obtrusive” got
more clicks. That is, ads that moved, popped up, popped down, utilized video,
and so on just got more attention. Next the researchers looked at ads that were
“contextually targeted” and found that they got more CTRs too. Contextually targeted means
that the content of the ad matched the content of the site. So, obtrusiveness
works (more CTRs). Contextual targeting does too (more CTRs as well). That’s
the first finding.
The second finding tweaks this
first one in a somewhat disturbing way (if you’re a seller, anyway). While
obtrusiveness and contextual targeting work individually, doing them at the
same time is not a good idea. Zappos.com, the famous shoe
seller, pioneered “two-way free shipping,” and this is now de rigueur in
e-commerce.
The fashion eyewear seller
WarbyParker.com offers a “home try-on” program in which customers get five
frames for five days to try at home for free. It’s an ideal company for the purposes
of our study, because all the items it sells have “touch and feel” attributes. Our
analysis showed that up to half of all the first-time customers of Bonobos had
gotten some helpful information about the company from existing customers of
Bonobos who shared their offline neighborhood. Bonobos.com sales were always
higher in neighborhoods with more real-world social capital, i.e., in
neighborhoods with more trust and interaction among neighbors. In neighborhoods
with more social capital, information transmission is just better. What gets
communicated has more veracity. If what is getting communicated is “good,” as
in, “These Bonobos pants are great!” then a seller benefits.
“Social capital does not
operate on (sales) directly; rather, it improves the learning process and
therefore indirectly drives sales when what is communicated is favorable.”
Big media like the New York
Times and the Washington Post reside in big towns like New York City and Washington,
DC. They have a large local base and a broad national following. Let’s adopt
the researchers’ nomenclature and call these kinds of news services Traditional
Media Outlets (TMOs). In addition, there are more organic and typically smaller
sources of information about products and services as well. These include
review sites and blogs and other forms of user-generated content (UGC). These
are known as Social Media Outlets (SMOs). So what’s better for sellers? TMO
coverage or SMO coverage?
TMOs provide the greater overall lift in sales for an online seller. They have a broader reach, and when an event like a media mention happens, sales spike. Places like the New York Times just have a lot of readers.
Now, on the other hand,
individuals participating in SMOs are more committed to the issues and causes
that define the SMO, so their engagement is stronger. That leads to a nice
twist to the result: In totality SMOs were more effective for two reasons. First,
even though the per-event (or mention) effect of being named and discussed in
an SMO is smaller than the per-event effect of a mention in a TMO, the mentions
are more frequent. Net-net, more frequent but smaller impacts add up to a
greater total effect than large per-event, but infrequent mentions in major
media. The four main ways that most Internet retailers acquire customers are:
(a) offline word of mouth (WOM), (b) online WOM, (c) traditional advertising,
and (d) online search.
Since the real and virtual
worlds compete with and complement each other, the next logical step is to
weave them together. If you’re a virtual-world seller of “touch and feel”
products, you need real-world touch points with customers. Virtual world
advertising is more effective when obtrusive or contextually targeted, but not
both. the fixed Internet dramatically reduces search and geographic frictions,
but the mobile Internet brings them back. On mobile we want more seamless
information (i.e., we are less tolerant of search friction) and we’re more
attracted to options that are locally close (i.e., we are less willing to
travel). So, we’re becoming simultaneously more spontaneous and more local in
our behaviors. And this will create huge opportunities and enhancements for all
local commerce. Your real-world life, made better by the virtual one.
No longer “either/or,” just a
single transforming topography—you’ll succeed when you use one world to enhance
what you do in the other.
Making GRAVITY Work for You
So if you are trying to get a
virtual-world business going, it makes sense to choose a real-world location
carefully—one where, on average, customers and employees are co-located.
Many forward-thinking
e-commerce companies, such as Warby Parker and Bonobos, create open
environments at corporate headquarters where customers can visit.
Step one in applying the
GRAVITY framework is to understand the implications of GEOGRAPHY, particularly
in terms of access to early customers and employees. they implemented a Home
Try-On program, enabling potential customers to receive five pairs of glasses
(without lenses) for free, and have five days to try them on.
Thus, step two is about
countering RESISTANCE to information search and purchase by giving customers
the means to reduce their uncertainty. Specifically, it’s about giving
customers access to the information required to enable them to make better
choices and feel comfortable doing so. Market research shows that customers who
request a Home Try-On packet share the contents with another three to four
people on average.
Warby Parker also leverages
adjacency effects in real-world locations—by putting showrooms in places where
potential customers are going to be not only the most receptive to the brand,
but also most likely to tell others about the product. You want to make sure
that you give potential customers the ability to share your product or service
and therefore grant access to a proximate group that will then deliver more
customers for you.
So as a general principle, you
need to make sure you have a strategy that allows you to link and access
clusters of customers who are distant from each other yet belong in the same
marketplace—yours. So make sure that you identify the real-world locations that
will give you access to the most receptive customers: those most starved of
local choices that are relevant to them. So, this real-world event was
reported, shared, amplified, and commented on through a variety of
virtual-world sources. In early 2012 the team decided to retrofit an old yellow
school bus (a familiar, iconic vehicle of sorts), and drive it all over the
country. And so began the Warby Parker Class Trip. This was essentially a
movable real-world showroom journeying all over the country, including places
that did not have Warby Parker stores or third-party retailers that stocked
Warby Parker glasses. In addition to experiencing the Trip when it rolled into
town, customers could share the journey virtually and chat about it via
Twitter, Instagram, and a variety of other virtual-world platforms. Customers
also had the opportunity to enter a contest involving the virtual-world sharing
of these real-world activities. My colleagues Toni and Santiago and I collected
and analyzed data on the locations where the bus stopped. In all of these
locations, we found significant increases in online sales, in addition to the
sales that took place on the bus itself.
The upshot of this model for
your own entrepreneurial efforts? Make sure that you allow your customers to
access your business in both real-world and virtual-world contexts in one
seamless and natural experience.
First, you should ideally be
addressing a very common problem—one that affects a large market.
Second, the founders of your team—and most research shows that two (or more) is better than one—should exhibit magnetic personalities, with a passion for the company that is obvious and infectious. These qualities will inspire others to come on board and see the vision through to fruition.
Third, and this is
nonnegotiable, the team must be able to efficiently and effectively get things
done. Ideas are a dime a dozen. Successful execution of them is something else.
Always keep in mind that the
benefits of shopping, selling, and searching online cannot be separated from
the locations where customers live in the real world. This means that you must
take into account the cities and towns that potential customers reside in, whom
they choose to live among, and what they have access to.
Your virtual-world business,
whether selling goods, services, or information, must quickly create sufficient
density—often by connecting and aggregating individuals from disparate
locations. Density breeds critical mass and engagement, and is necessary for
more density to follow.
Remember that the tactics and
strategies required for gaining followers, disseminating content, or selling
products online need to be customized for different locations. Moreover, the
virtual world is a great amplifier for whatever gets done locally in the real
one.
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