Location is (still) everything
A book review by Duncan Brett
David Bell, a New Zealand academic, and now a professor of marketing at Wharton business school at the University of Pennsylvania has written a book about online shopping and more specifically about the impact of where we live on our online behaviour.
The central premise of the book is that the way we behave and shop online is hugely influenced by our actual location in the real world.
The book concentrates on how this works out in the USA. There is not much focus on the rest of the world. We are left to assume things operate pretty much globally. That is probably true, but in some places without decent postal systems and courier services, a lack of trust in whether you will actually receive the product is likely to be a factor.
If you are thinking of starting a business online, or your job involves researching or marketing to retailers, then the book is worth a read. The basic principle that our online behaviour is grounded in our physical location is an interesting angle worth considering. This is not a dynamic you are likely to pick up in an online survey.
Bell has developed an acronym for his approach which he calls GRAVITY.
G stands for Geography. The way we use the Internet is dependent on our physical circumstances.
Take an online store. The offer is the same wherever you are. However, the relative attractiveness of that offer differs by location. For example if you want to buy nappies and live in Manhattan opposite a nappy store open 24/7, diapers.com is not that compelling. Now, think about someone stuck in the suburbs of Pennsylvania, with your closest nappy store a good 30 minutes away and definitely not 24/7. Diapers.com looks to be much more special now.
The size of the town you live in also matters. In a small town you have less options, so an online store becomes a substitute, in a large city, you have so many options, your head just spins, and online becomes a is a complement to help you understand what is going on.
The social observability effect also plays a role. We see and hear what our neighbours do and get exposed to word of mouth recommendations. Bell points out the importance of being visible, so bright delivery vans delivering to your office where it likely to be seen by more people is a good way to get noticed.
The concept of neighbourhood social capital is important. When one person does something, others see and begin to trust that thing. Bell reminds us of the old adage, people choose where to live, and birds of a feather flock together. Not exactly the same, but broad characteristics. Academics will call this homophiliy.
One aspect not directly linked to online behaviour, yet still, of considerable interest is that there is a large body of evidence to show our preference for individual brands is shaped by where we live. In the USA, market share of brands varies by location in all supermarket categories. Brand strength differs by region. The difference is usually explained by who got there first, what academics call first mover advantage, and this effect can last for decades.
When we move, we adjust our preference for that category to our new location. About 60% of the adjustment happens immediately and the rest very, very slowly.
As a sideline he introduces us to Zipfs law, which states frequency is inversely proportional to rank in a frequency table. Amongst other things this has implication for where you are in online search.
So, to succeed in the virtual world, you still need to understand where and how your customers live and behave in the real one. You still need that research.
And pick your real world location carefully, even if it is an Internet business, which does seem slightly counter-intuitive.
R is for Resistance. Bell introduces us to the concept of frictions. Frictions don’t absolutely prevent you from doing something, but they do act as a brake by making it a bit more difficult.
The real world puts geographic and search frictions in our way when we shop.
Geographic frictions arise because it takes time and effort to travel to the store. The further away and more inconvenient the store, the more friction there is.
Search frictions arise because in the real world we do not have easy access to information. There is a real cost to search, as we can’t easily travel across town to get a comparative price. Theory says we will keep searching until the cost of searching exceeds the expected gains.
Bell believes there are thousands of business possibilities just waiting for those who can remove real world search frictions.
The virtual world removes these, but then goes right ahead and puts its own frictions in place, like the loss of tactile sensation when buying and making us experience the pain of delay while waiting for delivery.
Once again location plays a role, because the location will determine the extent of the friction. Central place theory holds that bigger markets offer more variety in the physical world. In a big city there are more people so firms have the incentive to offer more and more variety. The same holds true for information. Bigger cities will have more sites dealing with local information. These sites operate with a bit of an offline dynamic as they only matter to local residents.
Even across countries, there appears to be a correlation between site preference and geographical proximity, possibly because of cultural connections. By Bell’s reckoning that is why Americans prefer Canadian to British pornography and those in Philadelphia prefer South African to Australian rugby sites. One does need to remember that South African rugby sites are vastly superior to the Australian ones.
The key to overcoming resistance is to understand all the ways customers are frustrated by friction. Frictions can be virtual or physical, to succeed you need to eliminate or at least reduce them. Giving the customer information to make better choices and feel comfortable about doing so, and reducing uncertainty are good ways to remove frictions.
A is for Adjacency. We all know that word of mouth is a very powerful form of advertising. Reviews are a form of word of mouth online, and their importance has grown tremendously. According to Bell, in the USA, reviews are used in 75% of purchases. They tend to be biased to the positive. And, by the New York Times reckoning, one third of online reviews are fake. Sellers are incentivized to produce positive reviews for themselves and negative reviews for their competitors. Negative reviews provide a double whammy. Not only do they slow sales, but they also impact the flow of subsequent positive reviews.
Given the importance of reviews it is worth considering what makes reviews more trustworthy. Expedia only lets verified customers post a review, which helps. Bell finds we tend to trust reviews more when the reviewer reveals details about themselves like name, location and background. We also tend to trust reviews from those who live closer to us more.
Herding plays a role (We copy others). We need social proof, so it is not just the review, but seeing others use the product that is very powerful.
Bell suggests a business should work to identify specific neighbourhoods and seed them. We tend to have common characteristics with our neighbours, so proximity can help the spread of information and awareness.
V is for Vicinity. Distance is not just physical space. Strong cultural similarity can make up for a lack of physical proximity. People don’t just pay attention to what cars people in their block drive, but also what people like them drive.
In the virtual world it is easy for us to expand our network geographically, and we find others with common interests across the world. One consequence of this is that we tend to reduce our exposure to diversity. A good illustration of this is in co-authorship in academic papers. A study shows co-authors now tend to be more widespread and further apart, but the number of joint papers from people with different disciplines is falling.
The way Internet businesses tend to grow their customer base is to first build it through proximity (a lot of people close to you) and giving you some critical mass of awareness. A second wave then occurs across the Internet with people joined by demographic (or interest) similarity. Bell calls this a spatial long tail. Local customers form the head, and then you have a long tail spread out at many different locations. Each location in itself is unimportant, but cumulatively it adds up. A successful business will need both sides of the tail.
Your head should be in well-populated urban areas. Once that is working, look to spread.
As an aside he gives us a tip from facebook, who found advertising to be most effective when companies targeted friends of people who liked them. (Mary likes Coke, why don’t you try some!). Readers should be aware that there is a growing body of literature disputing the efficacy of online advertising, outside of search.
I is for isolation. In the real world, retailers target and supply where the demand is. If you want things that people around you don’t, then offline retailers will ignore you and you are in what Bell calls a preference minority.
An isolated preference minority customer is brilliant for an online business, because they will struggle to get what they want offline and their costs will be high, so they will be relatively price insensitive.
Internet retailers find it much harder to compete on mainstream products.
T is for Topography. The retail landscape is changing and the offline and online worlds are merging. This is why many online retailers are starting to open offline stores. Bell cites Bonobo’s as an example, and suggests Internet sellers seed areas where there is a high level of real world trust. Plus people in the same ‘hood face the same frictions. The order in which you will gain customers generally follows the pattern of offline word of mouth, online word of mouth, traditional advertising, and online search.
There is another factor at play here, and that is the steady move of the online world from desktops to mobile. This has real consequences for the way we shop, as we search in the moment. Your rank in search becomes much more important (the mobile rank premium is 37% vs. 25% on a desktop).
The way we will shop online will change for a number of reasons, including: we are always instantly on, sensors allow us to take photos and communicate location, the impact of word of mouth is amplified as you can actually show people, mobile is an app world, and never have so many people been connected to a device that is a distribution system connected to a payment system.
Display advertising is a waste, despite sellers spending $12 billion in 2012 on display adverts, an American was more likely to complete a navy seal training program than click a banner ad. That’s what HubSpot says anyway.
Y is for You. With a nod to startup Internet entrepreneurs, Bell tells us the business model must address a common problem, the founders (preferably a pair) need magnetic personalities (don’t we all wish for a magnetic personality), and be efficient in getting things done. Talk is cheap and an idea is just that.
A successful Internet business is likely to do at least one of the following; disrupt an existing value chain, democratize access, pool resources / utilization or
provide a better match between supply and demand.
Whatever business you have in mind, it won’t hurt to consider the online / offline interaction. And keep an eye out for how a mobile world will rewrite the rulebook all over again.