Brands Still Matter, Even for Shopbots

In the early days of Internet commerce, conventional wisdom held that online shoppers were fickle bargain hunters and that the Internet would relentlessly drive down prices and profit margins. Pundits said the days of brand equity and consumer loyalty were numbered. The notion seemed all but confirmed when, in mid-1995, Andersen Consulting invented the first shopbot — an intelligent robotic agent that lists the cheapest merchandise first — and named it BargainFinder.

But Amazon.com and other brand-name online retailers that don't play the ultradiscount game are challenging that notion. It's true that, of all Internet shoppers, the users of shopbots are the most price-sensitive. But even among those bargain seekers, the concept of brand still matters, according to a working paper by Erik Brynjolfsson, associate professor at the MIT Sloan School of Management and codirector of the Center for eBusiness@MIT, and Michael D. Smith, assistant professor of management-information systems at Carnegie Mellon University.

In “The Great Equalizer? Customer Choice Behavior at Internet Shopbots” (http://e-commerce.mit.edu/papers/tge), the authors analyze consumer buying patterns at a shopbot called EvenBetter.com, since renamed DealTime.com, which offers comparison shopping for a wide variety of goods, including books and electronic gadgets. A key finding was that 51% of price-minded shoppers didn't choose the shopbot's cheapest offering. In fact, the analysis showed that shoppers were willing to pay a 3.1% premium for a brand name and a 6.8% premium at places where they'd shopped before.

Why is that? “While shopbots substantially weaken the market positions of branded retailers, brand name and retailer loyalty still strongly influence consumer behavior at Internet shopbots,” the paper says. The findings suggest that Internet consumers use brand name as a proxy for reliability in service quality.

The paper concludes that online businesses can exploit the shopbot phenomenon. First, companies should recognize that brand still matters. Second, they should consider charging lower prices to shopbot customers than to customers who visit the site directly. Third, they should try to reduce shipping and handling costs because shopbot users are keenly sensitive to such add-ons.

What is the future of shopbots? Two significant flaws have hindered their prophesied emergence as the dominant online shopping channel. Their listings aren't comprehensive, which means they miss a lot of merchandise. In addition, they give preferential treatment to retailers that pay for a higher ranking.

“Shopbot owners have competing goals: Provide comprehensive and unbiased listings, and have a workable revenue model,” Smith says. “The next challenge is how to achieve those goals. I think it's a real problem for them.”