b2c barriers and strategies: a case study of top b2c companies in china
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B2C Barriers and Strategies: A Case Study of Top B2CCompanies in ChinaJun Yu aa Department of Managerial Studies , University of Illinois, Chicago, College of BusinessAdministration , MC 243, 601 S Morgan Street, Chicago, IL, 60607 E-mail:Published online: 22 Sep 2008.
To cite this article: Jun Yu (2006) B2C Barriers and Strategies: A Case Study of Top B2C Companies in China, Journal ofInternet Commerce, 5:3, 27-51, DOI: 10.1300/J179v05n03_02
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B2C Barriers and Strategies:A Case Study
of Top B2C Companiesin China
Jun Yu
ABSTRACT. Researchers have raised several concerns about develop-ing Internet-based business-to-consumer (B2C) applications for devel-oping markets such as China. Although both the economy and theInternet population have grown rapidly in China, the potential of theonline market there has been questioned because of three importantbarriers–consumers’ preference for face-to-face transactions, the lack ofan efficient transportation infrastructure, and an underdeveloped creditpayment system. Nonetheless, the Internet B2C sector has seen muchgrowth in China and several companies have successfully incorporatedthe Internet into their business. This paper examines the strategies thatleading Chinese Internet firms adopted to overcome these three barriers.Besides providing insights into e-commerce development in China, theresults are useful for western firms attempting to market to consumers inChina and other developing countries. doi:10.1300/J179v05n03_02 [Articlecopies available for a fee from The Haworth Document Delivery Service: 1-800-HAWORTH. E-mail address: <[email protected]> Website:<http://www. HaworthPress.com> © 2006 by The Haworth Press, Inc. All rightsreserved.]
KEYWORDS. B2c, e-business, internet marketing, china, developingcountries
Jun Yu is Assistant Professor of Marketing, Department of Managerial Studies,University of Illinois, Chicago, College of Business Administration, MC 243, 601 SMorgan Street, Chicago, IL 60607 (E-mail: [email protected]).
Journal of Internet Commerce, Vol. 5(3) 2006Available online at http://jicom.haworthpress.com
© 2006 by The Haworth Press, Inc. All rights reserved.doi:10.1300/J179v05n03_02 27
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INTRODUCTION
To be able to make an online business successful, a company has toattract customers willing to shop online, deliver products to these cus-tomers, and receive payments from the customer. In developed marketssuch as the U.S., all of these can be achieved without much difficulty, atleast technically. Advertising would prompt targeted consumers to be-come actual buyers, efficient delivery is provided by UPS, FedEx,USPS, and others, and consumers can easily pay online with their creditcards.
However, it is a different story in less-developed countries. In China,whose rapid economic development has produced an enormous con-sumer market, all three tasks still appear to be difficult to achieve. First,the Chinese shopping culture favors direct, face-to-face transactions,which are exactly what e-commerce avoids (Samiee, 1998). Second,China has an underdeveloped transportation infrastructure that makesthe delivery of goods highly inconvenient (Haley, 2002; Samiee, 1998).Third, few Chinese have credit cards that work in the same way as creditcards in developed countries do (Zhao, 2002). Due to these problems,there are concerns about the potential, at least in the near term, of the on-line market in China (Agarwal and Wu, 2004; Haley, 2002; Rosen,1999).
Surprisingly, China’s B2C e-commerce has grown dramatically inthe past several years. Almost half of the Chinese people with access tothe Internet have online shopping experience, and half of these Internetusers regularly visit online stores, according to a recent report by theChina Internet Network Information Center (CNNIC, 2004). The samereport also indicates that more than 68 percent of the Internet users inChina would make an online purchase in the next 12 months. iResearch,a well-known e-commerce consulting company, estimated that onlinesales to consumers in China have more than doubled each year since2001, as shown in Figure 1.
The absolute online B2C sales are still small compared with those indeveloped countries. However, China already has the second largestInternet population and will be the largest in a few years (Wong et al.,2004), and the Chinese market has become more important for bothChinese and non-Chinese firms. For many multinational firms, even forthose pure-play Internet ones, the China market cannot be overlooked.For example, almost half of the sales of Amazon.com came from mar-kets outside the U.S. in 2004. Naturally, the enormous potential of theChinese market has to be incorporated into the global strategy for firms
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like Amazon. Early entrants into the Internet market will hold a strong“first-mover” advantage because e-commerce development in China isstill in its early phase (Kalyanaram et al., 1995).
To be able to succeed in the online business in China, firms have tocreate viable strategies to deal with the barriers to e-commerce identi-fied earlier. Knowledge about how to achieve this could be obtained byexamining how successful Chinese online companies develop theirconsumer business. The sheer growth of the Internet population, in andof itself, does not seem to explain the growth of B2C e-business inChina because it does not remove these barriers. It is important to ex-plore the answers to this question and obtain useful insights because ofthe increasing size of the Chinese market. Both the Internet populationin China and the Chinese economy will continue to grow rapidly.
This paper provides a study of the top B2C companies in China, ex-amining the approaches that have been adopted to overcome the majorbarriers to e-commerce. Besides providing insights into e-commerce inChina, the analysis would also be useful to multinational companiesthat attempt to establish an online business for the fast-growing Chinesemarket. It also has implications for e-business strategies in other devel-oping countries.
LITERATURE REVIEW:B2C E-COMMERCE
This section presents a brief review of the research in B2C e-com-merce in general, B2C e-commerce in developing countries, and B2Ce-commerce in China. Considering the time-sensitive nature of e-com-merce research, emphasis is given to more recent work.
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FIGURE 1. Online Sales in China (in millions of RMB)
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B2C E-Commerce
The potential of using the Internet to reach consumers is widely ac-knowledged (Craig et al., 2003). The role played by the Internet inmarketing to consumers has been discussed from a variety of perspec-tives. The foundation for effective marketing strategies is always an ad-equate understanding of consumers (Kotler, 2002). To this end, someresearchers have examined characteristics and behaviors of onlineshoppers. Issues that have been studied include different shopping orien-tations (Stell and Paden, 2002), perceptions of consumers regarding thebenefits and concerns of shopping online (Schimmel and Nicholls,2002), consumers’ perceived relative advantages and disadvantages ofshopping online versus shopping in traditional stores (Inks and Mayo,2002), online purchasing intention (Zhang and Prybutok , 2003), pri-vacy sensitivity (Lawler , 2003), concerns about security and onlinefraud issues (Janda and Fair, 2004), and online-shopping satisfaction(Janda and Ybarra , 2005). Overall, research seems to suggest that manyconsumers will stick to conventional shopping venues. But a great num-ber of consumers see Internet shopping as beneficial and have made pur-chases online. Those who shop online welcome the convenience of on-line shopping, but they also have concerns about privacy, transactionsecurity, and frauds. Hence, conventional shopping venues and Internetshopping will coexist (Roberts et al., 2003).
With these understandings about consumers on the Internet, appropri-ated marketing strategies should be devised (Stell and Paden, 2002; Ruppand Smith, 2003). Various theories have been put forth regarding strate-gies for loyalty building, price competition, providing information forcustomers, and online business competition. Markham (2006) mentionsseveral helpful techniques for shopping site development. Scott andMiller (2002) point out that firms who sell online must differentiate theirproducts and services to a greater extent than those who do not sell online.Lee et al. (2004) argue that a third-party assurance seal has an impact oncustomer purchasing intention. Others propose that cause marketing is aneffective way of building trust and reputation and differentiating a com-pany from others (N owak et al., 2004). Hopkins and Alford (2005) sug-gest that e-tailer image should be built around functional dimensions ofprice, merchandise, and service, and the affective dimensions of atmo-sphere, self-/site image congruence, and convenience.
Recent research has put more emphasis on relationship marketing.Various frameworks have been proposed to help online vendors de-velop and nurture longlasting relationships with consumers (e.g., Oinas,
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2002; Salam et al., 2005; Vijayaraman and Bhatia, 2002 ). Consideringthe complexity of the phenomenon, such frameworks typically incorpo-rate technological, behavioral, social, psychological, and organizationalinteractions between Internet vendors and their customers. Firms canalso build a good reputation by adopting symbolical, competitive, andrelational actions and maintain a certain balance of such actions (Bense-baa, 2004). For example, Murtaza and Greer (2003) discuss strategies ofusing web personalization for individual visitors. Integrative modelsthat connect some of these factors have also been suggested in the litera-ture. Grewal et al. (2003) build a price-value-loyalty chain model thatexamines how consumer characteristics interact with price and non-price factors to affect consumers’ perceived value, which in turn influ-ence the consumer’s loyalty towards the online retailer. In some cases,online and offline operations can even complement each other, espe-cially for companies that have established conventional shopping ven-ues ( Cordeiro, 2003).
E-Business in Developing Countries
B2C e-business has grown substantially in the past several years in thedeveloping world. However, most of the e-commerce adoption researchhas been conducted in industrialized countries, and more research isneeded to study e-commerce in developing countries (Grandon andPearson, 2004). Research that focuses on B2C issues in developing coun-tries is rare. Therefore, only several examples will be given here. In ananalysis of Internet development in various regions of the world, Debooet al. (2003) clearly show that Asia, South America, and the Middle Eastall have strong market potential. For example, South America has thefastest growing PC purchase rate, the Middle East has the second fastestgrowing PC purchase rate and some countries there have double-digitGDP growth, and Asia’s B2C e-commerce increases 100% each year.Corresponding to the rising importance of these markets, there have beenresearch efforts to understand consumer characteristics and behaviors indeveloping markets. For example, Multhitacharoen and Palvia (2002)find that people in Thailand have a lower acceptance level of Internetstores than those in the U.S. Issues related to the lower level of acceptanceinclude lack of legal protection and not having credit cards. Park and Jun(2003) compare Korean and American Internet users and find that thereare significant differences in Internet usage and perceived risks inInternet shopping between the consumers in the two countries.
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There is also some research about the extent to which firms in devel-oping markets embrace the Internet. Different patterns have been foundin these countries. In Brazil, telecommunication infrastructure is no lon-ger considered a barrier for e-commerce, and industries such as finan-cial services have widely adopted the Internet approach (Tigre, 2003).However, in Nigeria, Osuagwu (2003) concludes that e-mail was themost used aspect of the Internet system in Nigerian companies and Ni-gerian business organizations used the Internet system mostly for busi-ness communication. The low level of Internet education proved to bethe most influential factor in Internet appreciation in Nigerian com-panies. In the Russian market, there are problems in payment and deliv-ery systems (Hawk, 2002). In Hong Kong, perceived low e-shoppingcomparability, e-shopping inconvenience, e-transaction insecurity, andpoor Internet privacy, together with orientation toward social interac-tion and low awareness on the part of consumers, translate into sup-ply-side hurdles (Cheung and Liao, 2003). Grandon and Pearson’s(2004) study of e-commerce adoption in small- and medium-sized firmsin Chile found that Chilean managers/owners most receptive to adopt-ing e-commerce possess the financial and technological resources toimplement it, see e-commerce as increasing managerial productivityand supporting strategic decisions, feel external pressure to put e-commerce into operation, perceive e-commerce as compatible with pre-ferred work practices and existing technology infrastructure, and per-ceive e-commerce as useful for their firms.
Overall, research seems to have indicated that B2C e-commerce indeveloping countries have obstacles in the areas of cultural habit andbusiness and technology infrastructures. In the meantime, these marketsalso have substantial potential.
B2C E-Business in China
Researchers generally have agreed that there is tremendous potentialin the online consumer market in China (Wong et al., 2004). However, asresearch in B2C e-commerce in developing markets in general, researchin the area of B2C e-commerce in China is very limited. There are severalstudies about the online population in China. The rapid growth of theChinese online population and the telecommunication industry is docu-mented in Zhao (2002) and Wong et al. (2004). Regarding online con-sumer behavior, a somewhat outdated paper (Wee and Ramanchandra,2000) reveals that Internet shoppers in Mainland China, Hong Kong, andKorea have similar characteristics. Most of them are young and male,
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hold degrees, and are working professionals. They shop online because ofthe convenience. However, they are concerned about online security,fraud, refund issues, and merchandise quality. Most of these characteris-tics of the Chinese Internet population do not appear to have changedmuch, according to a more recent study by Wong et al. (2004), although itis evident that the Internet has become more accessible to people in al-most all age, education, and socioeconomic groups. Qiu et al. (2003)point out the cultural differences between American and Chinese Shop-pers. They also mention the general business infrastructure in China isunderdeveloped for B2C businesses. Others have explored several as-pects of conducting online B2C business in this market. Maynard andTian (2004) find that most of the Chinese Websites of the top 100 globalbrands integrate local cultural characteristics. In the web banner advertis-ing area, research indicates that additional banner exposure improvesbrand recall, changes their attitude toward the brand, and increases theirpurchase intention (Gong and Maddox, 2003).
As pointed out by Wong et al. (2004), e-commerce development inChina will be significantly influenced by local economic developmentand user behavior. However, knowing there is a large potential Internetconsumer base in China and understanding their essential characteris-tics and behaviors are only the initial steps in building successful B2Conline business in China. Next, more detailed discussions are providedabout three challenging issues that B2C e-businesses have to face inChina-consumer preference for face-to-face transaction, an underdevel-oped transportation infrastructure, and a lack of credit payment system.
BARRIERS TO DEVELOPING E-BUSINESS IN CHINA
Many factors affect the development of an online B2C business.Dhruv et al. (2002) identify a number of factors as either “enablers” or“limiters” for Internet retailing. The enablers include information avail-ability, access to price information, accessibility, and convenience.These are the factors whose presence would benefit the online business.On the other hand, the limiters, which would inhibit the growth of theB2C firm, include lack of trial, lack of interpersonal trust, lack of instantgratification, high shipping and handling costs, customer service issues,loss of privacy and security, lack of a stable customer base, and poor lo-gistics. Oinas (2002) also suggests that online B2C companies need todevelop competency in retailing, handling payments, and distribution,among other critical business functions.
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This study concentrates on three of the critical capacities that e-busi-nesses need to develop–a customer base, delivery of products, and pay-ment. In the case of China, we frame these issues as limiting factors inB2C e-commerce. As will be discussed next, the Chinese culture that fa-vors face-to-face transactions raises the question of whether a sufficientonline customer base can be created. In addition, the underdevelopedtransportation infrastructure, and the lack of a consumer credit systemare also barriers to B2C e-business. These three factors actually encom-pass almost all of the “limiters” identified in Grewal et al. (2002). Onlyby overcoming these three barriers can a B2C company achieve itsobjectives in sales growth and profitability (Figure 2).
Consumer Preference for Face-to-Face Transaction
The Chinese have long preferred completing transactions face-to-face. Business transactions are often a result of mutual trust rather thancontractual commitment. Direct interactions help build trust (Liu andBrookfield, 2000). Therefore, personal interactions in purchasing behaviorare prevalent in high-context, Confucian-based cultures (Samiee, 1998), ofwhich China is a major member. When rules and regulations are notsufficient, people rely on trust and familiarity as primary mechanisms toreduce social uncertainty. The relative paucity of regulations and cus-toms on the Internet makes consumer familiarity and trust especiallyimportant in the case of e-commerce (Gefen and Straub, 2004) . For aconventional Chinese consumer, it seems difficult to make a commit-
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FIGURE 2. Three Barriers to Online B2C Business
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ment for a purchase without seeing and feeling the item or having dealtwith the seller. The traditional Chinese saying of “I hand you the cashwith my hand, and you hand me the goods with yours” vividly attests tothis custom (Zhang, 2002).
The unwillingness to purchase without face-to-face interactions withthe seller obviously poses a challenge to online marketers (Samiee,1998). Ironically, it is the absence of face-to-face interactions in e-com-merce that brings convenience to the buyer, improves the efficiency andlowers the costs for the seller. For an e-business to be successful, thekey, then, would be building trust to attract potential customers (Wil-helm, 2000).
Underdeveloped Transportation Infrastructure
It is widely understood that one of basic benefits of shopping onlineis the convenience of shopping from home or office. The virtual trans-action typically requires the seller to arrange for the delivery of thegoods to the buyer if the purchased item is not a digital product. This isnot an issue in developed markets where delivery services are providedby companies that specialize in this type of service. However, there isstill no commercial delivery service firm with nationwide coverage inChina. Until recently, courier services such as FedEx and UPS were notavailable in China. FedEx gained the access to the Chinese market first,but its penetration is still limited. It has 10 offices in China and plans toopen 5 more in the near future. (Morning News, 2005). UPS currentlymaintains only 14 sales offices in China. The only distribution networkwith nationwide coverage that online businesses could use is the ChinaPost Service, whose services are costly and slow and represents “one ofthe major complaints that customers have about e-commerce in China”(Haley, 2002: p. 121). Tan and Wu (2002) point out that the remote ruralareas especially suffer from long delivery time and poor service. Over-all, the consensus is that China does not have an adequate national deliv-ery infrastructure to support B2C e-commerce (Meeker et al., 2004;Zhao, 2002).
Lack of Consumer Credit System
One of the factors that has facilitated online retailing in developedcountries is the well-developed credit payment system. With a creditcard, it is convenient for consumers to select a product and make a pay-ment immediately on the Internet, and the transaction is finished except
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for product delivery. However, credit cards, as understood in developedcountries, are almost nonexistent in China. There is no credit evalua-tion, card verification system, or central clearing house in place. As a re-sult, the majority of Chinese consumers still do not have a credit card.The problem of most of the debit cards that most cardholders have thereis that they can be used only in the city where the issuing bank is located(Worthington, 2005). It is not surprising that although the Chinese hadabout 330 million payment cards, only 9 percent of them use their cardsat least once a week (Tan and Wu, 2002). Therefore, neither firms norconsumers have benefited from the convenient payment method thate-commerce has brought to those in developed markets. It is frequentlypointed out by various authors that the lack of the credit payment systemwould greatly hinder China’s progress toward e-commerce (Haley2002; Henry, Phan, and Rohlmeier 2003; Meeker, Choi, and Motoyama2004; Worthington, 2005; Zhao, 2002).
A MULTI-FIRM CASE STUDY
As pointed out earlier, even in the presence of the three barriers toe-business, the online B2C sector has grown rapidly. The dramatic in-crease in the online population in China is an important factor but thiscannot by itself overcome the obstacles to e-commerce. An effectiveway of exploring this phenomenon is to study the successful Internetcompanies and find out how they “did it.” Because of the exploratorynature of the present research, a case study approach is adopted. This ap-proach enables the researcher to become deeply knowledgeable about afirm’s activities, thus allowing new insights to emerge. Yin (1994) de-fines the case method as an empirical inquiry that “investigates a con-temporary phenomenon within its real-life context (p. 13)”. To this end,we will examine the approaches taken by three leading online retailers–Dangdang.com, Joyo.com, and Store.Sohu.com. The three companiesare consistently listed in the top ten Chinese Internet businesses bye-commerce research firm, ChinaLabs, and have the highest sales inconsumer products among all of the B2C Internet companies in China.Data sources include numerous published news reports about the threecompanies, interviews with corporate-level executives, and informationprovided by the Websites of these online stores.
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Dangdang.com
A couple, Peggy Yu and Guoqing Li, founded Dangdang in 1999. Itinitially only sold books, and music and movies were added in 2001. InJuly 2001, Dandang achieved the distinction of being the “busiest on-line store” in China. The company says its goal is to have the most com-prehensive collection of Chinese-language books on the Internet forconsumers to purchase as conveniently as possible. It strives to providea large number of merchandise at low prices. In the meantime, it claimsthat it is providing the fastest possible delivery service. As of June 2005,more than six million consumers have made purchases at Dangdang. Tofinance its fast growth, Dangdang has received funds from internationalventure capital firms.
Dangdang is regarded by many as China’s Amazon because it lookslike Amazon in many aspects. It claims a 40 percent market share inChina’s online retail market. Its sales have grown roughly 80 percentannually, and reached RMB160 million in 2004. Books contributed 55percent of the sales, music CD and movie DVDs 35 percent, and othercategories 10 percent. It is currently the largest Chinese-language on-line store in the world. However, its sales are less than 2 percent of theconventional book market in China. Following the Amazon.com model,Dangdang also sells many more product categories beyond books, CDs,and DVDs, including cosmetics, computer-related products, gifts, toys,etc. It currently has more than 300,000 different products for sale.Dangdang broke even in 2002 and became profitable in 2003, after only afew years in business. In March 2004, Amazon proposed to acquireDangdang, believing that Dangdang had a business model that was suit-able for the Chinese market, enjoyed high brand recognition, and wasmanaged by a highly qualified management team. With a strong confi-dence in its growth potential, Dangdang was only interested in obtaininginvestment from Amazon, not outright acquisition. After the negotiationsbroke down, Dangdang has been seeking more investors for furthergrowth.
Joyo.com
Joyo is Dangdang’s rival in China’s online market. It was founded in2000 by several domestic software companies to sell books, music,movies, software, and computer games. In order to grow its business,the initial co-owners started to receive financing from internationalventure capitalists in 2003. The firm summarizes its Joyo Model as
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“upscale merchandise, full inventory, and fast delivery.” It boasts a reg-istered visitor base of 5.2 million as of late 2005. Joyo has followed anexpansion strategy that combines regional concentration and productline differentiation. To better serve regional consumers, it set up theShanghai and the Guangzhou branches, respectively in 2001 and 2003.In the product line area, it does not go after the quantity of merchandisebut focuses instead on providing the best, upscale products to consumers.
Overall, Joyo follows a different business model than Dangdang. Itdoes not aim to be the largest Chinese B2C store on the Internet but, in-stead, hopes to become an upscale specialty store. It has only a limitednumber of products for sale (about 10,000 in the beginning of 2005)even as it starts to offer everyday products such as bar soaps and tooth-pastes. In contrast to Dangdang, Joyo has inventory for the vast major-ity of the products it sells. Joyo’s corporate sales reached more thanRMB 200 million in 2004. However, part of the revenue is from non-Internet businesses such as book clubs and telephone cards. Joyo hopesto double its sales each year over the next five years and reach annualsales of RMB4 billion. Because of its concentration in the upscale seg-ment, it has a relatively high profit margin on most of it products. AfterAmazon failed to acquire Dangdang, it quickly acquired Joyo. Joyo’sexpansion into a wider range of product categories and its acquisition byAmazon could result in a real Amazon model that will compete withDangdang much more directly. In one of the consumer surveys, Joyowas rated number one in customer satisfaction among all online B2Ccompanies.
Store.Sohu.com
Store.Sohu.com is the online store set up by Sohu.com in 2001.Sohu.com was started by Charles Zhang in 1996 after he came back toChina after obtaining his doctorate in the U.S. Zhang brought back withhim his experience with online business in America and initial financingfrom U.S. investors. It quickly grew into one of the most famous Chi-nese-language web portals. Millions of Chinese consumers use Sohu.com for news, information search, e-mail, wireless messaging, instantmessaging, browsing, games, and shopping. Sohu had its IPO in 2000,and in the same year was selected by Forbes as one of the best smallpublic companies in the world. With the fast growth in many areas of itsbusiness, the online store, Store.Sohu.com, was set up in 2001, twoyears after Dangdang was founded and one year after Joyo’s establish-ment.
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Like Dangdang and Joyo, this online retailer has experienced fastgrowth in the past few years. What is different between Sohu and theother two firms is that Sohu has never positioned itself as a bookseller.Hence, it conspicuously does not follow the bookstore model of Ama-zon.com that is copied by Dangdang and Joyo. Besides books, CDs andDVDs, Sohu has cosmetics, clothing, decoration materials, jewelry,toys, home appliances, office products, sporting goods, computers, etc.Sohu’s strategy is to build its online store into an upscale shopping cen-ter. Currently, this store has 3 million registered users. Five million peo-ple visit this site daily. The quarterly sales in 2005 amounted to morethan RMB10 million. Therefore, its online sales are lower than those ofDangdang and Joyo.
STRATEGIES OF LEADING CHINESE COMPANIES
Due to the challenges of operating an e-business in China, it is criticalthat e-business firms develop strategies suitable to local market condi-tions. Although e-business models are much more advanced in devel-oped countries such as the U.S., these models cannot be copied directlyin China, where online companies have to devise new and unique waysto overcome challenges specific to China. The approaches that the threetop Chinese Internet retailers undertook in this regard are discussed next.Relevant information from other sources and the research literature isalso used to help the discussion when appropriate.
Overcoming Consumer Reluctance for Online Shopping
To overcome consumers’ reluctance for virtual shopping, four strate-gies were adopted: prudently selecting the products to offer in the onlinestores, educating consumers about the benefits of shopping online, de-livering value that Chinese consumers desire, and heavily promotingtransaction security and product quality.
1. Prudently selecting the products to offer in the online stores.Choosing the appropriate products to market online is one of the funda-mental considerations of any e-business. As discussed previously, Chi-nese consumers are extremely cautious when buying products they havenot seen. Therefore, companies have to carefully select the products thatcould be sold online, taking into consideration both the nature of theproduct and its price. Table 1 shows the types of products that consumershave purchased on the Internet, according to a CNNIC survey (CNNIC,
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2004). A cursory examination of the product categories makes it clearthat most of these products have a high level of standardization. Themost frequently purchased products are books, computers and relatedproducts, consumer electronics, everyday household items, and com-munication gadgets. These products do not have to be customized forindividual consumers (including computers, which are generally notcustomized regarding the configurations). It seems that, at this stage ofthe e-commerce development in China, standardized product categoriesare more acceptable to the consumer.
The importance of product selection is confirmed by the product se-lections of the three online retailers profiled here. Both Dangdang andJoyo concentrate on books. Sohu, on the other hand, is a leading sellerof well-known cosmetics brands. In addition, the majority of the prod-ucts that these companies are selling are not highly expensive. Most ofthe books sold by Dangdang and Joyo are priced around RMB35 orlower (about $4.5). Because the typical Chinese consumers’ disposableincome is still not high, very expensive items are not suitable for online
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TABLE 1. Products Purchased by Internet Shoppers
Product Percent of Respondents
Books 57.6
Computer and related products 33.4
CDs and DVDs 26.4
House appliances and household services 16.5
Communication devices 14.1
Clothing 12.3
Gifts 10.8
Cameras and related products 9.3
Cosmetics 8.7
Educational service 6.6
Sporting goods 6.5
Consumer electronics 6.4
Tickets to various events 5.5
Hotel reservation 3.5
Stationary 3.2
Medical care service 2.9
Financial service (including insurance) 1.5
Food 1.8
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stores. Products such as cars, big-ticket home appliances, and high-priced fashion products are not sold at any of the online stores due to thehigh expenses or variations in consumer preferences for different con-figurations of product attributes. This strategy fits the current psyche ofthe Internet users in China
2. Educating consumers about the benefits of online shopping. Be-cause most Chinese consumers are not familiar with the concept ofcatalogue shopping, let alone virtual shopping, and face-to-face trans-actions are the only shopping format they have ever known, it falls onthe online stores to convince consumers that there are real benefits fromshopping on the Internet. Many of the advertisements of the three retail-ers emphasize the advantages of online shopping. These advertisementsfrequently include words or phrases like “convenience,” “low price,”“shopping anytime anywhere,” “no need to step outside for what youneed,” etc. Ironically, the outbreak of the SARS epidemic in 2003 cre-ated an opportunity for the online retailers to promote their businesses.During the SARS crisis, all three companies enjoyed daily sales thatwere as high as ten times the ordinary level.
3. Delivering value that Chinese consumers desire. One of the mosteffective ways of attracting the buyer is to deliver value, which is de-fined as the difference between the benefits the consumer gets fromowning and using a product and the costs associated with acquiring theproduct (Armstrong and Kotler, 2002). Therefore, online firms couldconvince consumers to make online purchases if there is a higher valuein doing so, compared with the conventional shopping venues. Further-more, research has shown that, when used appropriately, consumer-per-ceived value could lead to consumer loyalty (Grewal et al., 2003). ForChinese consumers, this seems especially important as most do nothave high annual incomes. In addition, as many as 45 percent of theconsumers shop on the Internet to save money (CNNIC, 2004).
Therefore, if e-businesses deliver value that consumers desire, con-sumers will be attracted to this new shopping venue. Recently, Dangdangadvertised the slogan “our prices are 10 percent lower than any otherstores on the Internet.” To convince consumers that they indeed couldget values unavailable elsewhere, Dangdang designed a price compari-son system on its website so that shoppers could compare, in real time,Dangdang’s prices with those of its competitors, including Joyo andSohu. If it is was found that the Dangdang price was higher than that ofany online store, it would be cut automatically to below 90 percent ofthe lowest price found elsewhere. The price comparison tool greatly in-creased the traffic on Dangdang’s website. Joyo immediately reacted by
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offering a selection of books for RMB1 each, and the selection waschanged everyday. Sohu, the other store, adopted a “point” systemthrough which customers could accumulate points based on the amountof purchases they make. Customers would be eligible to exchange thepoints for items such as TVs, gifts, or tickets to entertainment events.Other steps of reducing consumers’ costs (thus increasing consumervalue) were also taken. For example, both Dangdang and Joyo offeredfree shipping in their major urban markets. The competition among theonline retailers, besides delivering value to consumers, has also acted as“eyeball grabbers.” Consumers who had never thought about buying onthe Internet were tempted by these saving opportunities. Sohu has spon-sored many events that are not directly related in any way to its busi-ness, including beauty pageants. The objective is to make consumerskeep the online store in mind and possibly make a purchase.
4. Heavily promoting transaction security and product quality. Due toconsumers’ preference for “buying before seeing,” which results fromthe lack of trust in the virtual vendor, it is important for the e-businessesto establish trustworthiness with its consumers. To motivate consumersto make the switch from brick-and-mortar stores to virtual stores, theleading online retailers have made much effort to ensure safe transac-tions. Showing the customer that the company cares about his or herwell-being is one of the effective ways of enhancing customer loyalty(Srinivasan et al., 2002). To help convince consumers that online storesare safe and legitimate, Dangdang has tried to avoid having only thewebsite as the point of contact with its customers. Besides conventionaltools such as telephone and mail, online bulletin board system, e-mail,and even instant messenger are also used to provide feedback to con-sumer inquiries and help customer solve problems. Dangdang has servicerepresentatives answering customers’ questions in real time through in-stant messaging systems such as MSN and QQ (a Chinese-language in-stant messaging system). Joyo established a state- of-the-art call center,which claims a first call through rate of above 90 percent, an unusuallyhigh rate even by the standards of developed markets. Apart from actu-ally solving problems in transactions, these systems serve to reduce thefeeling of insecurity in the mind of consumers about online transac-tions, and, to some degree, also help motivate the consumer to make thefirst try in shopping online. Sohu has leveraged its brand name as one ofthe most popular Chinese Web portals in advertising its service as a highquality one.
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Building a Reliable Distribution System
A significant portion of the sales of Joyo and Dangdang are frombooks. Prices of many books are only around RMB10. Fast delivery,thus, is important as consumers would not wait for seven days just tosave RMB1 on a RMB10 purchase. This magnifies the challenge facingthe online stores as they do not have a well-developed transportation in-frastructure to begin with. Several strategies have been adopted by thethree firms to overcome the problems with delivering goods to custom-ers. The strategies include a focus on major urban markets and usingmultiple distribution channels.
Focus on Major Urban Markets
All three online stores have a clear focus on major urban markets.This results from several considerations. First, the distribution of Internetusers in various regions of China is highly uneven. Internet activities aremainly concentrated in the better-developed coastal and urban areas(Wong, Yen, and Fang 2004; Zhao, 2002). Second, compared with ruralareas, urban areas enjoy a more developed transportation infrastructure.Third, the majority of the holders of bankcards reside in urban areas.Fourth, urban consumers in China have always led those in rural areasin trying new products and new consumption behaviors, and onlineshopping should not be an exception.
Dangdang and Joyo both have built large distribution centers in majormetropolitan markets. Consistent with its current focus on major urbanmarkets, Dangdang has adopted a phase-in strategy–it only builds a cen-ter when its sales in a market reach RMB40 million. In Beijing, one of themost developed cities in China, Dangdang is able to deliver productswithin 24 hours of the order. During the National Day holidays in 2004,Dangdang even made the promise “purchase in the morning, delivery inthe afternoon.” Joyo currently can deliver within 24 hours in Beijing,Shanghai, and Guangzhou, and is planning to gradually achieve the samedelivery rates in other cities in the next few years. Its VIP service inBeijing delivers the order only a few hours after the order is made. How-ever, this would not be possible without several distribution channels.
Multiple Distribution Channels
Four basic distribution channels have been adopted by the three lead-ing companies–postal service, direct delivery by the retailer, third-partycourier service, and alliances with established companies.
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Postal service. China Postal Service (CPS) currently is the only orga-nization that has a national delivery network. As discussed previously,the postal services are generally considered costly and slow. However,for regions not around major cities, CPS is still the only available deliv-ery provider for all three companies. In urban markets, the three compa-nies have negotiated with CPS to provide delivery services specificallytailored to their business. For example, Sohu entered an agreement withthe Beijing office of CPS to allow the customer to pick up the merchan-dise from convenient CPS locations the day after he or she makes theorder.
Direct delivery. Besides using the postal service, Joyo has built itsown delivery force in major cities. In Beijing, for example, customer or-ders via the Internet are first sorted and transferred to Joyo’s main ware-house for this region. Delivery trucks would then transport the sortedmerchandise to the company’s eight delivery branches. From there, de-livery workers then deliver the goods to customers’ homes or offices.Joyo delivers the majority of its own orders in Beijing, Shanghai, andGuangzhou, and its own delivery service is expected to become thelargest private delivery service provider in China.
Third-party delivery. In contrast to Joyo, Dangdang has relied mostlyon third-party delivery service providers–the independent courier ser-vice companies. Its delivery partners include 20 transportation compa-nies and 40 express delivery service firms (freelance couriers). All ofthese delivery service providers only serve regional markets with majorcities as their centers. They have established delivery workforces in theareas they serve, employing a large number of young people using bicy-cles as the main means of delivery within the cities. With an efficientdelivery system in place, Dangdang’s customers in Beijing can gener-ally expect to receive the merchandise a day after they make the orderonline, and those in Nanjing, Shanghai, and Guangzhou regularly getwhat they ordered in 3-5 days. “Bicycle boys are the last leg of e-businessin China,” said Peggy Yu, co-founder and CEO of Dangdang.
Alliances with established companies. The fourth major delivery chan-nel is establishing alliances with companies that have already built so-phisticated delivery networks. Compared with Joyo, Dangdang reliesmore on this approach. Xinhua Bookstores, the largest brick-and-mortarbookseller in the country, is the most important business partner forDangdang and delivers 85 percent of customer orders on behalf ofDangdang and grants its online rival space in its storage depots in Shang-hai and Guangdong. Dangdang’s information system is connected to thatof the Xinhua stores, and orders, if Dangdang does not have the inven-
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tory, are routed to Xinhua’s stores for processing. This way, Dangdang it-self only keeps inventory for about 30 percent of the merchandise it sells.
Designing Effective Payment Methods
As discussed earlier, another problem with developing e-business inChina is that the vast majority of consumers do not have credit cards(Worthington, 2005). Many have debit cards but their use is often re-stricted. To solve this problem, online retailers have adopted severalapproaches, which could be categorized as online payments, offline pay-ments, and store membership, which combines online and offline activ-ities.
Online Payments
There have been recent improvements in the bankcard industry. Sev-eral banks are collaborating with online stores to allow the consumer totransfer money from their bank accounts to online stores when theymake a purchase. However, many consumers still do not use or are notwilling to use bankcards on the Internet due to both fears about onlinetransactions and the constraints on the use of these cards. For instance,only 10-15 percent of Dangdang’s customers use bankcards in their pur-chases. Therefore, the other methods dominate payment activities.
Offline Payments
There are several offline payment methods. The most common one isCOD (cash on delivery), which all three companies use. With the CODapproach, the customer pays by cash when he or she receives the prod-uct. The courier company then transfers a portion of the money to theonline retailer after deducting their charge on the delivery. Dangdangpioneered the COD format in China. Two-thirds of Dangdang’s busi-ness is based on this payment collection method. On the part of the cus-tomer, this approach is especially attractive because it allows them tosee and feel the product before they take out the cash. This helps to alle-viate the “trust issues” associated with non-face-to-face transactions.Besides COD, all three online stores accept money orders and wiretransfers. The problem with money orders and wire transfers in China isthat they need more time to be processed. Often, the transfer processtakes several days, and online retailers process the order only after thepayment is cleared in the bank. This causes delay in delivery.
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Club Membership
Again, all three companies use this approach, which essentially re-quires the separation of two activities–sending money to the onlinestore and purchasing a certain item. The buyer has to register and open a“virtual account” with the online store, and “deposit” money under thataccount via money order, bank transfer, or other means. The buyer canthen use the money in the account toward any purchase with the onlinestore, as long as there is a balance that is sufficient for the purchase. Inthe past several years, this approach has made online purchase possiblefor millions of consumers. However, there are several obvious draw-backs. First, the consumer has to open multiple accounts if he or sheshops at several stores. Second, customers have to keep depositingmoney into the account if they intend to make additional purchases.
CONCLUSION
In this study we examined the approaches that leading Chinese onlineB2C companies have utilized to overcome three barriers to e-businessin China: a preference for face-to-face transactions, the underdevelopedtransportation infrastructure, and the lack of an efficient payment sys-tem. Companies that market to Chinese consumers on the Internet needto devise new and unique ways of overcoming these constraints. Thebasic approaches of the leading companies are presented in Table 2. It isclear that there are many similarities among the three companies in theirstrategies for dealing with the e-commerce barriers. All three carefullyselected merchandise that are feasible in online shops, devoted many ef-forts to promotion, developed reliable delivery service, and used bothonline and offline payment methods. However, there are also some dif-ferences depending on the backgrounds of these companies and theirbusiness models. For example, Sohu did not rely on promoting qualityand security issues to the extent that the other two did because Sohu en-joyed its parent company’s widely recognizable brand name. Dangdangand Joyo did not have this advantage.
If China continues to make progress with its basic economic infra-structure, it is likely that the constraints imposed by the three limitingfactors would gradually diminish. For example, the credit card industrywill continue to grow. Banks are taking steps to make consumer appli-cations easier. Some banks such as China Merchants Bank are offeringmajor international credit cards such as Visa and MasterCard. More
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widespread use of credit cards will undoubtedly help the developmentof e-commerce in China. However, as China lacks a consumer creditevaluation system, there will not be a dramatic change overnight. In themeantime, conducting e-business still requires developing feasible pay-ment collection methods. Since the organizations studied here are thetop B2C companies in China, their experiences are valuable lessons forother Internet ventures. Both domestic companies and multinationalfirms that hope to do business in China should examine the three issuesexamined here and devise creative ways to build a viable online busi-ness. The experiences of the three leading Chinese companies seem tosuggest a strategy that can be summarized by Figure 3.
As indicated in the beginning of this paper, there will be an enormousB2C e-business market in China in years to come. This opportunity willbe taken by those that take advantage of the fact that e-commerce is stillin its early stage in China. Companies with good products should notwait for the removal of the current hurdles in the e-business environ-ment. The key is to develop the appropriate e-business model that issuitable for the products being marketed. The business model has to in-corporate the three factors described in this study: attracting potentialconsumers willing to shop online, timely delivery of products to cus-
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TABLE 2. Success Factors
Firm Success Factors
Dangdang.com Concentrating on books, music, and movies,low pricesHeavy promotion on quality and serviceProviding consumer valueFocusing on urban markets, multiple distribu-tion channels, third-party delivery serviceOnline and offline payments
Joyo.com Concentrating on books, music, and movies,inexpensive merchandiseHeavy promotion on quality and serviceProviding consumer valueFocusing on urban markets, multipledistribution channels, own delivery serviceOnline and offline payments
Store.Sohu.com Upscale shopping for a variety of merchan-dise, inexpensive merchandiseLeveraging parent brand nameProviding consumer valueFocusing on urban markets, alliance withChina Postal ServiceOnline and offline payments
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tomers, and convenient payment methods. Online B2C companies thatcan achieve these goals will have a chance to occupy a share of thisfast-growing market.
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doi:10.1300/J179v05n03_02
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