This paper attempts to gain a better understanding of consumer behavior on Internet purchases. To address this objective a secondary literature survey was conducted. In the first part, the paper focuses on characteristics of Internet consumers through briefly exploring online demographics and activities, and then through classifying several shopper types. Second, the established five stages model of the consumer decision process is examined in the online shopping context. Third, potential drivers of Internet shopping are derived, focusing on benefits of online shopping, Web loyalty and Web site design quality. The fourth part deals with acceptance barriers to Internet shopping, in particular with general barriers, security issues and privacy concerns. Implications for online marketers are derived after each part of the paper. Finally, several conclusions, a summary of implications and further notes are presented at the end.

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TABLE OF CONTENTS

ABSTRACT   i

TABLE OF  CONTENTS  ii

LIST  OF FIGURES  iv

LIST  OF TABLES  v

1.  INTRODUCTION  1

1.1.  Motivation and focus  1

1.2.  Research methodology  2

2.  CHARACTERISTICS OF INTERNET CONSUMERS  3

2.1.  The online market  3

2.2.  Current demographics  4

2.3.  Online activities  4

2.4.  Shopper types/segmentation approaches  6

2.4.1.  Motivation-based segmentation  6

2.4.2.  Benefit-oriented segmentation  7

2.4.3.  Adoption-based segmentation  8

2.5.  Implications  8

3.  CONSUMER DECISION MAKING ON THE INTERNET  11

3.1.  Problem recognition  11

3.2.  Information search  12

3.2.1.  Information quality aspects  13

3.2.2.  Price search behavior patterns  14

3.3.  Evaluation of alternatives  15

3.3.1.  Intelligent shopping agents  16

3.3.2.  Virtual communities  17

3.4.  Choice/purchase stage  17

3.5.  Post purchase stage  18

3.6.  Implications  19

- iii - 4.POTENTIAL DRIVERS OF INTERNET SHOPPING 23

4.1. Benefits of online shopping 23

4.2. Satisfaction and Web brand loyalty 24 4.3. Site design quality 27

4.3.1. Product fit and media richness 29 4.3.2. Atmospheric aspects 31 4.4. Implications 32

5. ACCEPTANCE BARRIERS TO INTERNET SHOPPING 35 5.1. General barriers 35 5.2. Security issues 37 5.3. Privacy issues 38

5.3.1. Privacy perceptions and consumer attitudes 39

5.3.2. Information practices and policies of Web sites 40

5.4. Reducing risk perception 41 5.5. Implications 42

6. CONCLUSION 46 6.1. Final implications 48 6.2. Further notes 50

REFERENCES 51

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LIST  OF FIGURES  

Figure  1 Online purchase penetration in Q4 2000  

Figure  2 Customer Decision Making Process  

Figure  3 Incentives that triggered a first time online purchase  

Figure  4 Benefits of online shopping  

Figure  5 Components of Web brand loyalty  

Figure  6 Encouraging loyal online customers to switch a Web site  

Figure  7 EC Environment Characterization  

Figure  8 Product Characterization  

Figure  9 Impact of bad experience on future online shopping behavior  

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Table1 Opportunities to stimulate online purchasing 24

Table 2 Influence of first purchase satisfaction 25

Table 3 Reasons for purchase at certain stores 27

Table 4 Functional desires of Web sites 28

Table 5 Factors affecting consumer choice of online stores 28

1 INTRODUCTION

“There is no reason anyone would want a computer in their home” (Olson, 1977). Ken Olson, president, chairman and founder of Digital Equipment Corporation, 1977

1.1 Motivation and focus

The Internet and its phenomenon has already a remarkable impact on society. People integrate the Internet more and more into their daily lives due to the versatile opportunities the Internet offers them. Electronic commerce (e-commerce) on the Internet is growing substantially, showing that more and more people access the Internet and get converted into online shoppers and online purchasers.

The Internet has already a major influence on marketing strategies of corporations. This influence will continue to grow and lead to structural changes for the whole business world. In order to participate on this process companies must view the Internet as an opportunity instead of a threat. A major factor for successful competing on the Internet is the understanding of consumer behavior. This behavior drives the Internet economy. The Internet does not only function as a new communication medium, which can be used as another distribution channel, but it does create an entirely new marketplace. This means for the consumer to experience not only another purchasing opportunity (like catalogs), but the possibility to surf within this new marketplace - a virtual world - to an almost infinite number of destinations to gain and evaluate information and decide on a purchase. Hence it is very interesting to explore the specific consumer behavior in this new, virtual environment - the electronic market represented by the Internet.

The main objective of this paper is to sketch a picture of current online shopper characteristics and the decision process consumers follow on the Internet. Furthermore, potential drivers and acceptance barriers towards Internet shopping are discussed and implications for online marketers derived.

The structure of the paper is as follows: Chapter two provides very briefly some statistics about the online market, demographics of Internet users and their online activities, in particular their shopping activities. Furthermore, different approaches of classifying shopper typologies are presented briefly. Chapter three focuses on the buyer decision process, comparing the classical five steps model with conditions of the Internet and giving some deeper insight on selected issues. Chapter four deals with potential drivers of Internet shopping, in particular with benefits of online shopping, Web brand loyalty, and the importance of Web site design. Chapter five pays attention to acceptance barriers to Internet shopping. General barriers are discussed as well as security and privacy issues particularly as important influencing factors. Each of the above mentioned chapters close with derived implications for online marketers. Chapter six summarizes in the conclusion the results of this paper as well as the implications for online marketers, which were given after each main chapter. The paper closes with further notes and carefully pronounced further research suggestions.

1.2 Research methodology

The present paper is derived from recent academic literature and empirical surveys. Taking the enormous pace of progress of the surveyed subject - the Internet - into account, major sources of this paper were academic articles, Internet sources and . A variety of surveys have been considered as well as several books in the area of consumer behavior and industrial psychology. Although a large range of sources were utilized, some data could not be obtained due to financial limitations of the author (no ability to purchase data). However, the exploited sources should be sufficient enough to give an proper insight into consumer behavior on the Internet.

The dominance of US literature and surveys in this paper is justified by the fact that the US market holds a leading position in Internet adoption and hence most scientists and researchers have focused on the US market. This might change in the future with the evolving importance of other markets in the world. So far, there are several indicators that consumer online behavior in other countries develops not tremendously different from the US market and hence the paper focuses on this market.

In order not to go beyond the scope of this paper attention is given to a broad range of topics, but sometimes not as deeply as the author might have wished, for instance considering more several consumer typologies/orientations. Furthermore, the range of topics is also limited. For instance, it is important to note for companies that consumers who shop for personal purposes have different demands and preferences than users who shop for business purposes on the Web. Also geographical differences of consumer behavior on the Web can be significant, but could not be explored in more detail in order to stay within the scope of this paper.

2 CHARACTERISTICS OF INTERNET CONSUMERS

The tremendous and relatively fast adoption of the Internet is not only a consequence of permanent technological progress, but also accelerated trough changing needs of consumers. Far-reaching shifts in society transform consumer behavior in general and influence the acceptance of the Internet and electronic commerce (e-commerce) in particular. Negative growth birth rates and rising median age in developed countries will lead to demographic changes in society, raising, for instance, a growing need for relationships between firms and consumers to satisfy older customers. More women in the workforce will change for instance time perception of many potential customers and more single households will cause a demand for new products and services. As a consequence, future consumers will be dramatically different from past or even present consumers. They will be more demanding, more time-deprived, more information intensive, and highly individualistic (Sheth and Sisodia, 1997).

Since more and more consumers today integrate the Internet into their daily life, many of them start to shop electronically. It is interesting for retailers to gain more knowledge about the characteristics of these Internet consumers in order to be able to optimize marketing efforts and adjust strategic decisions.

The first part of this chapter provides very briefly some statistics about the online market, demographics of Internet users and their online activities, in particular their shopping activities. In the second part different approaches of classifying shopper typologies are presented briefly. The chapter closes with implications for marketers.

2.1 The Online market

According to recent figures from Nua (2002a) the Internet users worldwide accounted for roughly 10% of the world population, 580.8 million people were using the Internet (in May 2002). This figure breaks down to 185.8 million users in Europe, 182.8 million users in the USA and Canada, and 167.9 million surfers in the Asia-Pacific region. China is thereby a very fast growing market with currently around 57 million users (Nielsen/NetRatings, 2002). It is projected that there are between five and eight million users in Africa, most of them in North and South Africa (Nua, 2002b). For South Africa, the number of Internet users is estimated to be 2.9 million users (World Wide Worx, 2002). Although these figures might differ according to other surveys, it still gives an impressive picture of the online market. Countries with very high Internet penetration - the mature markets - are Iceland (70%), Sweden (65%), Denmark (60%), Hong Kong (60%), and the US with 59% (Nua, 2002a). Another interesting fact is that English will lose importance as a language spoken on the Web. According to figures from Global Internet Statistics (2002) 228 million English speaking people use the Internet compared to 339 million Non-English speaking, whereby the number of Non-English speaking users will grow faster in the near future.

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Considering the economic sizes of these online markets, the figures differ enormously. According to Shop.org (2002) online shoppers in the US spent $51.3 billion online in 2001, 21% more than the year before. The estimation for 2002 is $72.1 billion for the US market (which would mean an increase of 41%). Multi-channel retailers are among the most profitable, while 56% of US online retailers reported profitable online operations in 2001. For Europe, Forrester Research (2002) predicts the online market to be worth Euro 33 billion. To summarize, the growing online market is of significant importance for many companies, thus consumer behavior on the Web is worth investigating.

2.2 Current demographics

In mature Internet markets (see chapter 2.1) the demographic profile is converging toward the general structure of the society. According to a report of the U.S. Department of Commerce (2002) the American demographic profile of the Internet user is developing toward a common profile. Concerning the general age distribution it is evident that the very young (under 10 years) and older people (above 55 years) are lacking in the Internet adoption process. Gender is approximately equally distributed. Concerning the educational attainment, the typical Internet user is still more educated than the average, but the lower educated groups are catching up. Approximately 80% of people with bachelor degrees or higher use the Web compared to about 40% of people having a high school degree or less. Family income is also still an indicator for Internet usage, almost 70% of people with an family income of $50000 or higher surf the Web while only around 35% of people with family income of $25000 are connected in some way to the Internet. But, Web use is growing faster among people in lower family income brackets.

According to several studies this general development of demographic profiles is similar in other countries adopting the Internet, although there are huge differences concerning the current status. Europe shows a very diverse picture of demographic profiles as well as Asia. Concerning Africa and South America the Internet usage is more privileged to higher income and educated households, although there are some exceptions.

2.3 Online activities

People on the Web are engaging in several activities, and once again, several studies reveal slightly differing percentages of activities. According to a report of the U.S. Department of Commerce (2002) 84.0% of individuals online engage in email, and 67.3% conduct product/service information search as the main activities followed by looking for news, weather, sports (61.8%). Playing games is ranked fourth (42.1%) and online product/service purchases are made by 39.1% of Web users. These figures show that the Internet is not longer mainly used as a medium for information, but also perceived more and more as a transaction tool, representing an electronic market.

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The term online shopping is used as employing the Internet to research or browse products, compare prices, etc., but not necessarily for purchasing. In contrast, the term purchasing online is used as ordering a product or service online and completing the purchase/ transaction online.

According to The Boston Consulting Group (BCG) (2001), 78% of Internet users shop online and 55% purchase online in the US which lays slightly in contrast to the report of the U.S. Department of Commerce (2002). These figures place the USA in a leading position concerning business to consumer e-commerce adoption in contrast to less developed markets, for instance in South Africa 26% of Web users having shopped online (Webchek, 2002).

Most respondents of the GVU’s Tenth World Wide Web User Survey (GVU) (1998) survey shop for personal reasons 1-2 times per month (31%) or less than once per month (27%). Females are reported to shop more than males (21%, 3-5 times per month compared to 15%, 3-5 times per month for males). Concerning the frequency of purchasing, 43% of users purchase at least once per month and 38% less than once a month (GVU, 1998). On average users make ten transaction and spend $460 annually, 48% of online purchasers spend more than $500, 20% between $200 and $500, and 32% spend less than $200 online per year (The Boston Consulting Group, BCG, 2000a).

An interesting point is that women, at least in the USA, will strongly dominate online purchasing activities in the future. Women either make or influence some 80% of all household purchasesequivalent to $ 1.5 trillion annually and made already 56% of all online shopping in 1999 with a rising tendency. With a more than 74% of women dealing with household financial matters, they have immense spending power (Feather, 2000, pp.80-84). Such purchasing power signals a change what products will sell well online.

Men and women shop for different items on the Web. Men are more likely to purchase computer software and hardware. Men spend more money shopping online because they are still the dominant buyers of big-ticket items like computers. Women, on the other hand, are more likely to buy books, music, greeting cards, flowers, groceries, and travel services. Clothing is one of the fastest-growing online shopping categories and women already buying clothing online four times as often as men (Feather, 2000, pp.80-84). These findings are generally in line with findings from the GVU (1998) concerning the products purchased in categories.

A more recent survey of the BCG (2001) revealed that the leading product category purchased by Internet users, books (28%), is now accompanied by music/videos (26%) and computer software (23%). Compared to a study one year earlier (BCG, 2000a) all product categories grew, some with very strong rates. The clothing sector expanded from 10% to 22%, the leisure travel category grew from 11% to 20%, and remarkably 17% of users have purchased toys compared to 4% the year before. The results of the more recent study are presented in figure 1.

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Figure 1 Online purchase penetration in Q4 2000 (The Boston Consulting Group, 2001, p.10)

According to a GVU survey (1998) 30% of the US non-purchasers on the Web were somewhat likely or very likely to purchase online in the future. Additionally, 41% of the respondents located in Europe said that they thought they will be doing online purchasing ‘somewhat more’ over the next 6 months. These statements and development of products sold on the Web show that the online market penetration is still in its early stages and implies a vast potential for online retailers.

2.4 Shopper types/segmentation approaches

The Internet continues to grow and is in some countries already adopted by more than half of its inhabitants (see chapter 2.1). This leads to a very diverse picture of users in terms of demographic and psycho graphic profiles. Since many users turn (sooner or later) into online purchasers, there is a strong demand for online market segmentation from the business site. The following three subchapters briefly sketch different approaches from researchers and firms, characterizing online consumers.

2.4.1 Motivation-based segmentation

Wolfinbarger and Gilly (2001) developed an segmentation approach, based on whether the motivation to search online is either primarily goal-oriented (for efficiency) or experiential (for fun). These two different shopper types have different preferences and expectations online.

The goal-oriented shoppers are more transaction-oriented and desire to purchase what they want quickly and without distraction. Wolfinbarger and Gilly (2001) found in their study that 71% of these respondents planned their online purchase previously. The authors suggest that goal-oriented shoppers are interested in online shopping because of four specific attributes: convenience and accessibility, selection, availability of information, and lack of sociality. Importantly, these goal-oriented attributes are associated with increased freedom and control. As they experience little pressure to purchase before they are absolutely ready they are not impulsive.

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