Comparison shopping in the Information Age

One area of the services sector that seems to have mushroomed spectacularly into existence is comparison shopping services, also known as bots. During the past two months, three shopping bots have been acquired: Amazon.com bought Junglee; InfoSeek bought Quando; and, most recently, Inktomi announced the acquisition of C2B. Of course, these acquisitions would have gone largely unnoticed had these small companies been bought at low valuations, but quite the opposite occurred.

My point here is not to discuss the relative merits of the various bot products. Clearly they benefit the consumer, as they provide immediate price comparison and ensure more educated decision-making in purchases.

What these recent acquisitions illustrate, however, is the fundamental change in all purchasing behavior that has arisen as a result of the Internet. In the physical world, it used to be that when you went into a store to buy something, you either bought that something and it was yours, or you decided not to buy it and you left the store empty-handed.

Not so in the digital age. The Internet either has affected or will dramatically affect the purchase behavior of customers (and note I say "customers" rather than "consumers" to include corporate customers). Interestingly, I don't think that the customer is the agent of change for this behavioral transformation, rather I believe it is the vendor that is driving it.

The significant changes in vendor market dynamics that have resulted from this behavior shift are outlined below:

"Price competition" is now a redundant term
In an environment where the customer seamlessly can move from one vendor to the next, the notion of vendors competing over price makes little sense. This does not mean that there will be no price discrepancy between one storefront and another, but it implies that the reasons for price discrepancies have changed. For example, it used to be fairly difficult to know exactly how much to pay for a car. But in an environment where customers know exactly how much the car costs on a wholesale basis, it will be extremely difficult and disadvantageous for dealerships to compete on price, as they traditionally have done. Car dealers now will have to offer market price to even be considered a qualified vendor.

Price discrepancy is now equated with service
When price is not the stimulus for a purchase, services and the quality of those services necessarily become one of the primary means of differentiation (another obviously being brand). Amazon.com is not getting over 60 percent repeat purchases because of the price of its books, though price is a factor. Rather it is the service quality associated with Amazon purchases that has kept the online book giant's customers coming back for more. The fact that the company profiles its customers so that its agents know who customers are when they return, along with the fact that the company suggests books tailored to a specific customer's interests, certainly plays a larger role in determining the number of repeat Amazon customers. In other words, customers no longer are sure why they're paying a certain amount for certain products, but they know it has something to do with the services they are getting.

You now get what you ask for, not what you pay for
Customers used to pay for what they wanted, but not anymore. Information services and personal productivity tools that used to generate revenue now regularly are offered up for free. Why? Because, for many vendors, their relationship with their customers and their customers' demographics are far more important than the value of the product being sold. In an environment where competitors are just one click away, it becomes more worthwhile to essentially pay the customer than to ask the customer to pay. From browsers to periodicals, products that you paid for yesterday are free today.

Physical world shopping is changing fundamentally
Because of the Internet, the physical world shopping experience will be more immersive and more positive for the customer, but less immediately lucrative for the vendor. While I expect that entering a shop like Barnes & Noble or Toys R Us quickly will become similar to a Disney World experience, I expect that customers will browse more and spend more time in stores, even as they buy less in them in favor of making their purchases online. A company's physical world presence increasingly will be used to entertain and browse, while its e-commerce site will be used for comparison shopping and for actual purchasing. In other words, I certainly believe there is a role for both brick-and-mortar shops and e-commerce shops--but it is important to recognize that these experiences are not the same, although they are complementary.

These customer-vendor transformations already are taking place, and I think that, going forward, it will become increasingly important to examine the progress of such changes when deciding which e-commerce vendors are worth your investment.

Danny Rimer is an equity analyst at Hambrecht & Quist covering CNET and Netscape. He writes regularly about the Internet in Marketwise.