CHAPTER 2

THEORITICAL FOUNDATION

2.1 Non-Store Retailing Formats

Innovations in non-store formats have increased competitive pressures on store retailing

(Alba et al., 1997; Burke, 1997; May and Greyser, 1989). Electronic store retailing is the

newest concept of non store retail format in millennium ages which become threats for

both traditional stores and traditional catalog selling like “door-to door” sales.

The research in the past, concerning the evolution of retail industry has focused primarily

on “brick and mortar” store which has been described and explained by various different

theories. McNair developed the theory in 1958, which known as the wheel of retailing

theory. The theory explain that “new type of retailers usually enter the market as low-

status, low-margin, low price operators”. However, the other researchers, such as

Hollander wondered low cost as a necessary requirement to begin a new retail format like

shopping malls and convenience stores, as the example of retail formats that was

introduced with higher prices rather than lower prices.

Regarding the evolution in the retail industry, there are shift from physical stores to non-

store formats which may be analyzed at two levels. The first stage level is the shift

between physical stores to catalog sales. It indicates major shift in retail evolution for

both consumers and retailers. Catalog shopping is particularly appealing to time-

compressed consumers and consumers with relatively high disposable incomes as well as

those with a high need for labor saving goods and services (Gehrt et al., 1996; May and

Greyser, 1989). The purchasing method for catalog shopping is different with in-store

shopping based on perspective of consumers. As for personality, consumers using non

store retailing are likely to be characterized by higher level of confidence in their ability

to make purchases without physical inspection of the product (Dholakia and Uusitalo,

2002).

The second level stage, there are also shifts within various methods of in-home shopping.

The behavior of consumer in shopping is change form catalog shopping to electronic

shopping using internet as the media. From the benefit points, both of electronic shopping

and catalog shopping offer the similar benefits which are time saving and the

convenience of shopping without directly go to the stores and the location and the store

hours are not become the obstacles or problem. However, as the information technology

grow rapidly especially in today’s era (Digital Era), the continuous improvement may be

seen in electronic shopping and brought the new type of in-home shopping methods

which is the innovation building on past changes of non-store retailing format like

catalog and direct mailing shopping method.

2.2 Future of Electronic Shopping

Since the 1960s, rosy predictions have been presented regarding electronic shopping

(May and Greyser, 1989). However, it may become discontinuous improvement if it only

a few of customers’ interests, even though the computer skills and the technological

resources requirement are met. Besides the resources, managers and the organizations

have to learn the new consumers’ behavior in electronic shopping. In every organization,

human resources is the most important to met the customer satisfaction including the

electronic shopping stores. One of the electronic shopping companies gave brief

description about the positive results for the holiday shopping season in 1999:

“It was the result of an extraordinary human effort within most online retail

organizations rather than through highly automated and integrated processes” (The

Standard, 2000).

That is why not the entire electronic retail stores are successful or survive in the market.

Many of the electronic retail store even failed and maybe going bankrupt and we never

hear their names again such as Petstore.com, Toysmart.com, Boo.com, and

Craftshop.com (Motta, 2000). Reluctance by traditional retailers to invest more actively

in electronic store formats (Clemons and Bradley, 1998; Doherty et al., 1999) can be

partly attributed to the higher cost in selling goods electronically than selling through the

physical store (Burke 1997).

2.3 Cost of Electronic Shopping

Brown’s suggestion (1988), the cost of a retail format is based on the consumers’ costs.

The cost that incur from the consumers costs are non-monetary cost which are time

effort, and psychological costs and monetary costs also included. The application of the

wheel of retailing theory can be broadened as introductory of high price concepts. In

other words, there are compensations for the customers for saving in time and labor by

charging higher prices at shopping mall and convenience stores. Shopping mall and other

convenience store offer further additional benefits such as comfortable enjoyment, and

social interaction.

Non-store formats mush highlight consumer’s saving in non- monetary cost. The

attraction of the customers is the easiness and the convenience shopping which are not

limited by the location and other constraints. When the catalog sales introduces, they

satisfy consumers who considered the travelling cost is high or unable to visit the stores

because of the distances. In, particular, rural families adopted this shopping method

(May, 1989).

2.4 Consumer Behavior

The theory of consumers behavior can be describe as “the study of the processes involved

when individuals or groups select, purchase, use, or dispose of products, services, ideas,

or experiences to satisfy need and desires” (Solomon, 2007,p.7). Basically, it is the study

of how, when, what, and the frequencies of the consumer purchase the products.

According to Solomon (2007), consumer behavior theory is viewed as playing in a stage

from the perspective theory. Like in a play, people have many different roles and each

customer has their own lines, props, and costumes which are necessary in order to put a

good performance. Since, many different people’s roles, sometimes they change their

consumption decision depending the situation of the “play” at the time. Their criteria

when evaluating the products may be different from other ones.

The application of consumer’s behavior can be seen in the marketing strategies. Many

organizations are focus on consumer’s orientation, which is based on their behavioral in

the organization. Decisions are based on explicit assumptions and sound theory and

research are more likely to be successful than are decisions based solely on hunches or

institutions (Hawkins et al., 2006, p.9). The company must provide the more value to the

customers than the other competitors in order to survive in the market. Customer value is

the difference between all the benefits derived from a total product and all the costs of

acquiring those benefits (Hawkins et al., 2006, p.11). So, the successful key to survive in

the market is “providing superior customer value requires the organization to do a better

job of anticipating and reacting to customer needs than the competition does” (Hawkins

et al., 2006). The essence concept of marketing strategy can be described in the figure

below.

Figure 1.1 Marketing Strategy and Consumer Behavior (Hawkins, Mothersbaugh, Best,

2006, p.12).

Market analysis is referring to analysis of the consumers which is the basic foundation of

marketing strategy. Consumer behavior must be fully understood in order to anticipate

and react on their needs. According to Hawkins et al (2006), it is complex discovering the

needs of the consumers, however through the marketing research the consumer needs can

be often the accomplished. The company must fully measures and understands its ability

to meet the needs of customers which involve the evaluation of all aspect. All of firm’s

aspects must be evaluated, including financial condition, general managerial skills,

production capabilities, technological sophisticated, reputation, and marketing skills.

Competitors and the condition are also important for market analysis which involves the

other competitors’ capabilities and the strategies which possible do a better job of satisfy

consumers as well as the state of economy, physical environment, government laws and

regulations, and technology development that will affect the needs and expectation of the

customers.

A market segment is a portion of a larger market whose needs differ somewhat from the

larger market (Hawkins et al., 2006). The company must carefully select the target

segment in order to develop a total product that meets the customers’ expectations in the

segment better than the company who put all the products or services in all segments.

Market segments involves four steps, which are; identifying product-related need sets,

grouping customers with similar need sets, describing each group, selecting attractive

segment(s) to serve. The term need set is used to reflect the fact that most products in

developed economies satisfy more than one need (Hawkins et al., 2006). The need sets

can be various not only limited to the features of a product, but also the type, sources of

information about the products, the availability of the 'products, price of the products,

services regarding the products, the product’s brand, and even the originality place of the

product was produced. To identify the various set needs that the product will met or

satisfy the consumers, consumer research, focus groups and depth interview are needed to

discover the similarities and differences in consumption preferences across the groups.

Once the company sure it has a thorough understanding of each segment, the company

must select the target market – that segment(s) of the larger market on which we will

focus our marketing effort (Hawkins et al, 2006). In order to generate revenue, the

company must make the decision that based on its ability to provide the segment(s) that

are selected with high value of customers.

Hawkins et al (2006) explain that marketing strategy basically is answer of how the

company will provide superior customer value to its target market which requires the

formulation of a consistent marketing mix. The marketing mix is the product, price,

communications, distribution, and services provided to the target market (Hawkins et al.,

2006, p.19).Price is the amount of money one must pay to obtain the right to use the

product (Hawkins et al., 2007, p.21). The customer must pay the amount of the money in

order to buy the ownership of the products and obtain the right of the products. Price

often related with the quality of the products. Economists often assume that lower prices

for the same product will result in more sales than higher prices (Hawkins et al., 2006,

p.21). Sometimes, customer perceived value of the products can be reflected through the

prices. A product is anything a consumer acquires or might acquire to meet a perceived

need (Hawkins et al., 2006, p.19). So, if the price of the product is too low, the customer

perceived value of the product is low quality. The cost of product to the consumer is

different with the price of the products. Consumer cost is everything the consumer must

surrender in order to receive the benefits of owning/using the products (Hawkins et al.,

2006, p.21). For example, the cost of having notebook or laptop include the products

warranty, maintenance, finance charges, time, and efforts while shopping the laptop or

notebook to the store plus the purchase price of the product for additional cost of

consumers. In order to decrease the consumers cost, it is important for the company to

reduce the non-monetary cost of owning the product or operational cost. By reducing the

total cost of consumer, it is possible that the revenue and the market share increase. The

concept of total consumer cost is the key that explain why the non-store retail formats

grow rapidly, especially the electronic store retailing. The company can reduce the

monetary cost by increase the distribution and the services. Distribution is having the

product available where target customers can buy it (Hawkins et al., 2006,p.21).By

having many distribution points, it will reduce the consumer cost by the distance of going

shopping and also improve the efficiency of the supply chain of the products. Services

refer to auxiliary or peripheral activities that are performed to enhance the primary

products or services (Hawkins et al., 2006, p.22). Distribution and services work

synergic. For example, if the company has good distribution points that near at the

customers’ area; they are possible to increase the services by providing good delivery

services to their home directly. The electronics retail stores which are good in distribution

and services area will have the competitive advantage in the retail industry and can

increase the customer value.

The outcome is based on the consumer decision process which developed from the

marketing mix strategy. According to Hawkins et al. (2006), the outcomes can be divided

into four categories perspectives which are firm outcomes, society outcomes, and

individual outcomes. For the firm outcomes, product position is the most basic outcome

of marketing strategy. Products position is an image of the product or brand in the

consumer’s mind relative to competing product and brands (Hawkins et al., 2006, p.22).

It is important that the firm should has image positioning which is create set of belief,

representation and feelings about the product or brand. The image can be developed

through good communications through advertising, word-of-mouth (WOM), and maybe

sponsorship of the events. The company can generate the sales if the image or the brand

if the position match with the target market that desired. Many companies are customer

oriented since most of them know that the customer satisfaction is the major concern of

the firms.

Hawkins et al. (2006) describe about the how creating satisfied customers in the figure

below.

Figure 1.2 Creating Satisfied Customers (Hawkins, Mothersbaugh, Best, 2006, p.24).

The nature of consumer behavior can be described in the conceptual models. Hawkins et

al. (2006) gave the simple model of consumer behavior as follow.

Figure 1.3 Overall Model of Consumer Behavior (Hawkins, Mothersbaugh, Best, 2006,

p.26).

It might be not giving the sufficient detail about the specific behavior, but it provides the

general picture of nature consumer behavior. Individuals develop self-concepts and

subsequent lifestyles based on a variety of internal (mainly psychological and physical)

and external (mainly sociological and demographic) influences (Hawkins et al., 2006,

p.26). The consumer decision requirement is the satisfaction of needs and desires which

are produced by the self concept and lifestyle. The decision process is activated when the

individuals encounter the situation that is relevant. The experiences and acquisitions

affect the consumers’ lifestyles and concept and it is the major influence in consumer

decision process.

2.5 Framework

In Indonesia, there were 88.4% of the correspondent (majority are private employees and

a quarter of students as the respondents and 63.5% have their own Personal Computer or

PC.) acknowledge that they are able to do Internet transaction from the past survey

research by Indonesian Internet Business Community (2002) based on age that divided in

three groups (14-25, 26-35, 36-45 years-old), income, educational background (39.3%

bachelor degree, 34.5% high school degree, 5.7% Graduate/master/doctorate degrees),

occupation and spending level (70.4% spends Rp 1 to 2 million for regular monthly

expense) that conducted in ten major cities in Indonesia with total 1500 respondent. More

than 16% have performed online transactions for various reasons such as time-cost

efficiency, item availability (not available locally), and ease of access (use of credit card)

(Indonesia Internet Business Community, 2002). According the Indonesia Internet

Business Community (2002), There big opportunity for electronic retailer companies in

Indonesia if the security issue are resolved. Once convinced that the issues are resolved,

83% of the respondents who did not like online transaction are willing to participate in

ecommerce activities (Indonesia Internet Business Community, 2002). However in

Indonesia the culture in the community still affect the usage of Internet. That is why

socio-demographic variables and the past experiences became the important variables to

determine the behavior in electronic shopping in Indonesia.

Socio-demographic variables are associated with shopping behavior as well as consumer

innovativeness (Dholakia, Uusitalo, 2002, p. 461). There is evidence suggesting that the

higher consumers’ socio-economic status, measured by education, income, and

occupational status, the more positive the consumers’ perceptions of mail and phone

order buying relative to in-store shopping (In Schiffman and Kanuk, 1997, p.385).

The finding of the right demographic variables can be indicated from some of the latest e-

retailers, efforts in attracting and maintain their customers. Walace (2000) notes the

emphasis on woman “as the salvation for some dot-companies” (Dholakia, Uusitalo,

2002, p. 461). The use of internet has increased by women. Their economic power and

their dominant influence on household shopping behaviors are positive reasons for this

emphasis:

“For many e-retailers in the bloody summer of ’00, that’s reason enough.” (Wallace,

2000; Dholakia, Uusitalo, 2002, p. 461).

The orientation of men and women are different in shopping. Shopping behavior is still

gendered activity especially in household marriage, even though today sex roles already

have blurred. Men, for example, most of them are shopping because they have particular

need purposes. On the other hand, women, most of the may considered shopping as the

recreational activity, which generate positive feelings.

The age also the consideration of the customers’ needs, interests, and resources.

Teenagers, middle age people and, old age have different needs. Older consumers are

tending to use the shopping in traditional way, but most of them are not satisfied with the

non-format shopping such as electronic shopping. However, based on the Darian (1987),

the result of the research indicates the mixed evidence regarding the role of age on

consumers’ tendency toward non-store shopping. The younger generations have high

curiosity in learning something new and they are more adopted the technologies like

computer and other electronic devices faster than the old generations. Meanwhile, the old

generations are enjoying the shopping that associated with malls or physical store, since

their familiarity about technology and computers are low.

Education is also the factors of the behavior of electronic shopping. It is influence the

consumers on how they react with the innovations of new type of shopping, in this case

electronic shopping. There are positive relationship between in-home shopping and

educations from the previous study. Most of the internets users are have above-average

educational background.

Previous study supports the positive relationship between in-home shopping and

consumer income (Dholakia, Uusitalo, 2002, p. 462). Result from the previous study that

in the middle income groups were prefers in-home shopping to traditional shopping.

Income also determine the consumer whether Hedonic or Utilitarian consumers. Hedonic

consumers is the consumers who usually making the purchase decision of the product

based on their perception of the image of the product or product’s brand that match with

their own perceived value even the product has limited function. For example, a person

who buy and expensive Prada handbag may be feel stylish, frivolous, and/or indulgent at

the same time (Khan et al., 2004). On the opposite, the utilitarian customers are preferred

to see the product functionality over the image or brand as the priority. For example, the

consumer buy the notebook from ASUS because of the capabilities in running the

program and the high specification that met, even though the brand image are lower in

term of style and design such as VAIO and ACER. Although the hedonic and influence

is also influence by the customer’s perception, there are possibilities the customer shift

from utilitarian to hedonic goods because of the income.

The family composition also influences the consumptions that affect the behavior of the

consumers. The presence/absence of children as well as the age of the youngest child has

a significant influence on households’ needs, resources and expenditures (Solomon,

1999). Darian found housewives and part-time female workers with pre-school children

to be one group of potential in-home shopper (Dholakia, Uusitalo, 2002, p. 462).

Past experiences also the major variable which considered as the variable in determining

the future behavior. These sets of variables were considered: past in-shopping behaviors,

satisfaction with past store shopping and ownership of computers (Dholakia, Uusitalo,

2002, p. 462). The past experiences are affecting the behavior. It could generate the

behavior if the customers have positive past experience. Satisfaction of the consumers is

the goal of the companies in order to have the profits and generate the revenue, if the

consumers’ satisfaction increase, the wiliness of consumers switch the other store also

decrease. Computers are the resources of the consumers in order to do the electronic

shopping which require skills using the computers in order to access the electronic stores.