Consumer E-Commerce Growth Expectations May Be Unrealistic

Online consumer purchasing in the US will grow about 50 percent in 2000, 30 percent over the next year or two, and 20 percent for a year or two after that, according to a study conducted at New York University’s Stern School of Business. The study challenges the current predictions of many market research firms and public opinion leaders who have higher expectations for online consumer shopping and buying. For example, the Gartner Group’s Dataquest division projects that US online shopping revenues will increase more than tenfold by 2003, and eMarketer predicts that US consumer e-commerce sales will reach $37 billion by year-end 2000 and will grow by a factor of 13 overall from 1998 to 2003.

“The omnipresence of the Internet in society today certainly lends some credibility to the possibility of explosive growth for online purchasing. But the question everyone is really trying to answer is ‘How much?'” said Joel Steckel, professor of marketing at NYU and author of the study. “The results of this study show that the rate of growth in this area, while considerable, may be less than what is currently being predicted, at least domestically. Dataquest thinks ten times the money will be spent online three years from now. I think three times the number of people will be buying online four years from now. It’s hard to completely reconcile those numbers. Those that buy online would have to buy an awful lot more.”

According to Steckel, many of the current predictions are hard to accept because their numbers are either: 1) presented without methodological descriptions, prompting questions about their validity; 2) one-shot studies that do not permit longitudinal investigations; or 3) inconsistent with numbers from other sources. He said that many research companies do not completely expose their methodologies to public scrutiny, which is clearly understandable since their competitive advantage in the marketplace depends on their proprietary methodologies. Nevertheless, from a scientific viewpoint it is unfortunate, since it is difficult to evaluate their results without knowing more about how they were obtained.

Steckel’s study develops model-based, five-year “forecasts” of online shopping and buying in the United States. The forecasts are not based on what people say they will do or on some proprietary model. Rather, the study uses standard marketing methodology applied to data collected from people who tell what they have already done.

The paper highlights some useful generalizations as main results. Among the study’s findings:

  • Domestic online purchasing will grow about 50 percent in the year 2000, 30 percent over the next year or two after that, and 20 percent for a year or two after that.
  • Personal computer ownership and Internet access are approaching plateaus in the United States.
  • By the year 2004, at least 60 percent of those having access to PCs in the United States will have bought over the Internet.
  • Within five years, 90 percent of the American population with PC access will have Internet access as well.

These findings raise serious doubts about the predictions for explosive growth in the area of domestic online shopping and buying. According to Steckel, our knowledge on this subject is likely to be misguided.

“While the data from this study does show that there may be substantial growth in online purchasing over the next few years, I am skeptical about the current predictions for explosive growth in this area,” he said. “What I think most people are missing is that PC penetration in the US consumer population has already slowed, despite the proliferation of free PCs. Until other (probably wireless) technologies become available, online shopping is still constrained by PC ownership. Even then, new technologies will take a while to diffuse.”

Steckel’s study uses diffusion models to forecast the number of people participating in online shopping rather than using sales revenue for two reasons. First, sales revenues are composed of the number of people and how much they spend. By focusing on just one of these factors, there is a better chance of being successful. Second, diffusion models are the standard technology for forecasting the number of people to study first-time product adoption.

The result of the diffusion modeling process is a lifecycle curve for the innovation under consideration. The premise behind these models is that an innovation is adopted by a small, select group of adopters in the population based on mass media communications. These adopters, called innovators, then influence others to adopt via word-of-mouth. As time goes on and more people adopt the innovation, all non-adopters are subject to the same type of word-of-mouth, which continues until all members of the population who will eventually adopt the innovation have done so.

A Technographics® Benchmark Data Overview by Forrester Research predicts that by 2001, more than half of US households will be online, more than one-third will have purchased online, and one in 10 will have banked or invested online.

Like the NYU study, Forrester also predicts PC adoption will slow due to the increasingly difficult task of penetrating new households. Sixteen percent of offline households that have not yet purchased personal computers report that computers are too expensive, and 55 percent say they don’t need one. Almost 20 percent of households, typically having lower incomes and less education, say they will never go online. As penetration slows, Forrester says the growth of online households will emerge from two sources — outside the home and online devices. Initially, much of this growth will be driven by online access from places beyond the home, including work and school, before consumers turn to online devices like Web TV and game consoles to get online.

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