Most online consumers are understandably hesitant and tend to wonder whether or not to make a specific purchase from an unfamiliar eCommerce merchant. In many cases, and even if this anxiety isn't fairly justified, the net effect on eTailers is just the same and tends to be very detrimental to their business.
On average, online shopper anxiety creates a more complicated challenge for Web merchants, especially the ones without national or well-known trusted brands.
This phenomenon is simply a lack of consumer confidence that some define as the "risk discount," which states that buyers who perceive greater risk when making an online purchase will naturally discount the price they are willing to pay.
Shoppers simply perceive risk in an online transaction since they usually have a very limited knowledge of the seller's ability and willingness to deliver the goods or the service they acquired. Simply put, shoppers don't know as much about online merchants as they need to know in order to feel completely safe about the transaction.
Most eCommerce site owners and managers will take some steps to represent themselves in a reliable and trustworthy fashion. But prominent media attention has been focused on the scams of a few fraudulent or financially distressed merchants. Such wide-spread media coverage fuels the perception of online risk that some shoppers have.
Fundamentally, an eCommerce merchant must reduce or, in a perfect world, eliminate this perception of risk before, during and after the shopping experience. In an online environment, addressing uncertainty at every step of the buying process is extremely critical in distinguishing trustworthy and reliable merchants.
While data security is always a threat, mediocre merchant performance consistently and overwhelmingly represents the greatest risk to online shoppers.
As a matter of fact, the National Consumer League's Top 10 Internet Scam Trends for last year reported that merchant non-performance -- more specifically, non-delivery or misrepresentation of goods -- made up two thirds of all reported Internet scams.
On average, online shoppers' fears of being ripped off, and merchant non-performance cost legitimate eCommerce retailers billions of dollars in lost sales every single year.
Wide spread evidence, ranging from academic research to anecdotal and specific merchant experiences further supports this conclusion. A report issued two years ago by the investment firm Piper Jaffray concluded that "well-known and branded sellers are pulling the large numbers of fraud-averse online shoppers away" from lesser-known sellers, and that remaining buyers "are applying what amounts to a fraud discount" and are systematically pushing prices lower.
The overall trustworthiness or at least perceived trustworthiness of an online merchant now surpasses all other factors -- even price -- as the most important factor in a buyer's decision to make a purchase online or not.
In a growing online marketplace, the overall success for Web merchants depends more on how well they counter the risk discount than any other factor.
A rule of thumb in investing states that more risk requires a greater potential for return. The relationship between risk and return is the focus of a significant body of literature in the field of economics.
There has been countless studies that examine all the complex relationships between risk and pricing in online transactions that have consistently found a similar relationship.
If online shoppers feel a specific deal poses a greater risk, they will compensate by decreasing the price they are willing to pay for it. By doing a search on any major comparison shopping engine, you can clearly see the risk discount at work.
A recent search for the Sony Cyber-Shot DSC T-30 Digital Camera on Shopzilla vividly illustrates the difference in average prices for well-known retailers and lesser-known merchants. In this practical example, the average price of the camera from a well-known online retailer was US$69 -- or 17.6 percent -- more than that of a lesser-known online merchant.
This simply illustrates the fact that lesser-known retailers must sell their items at a significantly lower price just to compete with larger online brands. Some call this the inverse of the risk discount the "trust premium" -- which states that buyers who discount the prices they are willing to pay in high-risk transactions will pay a premium for low-risk transactions.
For this reason, we see why online buyers are willing to pay well-known online retailers more for an identical product than they are willing to pay a lesser-known eTailor. For small to mid-sized eCommerce merchants, turning the risk discount into a trust premium has never been more critical to profitability.
For most online retailers, building or buying a national brand name can be very expensive. Therefore, Internet retailers who seek to compete on the highest levels need an alternative strategy. One of the most effective strategies is to have an objective, trusted third-party institution endorse the retailer's business with both its own trusted brand as well as its financial resources.
The third party's endorsement and financial guarantees can enable online merchants to compete more effectively with established, well-branded, online retailers. Shoppers who have come to recognize and trust the third party's brand will know that they can trust the retailers who are permitted to use it.
Especially in the online segment, it's common knowledge that shoppers find some security in well-known retail brands. Many consumers will shop and buy in the online stores of national brands, but simply won't buy from smaller and lesser-known online retailers because they don't know enough about the retailer and they don't know what to expect.
In conclusion, there is a much higher level of uncertainty in transacting with weakly-branded merchants.