With traditional brick-and-mortar retail stores, foot traffic has always been one of the keys to success. After all, you have to attract potential customers before you can convert them to paying customers.
As shopping has increasingly moved online in recent years, it has proven once again the wisdom of the old adage that the more things change, the more they stay the same. Traffic is still the key to online sales. But the business strategies and tools used to drive online traffic are very different. And some strategies and tools work better than others in converting potential customers to paying customers.
In recent years, my primary research interests have involved analyzing data for different innovative business models to study which strategies and tools help e-commerce and crowdfunding websites thrive. I was particularly intrigued by the enormously successful Chinese online shopping website Alibaba.
While Amazon, eBay and most other major U.S. retail sites charge sellers a fee for every product they sell on their sites, Alibaba does not. In fact, the site lets millions of sellers set up shop on their platform for free, giving them access to hundreds of millions of shoppers.
But in that highly competitive and very crowded online environment, individual sellers find it exceedingly difficult to survive, much less prosper. That’s why, instead of charging transaction fees, Alibaba makes money by charging sellers for its advertising tools to draw traffic to their online shops. Data on the effectiveness of those advertising tools was the first research project I undertook in this area.
In a study published in the March 2020 issue of the journal Information Systems Research, my coauthors Ming Fan and Yong Tan of the University of Washington and I found that two popular advertising tools—sponsored search and social media endorsement—can both significantly increase traffic for sellers, with sponsored search being more effective than social media endorsement.
Sponsored search advertising allows the individual sellers on Alibaba to pay to have their products appear at or near the top of the results list when someone searches for a particular product on the e-commerce platform. Social media endorsement is when a seller pays to have someone recommend a product on social media, with a link to the item on the platform.
While both tools increased traffic for sellers, only sponsored search had a positive and significant impact on sales, our study found. And even then, the reputation of the seller had a lot to do with how large the sales increase was.
While sponsored search was more effective in increasing traffic with sellers with a low reputation, its effect on sales is larger for high-reputation sellers. And although social media endorsement increases traffic for sellers regardless of their reputation, it is effective in increasing sales for only high-reputation sellers.
Our findings suggest the limits of advertising. It may help attract potential customers to check out your online business, but it can’t overcome a bad reputation.
We also have been looking at another research question, regarding the effectiveness of communication between sellers and buyers on e-commerce sites, and between entrepreneurs and backers on crowdfunding sites.
Going back more than 10 years, Alibaba was already offering instant communication between buyers and the sellers on their platform via pop-up chat boxes. And rather than having an Alibaba representative answering questions, as Amazon did when it later added chat boxes, each Alibaba seller was responsible for responding to the queries that came to their business.
That led our research team to analyze data to see whether the live chat function helped Alibaba sellers convert browsers into customers. That study has not yet been published, but the data showed that the more responsive a seller was to customer questions, the more sales they converted. We also found that sellers who did not have detailed product information and photos on their sites benefited slightly more than those who offered detailed information. But those sellers with higher ratings and lower prices can convert more traffic to sales by utilizing online chat services.
In a follow-up project, we looked at a similar communications tool—a discussion board—employed by a Chinese crowdfunding site similar to Indiegogo or Kickstarter that allows potential backers to communicate directly with entrepreneurs seeking funding for products and projects. This is a tool that the U.S. crowdfunding platforms just adopted a year ago, years after the Chinese platform we studied. We were looking to see if what we learned in our e-commerce study would apply to crowdfunding platforms as well.
That study has not yet been finalized, but our hypothesis is that if the entrepreneurs, or starters, who are seeking funding can provide convincing answers or deliver positive sentiments in those discussion boards, it will definitely help them gain more backers. And similarly, they should carefully monitor and maintain their relationship with their potential backers on the discussion board. If they see there are negative sentiments being posted, they should introduce more positive information about their product.
We see these research questions as providing a win-win for sellers or entrepreneurs as well as for the platforms that host their sites. Analyzing which tools and strategies are most effective will help sellers convert more browsers to paying customers. And having successful sellers will help the platform grow.