Intro-Part Two
Since the opening of the Internet for businesses in 1995, the Internet related investments have accelerated. The companies involvement in Internet range from having an e-mail address to having the entire business on the Internet such as Amazon.com and Boxman who sell books and CDs respectively. When part of the buying process is taken part on the Internet it is usually referred to as electronic commerce. Different businesses have different prerequisites for electronic commerce. Morgan Stanley (1997) have in a report identified several businesses categories they believe have good opportunities for being successful in electronic commerce. Among those mentioned are books, music, and cars.
So called car buying or brokering services started to turn up during 1995-96 in the U.S.. Those services go at least one step further in providing information to the customer than merely present static information. Those services involve the customer in the process of providing the relevant information, the customer can for example choose a car model and configure details such as accessories, colour, wheels, etc. according to her own desire. The customer can also request an offer for the configured car. It should be noticed though, that the services do not let the customer go through all the stages of the buying process. For this reason it would be more correct to refer to those services as brokering services rather than buying services, although the latter is commonly used.
The automotive related industry in the U.S. has during the last couple of years made significant progress in using the Internet for car brokering. Now the turn has come to the European market. During the last two years, several Internet car brokers have started a business on the Swedish market. They have until September 1998 been focused on pre-owned cars, but since then Bilweb, a Swedish third party brokering service, has introduced a pilot service for brokerage of new cars. In 1999, at least one new third party service is planned to be launched. Manufacturers are also interested in acting on this market for strategic reasons, e.g. retaining market shares and brand image.
With this scenario in mind, Volvo Cars (from here on Volvo is used as an equivalent of Volvo Cars) started a pilot web service, called VolvoNet, in Belgium for brokerage of new and pre-owned cars which has been operational
since August 1998. After a test period the service will be evaluated and if the results are satisfactory the site will be launched in Sweden. This thesis is to be based on the above mentioned pilot web service. (We recommend the reader to visit the site at (www.volvocars.volvo.be) and try it out, especially the Request offer link.)
“– It says here: The Internet is the future of business….We have to be on the Internet.
– Why?
– …it doesn’t say.”
(IBM commercial)
Like the IBM commercial implies, there is not much to gain from entering the Internet if one does not know the reasons for doing so. To go, like Volvo might do, from having a pilot car brokering service (sometimes called buying service) in Belgium to a full launch of the same service in Sweden is quite a big step. A pilot service like the one in Belgium does not call for much commitment; a full launch, on the contrary, means that full commitment is required from Volvo.
Since a launch will imply costs both for development of the service and for launching it with success, Volvo needs some assurance that they will receive value for their money. There are no major problems calculating the costs due to an Internet investment; the costs encompasses among others start-up costs and education of employees and are as good as unavoidable. Volvo rather needs to find the opportunities with the service, i.e. what could be accomplished with it and how it can provide Volvo with added value. Unlike most of the costs, the opportunities are not unavoidable, indeed, they need to be identified before they can be taken advantage of.
Hence, before the service can be launched in Sweden, Volvo in a first stage needs to find out in what way the service can benefit Volvo, Volvo’s dealers, and Volvo’s customers. It is necessary to find out what unique benefits VolvoNet can provide for all three parties, that is, benefits that no other service provides. In a second stage, Volvo needs to find out how the dealers’ and customers’ benefits can benefit Volvo.
The purpose of this thesis is to give Volvo decision support for deciding whether Volvo’s buying service (VolvoNet) should be launched in Sweden or not. Using the GRT model from the first part of this thesis, GRT – A Valuation Model for IT Investments, we will identify the potential benefits and utilities for Volvo from introducing VolvoNet in Sweden, quantify the identified utilities, and finally, construct formulas for estimation of their total gross value.
The study is to be based on Volvo’s pilot web service, VolvoNet in Belgium. (If you have not visited the site already, we recommend the reader to try it out at (www.volvocars.volvo.be), especially the Request offer link.)
The competition on pre-owned car brokering in Sweden on the Internet is already considerable, whereas new car brokering is still in its early stages. Although VolvoNet also offers brokerage of pre-owned cars we believe that the main competitive advantage of VolvoNet for Volvo is on new cars. Therefore, this study only concerns new car brokering.
The objective of the thesis is to study the functions of VolvoNet, why we do not discuss any benefits or utilities derived from the design of the site. The functions concerned are as follows:
- Read product information
- Order brochures
- Book a test-drive
- Build your own Volvo (i.e. configuring your own Volvo)
- Request an offer
- Ask a dealer to contact you
- Calculate the annual cost for car insurance
- Calculate payments for car loan
This academic thesis is written mainly for two audiences, the Department of Business Economics, the University of Uppsala, within the context of a course in information technology, as well as for Framtidsfabriken/Volvo. We
therefore assume that the reader has basic knowledge of business economics and the Internet and we do not, for example, define or explain the functions of the Internet or basic business terms.
Due to the complex, and to us unknown, organisational consequences VolvoNet may bring about for Volvo,
we will not take these effects in account.
We have recognised negative consequences from using the Internet for car brokering such as rather high
costs and a certain risk. When investing a lot of money into an Internet venture, there is a risk that if car brokering on the Internet becomes a failure, most of the money invested will be lost. But all parties we have been in contact with consider this development on the Internet inevitable for the industry. With this as a starting point we have decided to merely concentrate upon the benefits and utilities of VolvoNet.
We will use VolvoNet as a name for the car brokering service in Sweden, although it is not even certain that
the service will have a name at all, if launched. Furthermore, with VolvoNet we mean the Swedish service unless it is clear from the context that we talk about the pilot service in Belgium with the same name. We will presume that the service in Sweden will be the same as the service in Belgium.
This thesis is trying to measure the effects of an Internet investment. To be able to distinguish the effects of the investment and the economical contribution brought by the investment we use two terms, benefit and utility.
We use the word benefit to describe the positive effects that are generated by the VolvoNet investment. That is, where we perceive that there is a value added by VolvoNet compared to other similar Internet services available. For instance, a benefit with the Internet is that customers get comprehensive information online and therefore might require less printed material. One of the utilities derived from that example could be reduced distribution costs.
In this thesis we use the word utility to describe the economical effect of a certain benefit, e.g. more customers. It is important to notice that utility is perceived differently by different parties. It is hence important to keep in mind from whose perspective it is a utility.
The Internet and the World Wide Web
We are aware of the difference between the two terms, but we have chosen not to make any difference between the two in this thesis. For that reason we will use the Internet term to describe both of them.
Average Customer Value and how to value customers
That it is less costly to keep an old customer than to attract a new one (Jakobsson, 1995) is common marketing knowledge. This implies that one would want to keep old customers as long as possible to gain from their repeated purchases. There are several different definitions of brand loyal customers, but most of them include that the customers have a long lasting commitment and preferences to a specific brand (Assael, 1995), which leads to goodwill, repurchases of products and services, and positive word-of-mouth. The most brand loyal customers might even be prepared to pay a price premium for “their” brand.
For valuation of the customer value we need some tool to measure it with. Our suggestion is to use an Average
Customer Value (ACV). This measurement tells how much an average customer is worth, including all customers, future sales, and word-of-mouth. By multiplying the Average Customer Value with the number of customers today, you get the total value of your present customers. Subsequently, by estimating the change in the number of customers and the change in the Average Customer Value due to a benefit with the new service, you have also estimated the impact that benefit has on the total value of your customers. Since this tool is rather general it can be applied to several different utilities to calculate the total change in the value of your customers due to the investment. The formula where the ACV and number of customers are used is as follows:
[ delta ACV × ( Cn + delta C) + delta C ×(ACVn + delta ACV) – ( delta ACV × delta C) ],
where
n = VolvoNet is decided not to be launched.
C = The number of customers that buy a Volvo.
Delta C = The change in number of Customers that buy a Volvo due to the utility, if the service is launched.
ACV = Average Customer Value, calculated as the average value of all generated cash-flows in the future, discounted to present value, for every Volvo car customer.
Delta ACV = Change in Average Customer Value due to the utility, if the service is launched.
The formula can be used when only ACV changes, when only the number of customers changes and when both
changes.
Examples:
Original values: ACV = SEK 100,000 and C = 200,000 people
1) ACV increases by SEK 10 gives us the following calculation:
10 × (200,000 + 0) + 0 × (100,000 + 10) – (10 × 0) = SEK 2,000,000
2) C increases by 30 gives us the following calculation:
0 × (200,000 + 30) + 30 × (100,000 + 0) – (0 × 30) = SEK 3,000,000
3) ACV increases by 10 and C increases by 30 gives us the following calculation:
10 × (200,000 + 30) + 30 × (100,000 + 10) – (10 × 30) = SEK 5,000,300
