February 2000 Donıt Underestimate the Value of Estimation in E-Commerce By ManMohan S. Sodhi The redoubtable Professor Gene Woolsey of the Colorado School of Mines is reported to have said that an OR professional ought to be able to quickly estimate the number of cars passing in one day through a stretch of a particular freeway. As with freeways, numbers are not already known in the world of e-commerce and e-business, yet decisions need to be made quickly. Recently I met someone who expressed a desire to go into the lingerie business on the Web, selling directly to consumers. As an OR professional, how would you help her make a business case? Hard numbers are even more difficult to come by in this business of soft wear, so you need to estimate. Here are some questions you could ask her and yourself while preparing a business case: Are you extending an existing business or is this a new business? If you are extending your sales from a brick-and-mortar store, the situation is different from if you were starting a web-only business or extending a catalog-based business. In case of a brick-and-mortar store, you have to decide if you are going to employ synergies between your brick-and-mortar and web business, or if you are going to run these as completely different businesses. Victoriaıs Secret has the same merchandise on its web site as its brick-and-mortar stores, but the two are apparently run as separate businesses, as returns cannot be made to a regular store. In contrast, Barnes and Noble is using synergy by fulfilling orders in some metropolitan areas from its brick-and-mortar stores and also accepting returns. In either case, you have to estimate how many buyers will be existing purchasers and how many will be new. Finally, catalog-based sellers have the easiest transition to the web as the order fulfillment process and target market may remain the same. What is the target population? Identify the target population that would purchase your products using any channel. For instance, you may wish to target professional women. What about men buying lingerie and related items for their female significant others in that category? What product are you selling and what else is out there on the web? Yahoo (www.yahoo.com) gives more than 150 listings under Business-Economy-Companies-Apparel-Lingerie. Other listings appear under different countries, e.g., New Zealand had three listings under lingerie and Singapore one. These listings advertise a wide range of lingerie and related items, so you need to decide your market niche based on your expertise and sales potential. Victoriaıs Secret (www.victoriassecret.com) caters to women with a wide range of products, including undergarments, nightwear, swimwear and perfumes. Becoming Inc. (www.becoming.com) focuses on women with cancer and includes prostheses in the product line. Edible Undies (www.edibleundies.com) provides undergarments in many flavors like cherry and chocolate. What is the business potential? You need to identify the proportion of your target population that is currently online and its rate of growth. You also need to estimate the average purchase amount in a single transaction, and the expected number of transactions per year or quarter. You should also estimate the market penetration you are likely to achieve in order to estimate future revenues. The following snippets from Cyber Atlas (www.cyberstlas.com) may be useful: In the past year, there has been a 100 percent increase in the number of consumers who ³purchase products or services² online and a 54 percent increase in those who ³shop for products or services.² — Internet News Online holiday shoppers will spend less than 10 percent of their budgets online in 1999, according to Jupiter Communications, but AOL says shoppers are prepared to spend more than they did last year. The rate of growth of online spending per person is declining even though total online retail spending is increasing, according to a study by the The Wharton School of Business. The study also found there is a significant dropout rate among online shoppers, and 15 percent of online buyers from 1997 did not buy online in 1998. There are now 27 million women online in the United States, according to Marketerıs User & Usage Report, and they account for 46 percent of the Internet users in America. A report by NetSmart America goes even further, finding that 58 percent of the new Internet users in the United Sates are women (up from 44 percent in 1998), and predicting that at current growth levels women will lead men in Internet access 60 percent to 40 percent by 2002. Conclusion These steps may seen obvious, but they are something OR professionals do not get trained to do. Of course, given a project we will create the numbers needed, but it may be worthwhile to develop a set of steps for making estimation. It is really important to cross-refer your estimates by using different ways to estimate, by using published data or by using pure common sense. And, given large uncertainties, we need to teach others and train ourselves to make multiple forecasts in order to plan in a flexible manner. Once you can make good estimates, you can claim to be a true OR professional in Professor Woolseyıs eyes. That ainıt easy. Dr. ManMohan S. Sodhi (MohanSodhi@AOL.com) is president of the Logistics Section of INFORMS and Manager in supply chain planning with Andersen Consulting in Chicago. Table of Contents OR/MS Today Home Page OR/MS Today copyright İ 2000 by the Institute for Operations Research and the Management Sciences. All rights reserved. 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