Speed is Online Retail's New Frontier

This article originally appeared in the Chicago Tribune on Dec. 8, 2013.

By Alexander Chernev

Everything is faster these days. Video streaming eliminates the wait for DVDs by mail. Smartphones eliminate standing around for a cab. The desire for instant gratification has crept into every aspect of our lives, including the way we shop. Amazon.com even plans the delivery of packages by flying drone.

Seeking instant gratification in shopping is not new, but our view of time has changed — and so has our tolerance for waiting. This impatience does not come at the expense of our preference for variety: We prefer the array of choices offered by online retailers. We just want the options to be in our hands faster.

Our heightened expectations for variety and speed pose a challenge for both bricks-and-mortar and online retailers. Bricks-and-mortar outlets will need to keep a greater variety of items in stock, and online retailers will have to find ways to speed up the delivery of goods to customers. This might prove to be a test of two business models: "buy in-store, take-home" shopping versus "buy online, we deliver" shopping.

Online retailers have long realized the importance of speed. Amazon's Prime program — offering two-day shipping on all purchases for a flat annual fee, as well as discounted one-day shipping — introduced speed as the new frontier in online retailing. It was no longer only about variety, convenience and price. Following this "faster-is-better" strategy, Amazon later introduced same-day service in selected cities, so that orders placed in the morning are delivered the same day. Wal-Mart, Google and eBay followed suit.

The latest news from Amazon, however, can set it apart from the competition. The first news — launching a service with "octocopters" delivering orders within 30 minutes — grabbed everyone's imagination. Amazon's other news has the potential to change online business today rather than years from now. The Postal Service will deliver Amazon packages on Sundays. This service will be offered at no extra cost to Amazon Prime customers, indicating the importance the company places on bridging the time lag between purchase and delivery.

Shortening the delivery gap for Amazon means becoming more similar to bricks-and-mortar retailers in that it can no longer afford to keep products in a few warehouses spread around the country, and must establish local distribution centers in places where its customers live. This perhaps is one of the reasons why Amazon is now backing the Internet sales tax bill that would require large online retailers to collect taxes in all states (currently companies have to charge sales tax only in states where they have a physical presence, like a store or a warehouse).

If Amazon is planning to build distribution centers in major cities, including those in states in which the company now has no physical footprint, such as Chicago, Denver and Las Vegas, its no-sales-tax advantage will disappear anyway. The new sales tax bill can actually benefit Amazon by requiring all of its competitors to collect sales tax as well, but without the added benefit of being able to offer rapid delivery.

Building a faster distribution system will likely give online retailers a competitive edge. While many of us might not opt for same-day service, it might become a reference point that will compel us to select the premium two-day service over the traditional ground service. What seemed fast yesterday might not be quick enough tomorrow.

Companies will raise our expectations for even faster delivery in the future. This can change the nature of retail competition — making "meeting and exceeding customer expectations" all about speed.

- Alexander Chernev is a professor of marketing at Northwestern University.