Online retail contributes to decline in product quality, study shows

Jul 10, 2012 By Phil Ciciora
Yunchuan "Frank" Liu, a professor of business administration, says when manufacturers bypass retailers and sell directly consumers online, product quality can suffer. Credit: L. Brian Stauffer

(Phys.org) -- Consumers may revel in the convenience of online shopping, but the low prices on the Internet are often accompanied by even lower product quality, warns new research co-written by a University of Illinois business professor.

Yunchuan “Frank” Liu says when manufacturers bypass retailers and sell directly to consumers online, product quality can suffer.

“The research shows that there is a negative effect in that the quality of the product can go down,” he said. “Although there are many positive aspects to e-commerce, the issue of declining product quality is a very big negative, which could increase in significance in the future. This should be alarming to consumers and public policy makers who champion the convenience of online shopping.”

The study, which will appear in the journal Management Science, studies the effect of channel structures – that is, online versus offline channels – on the product quality of goods produced by manufacturers, said Liu, who co-wrote the study with Nicholas C. Petruzzi, a professor of business administration at Illinois, and Hongyan Shi, of Nanyang Technological University in Singapore.

Although shopping is more convenient than ever before, Liu says manufacturers have little incentive to produce high-quality goods when selling their wares online.

“In the traditional approach, manufacturers had to go through a ‘middleman’ to get their products to market,” Liu said. “If consumers purchase goods through a retailer, they have to physically drive to the shop, talk to a salesperson and compare it to the competition. Compared to an online transaction, where the consumer is pretty much relying on information supplied by the manufacturer, the purchase of a product at a bricks-and-mortar store is complicated.”

So how can retailers ensure that their products survive this complicated purchasing process? The answer is that the product quality has to be really good, Liu says.

“If you sell a lousy product, consumers will not be willing to drive to retailers,” he said. “That’s why your product quality has to be really, really good.”

For example, before the advent of the Internet, if you wanted to buy a computer, you had to drive to an electronics store. With the Internet, “you can buy one directly from Dell, which is very convenient for consumers – they can shop from home, and the prices often are cheaper than at an electronics store,” Liu said.

But then there’s the issue of product quality.

“Dell computers have a reputation for being cheap but of low quality,” Liu said.

The study warns against the “Dell-ization” of other online goods.

“In the Internet age, many people believe the traditional way of doing retailing is too old-fashioned,” he said. “But in this case, the traditional retail channel still has a lot of value, because there’s a lot of incentive for manufacturers to produce high quality products when they know they will be displayed on a shop floor and tested by consumers before they’re purchased.”

According to Liu, out of the most highly successful traditional retailers, none sell directly to consumers, which, for consumers, turns out to be a bulwark against declining product quality.

“If you’re talking about clothing, prices are higher at the older department store chains but the product quality is usually very high,” he said. “However, if we look at the direct channel manufacturers – that is, the factory outlet stores, the direct-to-channel outlet manufacturers – the price is lower but the is not high.”

According to Liu, there are two types of consumers: Those who care about quality over price, and vice versa.

“The latter type of consumer wins with the advent of e-commerce, because they don’t care about quality – they only like low price,” he said. “But the first group of consumers are hurt, because quality as a whole is dragged down by manufacturers who cater to the Internet.”

For consumers, the take-away from the research is simple: “If you want a high-quality product, buy from a physical store,” Liu said. “If you want the cheapest possible price, buy through the Internet.”

Although the reports of the demise of traditional retailers have been greatly exaggerated, Liu says they can survive and even thrive in the e-commerce age by playing up the quality angle to consumers.

“Since they’re not going to win in a price war versus the Internet bricks-and-mortar stores not only need to stock high-quality products, they need to let know that they can out-compete the Internet with the quality of their products.

”As the saying goes, you get what you pay for.”

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CapitalismPrevails
1.3 / 5 (3) Jul 10, 2012
low prices on the Internet are often accompanied by even lower product quality


I don't buy this at all. So the alternative is to make customers go back to the stone age and shop products at the mall? If a company is selling it's product on Amazon.com, consumers are going to check against the best seller list and highest rated list. They are going to read the most favorable review against the most critical review. Knowing the consumer has much better access to pertinent information on the product and competing products, the business should be far more motivated to produce higher quality.
antialias_physorg
5 / 5 (3) Jul 10, 2012
I don't buy this at all.

Why not? It's capitalism at its finest: Lots of competitors so you have to go either for high quality or lowest price - there is no 'in between' (because shoppers will go for either the one or the other)...and the only way to get lowest price is to manufacture with substandard quality and in countries with low wages.

If a company is selling it's product on Amazon.com, consumers are going to check against the best seller list

Hm. I guess you should start reading the articles before commenting - because it says right in the very first sentence (!)
Liu says when manufacturers bypass retailers and sell directly to consumers online, product quality can suffer.

Amazon is a retailer. Not a manufacturer

freethinking
1 / 5 (1) Jul 10, 2012
Printing industry is a great example of this. Use the cheapest online printer, ie. Vista Print, and you get low quality printing and you advertise Vista Print. Go to a traditional printer and you get much better quality, with a bonus of not advertising for the printer.
CapitalismPrevails
1 / 5 (3) Jul 10, 2012
and the ONLY way to get lowest price is to manufacture with substandard quality and in countries with low wages.
Then why am i using a computer which is at least twice as fast as the one i had 10 years ago for the same price? Because apparently competition produced higher quality at the lower price. BTW, those "low wages" are the only alternative those foreign laborer have other than going back to working on rice paddies. If the iPad was manufactured in the U.S. it would probably cost $2000 and would more people be able to afford it? NO, and that's the morality of productivity.
I guess you should start reading the articles before commenting
Hmm, I guess that's why i said i don't buy the asserted premise. Sure some consumers will go direct but that's their choice and they may have their reasons. But the internet is inherently about information and consumers won't be able to miss finding reviews on products they want after a google search.
Lex Talonis
1 / 5 (2) Jul 10, 2012
Bahhhh if the sellers sell you shit, or do a bad job of it, you can always get back at them via review sites or consumer complaint sites.

Sometimes though, people just wise up to the false economy of buying cheap shit....

While sometimes really really good quality does cost a great deal more than bottom of the bucket bargains, in terms of quality, quality of durability, quality of work performed, quality of accuracy, quality of finish, etc., well if just pays in terms of durability and results to buy better than buy on price....

It's like professionals buying tools.... they talk and the crap ones get side lined and the preferential purchases become the standard.

It's just not worth all the bullshit you have to put up with when buying cheap crap...

But like the TAG Heuer watches... they come out of the factory at $350, they sell them to the importer for $600 apiece, who sells them to the retailer for $1200 each and the customer pays $3500 each.

It pays to shop.
antialias_physorg
3 / 5 (3) Jul 11, 2012
Then why am i using a computer which is at least twice as fast as the one i had 10 years ago for the same price? Because apparently competition produced higher quality at the lower price.

Because (and I know this for a fact, because my father worked at IBM when the first PCs came out and they made a humongous fortune):
The quality remained exactly the same for many years. The price of manufacturing the PC remained exactly the same for many years (the material costs are next to negligible in electronics and the labor costs are near constant).

In the beginning there was just a higher demand than production capacity so they could be sold at higher profit (among the sheep the rich ones could be fleeced), while later on the production capacity was upped so now they could also sell to those who formerly couldn't afford the overpriced stuff (making another fortune with less profit but mass sales)

Capitalism optimizes profit - not product.
antialias_physorg
3 / 5 (3) Jul 11, 2012
it would probably cost $2000 and would more people be able to afford it?

Apple posts an annual net PROFIT in the range of 60%. You can imagine how little actual value is in their products (if you look at the teardowns of their products it's hilarious what kind of junk they put in there - and what people pay just to have a white casing that costs Apple less than a dollar to make).

Apple could sell an iPad for 50% of what it costs now, have it manufactured in the US and stil make more profit than most other computer manufacturers make off their product.

But the internet is inherently about information and consumers

That's why most 'reviews' (and an increasing number of comments on retailer sites like Amazon) are already company sponsored. They're not stupid. They have realized that this is a type of ad that can't be easily filtered.