In a Q&A, Mary Modahl of Forrester Research talks about the evolution and future of e-commerce

Modahl's willingness to go out on a limb is why she's one of the premier thinkers on e-business today. "Companies listen to her more than they listen to other people," says former Forrester colleague Bill Bass, now vice-president for e-commerce at Lands' End. Now, so can the rest of the world. Modahl has written a book, Now or Never: How Companies Must Change Today to Win the Battle for Internet Consumers, that goes beyond predictions to outright prescriptions. In it, she says traditional companies still have a chance to make their mark online. But she insists they must make sweeping changes in their organizations, their branding, and their market focus to succeed.

"ONE OF THE GUSTS." ]
It's a pointed message, but one that's no surprise to anyone who has followed Modahl's career. After graduating from Harvard University in 1983 with an economics degree -- earning money by modeling clothes for catalogs and store advertisements -- she went into banking at Bank of Boston. After three and a half years in Boston and London, however, she realized her penchant for questioning the status quo wouldn't move her up the career ladder from loan officer to management. "I was just never going to fit," she says. "I was never going to have the wingtip shoes."

Returning to the States with new husband Richard, Modahl decided to try getting into market research. The field had intrigued her ever since she came across pioneer technology analyst Esther Dyson while writing a college thesis on semiconductor-industry competition. Eventually, she persuaded Forrester founder and CEO George Colony to hire her in 1988 -- one appeal of Forrester being the permission to wear jeans -- and started covering computer networking.

Never a technology guru, Modahl moved Forrester toward analyzing technology's impact on consumers -- an angle for which Forrester is best-known today. Modahl's focus on divining customer attitudes has resulted in some unusually prescient advice. Bass recalls that several years ago, Modahl advised Time Warner to buy AOL or Yahoo! Inc., or one of those companies would buy Time Warner -- as AOL recently announced it would do. "She's one of the gusts of fresh air here," says William Bluestein, Forrester's vice-president for corporate strategy and development.

In 1994, she formed Forrester's new-media group, quickly moving to cover the exploding Internet and e-commerce fields. After trying out online chat herself, she was struck by the Net's power to connect people. "It was pretty clear that this was going to affect the media industry, financial services, retail, and business-to-business trade," she says. "When humans get together, a marketplace forms."

Although Modahl is quoted often, she jealously guards her privacy off the job. Living in Concord, Mass., with her husband and two young children, she says she has little time for anything but working and raising her family. Colleagues say she won't have a meeting early in the morning because she insists on taking her children to school every day she's not traveling. "I'm the proverbial soccer mom on the weekends," she says. Except for some hiking and skiing, "We pretty much just hang out with friends." Notes Bass: "Here's a person who forecasts massive change all the time, and she needs that stability."

Modahl recently talked with Rob Hof of Business Week's Silicon Valley bureau about the future of e-commerce. The key for companies laboring to incorporate the Net into their businesses, she says, is to understand how to reach very different kinds of consumers online -- and do it much more quickly than they'd ever dreamed before. Edited excerpts follow:

Q: Forrester segments the online consumer population into groups that are actually quite different from each other in terms of how they view technology. Can you describe these groups?
A: The mainstream consumer base has this essential divide between high-income technology pessimists and low-income technology optimists. If you look at the distribution of disposable income, low-income optimists control under a trillion dollars in a total of over $6 trillion in personal disposable income. So they're a very small part of this available market.

But that really gives the lie to the fact of how important these guys are. If you look at them, they tend to be very educated, single [people] who, over time, will get married, most likely to each other, and turn into high-income optimists. If you look at the 16- to 22-year-old portion of that group, mostly college students, 62% of them are shopping online. That's incredible -- six times the rate of the overall population.

High-income pessimists are people who have the means to spend a lot online but whose natural predilections cause them to resist technology. When they do get online and get comfortable doing something, they tend to be far more loyal than other types of consumers. They're tough to win, but they're a great customer base to have once you get them. They don't surf around.

Right now, a lot of the business being done on the Internet is with people who will tolerate an amazing amount of difficulty. I mean, think about how long you have to wait after you turn your PC on. It drives me crazy. It's faster for me to buy from Gap or J. Crew with my catalog because it's on my coffee table, and I can dial my phone a lot faster than I can boot my PC. But I wade through all that, because I think technology is cool.

Q: How do companies market to these groups that have totally different needs and desires?
A: The low-income optimists are interested in what's new, what's cool -- very communicative, they download music. They're not afraid of technology. And the kinds of messages that work with them center on lifestyle needs: Is it fun, is it cool, does it connect me with other people that I care about? Traditional consumers want to know: This isn't going to be scary, [that] it's familiar -- it's such a different approach. It's important to recognize how different their needs are.

Q: So what does a company like, say, Charles Schwab do online?
A: If you look at a company like Schwab, they've done very well with high-income technology optimists -- the earliest early adopters. You had to be a brave client to be a Schwab client five years ago. Now, Schwab is really trying to broaden its market away from these very self-directed investors toward a group it calls the validators. These are people who fundamentally feel like they know what they're doing in their investment strategy, but still want to validate that with expert opinion. They will definitely pick up some high-income pessimists as well. Certainly more than, say, an AmeriTrade or an E*Trade.

Fidelity has done a really good job with high-income pessimists. They've really been strong in making more traditional consumers feel comfortable that they can go online and do business. And there's tremendous integration between the Web site and the telephone.

Q: Who does this imply will win online?
A: I think it's an enormous benefit for traditional companies, if they can deliver an effective offering. A lot of them to date haven't been able to do that. But that said, the technology pessimist is not in a hurry with respect to the Internet. The existence of a brand and the trust really does make a difference in how they approach doing business. It's a lot easier for them.

Q: What traditional companies are doing things right? Should they do online operations internally or spin it out to be more independent?
A: I don't think there's going to be a single answer. It depends on the particular leadership and governance of the company. In a company where most of the business is going to head to the Internet, and where the CEO really embraces that and is able to lead that kind of a transformation, undoubtedly the best strategy is to build from within the company. But this takes tremendous courage. Companies that transform to Internet companies are very badly punished in the stock market in the near term -- though that may be changing.

Where the CEO does not embrace it as completely and is unwilling or unable to lead the transformation, then some kind of separation is pretty important. There are even some businesses where I would argue a very substantial part of the business is not going to be online.

Q: Like maybe Wal-Mart Stores?
A: Well, Forrester is suggesting that by 2003, something on the order of 7% of retail will be online. If you say Wal-Mart is the most mainstream example, you might imagine that something like 10% of their revenues ultimately would be online. So what does that mean for the structure of their Internet organization? I would suggest that it's pretty important from the consumer's point of view to have a consistent experience across the Internet and at retail. So the separation really jeopardizes that. But if you're unable to get the Web effort moving, then separation really becomes the only way.

Traditional companies suffer. They have a lot of infighting, who's in charge of the Web, customers object, shareholders object. They face challenges that dot-coms don't face.

Q: You write in your book about how difficult it is for traditional companies to deal with the rate of change on the Net, but it also seems to be so fast that even dot-coms have trouble keeping pace.
A: It's a little bit like business model du jour. You're seeing it acutely in automobiles. First it was the Autobytel model -- passing leads onto dealers. All of a sudden, dealers found themselves with an avalanche of e-mail leads, less than a fifth of which they could actually follow up on. They just weren't set up to deal with these -- an e-mail lead was very iffy. That model seems to have generated some discontent on the part of dealers.

So now we're in the midst of a real shift to a model where the online site actually completes the sale of the car...so the dealer is essentially acting as an inventory provider. [But] most of the money is made in the financing of the car. So who gets to do the financing becomes the big tussle now.

This has all happened inside of two and a half years. It's a pretty fast pace for an industry that's used to thinking about model years two and three years out, where the biggest issues have always been the price of gas, the overall economy, and the price of imports. Now, all of a sudden, there's competition on their home turf for distribution and delivery. It illustrates how up in the air everything is.

Q: A lot of traditional companies like to tout how they can do "bricks and clicks" and therefore serve customers better than dot-coms? Does this mean dot-coms have to open physical stores?
A: The virtual company turns out to be a big lie. But I think there will be both types. Take the catalog market. There are certainly catalogers that only sell through the mail. But in recent years, companies that have done better have been hybrids like J. Crew or Banana Republic or Victoria's Secret. But with L.L. Bean or Lands' End, most consumers don't get to see those labels on Main Street or in the mall. All the recent big hits have been crossover direct and retail brands, because the two channels feed each other. The mail-only companies can get out of touch, like J. Peterman.

Q: What does that say about Amazon.com and the other pure-play dot-coms?
A: I would not suggest that Amazon should now go on a massive retail store-opening exercise. I do think there's room for clicks-only retailers. Amazon in some sense has a unique position. It's early, it has a huge brand, it works better than almost any store on the Internet.

Where traditional companies have a strength that Amazon doesn't have is that they can leverage their bricks. The best way to compete with Amazon is to do what they aren't doing: getting it locally at the store or having it delivered in the next hour.

I really think we are at a turning point in the marketplace. The dot-coms have absolutely had the upper hand throughout 1999. But clearly, being a dot-com in and of itself is not a strategic advantage. There's an advantage in being agile, in being new, in being funded, and in having a single purpose to your organization.

But the idea that traditional companies would just be DOA for the Internet has been off-base, and now you're starting to see traditional companies invest very significant amounts of money. A lot of it is traditional companies creating operating units that are becoming more and more effective. Toys 'R' Us has had difficulties, Wal-Mart has had troubles.

But we're still looking at very early days. It's not too late for companies who were badly chastised this year to come back in Christmas 2000 and 2001 and 2002 and really take a strong position. It is absolutely not over. The relative strength of traditional companies is going to become apparent over the next 12 to 18 months. I also think some dot-coms are going to fail to become profitable.

Many of them are not only selling at a loss on a total-cost basis, they're selling at a loss on a variable-cost basis. When you're buying product for $15 and selling it for $10, you can gain market share very quickly, but it's not a very sustainable model because you're attracting bottom-feeder price shoppers.

I'm expecting that there will be some long faces as some of the dot-coms realize they don't have their fulfillment act together. By the end of 2000, you'll start to see very significant dot-com flameouts. They've run through the $50 million or $60 million or $70 million in their IPO, but they still managed to run out of cash by the end of 2000, or mid-2001.

Q: Will it take that long to happen?
A: It's pretty hard to burn through that much cash, even if you're burning it at a rate of $5 million a month. You've still got a 12- to 16-month window to get through that money.

Q: Amazon is often seen as the strongest e-tailer, but can it weather the coming changes?
A: Their basic bet is that the relative scale at which you can become profitable is very, very large. Amazon has made tremendous investments in both of those, and the actual customer experience on their site is tremendously good compared with the Web average. The presence that they've created for the Amazon name has made a big impact. People who know nothing about e-commerce know about Amazon.

They are essentially hoping to follow in the footsteps of AOL and Yahoo!, and both those companies grew very quickly on the revenue side, generating very substantial losses. Amazon's theory is that they can scale up first and be profitable later. I'm certainly shocked by the scope of the losses, and most people are. I feel that their customer experience is so good that they have a solid customer base, but whether they're going to be able to turn this into a profitable operation is really anyone's guess. I'm not even sure how confident they actually are. Warehouse operations, customer service -- these are not switch-on-and-off kinds of things. Amazon is doing this on a scale that very much exceeds the scale at which AOL did it.

Q: One big difference is that Amazon is actually taking possession of goods -- that's very expensive.
A: That's a good strategy, though. One of the biggest problems of dot-coms is that they have no control over fulfillment. We see a lot of these companies, 50 or 60 a week coming through Forrester, and you ask them how they're fulfilling products, and the answer is, "Oh, we outsource." There's zero control.

Q: How has the Internet changed the behavior of consumers overall?
A: The biggest change is the fruit-fly phenomenon. The attention span is just getting so short now. It's not just "Show me," it's "Show me in less than three seconds." That has created new kinds of pressures. It's partly driven by the retail experience online, but a lot of it has been driven by the media experience online. In a single page will be multiple thought streams.

You go on a TV show now, and there will be a person interviewing another person, and below that ... two stock tickers going at two different rates. There's another thing above that giving sports scores. On the left hand at the top, there's breaking news. Five, six, seven unrelated items on a page is now becoming standard for media consumption. I'm sure that it's affecting brains. There's gotta be cool brain research going on about this.

So the media experience is changing how people view the shopping experience. The idea of careful looking, touching, spending time may be giving way to a desire to move quickly. You definitely see a clear relationship between the speed with which pages load and the amount people will spend per page. The premium on incredibly fast site performance and very few clicks to buy something is extremely important. If it's going to take more than three clicks, you're just history.

Q: It seems like that impatience is extending more and more to physical stores, too.
A: There's no patience for uninformed shop assistants [in physical stores]. The in-store experience in most stores is terrible -- wandering up and down the aisles, it's a nightmare with children. So I think consumers will begin to divide up shopping for things they know they want to buy -- where they will really hit the Web fast. Anything you know you want to buy is faster to get on the Web.

If I know that I need some new mascara or eyeliner, I have to ask myself how long would it actually take me to get into a department store and buy these things. For me, it can take two weeks to actually find the time in my schedule. Even with a two-day delivery online, that's so much faster.

But that is so distinct from shopping for pleasure, which is a valid experience and will continue to exist. It can be fun to window-shop. You'll see consumers be multichannel shoppers, and I think the best retailers will be multichannel retailers, eventually. Your relationship with a store is not channel-specific, unless the retailer forces it to be that way.

Q: There's a lot of new buying models emerging, from Priceline's name-your-price to group buying like Mercata. How do you view their prospects?
A: My nanny's family needed to come out and visit, and I would not have pegged them as technology-savvy people, but they went on Priceline and got their tickets. It was great for them. They saved hundreds of dollars. For low-income technology optimists, it's a tremendously beneficial service.

What I think is interesting about consumer behavior online is the demise of set pricing. Dynamic pricing is a huge deal on the Internet. Fixed pricing is a uniquely Western phenomenon. It's not widely practiced in South America or Asia. It is actually a very recent Western construct -- within 100 to 200 years old. Fixed pricing may actually be an aberration due to our monetary system. With the Internet, it actually may fade away again. I don't know if that's entirely the case, but the supply features of most consumer products are such that allowing pricing to clear the market is a better solution than allowing physical-distribution backups. Consumers do have a certain amount of enthusiasm for [dynamic pricing]. It's a form of entertainment.

You're going to see far more dynamic pricing. Even when the consumer perceives a fixed price, I think you're actually going to experience dynamic pricing. Amazon actually resets pricing on its products automatically. If the demand for a product goes up, they will reset that, based on a calculus that they do. The discount is reduced if the item soars in popularity.

Even if consumers don't always automatically go to buy the lowest price, the sheer fact that the competitors can see the pricing creates an efficiency in the market. I think that will cause a narrow range of pricing over time.

Q: What will be the role of shopping bots? They seem to change the playing field so fast that it's tough for e-tailers to deal with them.
A: We're moving to a point where consumers can really see everything that's in the market. Consumers are different, too. Some feel comfortable with bots and others don't. Some consumers are price shoppers, and some aren't, and that is not income-related. And people are price-sensitive for some products and not for others. You can go into the parking lot of Sam's Club and Costco, and it's full of Mercedes and BMWs.

Q: Are more people who go online actually buying there, or is the percentage who shop online remaining steady?
A: There used to be a window between the time when somebody would go online and when they would shop online. That window used to be 18 to 24 months. Every time we collect data, the window is closing. Now, somebody might be online only six months before they actually start buying online.

Souce:  Robert Hof, Businee Week, March 22, 2000
              Hof covers technology for Business Week in New York