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[MUSIC] Okay, welcome back everybody.
Let's start at the start. This is module one, online offline
interaction, omni channel, and all those great buzz
words. So, as I mentioned earlier we all live now
both in the physical world, and also in the
virtual world. We're on our phones, we're on our tablets,
we're on the Internet. And we want to start thinking about what
this means for customer behavior, and what this means
for commerce. So what I want to do to begin our
discussion here is to think about the two most important
frictions that the real world throws our way.
That the virtual world helps us get over in terms of overcoming those things.
So the first friction that the real world throws our way is a friction called search
friction. So imagine, back in 1987 and you want to
buy a big screen TV so you can really get an up close and
personal view of the Rugby World Cup. So you face the following problem.
Which store shall I go to, to buy the TV? Who's going to have the best assortment?
Who's going to have the best price? It's so very, very hard
for you to know. So, you think, well the closest store to
my house is three miles away. Let me go over there and check out the
products and prices. And you find a price on a TV there, let's
imagine it's 2,500 U.S. dollars, $2,500. And so then you're faced with another
decision. Do you buy the product there at the store
for $2,500, or do you incur the cost? The search cost and the time cost to get
in your car and to drive to another store, in the hopes that
you might find a cheaper deal. So this was back in 1987, and this is
called the friction of search. Meaning that if you want to get better
deals, better prices, better assortment, better
value, higher satisfaction, you've got to go out and search for things
and you incur a cost of doing so. And this is a problem that's been studied
by economists for decades and decades. In fact, a very famous economist who won
the Nobel Prize, talked about the economics of information.
And actually derived some mathematical formulas about how often and
how long you should continue to search. And when you should just stop and say
okay, enough is enough, let me buy this one.
Now let's fast forward to 2013. Or even 2011, because that's the Rugby
World Cup again, 24 years later. It's the same two teams playing in the
final. Again in my home town of Auckland, New
Zealand. And now, instead of having to go through
that process, you can go onto a website, let's
say, milo.com. M, i, l, o, .com, started by
one of our students at the Wharton School at
The University of Pennsylvania, and later purchased by ebay.
And milo.com will tell you the prices and the assortment
of the various products that you might want to buy.
You can do it all from the comfort of your home, from the comfort of your cell phone.
And so what the Internet has done in that case is, it has reduced the friction of
search. Reduced the friction of search, so that's
the first major thing that the online world
does, that helps us out in the offline world.
And so some of you who are out there, you might be thinking about, gee,
perhaps I could start a business, that would help people reduce the friction of
search. A business like Yelp.
you might want to figure out where you're going to go and eat your dinner.
If you go onto Yelp, you can get reviews of other users about what
restaurants are the best restaurants to eat
at, the best value in your neighborhood. So, there are many, many important
businesses that have started to reduce the friction of
search. That's the first one.
The second friction that gets thrown your way is the
friction of the geography that you end up living in.
So let's imagine that I live in Manhattan. I don't, I wish I did.
Let's imagine I lived in New York City. In New York City everything is available
to me all day, all night. I have all the shops that I want to
go to to buy anything that I could possibly Imagine.
If on the other hand, I have a quieter life and
I live in Iowa City, there are some benefits of that.
But also in terms of the products and services I have available to me, they are
much more limited. So, there's the friction of geography.
Meaning that the location that you have chosen to live in,
offers you certain benefits, but also imposes certain costs on you.
So if you want to fancy pair of designer jeans and
you live in New York City, you can probably just
walk out of your door and go and buy a pair from any number of stores right there
in Manhattan. If you live in Iowa that's going to be a
little bit more difficult. So you might want to therefore
go on to the Internet, step into the virtual world, and
purchase products that then can be delivered to your geographic location.
So that's the second thing that the Internet does for us.
It reduces the geographic friction of where we live.
So, again, I want you to keep those two things in mind as we go ahead.
There are other things we could think about
as well, like transport frictions and so on.
But search friction and geographic friction are
the two most important principles, that help
us understand how the real world and the virtual world interact with each other.
[MUSIC]