Optimizing sunk investments in e-commerce: a quality assurance challenge for small businesses

Abstract.

In a traditional retail environment, the reputation value of a brand name leads profitable firms with established brands to work hard to maintain quality. A store may rely on its reputation to signal that its goods are of high quality. A retailer that expects repeated purchases by a consumer – if it provides high-quality products – has a strong incentive not to provide defective products or poor service. Translating this type of quality assurance into digital sales media poses unique challenges, particularly for small businesses. Retailers that have only a local geographic reputation require innovative strategies to convince a potential global market that the products or services they provide are of appropriate quality when they make the move into electronic commerce retailing.

This paper provides a model that identifies a number of unique factors that should be considered when estimating the optimal level of investment into an e-commerce initiative. Decisions of this type are particularly difficult for small businesses because they may lack expertise in digital marketing and sales and they may have insufficient resources required for ideal levels of investment. These constraints have led to some creative cost and risk minimizing solutions that have been adopted by certain small businesses in their effort to make the transition into the digital marketplace.