Chapter 10 - E-Commerce: Digital Markets, Digital Goods

E-commerce is defined as the process of buying and selling goods and services electronically using the Internet, networks, and other digital technologies.  It involves transactions between and among organizations and individuals.  It began in 1995 and showed exponential growth in retail sales until the recession of 2008-2009.  In 2010 it began growing again at an estimated 12 percent annually. 

E-commerce has grown so rapidly because the Internet and e-commerce technologies are much more rich and powerful than previous technology revolutions.  Unique features of e-commerce include ubiquity, global reach, universal standards, richness, interactivity, information density, personalization/customization, and social technology.  Ubiquity is having Internet/Web technology available everywhere, such as at work, at home, and elsewhere via mobile devices.  Global reach is having technology reach across national boundaries, around the Earth.  Universal standards allow sharing by all nations around the world and enable any computer to link with other computer regardless of the technology platform each is using.  Richness refers to the complexity and content of a message.  Interactivity is where the technology works through interaction with the user.  Information density is how the technology reduces information costs and raises quality.  Personalization/customization is where the technology allows personalized messages to be delivered to individuals as well as groups.  Social technology allows users to create and share with their personal friends and others content in the form of text, videos, music, or photos.

The Internet has created a digital marketplace and as a result it has changed the way companies conduct business and increased their global reach.  Digital markets are said to be more “transparent” than traditional markets.  One feature that makes digital markets transparent is the reduction of information asymmetry.  Information asymmetry exists when one party in a transaction has more information that is important for the transaction than the other party.  Also, digital marketplaces are very flexible and efficient because they operate with reduced search and transaction costs, lower menu costs, greater price discrimination, and the ability to change prices dynamically based on market conditions.  Menu costs are the merchants’ costs of changing prices.  These markets also provide many opportunities to sell directly to the consumer, bypassing intermediaries.  By eliminating the middleman in the distribution channel, purchase transaction costs can be significantly lowered.  This removal of organizations or business process layers responsible for intermediary steps in a value chain is known as disintermediation.  The digital marketplace has expanded sales of digital goods.  These are goods that can be delivered over a digital network. 

One was to classify e-commerce is by the nature of participants in the e-commerce transaction.  Business-to-consumer (B2C) e-commerce involves retailing products and services to individual shoppers.  Business-to-business (B2B) e-commerce is the sales of goods and services amoung businesses.  Consumer-to-consumer (C2C) e-commerce involves consumers selling directly to consumers.  Another way to classify e-commerce is by the platforms used by participants in a transaction.  Mobile commerce is using handheld wireless devices for purchasing goods and services from any location.  Two types of m-commerce are smart phones and e-readers.

E-commerce business models have emerged to add extra value to existing products and services or to provide the foundation for new products and services.  Types of e-commerce business models include portals, e-tailers, content provider, transaction brokers, market creators, service providers, and community providers.  Portals such as Google and Bing offer powerful Web search tools as well as an integrated package of content and services all in one place.  E-tailers are online retail stores, such as Amazon.  Here customers only need to connect to the Internet to check their inventory and place an order.  A content provider creates revenue by providing digital content, over the Web.  The ITunes Store and Apple’s Internet-connected devices such as the iPhone, iPod, and iPad are examples.  They have enabled new forms of digital content delivery from podcasting to mobile streaming.  Podcasting is a method of publishing audio or video broadcast via the Internet.  Streaming is a method of publishing music and video files that flows a continuous stream of content to a user’s device without being stored locally on the device.  Transaction brokers are sites that process transactions for consumers normally handled in person, by phone, or by mail.  Market creators provide a digital environment where buyers and sellers can meet, search for products, display products, and establish prices for those products.  Service providers offer services online, such as photo sharing, video sharing, and online sites for data backup and storage.  Community providers are sites that create a digital online environment where people with similar interests can buy and sell goods, share interests, communicate with like-minded people, and receive interest-related information.

A revenue model shows how a firm will earn revenue, generate profits, and produce a superior return on investment.  Most firms rely on one, or some combination, of the following e-commerce revenue models:  advertising, sales, subscription, free/freemuin, transaction fee, and affiliate.  The advertising revenue model is the most widely used revenue model in e-commerce.  In this model a Web site generates revenue by attracting a large audience of visitors who can then be exposed to advertisements.  In a sales revenue model a company derives revenue by selling goods, information, or services to customers.  The subscription revenue model is where a Web site offering content or services charges a subscription fee for access to some or all of its offerings on an ongoing basis.  The free/freemuim revenue model is how firms offer basic services or content for free, while charging a premium for advanced or special features.  In the transaction fee revenue model a company receives a fee for enabling or executing a transaction.  An affiliate revenue model is where Web sites (called “affiliate Web sites”) send visitors to other Web sites in return for a referral fee or percentage of the revenue from any resulting sales.

Web 2.0 online services are one of the fastest growing areas of e-commerce revenues, with the most popular social networking.  This links people through their mutual business or personal connections, enabling them to mine their friends for sales leads, job-hunting tips, or new friends.  Examples include Facebook, MySpace, Friendster, and LinkedIn.  These sites offer new possibilities for e-commerce.  Networking sites sell banner, video, and text ads; sell user preference information to marketers; and sell products, such as music, videos, and e-books.  At social shopping sites, such as Kaboodle and ThisNext, one can swap shopping ideas with friends.

Wisdom of crowds is the belief that large numbers of people can make better decisions about a wide range of topics or products than a single person or small committee of experts.  This concept suggests that firms should consult with thousands of their customers first as a way of establishing a relationship with them, and then better understand how their products and services are used and appreciated (or rejected).  This allows firms to help in solving some business problems using crowdsourcing.  Firms can also use this concept in the form of prediction markets, which are established peer-to-peer betting markets where participants make bets on specific outcomes of business decisions. 

E-commerce has affected marketing and marketing communications more than any other industry.  The Internet provides marketers with new ways of identifying and communicating with millions of potential customers at costs far lower than traditional media.  The Internet enables long tail marketing, which is the ability for firms to profitably market goods to very small online audiences, largely because of the lower costs of reaching very small market segments.  The Internet also provides new ways to gather information from customers, adjust product offerings, and increase customer value.  Behavioral targeting techniques are used to increase the effectiveness of banner, rich media, and video ads.  This technique refers to tracking the click-streams (history of clicking behavior) of individuals on thousands of Web sties for the purpose of understanding their interests and intentions, and exposing them to advertisements that are uniquely suited to their behavior.  Many believe this technique leads to more efficient marketing and larger sales and revenues.  However, it also leads to the invasion of personal privacy without user consent.  This technique takes place at the individual Web site level and on various advertising networks that track users across thousands of Web sites.  It enables firms to understand how well their Web site is working, create unique personalized Web pages that display content or ads for products or services of special interest to each user, improve the customer’s experience, and create additional value through a better understanding of the shopper. 

B2B e-commerce refers to the commercial transactions that occur among business firms.  Most of these transactions are still based on proprietary systems for electronic data interchange (EDI), which is the direct C2C exchange between two organizations of standard business transactions, such as orders, shipment instructions, or payments.  Private industrial networks (private exchanges) consist of a large firm using an extranet to link to its suppliers and other key business partners for efficient supply chain management and other collaborative commerce activities.  Net marketplaces (e-hubs) provide a single, digital marketplace based on Internet technology for many different buyers and sellers.  Exchanges are independently owned third-party Net marketplaces that connect thousands of suppliers and buyers for spot purchasing. 

M-commerce is the use of wireless devices, such as cell phones or handheld digital devices, to conduct both B2C and B2B e-commerce transactions over the Internet and is the fastest growing of e-commerce.  The main areas of growth are location-based services; software application sales at stores such as iTunes; entertainment downloads of ring tones, music, video, and TV shows; mobile display advertising; direct shopping services; and e-book sales.  M-commerce applications have taken off for services that are time-critical, that appeal to people on the move, or that accomplish a task more efficiently than other methods.  Types of applications include location-bases services, banking and financial services, wireless advertising and retailing, and games and entertainment. 

In order to build a successful e-commerce site, a strong understanding of business, technology, and social issues, as well as a systematic approach is needed.  The two most important challenges management faces are developing a clear understanding of their business objectives and knowing how to choose the right technology to achieve those objectives.  The first step in the building process is to be aware of the main areas where decisions need to be made, i.e., bringing in the best individuals who possess the skill sets needed to build and manage a successful e-commerce site.  Next decisions will need to be made about the site’s hardware, software, and telecommunications infrastructure.  Customers’ demands will drive these decisions.  Once these decisions are made, the next step is planning the Web site to identify the specific business objectives for the site, and then developing a list of system functionalities and information requirements.  Business objectives are the capabilities the site needs to have.  System functionalities are the types of information system capabilities needed to achieve the business objectives.  The information requirements are the information elements that the system must produce in order to achieve the business objectives. 

Choices from building and maintaining the Web site range from outsourcing the entire Web site development to an external vendor to building everything in-house and deciding whether to host the site on the firm’s own servers or outsource the hosting to a Web host provider.  The building decision has pros and cons for whichever choice is made.  If building in-house a pre-built template should be used to create the Website.  This is the least expensive and simplest way to go.  However, the risk of high development costs and doing a poor job come with not using the pre-built template.  External vendors are relied heavily on to provide sophisticated Web site capabilities, while also maintaining a substantial internal staff.  Most companies choose to outsource hosting and pay a company to host their Website.  This means that the hosting company is responsible for making sure the site is “live” or accessible, 24 hours a day.  With this businesses need not concern themselves with technical aspects of setting up and maintaining a Web server, telecommunications links, or specialized staffing.

System maintenance is the biggest component of a Web site budget.  This is followed by system development, content design and development, telecommunications and hardware, and software.  A simple Web site can be built and hosted with a first-year cost of $5,000 or less.