CHAPTER 10 "E-commerce: Digital Market, Digital Goods"
10.1 E-commerce and The Internet
E-commerce Today
The e-commerce revolution is still unfolding. Individuals and
businesses will increasingly use the Internet to conduct commerce as more
products and services come online and households switch to broadband
telecommunications. More industries will be transformed by e-commerce,
including travel reservations, music and entertainment, news, software,
education, and finance.
Why E-commerce Is Different
Why has e-commerce grown so rapidly? The answer lies in the unique
nature of the Internet and the Web. The unique features of the Internet and Web
as a commercial medium are shown below:
Ubiquity
E-commerce is ubiquitous, meaning that is it available just about
everywhere, at all times. From a consumer point of view, ubiquity reduces transaction costs—the
costs of participating in a market.
Global Reach
E-commerce technology permits commercial transactions to cross
cultural and national boundaries far more conveniently and cost effectively
than is true in traditional commerce.
Universal Standards
The universal technical standards of the Internet and e-commerce
greatly lower market entry costs—the cost merchants must pay simply to bring their goods to
market. At the same time, for consumers, universal standards reduce search costs—the effort
required to find suitable products.
Richness
The larger the audience reached, the less rich the message. The
Web makes it possible to deliver rich messages with text, audio, and video simultaneously
to large numbers of people.
Interactivity
Unlike any of the commercial technologies of the twentieth
century, with the possible exception of the telephone, e-commerce technologies
are interactive, meaning they allow for two-way communication between merchant
and consumer.
Information Density
The Internet and the Web vastly increase information density—the
total amount and quality of information available to all market participants, consumers,
and merchants alike. E-commerce technologies reduce information collection,
storage, processing, and communication costs while greatly increasing the
currency, accuracy, and timeliness of information.
Personalization/Customization
E-commerce technologies permit personalization:
Merchants can target their marketing messages to specific individuals by
adjusting the message to a person’s name, interests, and past purchases. The
technology also permits customization—changing the delivered product or service based on a user’s preferences
or prior behavior.
Key Concepts in E-commerce: Digital Market and Digital Goods in A Global Marketplace
The Internet has changed the way companies conduct business and
increased their global reach. The Internet reduces information asymmetry. An information asymmetry exists
when one party in a transaction has more information that is important for the transaction than the
other party. Digital markets 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.
By selling directly to consumers or reducing the number of
intermediaries, companies are able to raise profits while charging lower
prices. The removal of organizations or business process layers responsible for
intermediary steps in a value chain is called disintermediation.
Digital Goods
The Internet digital marketplace has greatly expanded sales of
digital goods. Digital goods are goods that can be delivered over a digital network. Music tracks,
video, Hollywood movies, software, newspapers, magazines, and books can all be
expressed, stored, delivered, and sold as purely digital products.
10.2 E-commerce: Business and Technology
E-commerce is a fascinating combination of business models and new
information technologies. Let’s start with a basic understanding of the types of
e-commerce, and then describe e-commerce business and revenue models.
Types of E-commerce
The three major electronic commerce categories are:
- business-to-consumer (B2C) e-commerce
- business-to-business (B2B) e-commerce
- consumer-to-consumer (C2C) e-commerce.
E-commerce Business Models
Changes in the economics of information described earlier have
created the conditions for entirely new business models to appear, while destroying
older business models.
Portal
Portals such as Google, Bing, offer powerful Web search tools as
well as an integrated package of content and services, such as news, e-mail, and
more, all in one place. Initially, portals were primarily “gateways” to the
Internet. Although there are hundreds of portal/search engine sites, the top
five sites gather more than 95 percent of the Internet traffic because of their
superior brand recognition
E-tailer
Online retail stores, often called e-tailers, come in
all sizes, from giant Amazon with 2010 revenues of more than $24 billion, to tiny
local stores that have Web sites. An e-tailer is similar to the typical bricks-and-mortar
storefront, except that customers only need to connect to the Internet to check
their inventory and place an order.
Content Provider
“Content” is defined broadly to include all forms of intellectual
property. Intellectual property refers to all forms of human expression that can be put into a
tangible medium such as text, CDs, DVDs, or stored on any digital (or other)
media, including the Web.
Transaction Broker
Sites that process transactions for consumers normally handled in
person, by phone, or by mail are transaction brokers.
Market Creator
Market creators build
a digital environment in which buyers and sellers can meet, display products,
search for products, and establish prices.
Service Provider
While e-tailers sell products online, service providers offer
services online.
Community Provider
Community providers are
sites that create a digital online environment where people with similar
interests can transact (buy and sell goods); share interests, photos, videos;
communicate with like-minded people; receive interest-related information; and
even play out fantasies by adopting online personalities called avatars.
E-commerce Revenue Models
A firm’s revenue model describes how the firm will earn revenue, generate profits, and
produce a superior return on investment.
Advertising Revenue Model
In the advertising revenue model, a Web site generates revenue by attracting a large audience of
visitors who can then be exposed to advertisements.
Sales Revenue Model
In the sales revenue model, companies derive revenue by selling goods, information, or
services to customers.
Subscription Revenue Model
In the subscription revenue model, a Web site offering content or services charges a subscription
fee for access to some or all of its offerings on an ongoing basis.
Free/Freemium Revenue Model
In the free/freemium revenue model, firms offer basic services or content for free, while charging a
premium for advanced or special features.
Transaction Fee Revenue Model
In the transaction fee revenue
model, a company receives a fee
for enabling or executing a transaction.
Affiliate Revenue Model
In the affiliate revenue model, 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: Social Networking and The Wisdom of Crowds
One of the fastest growing areas of e-commerce revenues are Web
2.0 online services. The most popular Web 2.0 service is social networking,
online meeting places where people can meet their friends and their friends’
friends. Social networking sites and online communities offer new possibilities
for e-commerce. At social shopping sites like Kaboodle, ThisNext, and Stylehive you can swap shopping
ideas with friends. Online communities are also ideal venues to employ viral marketing
techniques.
The Wisdom of Crowds
In a phenomenon called “the
wisdom of crowds,” some argue that large
numbers of people can make better decisions about a wide range of topics or
products than a single person or even a small committee of experts. In marketing,
the wisdom of crowds concept suggests that firms should consult with thousands
of their customers first as a way of establishing a relationship with them, and
second, to better understand how their products and services are used and
appreciated (or rejected). Beyond merely soliciting advice, firms can be
actively helped in solving some business problems using what is called crowdsourcing.
Firms can also use the wisdom of crowds in the form of prediction
markets. Prediction markets are established as peer-to-peer betting markets where participants
make bets on specific outcomes of, say, quarterly sales of a new product,
designs for new products, or political elections.
E-commerce Marketing
The Internet provides marketers with new ways of identifying and
communicating with millions of potential customers at costs far lower than
traditional media, including search engine marketing, data mining, recommender
systems, and targeted e-mail. The Internet enables long tail marketing. Many e-commerce marketing firms use behavioral
targeting techniques to increase the effectiveness of banner, rich media, and
video ads. Behavioral targeting refers to tracking the click-streams (history of clicking
behavior) of individuals on thousands of Web sites for the purpose of
understanding their interests and intentions, and exposing them to
advertisements that are uniquely suited to their behavior.
B2B E-commerce: New Efficiencies and Relationships
The process of conducting trade among business firms is complex
and requires significant human intervention, and therefore, it consumes
significant resources. The challenge of B2B e-commerce is changing existing
patterns and systems of procurement, and designing and implementing new Internet-based
B2B solutions.
About 80 percent of online B2B e-commerce is still based on
proprietary systems for electronic data interchange (EDI). Electronic data interchange enables the computer-to-computer exchange
between two organizations of standard transactions such as invoices, bills of
lading, shipment schedules, or purchase orders. Private industrial networks typically consist of a large firm using an extranet to link to its
suppliers and other key business partners. Another term for a private
industrial network is a private
exchange. Net marketplaces,
which are sometimes called e-hubs, provide a single, digital marketplace based
on Internet technology for many different buyers and sellers
10.3 The Mobile Digital Platform and Mobile E-commerce
In five years, the majority of Internet users in the United States
will rely on mobile devices as their primary device for accessing the Internet.
M-commerce has taken off. However, m-commerce is the fastest growing form of
e-commerce, with some areas expanding at a rate of 50 percent or more per year,
and is estimated to grow to $19 billion in 2014.
Mobile Commerce Service and Applications
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.
Location-Based Services
Wikitude.me provides a special kind of browser for smart phones
equipped with a built-in global positioning system (GPS) and compass that can
identify your precise location and where the phone is pointed. Loopt is a free
social networking application that allows you to share your status and track
the location of friends via smartphones. Foursquare provides a similar service
to 4 million registered users, who are able to connect with friends and update
their location.
Banking and Financial Services
Banks and credit card companies are rolling out services that let
customers manage their accounts from their mobile devices.
Wireless Advertising and Retailing
Although the mobile advertising market is currently small, it is rapidly
growing as more and more companies seek ways to exploit new databases of
location-specific information.
Games and Entertainment
Cell phones have developed into portable entertainment platforms. Smartphones
like the iPhone and Droid offer downloadable and streaming digital games,
movies, TV shows, music, and ringtones.
10.4 Building An E-commerce Web Site
Building a successful e-commerce site requires a keen
understanding of business, technology, and social issues, as well as a
systematic approach. The two most important management challenges in building a
successful e-commerce site are:
- developing a clear understanding of your business objectives
- knowing how to choose the right technology to achieve those objectives.
Pieces of The Site-Building Puzzle
First, you must be aware of the main areas where you will need to
make decisions. On the organizational and human resources fronts, you will have
to bring together a team of individuals who possess the skill sets needed to
build and manage a successful e-commerce site. You will also need to make
decisions about your site’s hardware, software, and telecommunications
infrastructure. The demands of your customers should drive your choices of
technology.
Business Objectives, System Functionality, and Information Requirements
The key lesson to be learned here is to let the business decisions
drive the technology, not the reverse. This will ensure that your technology
platform is aligned with your business. Your planning should identify the
specific business objectives for your site, and then develop a list of system
functionalities and information requirements.
Building The Web Site: In-House vs. Outsourcing
The Building Decision
If you elect to build your own site, there are a range of options.
The decision to build a Web site on your own has a number of risks. You will be
reinventing what other specialized firms have already built, and your staff may
face a long, difficult learning curve, delaying your entry to market. Your
efforts could fail. On the positive side, you may able to build a site that
does exactly what you want, and develop the in-house knowledge to revise the
site rapidly if necessitated by a changing business environment.
The Hosting Decision
Most businesses choose to outsource hosting and pay a company to
host their Web site, which means that the hosting company is responsible for
ensuring the site is “live” or accessible, 24 hours a day. With a co-location agreement,
your firm purchases or leases a Web server but locates the server in a vendor’s
physical facility. In the age of cloud
computing, it is much less expensive to host your Web site in virtualized
computing facilities. The cost of pure hosting has fallen as fast as the fall
in server prices, dropping about 50 percent every year.
Web Site Budgets
In general, the cost of hardware, software, and telecommunications
for building and operating a Web site has fallen dramatically (by over 50
percent) since 2000, making it possible for very small entrepreneurs to create
fairly sophisticated sites. At the same time, the costs of system maintenance
and content creation have risen to make up more than half of typical Web site
budgets.
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source: "Management Information System" e-book, 12th edition, written by Kenneth C. Laudon and Jane P. Laudon.