ISM/U3 Topic 2 E-Commerce – Digital Markets, Digital Goods
E-commerce refers to the use of the Internet and the Web to transact business. More formally, e-commerce is about digitally enabled commercial transactions between and among organizations and individuals. For the most part, this means transactions that occur over the Internet and the Web. Commercial transactions involve the exchange of value (e.g. money) across organizational or individual boundaries in return for products and services.
Like all bubbles, the “dot-com” bubble burst in March 2001. A large number of e-commerce companies failed during this process. Yet for many others, such as Amazon, eBay, Expedia, and Google, the results have been more positive. By 2006, e-commerce revenues returned to solid growth, and have continued to be the fastest growing form of retail trade in the United States, Europe and Asia.
Difference in E-Commerce
E-commerce is ubiquitous, meaning that is it available just about everywhere, at all times. The result is called a marketspace – a marketplace extended beyond traditional boundaries and removed from a temporal and geographic location.
E-commerce technology permits commercial transactions to cross cultural and national boundaries far more convenient and cost effectively than is true in traditional commerce. As a result, the potential market size for e-commerce merchants is roughly equal to the size of the world’s online population.
One strikingly unusual feature of e-commerce technologies is that the technical standards of the Internet and, therefore, the technical standards for conducting e-commerce are universal standards. The universal technical standards of the Internets must pay simply to bring their goods to market. At the same time, for consumers, universal standards reduce search costs – the effort to find suitable products.
Information richness refers to the complexity and content of a message. Traditional markets, national sales forces, and small retail stores have great richness: They are able to provide personal, face-to-face service using aural and visual cues when making a sale.
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.
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. Price transparency refers to the ease with which consumers can find out the variety of prices in a market; cost transparency refers to the ability of consumers to discover the actual costs merchants pay for products. Price discrimination is selling the same goods, or nearly the same goods, to different targeted groups at different prices.
The technology also permits customization – changing the delivered product or service based on a user’s preferences or prior behavior. The result is a result of personalization and customization unthinkable with traditional commerce technologies.
Social Technology: User Content Generation and Social Networking
In contrast to previous technologies, the Internet and e-commerce technologies have evolved to be much more social by allowing users to create and share with their personal friends (and a larger worldwide community) content in the form of text, videos, music, or photos. Using these forms of communication, users are able to create new social networks and strengthen existing ones.
Key Concepts in E-Commerce: Digital Markets and Digital Goods in a Global Marketplace
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 (merchants’ cost of changing prices), greater price discrimination, and the ability to change prices dynamically based on market conditions. In dynamic pricing, the price of a product varies depending on the demand characteristics of the customer or the supply situation of the seller. The removal of organizations or business process layers responsible for intermediary steps in a value chain is called disintermediation.
The Internet digital marketplace has greatly expanded sales of digital goods. Digital goods are goods that can be delivered over a digital network.
E-Commerce: Business And Technology
Types of E-Commerce
There are many ways to classify electronic commerce transactions. The three major electronic commerce categories are:
- Business-to-consumer (B2C) electronic commerce involves retailing products and services to individual shoppers.
- Business-to-business (B2B) electronic commerce involves sales of goods and services among businesses.
- Consumer-to-consumer (C2C) electronic commerce involves consumers selling directly to consumers.
The use of handheld wireless devices for purchasing goods and services from any location is termed mobile commerce or m-commerce.
E-Commerce Business Models
All, in one way or another, use the Internet to add extra value to existing products and services or to provide the foundation for new products and services.
Portals such as Google, Bing, Yahoo, MSN, and AOL offer powerful Web search tools as well as integrated package of content and services such as news, e-mail, instant messaging, maps, calendars, shopping, music downloads, video streaming, and more, all in one place.
Online retail stores, often called e-tailers, comes in all sizes, from giant Amazon with 2010 revenues of more than 24 billion, to tiny local stores that have Web sites.
While e-commerce began as a retail product channel, it has increasingly turned into a global content channel. “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. Podcasting is a method of publishing audio or video broadcasts via the Internet, allowing subscribing users to download audio or video files onto their personal computers or portable music players. Streaming is a publishing method for music and video files that flows a continuous stream of content to a user’s device without being stored locally on the device.
Sites that process transactions for consumers normally handled in person, by phone, or by mail are transaction brokers. The largest industries using this model are financial services and travel services.
Market creators build a digital environment in which buyers and sellers can meet, display products, search for products, and establish prices.
While e-tailers sell products online, service providers offer services online.
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.
WEB 2.0: Social Networking and The Wisdom of Crowds
At social shopping sites like Kaboodle, ThisNext, and Stylehive you can swap shopping ideas with friends. Facebook offers this smae service on a voluntary basis.
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. Beyond merely sloliciting 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.
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, recommended systems, and targeted e-mail. The Internet enables long tail marketing. 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 trade between business firms (business-to-business commerce or B2B) represents a huge marketplace. The process of conducting trade among business firms is complex and requires significant human intervention, and therefore, it consumes significant resources. About 80 percent of online B2B e-commerce is still based on proprietary systems for electronic data interchange (EDI). 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 private industrial network is 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. Exchanges are independently owned third-party Net marketplaces that connect thousands of suppliers and buyers for spot purchasing.
The Mobile Digital Platform And Mobile E-Commerce
In 2010, m-commerce represented less than 10 percent of all e-commerce, with about $5 billion in annual revenues generated by selling music, videos, ring tones, applications, movies, television and location-based services like local restaurant locators and traffic updates.
M-Commerce Services And Applications
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.
Banking and Financial Services
Banks and credit card companies are rolling out services that let customers manage their account from their mobile devices. JPMorgan Chase and Bank of America customers can use their cell phones to check account balances, transfer funds, and pay bills.
Wireless Advertising and Retailing
Although the mobile advertising market is currently small ($784 million), it is rapidly growing (up 17 percent from last year and expected to grow to over $6.2 billion by 2014), 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.
Building An E-Commerce Web Site
The two most important management challenges in building a successful e-commerce site are (1) developing a clear understanding of your business objectives and (2) knowing how to choose the right technology to achieve those objectives.
Pieces of The Site-Building Puzzle
You have to identify the key decision areas within your budget and time frame. Once you make decision, you will need to think about a plan for the project and carefully consider your site’s design.
Business Objectives, System functionality, and Information Requirements
There are many choices for building and maintaining Web sites. Choices range from outsourcing the entire Web site development to an external vendor to building everything yourself (in-house).
The Building Decision
In the past, bricks-and-mortar retailers typically designed their e-commerce sites themselves (because they already had the skilled staff and IT infrastructure in place to do this). Today, however, larger retailers rely heavily on external vendors to provide sophisticated Web site capabilities, while also maintaining substantial internal staff. Medium-size start-ups will often purchase a sophisticated package and then modify it to suit their needs. Very small mom-and-pop firms seeking simple storefronts will use templates.
The Hosting Decision
With a co-location agreement, your firm purchases or leases a Web server (and has total control over its operation) but locates the server in a vendor’s physical facility.
Web Site Budgets
Simple Web sites can be built and hosted with a first-year cost of $5,000 or less. The Web sites of large firms with high levels of interactivity and linkage to corporate systems cost several million dollars a year to create and operate.