E-commerce Fundamentals Chapter 2 E-commerce Fundamentals

Learning outcomes Evaluate changes in business relationships between organizations and their customers enabled by e- commerce Identify the main business and marketplace models for electronic communications and trading Describe different revenue models and transaction mechanisms available through online services.

Management issues What are the implications of changes in marketplace structures for how we trade with customers and other partners? Which business models and revenue models should we consider in order to exploit the Internet? What will be the importance of online intermediaries and marketplace hubs to our business and what actions should we take to partner these intermediaries?

E-commerce environment Needs of customers Local and international economic conditions Legislation Technological innovations E-commerce environment highly influencing business strategies in the e-commerce field. The 4 environmental factors must be considered and should be monitored.

The acronym is SLEPT Society (consumers) Legal Economy Politic Technology Figure 2.1 The environment in which e-business services are provided

Local conditions

Environment constraints and opportunities Customers – which services are they offering via their web site that your organization could support them in? Competitors – need to be benchmarked in order to review the online services they are offering – do they have a competitive advantage? Intermediaries – are new or existing intermediaries offering products or services from your competitors while you are not represented? Suppliers – are suppliers offering different methods of procurement to competitors that give them a competitive advantage? Macro-environment Society – what is the ethical and moral consensus on holding personal information? Country specific, international legal – what are the local and global legal constraints for example on holding personal information, or taxation rules on sale of goods? Country specific, international economic – what are the economic constraints of operating within a country or global constraints? Technology – what new technologies are emerging by which to deliver online services such as interactive digital TV and mobile phone-based access?

Lack of Privacy = Lack of Sales “Consumer privacy apprehensions continue to plague the Web. These fears will hold back roughly $15 billion in e-commerce revenue.” -Forrester Research, September 2001 “Privacy and security concerns could cost online sellers almost $25 billion by 2006.” -Jupiter Research, May 2002 “Online retail sales could be 25% higher by 2006 if consumer’s fears about privacy and security were addressed.” -Jupiter Research, 2002 apprehensions = kekuatiran

Figure 2.2 B2B and B2C interactions between an organization, its suppliers and its customers

B2B and B2C characteristics Proportion of adopters with access Low to medium High to very high Complexity of buying decisions Relatively simple – individual and influencers More complex – buying process involves users, specifiers, buyers, etc. Channel Relatively simple – direct or from retailer More complex, direct or via wholesaler, agent or distributor Purchasing characteristics Low value, high volume or high value, low volume. May be high involvement Similar volume/value. May be high Involvement. Repeat orders (rebuys) more common Product characteristic Often standardized items Standardized items or bespoke for sale

Marketplace channel structures Figure 2.3 Disintermediation of a consumer distribution channel showing (a) the original situation, (b) disintermediation omitting the wholesaler, and (c) disintermediation omitting both wholesaler and retailer

Marketplace channel structures Describes the way a manufacturer delivers products and services to its customers

Vauxhall

When to use intermediary and when to disintermediation? Figure 2.4 From original situation (a) to disintermediation (b) and reintermediation (c)

Reintermediation Creation of a new intermediary Example: B&Q www.diy.com Opodo www.opodo.com Boots www.wellbeing.com www.handbag.com Ford, Daimler (www.covisint.com) Partnering with existing intermediary – Mortgage broker Charcol and Freeserve

Reintermediation

Online Intermediaries Directories Search Engines Malls Virtual resellers Financial Intermediaries Forums, fan clubs and user groups Evaluators Directories are now less important since the same function can be served by search engines. Malls are also not effective since they have no added value to retail stores

Aggregators: web site that provide price comparison service to consumer. Figure 2.6 Yahoo! Shopping Australia, a price comparison site based on the Kelkoo.com shopping comparison technology (http://shopping.yahoo.com.au)

Blogs Give an easy method of regularly publishing web pages, e.g. online journals, diaries or event listing Include feedback or comments

Figure 2.5 Dave Chaffey’s blog site (www.davechaffey.com)

Importance of multi-channel marketplace models Customer journey – modern multi-channel behavior as consumers use different media Offline Mixed-mode Online

Figure 2.7 Example channel chain map for consumers selecting an estate agent to sell their property

Meta services Search engines Portal Directories ‘A gateway to information resources and services’ Directories News aggregators MR aggregators MR=market research Comparers Exchanges

Types of portal Type of portal Characteristics Example Access portal Associated with ISP Wanadoo (www.wanadoo.com) and now (www.orange.co.uk) AOL (www.aol.com) Horizontal or functional portal Range of services: search engines, directories, news recruitment, personal information management, shopping, etc. Yahoo! (www.yahoo.com) MSN (www.msn.com) Google (www.google.com) for which a long period just focused on search. Vertical A vertical portal covers a particular market such as construction with news and other services. Construction Plus (www.constructionplus.co.uk) Chem Industry (www.chemindustry.com) Barbour Index for B2B resources (www.barbour-index.com) E-consultancy (www.e-consultancy.com) Focuses on e-business resources Media portal Main focus is on consumer or business news or entertainment. BBC (www.bbc.co.uk) Guardian (www.guardian.co.uk) ITWeek (www.itweek.co.uk) Geographical (Region, country, local) May be: horizontal vertical Google country versions Yahoo! country and city versions Craigslist (www.craigslist.com) Countyweb (www.countyweb.com) Marketplace Horizontal EC21 (www.ec21.com) eBay (www.eBay.com) Search portal Main focus is on Search Google (www.google.com) Ask Jeeves (www.ask.com) Media type Voice Video Delivered by streaming media or downloads of files Silicon (www.silicon.com)

Online representation Place of purchase Examples of sites A. Seller-controlled Vendor sites, i.e. home site of organization selling products, e.g. www.dell.com. B. Seller-oriented Intermediaries controlled by third parties to the seller such as distributors and agents, e.g. Opodo (www.opodo.com) represents the main air carriers C. Neutral Intermediaries not controlled by buyer’s industry, e.g. EC21 (www.ec21.com). Product-specific search engines, e.g. CNET (www.computer.com) Comparison sites, e.g. Barclay Square/Shopsmart (www.barclaysquare.com) Auction space, e.g. eBay (www.ebay.com) D. Buyer-oriented Intermediaries controlled by buyers, e.g. Covisint used to represent the major motor manufacturers (www.covisint.com) although they now don’t use a single marketplace, but each manufacturer uses technology to access its suppliers direct. Purchasing agents and aggregators E. Buyer-controlled Web site procurement posting on company’s own site, e.g. GE Trading Process Network (www.tpn.geis.com

Seller-oriented- Opodo.co.uk

Buyer-oriented-covisint.com

Figure 2.8 Variations in the location and scale of trading on e-commerce sites

Commercial arrangements for transactions Commercial (trading) mechanism Online transaction mechanism of Nunes et al. (2000) 1. Negotiated deal Example: can use similar mechanism to auction as on Commerce One (www.commerceone.net) Negotiation – bargaining between single seller and buyer. Continuous replenishment – ongoing fulfilment of orders under pre-set terms 2. Brokered deal Example: intermediaries such as screentrade (www.screentrade.co.uk) Achieved through online intermediaries offering auction and pure markets online 3. Auction Example: C2C: E-bay (www.ebay.com) B2B: Industry to Industry (http://business.ebay.co.uk/) Seller auction – buyers’ bids determine final price of sellers’ offerings. Buyer auction – buyers request prices from multiple sellers. Reverse – buyers post desired price for seller acceptance 4. Fixed-price sale Example: all e-tailers Static call – online catalogue with fixed prices. Dynamic call – online catalogue with continuously updated prices and features 5. Pure markets Example: electronic share dealing Spot – buyers’ and sellers’ bids clear instantly 6. Barter Example: www.intagio.com and www.bartercard.co.uk Barter – buyers and sellers exchange goods. According to the International Reciprocal Trade Association (www.irta.com ) barter trade was over $9 billion in 2002.

Figure 2.9 Priceline Hong Kong service (www.priceline.com.hk)

Business model Timmers (1999) defines a ‘business model’ as: An architecture for product, service and information flows, including a description of the various business actors and their roles; and a description of the potential benefits for the various business actors; and a description of the sources of revenue.

Business models on the web E-shop E-procurement E-malls E-auctions Virtual communities Collaboration platforms Third-party marketplace Value-chain service providers Information brokerage Trust and other services

Figure 2.10 Alternative perspectives on business models

Revenue models – publisher example 1. Subscription access to content. 2. Pay-per-view access. 3. CPM on site display advertising. 4. CPC advertising on site. 5. Sponsorship of site sections, content or widgets. 6. Affiliate revenue (CPA or CPC). 7. Subscriber data access for e-mail marketing. 8. Access to customers for research purposes. CPM = cost per mille (thousand). Cost to the advertiser or revenue for the publisher when an ad is displayed 1000 times. CPC = cost per click. Cost to the advertiser when an ad is clicked once CPA = cost per acquisition. Cost to the advertiser for each sales or at least lead generated after a click.

Figure 2. 11 Alex Tew’s Million Dollar Home Page (www Figure 2.11 Alex Tew’s Million Dollar Home Page (www.milliondollarhomepage.com)

Figure 2.13 www.firebox.com

Summary The constantly changing e-business environment should be monitored by all organizations in order to be able to respond to changes in social, legal, economic, political and technological factors together with changes in the immediate marketplace that occur through changes in customer requirements and competitors’ and intermediaries’ offerings The e-business marketplace involves transactions between organizations and consumers (B2C) and other businesses (B2B). Consumer-to-consumer (C2C) and consumer-to-business categories (C2B) can also be identified

Summary The Internet can cause disintermediation within the marketplace as an organization’s channel partners such as wholesalers or retailers are bypassed. Alternatively, the Internet can cause reintermediation as new intermediaries with a different purpose are formed to help bring buyers and sellers together in a virtual marketplace or marketspace. Evaluation of the implications of these changes and implementation of alternative countermediation strategies is important to strategy

Summary Trading in the marketplace can be sell-side (seller- controlled), buy-side (buyer-controlled) or at a neutral marketplace A business model is a summary of how a company will generate revenue identifying its product offering, value-added services, revenue sources and target customers. Exploiting the range of business models made available through the Internet is important to both existing companies and start-ups

Summary The Internet may also offer opportunities for new revenue models such as commission on affiliate referrals to other sites or banner advertising The opportunities for new commercial arrangements for transactions include negotiated deals, brokered deals, auctions, fixed-price sales and pure spot markets, and barters should also be considered The success of dot-com or Internet start-up companies is critically dependent on their business and revenue models and traditional management practice

Homework Describe your dream e-commerce website Write details of your website: What are the transaction actors (B2B, B2C, or others) If you are to create intermediaries, specify what kind of intermediaries are you going to create What are the trading mechanisms Explain the marketplace position Explain the revenue model