Commerce Business Models - - E-Commerce Sourcebook 1

PREFACEANDUSER’SGUIDE

T Legal Considerations of E-Commerce T Online Content Management and Provision T Web Site Design

Obviously, such topics easily merit more informa-tion than could be addressed in a book of this size and nature, and thus each essay is accompanied by suggestions and resources for further reading. Essays are arranged alphabetically by topic, and all essays are listed in full for easy perusal within the table of contents page.

DIRECTORY OF E-COMMERCE ASSOCIATIONS, CON-SULTANTS, AND OTHER ORGANIZATIONS. This sec-ond section, spanning Volumes 1 and 2, provides coverage on over 4,700 organizations, agencies, and associations relevant to the e-commerce industry. En-tries contain organization name; contact information including contact name, address, and phone, toll-free and fax numbers; email and URL addresses; brief description of purpose and services; and descriptive data such as number of employees, date founded, publications, and awards. Entries are arranged alpha-betically within the following categories:

T Associations T Computer Software T Consultants

T Educational Programs

T Government Regulatory Agencies T Publications

T Trade Shows & Conventions T Web Site Designers

T Website Hosting Companies

DIRECTORY OF LEADING E-COMMERCE COMPA-NIES. Despite the massive shakeout of so many e-commerce firms, there were a number of highly suc-cessful companies who not only sustained the down-turn in the dot-com market but managed to flourish and mature, acting as forebears of the kinds of firms that will emerge in the 21st century. This final section is devoted to those examples, and is subdivided into two parts within Volume 2. The first half arranges companies alphabetically by company name, with each entry containing complete contact information including contact name, address, and phone, toll-free

and fax numbers; email and URL addresses; brief description of the type of business; and descriptive data such as annual revenue, number of employees, date founded, and major partners. The second half consists of rankings of these firms according to annual revenues and number of employees.

A General Index is also included at the end of Volume 2 to provide easy access to organization names, personal names, industries, and subject terms.

It is important to note that references are to book numbers rather than to page numbers, and that each section begins with book number ‘‘1.’’ Each book number reference is preceded by a letter denoting a section of the book: ‘‘T’’ denotes a ‘‘How To’’ topic,

‘‘O’’ denotes a listing within the Organization section, and ‘‘C’’ refers the user to a listing within the Compa-nies section.

METHOD OF COMPILATION. Directory listings and company profiles in GECS were obtained using a variety of means: Direct contact with the associations, organizations, companies, and agencies through tele-phone surveys, Internet research, or through materials provided by those listees; government resources; and data obtained from other relevant Gale directories.

ACKNOWLEDGMENTS. The editors gratefully ac-knowledge the wise counsel and helpful suggestions of our advisors:

Stephen M. Hayes, Business Services Librarian, Thomas Mahaffey, Jr. Business Information Center, University Libraries of Notre Dame, University of Notre Dame, Notre Dame, Indiana.

Dr. Jerome Katz, Ph.D, Mary Louise Endowed Professor of Management at Saint Louis University, Missouri.

Brenda Reeb, Director, Management Library, Uni-versity of Rochester, Rochester, New York.

COMMENTS AND SUGGESTIONS

Comments and suggestions regarding the Gale E-Commerce Sourcebook are invited and encouraged.

Please contact:

Managing Editor, Business Product Gale Group

27500 Drake Rd.

Farmington Hills, MI 48331-3535 Telephone: 800-347-GALE [email protected]

‘‘How To’’ Topics in E-Commerce

This section provides information and answers to common questions related to e-commerce. Each essay concludes with suggestions for further information and resources.

❚ 1

ACCOUNTING PRACTICES IN E-COMMERCE

In the early days of e-commerce and through the thick of the dot-com boom, common wisdom held that the novelty of the new electronic business model, particularly as rendered over the Web, was enough to float a business. Thus companies put their efforts into creating the appearance of innovation, while some traditional business concerns were pushed to the back burner. This logic was fed by copious commentary in business journals that dot-coms heralded the death of the traditional business model. Only when the e-commerce bubble burst in the early 2000s did opinions begin to change in earnest, and e-commerce entrepre-neurs discovered that a novel business idea wasn’t enough—it had to be backed up by solid practices, and accounting mattered to businesses, customers, and investors alike.

So old-school bookkeeping practices are vitally important, but the process of selecting the best ac-counting practices for your firm depends on your spe-cific business needs. These practices have to arise organically out of the practices and operations your firm employs in general.

NEW CONSIDERATIONS FOR THE INFORMATION AGE

Some accounting considerations are fairly new in the e-commerce era, or at least take on new impor-tance. E-commerce firms, especially pure-play, on-line-only firms, create new forms of value that must be accounted for in some way. Firms delivering full-fledged e-commerce services are more likely to focus their accounting strategies around the product or ser-vice they’re offering, paying special attention to fac-tors like intellectual property and the firm’s unique business practices. Innovative practices may have in-nate value in a still-forming e-commerce market.

With the wealth of data at your firm’s virtual fin-gertips, it’s crucial to keep in mind that any informa-tion that can be transferred into useful knowledge has potential power to augment your financial situation.

It’s important to not only harness such knowledge for your firm’s benefit, but to account for it as well.

This doesn’t necessarily mean that the rules of the accounting game have changed; rather, established theories and methods of accounting have simply been intensified by the addition of new layers of detail.

Accounting practices have to mirror the greater com-plexity and subtle detail of business the Information Age.

Determining when and how to account for particu-lar transactions can have a great impact on the com-pany’s cash flow, assets, and profits. Your firm must devise stable models for allocating costs. Choosing whether to expense a cost, classifying it as a simple expense incurred immediatedly, or to capitalize a cost, classifying it as an investment that can be amortized over time, is one factor e-commerce firms must con-sider. For instance, you need to determine how best to account for internal-use software—software your business develops or uses exclusively within the firm with no plans to profit from the software itself. In general, accounting organizations favor expensing certain stages of software development as they are incurred, as well as all costs surrounding the software use, such as training, data maintenance, interest pay-ments. However, certain direct development costs, usually the ones directly tied to writing and testing the software, are often capitalized as internal investments.

Your company’s financial team will need to be famil-iar with published standards, such as those of the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Standards Board (FASB), in order to navigate through these complex decisions.

Similarly, advertising costs can be expensed as incurred—at each step as the advertising program is developed—or when the advertisement actually hits the market. Less often, advertising costs may be amor-tized on the books, provided that the advertising meets certain characteristics of longer-term investments. The timing of the expense accounting may seem trivial, but it is hardly trivial. In financial statements that auditors, tax authorities, and investors need to make crucial decisions about your firm, the timing of such

‘‘HowTo’’TopicsinE-Commerce

decisions becomes very important for assessing the actual state of your firm’s financial position at a given time.

Intellectual capital refers to the accumulated knowledge, expertise, and intangible assets in your firm. It comes from employees; equipment such as hardware, databases, and IT networks; and a host of other sources including patents, trademarks, and the scalability of existing hardware and software—any-thing that can be considered to add value in some vital way. Because the future value of intellectual capital is difficult to judge, it is likewise difficult to quantify intellectual capital for accounting purposes.

Nonetheless, the increasing role of intellectual capital in assessing the value of businesses, particularly in the e-commerce markets, demands that your firm not let this asset go unaccounted for.

SOFTWARE

Software packages come in all varieties and soft-ware consultants are readily available to help you integrate those software applications with your com-pany’s specific ways of conducting business. While early electronic accounting applications consisted of basic spreadsheets, word processors, and databases, applications available in the e-commerce world har-ness all the power of modern information technology and telecommunications for almost unlimited options and tremendous power and efficiency.

Accounting applications are generally able to track all relevant accounting information, from basic ac-counts payable and receivable to intangible assets, and can augment their usefulness by managing inventory, cutting checks, devising regular reports and account-ing summaries, trackaccount-ing customer and vendor ac-counts, and integrating with other vital systems, such as supply chain management applications, data ware-houses, and internal networks and extranets.

WHAT’S THE BOTTOM LINE?

The challenge for your company is to create a strategy that will put your firm in the strongest overall position both internally and in the eyes of outsiders.

This includes staying within the bounds of accounting ethics, which means not overstating your firm’s finan-cial health by hiding, over- or understating any infor-mation vital to an outside observer. Such practices aren’t just important to outsiders. In order for you to make accurate assessments of your firm and sound strategic decisions, you need a clear accounting schedule.

FURTHER READING

Borthick, Sandy. ‘‘Call Accounting—for IP?’’ Business Communications Review, August 2000, 14.

Honig, Susan A. ‘‘The Changing Landscape of Computerized Accounting Systems.’’ CPA Journal, May 1999, 14.

Kupiek, Eva. ‘‘Shifting Strategies: Challenging the Traditional Business Knowledge.’’ CMA Management, May 2000, 15.

Stout, William D., and Ronald E. Marden. ‘‘Accounting for Web Site Costs.’’ Ohio CPA Journal, January-March 2001, 34.

Weintraub, Doug. ‘‘Integration of People Application and Technology Critical for Forward Success.’’ Ohio CPA Journal, July-September 2000, 38.

❚ 2

ADVERTISING YOUR WEB SITE

Online advertising is not a mature medium. As it evolves, unresolved questions about its effectiveness remain. While studies have shown that simple banner ads will drive people to try new products, low click-through rates have caused the use of banner ads to decline. Although banner ads offer the possibility of clicking through to another Web site, advertisers should not look at online advertising only as a direct response medium. Online advertising also offers the possibility of building brand awareness. Creating such awareness is not necessarily measured by click-through rates. Since people generally go online to perform some type of task, it is not surprising that they are often unwilling to click-through an online ad. However, that doesn’t mean that the ad was not effective in terms of creating awareness and possibly some future action.

OBJECTIVES OF ONLINE ADVERTISING Owners who want to advertise their Web sites need to determine whether their strategy is to drive sales or to create greater awareness of their site. An early-2002 study by AdRelevance based on interviews with marketing executives involved in online advertising found that 61 percent mentioned some aspect of brand-ing as their main online advertisbrand-ing strategy. Creatbrand-ing awareness ranked higher than direct response, driving traffic, and driving sales as a primary objective.

Other studies have shown that direct response and converting viewers to customers were more important to online advertisers than building brand awareness.

A Nielsen/NetRatings study of new online advertising campaigns launched in the first quarter of 2001 found that nearly 90 percent were direct marketing cam-paigns and that only slightly more than 10 percent were branding campaigns.

These types of mixed results indicate the dual na-ture of online advertising. On the one hand, direct response ads allow for feedback and a direct connec-tion with the viewer, who can respond to an online ad with a single click. On the other hand, online advertising facilitates brand-building by spreading the word about a Web site. Advertisers may choose both objectives and assign a percentage of ads for sales and a percentage for brand-building. Ads that are de-signed to drive sales are measured differently than those intended to build brand awareness. Click-through and conversion rates are effective measures of ads designed to increase sales at a Web site. Brand-building ads, on the other hand, are measured by such factors as awareness, recall, and persuasion.

Ads that build brand or name awareness for a Web site are more successful if they also promote brand understanding. Name awareness alone is not sufficient to drive traffic to a Web site. Rather, successful brand-building ads offer multiple benefits to drive traffic.

They explain overall brand positioning by spelling out the benefits of the site and how the site is able to deliver them. Recognizing that one of the principal motivations for searching the Web is to find informa-tion, successful ads for Web sites present information-based benefits available at the advertised site, such as a product search feature, relevant content, or quality of information.

WHERE TO ADVERTISE

Major Internet portals and other high-traffic sites account for a high percentage of Internet advertising.

According to the Interactive Advertising Bureau (IAB), the top 25 sites in terms of traffic took in 88 percent of all online advertising revenue during the first half of 2001.

Web sites seeking to launch large advertising cam-paigns that would involve ads appearing on several sites may use the services of companies that specialize in online advertising and operate advertising net-works. Ad networks such as those operated by Dou-bleClick Inc., 24/7 Real Media Inc., and ValueClick Inc. serve as go-betweens between advertisers and Web site publishers. While the ad networks vary from agency to agency, they typically include higher traffic Web sites organized into categories. They also offer enhanced targeting capabilities that can deliver ad impressions to viewers based on their past actions.

AD PRICING MODELS

There are two basic models for pricing online ads, cost-per-impression and cost-per-performance. Cost-per-impression (also known as cost-per-view) means that advertisers are charged for the number of people who actually see the ad, based on traffic to the Web

sites where the ad appears. This model usually charges on a cost-per-thousand (CPM) basis. It is a model that is based on traditional advertising, where advertisers are charged according to the number of subscribers or size of audience.

The cost-per-performance model, on the other hand, offers advertisers the opportunity to pay on the basis of measurable results. Online ads may be measured in term of click (CPC), cost-per-action (CPA), cost-per-lead (CPL), or cost-per-acqui-sition (CPA). Cost-per-action pricing includes not only clicks but also sales and leads. Cost-per-lead pricing is often used in business-to-business ads, where the advertiser specifies how many leads it wants a specific promotion to generate and pays only for those that are delivered. Cost-per-acquisition is similar to CPL except that advertisers only pay when the user makes an actual purchase and is ‘‘acquired’’ as a customer.

TYPES OF ONLINE ADS

According to a December 2001 study by the Inter-active Advertising Bureau (IAB) and Pricewater-houseCoopers (PwC), banner ads accounted for 36 percent of U.S. online advertising revenue in the first three quarters of 2001. Sponsorships came in second with 27 percent, followed by classified ads (16 per-cent), slotting fees (8 perper-cent), keyword search (4 percent), interstitials (3 percent), e-mail (2 percent), rich media (2 percent), and referrals (2 percent).

While banner ads accounted for the highest per-centage of online advertising revenue, their use de-clined in 2001 compared to 2000. Web site publishers often participate in banner exchanges with other Web sites, but they need to be careful that their ads are reaching an appropriate audience. Banner ad ex-changes often result in less effective targeting.

New ad formats include floating ads and cursor ads. Floating ads appear on screen and can’t be closed or scrolled past. Since they don’t open another win-dow, software programs designed to suppress pop-up ads won’t find the floating ads. Such ads typically run for only a few days to avoid the risk of alienating users. Cursor ads involve attaching the advertiser’s logo to the user’s mouse arrow. Still other types of ads include sound effects, such as music and voiceovers, to gain attention. Known as rich media ads, they utilize JavaScript, dynamic HTML, and downloadable soft-ware to gain the user’s attention through interactivity, animation, and multimedia effects.

Pop-up ads, while they may gain attention, are meeting resistance from Internet users, who have learned to close them even before they are loaded.

Users resent that pop-up ads take away control of their computer screen. They serve to interrupt users

‘‘HowTo’’TopicsinE-Commerce

rather than engage them. However, pop-up ads and other interstitials were found to be effective in terms of ad recall.

Text-based ads offer small advertisers a chance to appear on sites that receive a lot of traffic, such as the popular search engine Google (www.google.com).

Google’s AdWords program allows small advertisers to mount a campaign of text-based ads for less than

$100. An AdWords campaign at Google might consist of several text-based ads that rotate against the same set of keywords. Google is able to determine which ads have the highest click-through rate and subse-quently can show those ads more fresubse-quently than ads with lower click-through rates.

ONLINE ADVERTISING STILL GROWING Advertising a Web site online is one of several ways to market and promote an e-commerce Web site.

Online advertising was still evolving in 2002 as the industry sought to define and standardize performance measurements. Advertisers could choose from several different pricing models. While the largest online ad-vertisers spent millions of dollars to build their brands and drive traffic to their Web sites, advertising oppor-tunities also existed for small and medium-size e-commerce Web sites. During the first half of 2002, the number of unique online ads rose steadily, indicat-ing that online advertisindicat-ing was makindicat-ing a comeback from the decline in 2001.