INTRODUCTION TO ELECTRONIC COMMERCE

Electronic commerce (e-commerce) can be defined as the process of buying, selling, transferring, or exchanging products, services or information via computer networks including the internet (Rainer, Turban etal 2007).

E-commerce has grown dramatically over the last ten years and continues to grow at a very high rate. Some of the reasons for this growth are discussed in the next two sections.

E-business is a broader concept as in addition to buying and selling of goods and services it also includes servicing customers, collaborating with business partners and performing electronic transactions both within and outside an organisation.

Internet Technology and the Digital Firm

The Internet is an international network of networks connecting many millions of people from most countries in the world. It is the largest information superhighway in the world. The Internet provides a universal and easy-to-use set of technologies and standards that can be adopted by all organisations, no matter what computer system or information technology platform they are using. It provides a much lower cost and easier-to-use alternative for coordinating activities than proprietary networks, it reduces organisational transaction and agency costs and increases communication, including electronic mail, online forums, and chatting. Additionally it provides access to increased information and information retrieval from many thousands of online databases around the world and increases market potential with online offerings of information and products through the easy-to-use World Wide Web.

The Internet is changing how companies do business

The Internet radically reduces the cost of creating, sending, and storing information while making that information more widely available. The Internet reduces search costs, allowing customers to locate products, suppliers, prices, and delivery terms. The Internet enables companies to collect and analyse more detailed and accurate information about their customers, allowing these companies to more effectively target their products and services to a suitable market. The Internet has transformed the richness and reach of information. It can help companies create and capture profits in new ways by adding extra value to existing products and services. It also provides the foundation for new products and services. The Internet permits personalisation (targeting personal messages to consumers) and customisation (changing a product or service based on consumer preference or history).

Page 103 Digital Goods and Digital Markets

Digital Goods

Digital goods are products that can be created, stored, delivered and sold as purely digital products and can be delivered over a digital network such as the internet. They include music, video, newspapers books and software. When compared to traditional goods, the marginal cost of producing another unit of a digital good is approximately zero and delivery costs over the Internet are very low. However while the marketing costs of digital goods are similar to physical goods the methods of marketing have change significantly with the phenomenal growth of internet marketing. The pricing of digital goods is far more flexible and can be varied depending on demand conditions and customer profile. Digital goods are sold in digital markets.

Digital Markets

Digital markets are very flexible and efficient because they allow the following:

 Reduced search and transaction costs

 Lower costs of changing prices

 Price discrimination

 Dynamic pricing (prices changing based on the demand characteristics of the customer or the seller's supply situation)

 Disintermediation: Elimination of intermediaries such as wholesalers or retailers Disintermediation

The typical distribution channel has several intermediary layers, each of which adds to the final cost of a product (see Figure 10.1.). Removing layers such as wholesalers and retailers lowers the final cost of the product or service to the consumer. Disintermediation or removing the intermediaries, has allowed many companies to improve their profits while reducing prices. For example Airlines have reduced their costs by using the internet to sell flights directly to their customers thereby removing the travel agent from transactions with customers. As a result the cost of flights to consumers have been a significant reduced.

Figure 10.1: Three different distribution channels

Page 104 Internet business models for electronic commerce

Laudon and Laudon (2010) identified the following eight Internet business models:

1. Virtual storefront: These sell physical products directly to consumers or individual businesses. Online retail stores are also called e-tailers.

2. Information broker: These provide product, pricing, and information to individuals and businesses. They generate revenue from advertising and from directing buyers to sellers.

3. Transaction broker: The transaction broker processes online sale transactions for consumers and generates a fee each time.

4. Online marketplace: An online marketplace provides a digital environment where buyers and sellers meet, search for and display products, and set prices for those products.

It can also provide online auctions facilities to users.

5. Content provider: A content provider creates revenue by providing digital content, such as digital news, music, photos, or video on the Web. Some newspapers and magazines are now pursuing this online strategy.

6. Online service provider: The online service provider supplies online services for individuals and businesses and generates revenue from subscription or transaction fees and from advertising. An example of an online service provider is salesforce.com who provides a Web based Customer Relationship Management (CRM) solution for businesses.

7. Virtual community: The virtual community provides an online meeting place where people with similar interests can communicate and find useful information. These include YouTube, and social networking sites such as Facebook and MySpace.

8. Portal: The portal provides an initial point of entry to the Web along with specialised content and other services. Examples of portals include Google, Bing, Yahoo, MSN etc.

Many of these new business models generate revenue from:

 Sales of traditional or digital goods

 Selling advertising space for banner ads and pop-up ads

 Transaction fees

 Sales of marketing information collected by users

 Directing buyers to sellers and charging a referral fee or percentage of the revenue from resulting sales

 Charging a subscriptions fee to access content and service

 Offering a basic service for free and charging a premium for special features.

Page 105 PURE-PLAY AND CLICKS-AND-MORTAR BUSINESS MODELS

A pure-play business model is based purely on the Internet. An example of a company using this business model is Amazon.com A clicks-and-mortar business model has a Web site that is an extension of a traditional bricks-and-mortar business.