e-Commerce and web page development Lecture Note 2012 E.

Chapter 1: E-commerce Business Models and concepts

1.1 What is e-commerce?

E-commerce involves the use of the Internet, the World Wide Web (Web), and mobile apps and browsers
running on mobile devices to transact business. Although the terms Internet and Web are often used
interchangeably, they are actually two very different things. The Internet is a worldwide network of
computer networks, and the Web is one of the Internet’s most popular services, providing access to
billions of web pages. An app (short-hand for application) is a software application. The term is typically
used when referring to mobile applications, although it is also sometimes used to refer to desktop
computer applications as well. A mobile browser is a version of web browser software accessed via a
mobile device.

More formally, e-commerce can be defined as digitally enabled commercial transactions between and
among organizations and individuals. Each of these components of our working definition of e-commerce
is important.

 Digitally enabled transactions include all transactions mediated by digital technology. For the
most part, this means transactions that occur over the Internet, the Web, and/or via mobile
devices.
 Commercial transactions involve the exchange of value (e.g., money) across organizational or
individual boundaries in return for products and services. Exchange of value is important for
understanding the limits of e-commerce. Without an exchange of value, no commerce occurs.

The professional literature sometimes refers to e-commerce as digital commerce. For our purposes, we
consider e-commerce and digital commerce to be synonymous.

It takes place between companies, between companies and their customers, or between companies and
public administration.

E-commerce refers to paperless exchange of business information using the following ways:

 Electronic data exchange

 Electronic mail(e-mail)
 Electronic fund transfer and
 Other network-based technologies

Stay safe prepared by: Dagne G Page 1

 e-Commerce and web page development Lecture Note 2012 E.C

1.1.1 Unique features of e-commerce

Figure 1.1 illustrates eight unique features of e-commerce technology that both challenge traditional
business thinking and help explain why we have so much interest in e-commerce. These unique
dimensions of e-commerce technologies suggest many new possibilities for marketing and selling—a
powerful set of interactive, personalized, and rich messages are available for delivery to segmented,
targeted audiences. Prior to the development of e-commerce, the marketing and sale of goods was a mass-
marketing and sales force–driven process. Marketers viewed consumers as passive targets of advertising
campaigns and branding ―blitzes‖ intended to influence their long-term product perceptions and
immediate purchasing behavior. Companies sold their products via well-insulated channels. Consumers
were trapped by geographical and social boundaries, unable to search widely for the best price and
quality. Information about prices, costs, and fees could be hidden from the consumer, creating profitable
information asymmetries for the selling firm. Information asymmetry refers to any disparity in relevant
market information among parties in a transaction. It was so expensive to change national or regional
prices in traditional retailing (what are called menu costs) that one national price was the norm, and
dynamic pricing to the marketplace (changing prices in real time) was unheard of. In this environment,
manufacturers prospered by relying on huge production runs of products that could not be customized or
personalized.

E-commerce technologies make it possible for merchants to know much more about consumers and to be
able to use this information more effectively than was ever true in the past. Online merchants can use this
information to develop new information asymmetries, enhance their ability to brand products, charge

Stay safe prepared by: Dagne G Page 2

 e-Commerce and web page development Lecture Note 2012 E.C
premium prices for high-quality service, and segment the market into an endless number of subgroups,
each receiving a different price. To complicate matters further, these same technologies also make it
possible for merchants to know more about other merchants than was ever true in the past. This presents
the possibility that merchants might collude on prices rather than compete and drive overall average
prices up. This strategy works especially well when there are just a few suppliers.

 Ubiquity In traditional commerce, a marketplace is a physical place you visit in order to transact.
For example, television and radio typically motivate the consumer to go someplace to make a
purchase. E-commerce, in contrast, is characterized by its ubiquity: it is available just about
everywhere, at all times. It liberates the market from being restricted to a physical space and
makes it possible to shop from your desktop, at home, at work, or even from your car, using
mobile e-commerce. The result is called a marketspace—a marketplace extended beyond
traditional boundaries and removed from a temporal and geographic location.

From a consumer point of view, ubiquity reduces transaction costs—the costs of participating in a
market. To transact, it is no longer necessary that you spend time and money traveling to a
market. At a broader level, the ubiquity of e-commerce lowers the cognitive energy required to
transact in a marketspace. Cognitive energy refers to the mental effort required to complete a
task. Humans generally seek to reduce cognitive energy outlays. When given a choice, humans
will choose the path requiring the least effort—the most convenient path.

 Global Reach E-commerce technology permits commercial transactions to cross cultural,

regional, and national boundaries far more conveniently 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 (an estimated 3.3 billion in 2016). More
realistically, the Internet makes it much easier for startup e-commerce merchants within a single
country to achieve a national audience than was ever possible in the past. The total number of
users or customers an e-commerce business can obtain is a measure of its reach.

In contrast, most traditional commerce is local or regional—it involves local merchants or

national merchants with local outlets. Television, radio stations, and newspapers, for instance, are
primarily local and regional institutions with limited but powerful national networks that can
attract a national audience. In contrast to e-commerce technology, these older commerce
technologies do not easily cross national boundaries to a global audience.

 Universal Standards 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—they are shared by all nations around the world. In contrast,
most traditional commerce technologies differ from one nation to the next. For instance,
television and radio standards differ around the world, as does cell phone technology.

The universal technical standards of e-commerce greatly lower market entry costs— the cost
merchants must pay just to bring their goods to market. At the same time, for consumers,
universal standards reduce search costs—the effort required to find suitable products. And by

Stay safe prepared by: Dagne G Page 3

 e-Commerce and web page development Lecture Note 2012 E.C
creating a single, one-world marketspace, where prices and product descriptions can be
inexpensively displayed for all to see, price discovery becomes simpler, faster, and more
accurate.

 Richness Information richness refers to the complexity and content of a message. Traditional
markets, national sales forces, and retail stores have great richness: they are able to provide
personal, face-to-face service using aural and visual cues when making a sale. The richness of
traditional markets makes them a powerful selling or commercial environment. Prior to the
development of the Web, there was a trade-off between richness and reach: the larger the
audience reached the less rich the message.

E-commerce technologies have the potential for offering considerably more information richness
than traditional media such as printing presses, radio, and television because they are interactive
and can adjust the message to individual users. Chatting with an online sales person, for instance,
comes very close to the customer experience in a small retail shop. The richness enabled by e-
commerce technologies allows retail and service merchants to market and sell ―complex‖ goods
and services that heretofore required a face-to-face presentation by a sales force to a much larger
audience.

 Interactivity Unlike any of the commercial technologies of the twentieth century, with the
possible exception of the telephone, e-commerce technologies allow for interactivity, meaning
they enable two-way communication between merchant and consumer and among consumers.
Traditional television or radio, for instance, cannot ask viewers questions or enter into
conversations with them, or request that customer information be entered into a form.
Interactivity allows an online merchant to engage a consumer in ways similar to a face-to-face
experience. Comment features, community forums, and social networks with social sharing
functionality such as like and Share buttons all enable consumers to actively interact with
merchants and other users. Somewhat less obvious forms of interactivity include responsive
design elements, such as websites that change format depending on what kind of device they are
being viewed on, product images that change as a mouse hovers over them, the ability to zoom in
or rotate images, forms that notify the user of a problem as they are being filled out, and search
boxes that auto fill as the user types.
 Information Density E-commerce technologies 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. At the same time, these technologies greatly increase the currency,
accuracy, and timeliness of information—making information more useful and important than
ever. As a result, information becomes more plentiful, less expensive, and of higher quality.

A number of business consequences result from the growth in information density. One of the
shifts that e-commerce is bringing about is a reduction in information asymmetry among market
participants (consumers and merchants). Prices and costs become more transparent. 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

Stay safe prepared by: Dagne G Page 4

 e-Commerce and web page development Lecture Note 2012 E.C
pay for products. Preventing consumers from learning about prices and costs becomes more
difficult with e-commerce and, as a result, the entire marketplace potentially becomes more price
competitive. But there are advantages for merchants as well. Online merchants can discover much
more about consumers; this allows merchants to segment the market into groups willing to pay
different prices and permits them to engage in price discrimination—selling the same goods, or
nearly the same goods, to different targeted groups at different prices. For instance, an online
merchant can discover a consumer’s avid interest in expensive exotic vacations, and then pitch
expensive exotic vacation plans to that consumer at a premium price, knowing this person is
willing to pay extra for such a vacation. At the same time, the online merchant can pitch the same
vacation plan at a lower price to more price-sensitive consumers. Merchants also have enhanced
abilities to differentiate their products in terms of cost, brand, and quality.

 Personalization and 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. Today this is achieved in a few milliseconds and
followed by an advertisement based on the consumer’s profile. The technology also permits
customization—changing the delivered product or service based on a user’s preferences or prior
behavior. Given the interactive nature of e-commerce technology, much information about the
consumer can be gathered in the marketplace at the moment of purchase. With the increase in
information density, a great deal of information about the consumer’s past purchases and
behavior can be stored and used by online merchants. The result is a level of personalization and
customization unthinkable with traditional commerce technologies. For instance, you may be able
to shape what you see on television by selecting a channel, but you cannot change the contents of
the channel you have chosen. In contrast, the online version of the Wall Street Journal allows you
to select the type of news stories you want to see first, and gives you the opportunity to be alerted
when certain events happen. Personalization and customization allow firms to precisely identify
market segments and adjust their messages accordingly.

 Social Technology: User-Generated Content and Social Networks In a way quite different
from all previous technologies, e-commerce technologies have evolved to be much more social
by allowing users to create and share content with a worldwide community. Using these forms of
communication, users are able to create new social networks and strengthen existing ones. All
previous mass media in modern history, including the printing press, used a broadcast model
(one-to-many): content is created in a central location by experts (professional writers, editors,
directors, actors, and producers) and audiences are concentrated in huge aggregates to consume a
standardized product. The telephone would appear to be an exception but it is not a mass
communication technology. Instead the telephone is a one-to-one technology. E-commerce
technologies have the potential to invert this standard media model by giving users the power to
create and distribute content on a large scale, and permit users to program their own content
consumption. E-commerce technologies provide a unique, many-to-many model of mass
communication.

Stay safe prepared by: Dagne G Page 5

 e-Commerce and web page development Lecture Note 2012 E.C

1.2 Business Models

A business model is a set of planned activities (sometimes referred to as business processes) designed to
result in a profit in a marketplace. A business model is not always the same as a business strategy,
although in some cases they are very close insofar as the business model explicitly takes into account the
competitive environment. The business model is at the center of the business plan. A business plan is a
document that describes a firm’s business model. A business plan always takes into account the
competitive environment. An e-commerce business model aims to use and leverage the unique qualities
of the Internet, the Web, and the mobile platform.

1.2.1 Key Elements of Business Models

If you hope to develop a successful business model in any arena, not just e-commerce, you must make
sure that the model effectively addresses the eight elements. These elements are value proposition,
revenue model, market opportunity, competitive environment, competitive advantage, market strategy,
organizational development, and management team. Many writers focus on a firm’s value proposition and
revenue model. While these may be the most important and most easily identifiable aspects of a
company’s business model, the other elements are equally important when evaluating business models
and plans, or when attempting to understand why a particular company has succeeded or failed.

 Value Proposition A company’s value proposition is at the very heart of its business model. A
value proposition defines how a company’s product or service fulfills the needs of customers. To
develop and/or analyze a firm’s value proposition, you need to understand why customers will
choose to do business with the firm instead of another company and what the firm provides that
other firms do not and cannot. From the consumer point of view, successful e-commerce value
propositions include personalization and customization of product offerings, reduction of product
search costs, reduction of price discovery costs, and facilitation of transactions by managing
product delivery.

 Revenue Model A firm’s revenue model describes how the firm will earn revenue, generate
profits, and produce a superior return on invested capital. We use the terms revenue model and
financial model interchangeably. The function of business organizations is both to generate
profits and to produce returns on invested capital that exceed alternative investments. Profits
alone are not sufficient to make a company ―successful‖. In order to be considered successful, a
firm must produce returns greater than alternative investments. Firms that fail this test go out of
existence. Although there are many different e-commerce revenue models that have been
developed, most companies rely on one, or some combination, of the following major revenue
models: advertising, subscription, transaction fee, sales, and affiliate.

 Market Opportunity The term market opportunity refers to the company’s intended
marketspace (i.e., an area of actual or potential commercial value) and the overall potential
financial opportunities available to the firm in that marketspace. The market opportunity is
usually divided into smaller market niches. The realistic market opportunity is defined by the
revenue potential in each of the market niches where you hope to compete. For instance, let’s
assume you are analyzing a software training company that creates online software-learning

Stay safe prepared by: Dagne G Page 6

 e-Commerce and web page development Lecture Note 2012 E.C
systems for sale to businesses. The overall size of the software training market for all market
segments is approximately $70 billion. The overall market can be broken down, however, into
two major market segments: instructor-led training products, which comprise about 70% of the
market ($49 billion in revenue), and computer-based training, which accounts for 30% ($21
billion). There are further market niches within each of those major market segments, such as the
Fortune 500 computer-based training market and the small business computer-based training
market. Because the firm is a start-up firm, it cannot compete effectively in the large business,
computer-based training market (about $15 billion). Large brand name training firms dominate
this niche. The start-up firm’s real market opportunity is to sell to the thousands of small business
firms that spend about $6 billion on computer-based software training. This is the size of the
firm’s realistic market opportunity.

 Competitive Environment A firm’s competitive environment refers to the other companies

selling similar products and operating in the same marketspace. It also refers to the presence of
substitute products and potential new entrants to the market, as well as the power of customers
and suppliers over your business. We discuss the firm’s environment later in the chapter. The
competitive environment for a company is influenced by several factors: how many competitors
are active, how large their operations are, what the market share of each competitor is, how
profitable these firms are, and how they price their products. Firms typically have both direct and
indirect competitors. Direct competitors are companies that sell very similar products and
services into the same market segment. For example, Priceline and Travelocity, both of whom
sell discount airline tickets online, are direct competitors because both companies sell identical
products—cheap tickets. Indirect competitors are companies that may be in different industries
but still compete indirectly because their products can substitute for one another. For instance,
automobile manufacturers and airline companies operate in different industries, but they still
compete indirectly because they offer consumers alternative means of transportation. CNN, a
news outlet, is an indirect competitor of ESPN, not because they sell identical products, but
because they both compete for consumers’ time online. The existence of a large number of
competitors in any one segment may be a sign that the market is saturated and that it may be
difficult to become profitable. On the other hand, a lack of competitors could signal either an
untapped market niche ripe for the picking, or a market that has already been tried without
success because there is no money to be made. Analysis of the competitive environment can help
you decide which it is.

 Competitive Advantage Firms achieve a competitive advantage when they can produce a
superior product and/or bring the product to market at a lower price than most, or all, of their
competitors. Firms also compete on scope. Some firms can develop global markets, while other
firms can develop only a national or regional market. Firms that can provide superior products at
the lowest cost on a global basis are truly advantaged. Firms achieve competitive advantages
because they have somehow been able to obtain differential access to the factors of production
that are denied to their competitors—at least in the short term. Perhaps the firm has been able to
obtain very favorable terms from suppliers, shippers, or sources of labor. Or perhaps the firm has
more experienced, knowledgeable, and loyal employees than any competitors. Maybe the firm
has a patent on a product that others cannot imitate, or access to investment capital through a

Stay safe prepared by: Dagne G Page 7

 e-Commerce and web page development Lecture Note 2012 E.C
network of former business colleagues or a brand name and popular image that other firms cannot
duplicate. An asymmetry exists whenever one participant in a market has more resources—
financial backing, knowledge, information, and/or power—than other participants.

 Market Strategy No matter how tremendous a firm’s qualities, its marketing strategy and
execution are often just as important. The best business concept, or idea, will fail if it is not
properly marketed to potential customers. Everything you do to promote your company’s
products and services to potential customers is known as marketing. Market strategy is the plan
you put together that details exactly how you intend to enter a new market and attract new
customers. For instance, Twitter, YouTube, and Pinterest have a social network marketing
strategy that encourages users to post their content for free, build personal profile pages, contact
their friends, and build a community. In these cases, the customer becomes part of the marketing
staff!

 Organizational Development Although many entrepreneurial ventures are started by one

visionary individual, it is rare that one person alone can grow an idea into a multi-million dollar
company. In most cases, fast-growth companies—especially e-commerce businesses—need
employees and a set of business procedures. In short, all firms—new ones in particular—need an
organization to efficiently implement their business plans and strategies. Many e-commerce firms
and many traditional firms that attempt an e-commerce strategy have failed because they lacked
the organizational structures and supportive cultural values required to support new forms of
commerce. Companies that hope to grow and thrive need to have a plan for organizational
development that describes how the company will organize the work that needs to be
accomplished. Typically, work is divided into functional departments, such as production,
shipping, marketing, customer support, and finance. Jobs within these functional areas are
defined, and then recruitment begins for specific job titles and responsibilities. Typically, in the
beginning, generalists who can perform multiple tasks are hired. As the company grows,
recruiting becomes more specialized.

 Management Team Arguably, the single most important element of a business model is the
management team responsible for making the model work. A strong management team gives a
model instant credibility to outside investors, immediate market-specific knowledge, and
experience in implementing business plans. A strong management team may not be able to
salvage a weak business model, but the team should be able to change the model and redefine the
business as it becomes necessary. Eventually, most companies get to the point of having several
senior executives or managers. How skilled managers are, however, can be a source of
competitive advantage or disadvantage. The challenge is to find people who have both the
experience and the ability to apply that experience to new situations. To be able to identify good
managers for a business start-up, first consider the kinds of experiences that would be helpful to a
manager joining your company. What kind of technical background is desirable? What kind of
supervisory experience is necessary? How many years in a particular function should be
required? What job functions should be fulfilled first: marketing, production, finance, or
operations? Especially in situations where financing will be needed to get a company off the

Stay safe prepared by: Dagne G Page 8

 e-Commerce and web page development Lecture Note 2012 E.C
ground, do prospective senior managers have experience and contacts for raising financing from
outside investors?

1.2.2 Understanding E-commerce: Organizing Themes

It useful to think about e-commerce as involving three broad interrelated themes: technology, business,
and society.

Technologies develop first, and then those developments are exploited commercially. Once commercial
exploitation of the technology becomes widespread, a host of social, cultural, and political issues arise,
and society is forced to respond to them.

Technology: The development and mastery of digital computing and communications technology is at
the heart of the newly emerging global digital economy we call e-commerce. To understand the likely
future of e-commerce, you need a basic understanding of the information technologies upon which it is
built. E-commerce is above all else a technologically driven phenomenon that relies on a host of
information technologies as well as fundamental concepts from computer science developed over a 50-
year period. At the core of e-commerce are the Internet and the Web, which we describe in detail in
Chapter 2.

Underlying these technologies are a host of complementary technologies: cloud computing, desktop
computers, smartphones, tablet computers, local area networks, relational and non-relational databases,
client/server computing, data mining, and fiber-optic switches, to name just a few. These technologies lie
at the heart of sophisticated business computing applications such as enterprise-wide information systems,
supply chain management systems, manufacturing resource planning systems, and customer relationship
management systems. E-commerce relies on all these basic technologies—not just the Internet. The
Internet, while representing a sharp break from prior corporate computing and communications
technologies, is nevertheless just the latest development in the evolution of corporate computing and part
of the continuing chain of computer-based innovations in business.

Business: While technology provides the infrastructure, it is the business applications—the potential for
extraordinary returns on investment—that create the interest and excitement in e-commerce. New
technologies present businesses and entrepreneurs with new ways of organizing production and
transacting business. New technologies change the strategies and plans of existing firms: old strategies are
made obsolete and new ones need to be invented. New technologies are the birthing grounds where
thousands of new companies spring up with new products and services. New technologies are the
graveyard of many traditional businesses. To truly understand e-commerce, you will need to be familiar
with some key business concepts, such as the nature of digital markets, digital goods, business models,
firm and industry value chains, value webs, industry structure, digital disruption, and consumer behavior
in digital markets, as well as basic concepts of financial analysis.

Society: With around 267 million Americans now using the Internet, many for e-commerce purposes, and
more than 3.3 billion users worldwide, the impact of the Internet and e-commerce on society is significant
and global. Increasingly, e-commerce is subject to the laws of nations and global entities. You will need
to understand the pressures that global e-commerce places on contemporary society in order to conduct a

Stay safe prepared by: Dagne G Page 9

 e-Commerce and web page development Lecture Note 2012 E.C
successful e-commerce business or understand the e-commerce phenomenon. The primary societal issues
we discuss in this book are individual privacy, intellectual property, and public welfare policy.

Because the Internet and the Web are exceptionally adept at tracking the identity and behavior of
individuals online, e-commerce raises difficulties for preserving privacy—the ability of individuals to
place limits on the type and amount of information collected about them, and to control the uses of their
personal information. Because the cost of distributing digital copies of copyrighted intellectual property—
tangible works of the mind such as music, books, and videos—is nearly zero on the Internet, e-commerce
poses special challenges to the various methods societies have used in the past to protect intellectual
property rights.

1.3 Types of E-Commerce

There are a number of different types of e-commerce and many different ways to characterize them. For
the most part, we distinguish different types of e-commerce by the nature of the market relationship—
who is selling to whom. Mobile, social, and local e-commerce can be looked at as subsets of these types
of e-commerce.

1.3.1 Business-to-Consumer (B2C) E-Commerce

The most commonly discussed type of e-commerce is business-to-consumer (B2C) e-commerce, in which
online businesses attempt to reach individual consumers. B2C e-commerce includes purchases of retail
goods, travel and other types of services, and online content. Even though B2C is comparatively small (an
estimated $600 billion in 2016 in the United States), it has grown exponentially since 1995, and is the
type of e-commerce that most consumers are likely to encounter.

1.3.2 Business -to- Business (B2B) E- Commerce

Business-to-business (B2B) e-commerce, in which businesses focus on selling to other businesses, is the
largest form of e-commerce, with around $6.7 trillion in transactions in the United States in 2016. There
is an estimated $14.5 trillion in business-to-business exchanges of all kinds, online and offline, suggesting
that B2B e-commerce has significant growth potential. The ultimate size of B2B e-commerce is
potentially huge. There are two primary business models used within the B2B arena: Net marketplaces,
which include e-distributors, e-procurement companies, exchanges and industry consortia, and private
industrial networks.

1.3.3 Consumer-to-Consumer (C2C) E-Commerce

Consumer-to-consumer (C2C) e-commerce provides a way for consumers to sell to each other, with the
help of an online market maker (also called a platform provider) such as eBay or Etsy, the classifieds site
Craigslist, or on-demand service companies such as Airbnb and Uber. In C2C e-commerce, the consumer
prepares the product for market, places the product for auction or sale, and relies on the market maker to
provide catalog, search engine, and transaction-clearing capabilities so that products can be easily
displayed, discovered, and paid for.

Stay safe prepared by: Dagne G Page 10

 e-Commerce and web page development Lecture Note 2012 E.C

Reading Assignment:

E-commerce generations

Stay safe prepared by: Dagne G Page 11