Introduction to Ecommerce PDF

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Introduction to Ecommerce reading for Digital Marketing 2021...

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A BRIEF BACKGROUND TO E-COMMERCE By: Dr Brent Coker Internet Marketing Researcher and Lecturer Faculty of Business and Economics/Melbourne School of Business University of Melbourne [email protected]

The internet emerged as a mainstream channel for conducting retail activities in the mid to late 1990’s. This period was characterised by the so called “dot-com” bubble, whereby speculation and over-confidence drove the share prices of online businesses to unusually high levels. A key feature of the dot-com bubble era was normative investment into ecommerce businesses who were either not making any profit, or more commonly, were running at a loss. The expectations fuelling this speculative investment behaviour was based on the assumption of “network effects”. When network effects are present, the value of using a product or service increases in relation to the number of other people using the product or service. For example, the value of owning a telephone increases with the number of other people who also own a telephone. Thus, the aim of many dot-coms in the 90’s was to grow big as fast as they could, rather than focussing on making profit. The reasoning was that profits could be made after the company had captured significant market share and built a strong brand presence (Brynjolfsson & Smith, 2000). The dot-com bubble burst in March 2000, wiping USD$5 trillion off the value of the publicly listed companies. Since that event, usage of the internet as a retail channel by consumers has steadily increased year after year. In Australia in 2011, approximately 62% of adult internet users purchased goods or services online (ACMA, 2012). To an extent, the expectation of certain digital content remaining free became embedded in internet culture, as reticence towards paying for content of value developed. Most online 1

newspapers even to this day will tend to offer content for free. The New York Times was the first to make users pay for content (“pay-wall”) in 1997, but success of this decision was mixed, with general disgruntlement from consumers, and many websites describing how to bypass the pay-wall emerging.

Internet Business Models In the late 90’s, firms were primarily concerned with how to integrate online channels into their existing “bricks-and-mortar” (traditional offline business) operations (Tate, Coker, & Hope, 2004; Tate, Hope, & Coker, 2005). Trial and error as a result of experimenting with shifting traditional business models online resulted in an understanding of several unique features of the internet that shaped new business models to come. Some of these unique aspects of the internet had a profound effect on entire industries. Notably, products that could be digitized such as music, literature, and software redefined how the publishing and media industries distributed their goods (Brynjolfsson, Hu, & Smith, 2003). A book for example can be turned into digital form and distributed online much more cheaply than physical distribution (many books nowadays can be read on digital “readers”). Storage and portability of books is also greatly improved when digitized. As a result, the publishing industry has been forced to undergo rather severe changes to its traditional business model in response to the opportunities for digitization borne from the internet. Music and software can also be digitized, distributed and stored on the internet. This had a profound effect on the software and music industries as hardcopy distribution channels (such as CD) have become far less common. Content that can be digitised has been particularly problematic for businesses to monetise online for two reasons. First, because the internet removes geographical boundaries, the search costs for consumers are lower (Bakos, 1997). Search costs are those costs incurred for consumers to compare all offerings in a market (e.g., travel cost and time lost). As a result, markets for products online are more crowded than traditional offline markets, with many similar competing alternatives easily available to the consumer. The second issue concerns the ease with which digitized content can be copied, distributed, stored and 2

shared between consumers. Given the relative ease of doing so, a large and robust illegal sharing culture has emerged (Chellappa & Shivendu, 2005). Despite these issues however, there are several advantages for digitising content, including making easily available to consumers the chance to sample (“trial”) the content before purchase. This is usually done by making available excerpts from the content if a book or music, or offering a limited feature set (or time constrained) version of the software.

Internet Business Monetisation Strategies There are several unique features of the internet as an e-commerce environment that have facilitated the application and sophistication of systems for generating revenue. The first concerns the ease with which content may be substituted online. Given that the internet is not constrained by geographical boundaries, shelf space, or physical distance between competitors, consumers are easily able to switch between market competitors (Burnham, Frels, & Mahajan, 2003). This has resulted in price pressures in many markets (Bakos, 1997). Products that can be digitized, such as software and music, have extremely low marginal cost of production, and as a result price pressures are particularly strong (Bakos, 1997, 1998). This combined with an implicit culture online of making information available for free has resulted in new models of generating revenue online. Free now, pay later To a great extent, the old “grow-as-fast-as-possible” dot-com business model strategies still exist. The overarching aim is to capture as much market share as possible, and develop recognition and recall of the brand, then figure out how to tax consumers after significant market share has been won. Social media platforms are one example. The network effect of having as many people as possible connected on the social media platform is important before viable revenue streams can be formulated. Twitter is one well-known example of this: Despite the ubiquity of the service, the company has only recently considered stable monetization plans as a precursor to their recent IPO.

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One general distinction that can be made between modern online business models is whether or not the revenue generated by the business comes directly from the user (symmetric), or from a third party source other than the end user (asymmetric). An example of a symmetric business model is Amazon.com, where the consumer who purchases an item also receives and pays for the item, just like a traditional offline retail business. In contrast to symmetric business models, asymmetric business models offer their product (service) for free to end consumers. They generate revenue from a third party, such as an advertiser. An example of an asymmetric business model online includes Facebook, where revenue is generated from advertisers and businesses paying to put marketing type content in view of Facebook consumers who use the service for free. Display Advertising Given an implicit expectation by consumers of gaining access to free content on the internet, combined with the competitive price forces from the absence of geographical boundaries, the advertising model of generating revenue online has become very popular. With this model, businesses aim to get as much traffic (visitors) as possible onto their website, with the expectation that some proportion of that traffic will click on one or more advertisements that are displayed on their website. The business earns revenue from the company that provides the advertisements, most commonly each time a person clicks on an advertisement1. The largest provider of advertising content on the internet is Google. Their product “AdWords” enables any website owner to display advertisements from other businesses on their website. The advertisements are piped from Google (Google controls what advertisements are displayed, and when). Advertisers make a contract with Google to display their advertisements on Google’s AdWords network, which then displays on websites participating on the AdWords system throughout the internet. To simplify, advertisers pay Google each time a person clicks on one of their advertisements on these 1

Another model known as CPM (Cost per Thousand impressions) is also available for internet advertising. The advertiser pays per thousand (M) of advertisements displayed, rather than paying per click on an advertisement, similar to traditional TV or Radio advertising models. This model however is less popular than CPC on the internet.

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websites. The advertiser can specify a URL that the consumer is directed to when they click on an AdWords advertisement. The webpage that the consumer is directed to after clicking on an advertisement is called a “landing page”. A landing page is a web page that is usually on the advertiser’s website, and is designed specifically to greet consumers who have clicked on an advertisement. Google in turn pays a percentage of the revenue earned from people clicking on the advertisements to the website owner displaying the advertisement and participating in the AdWords advertisement display system. Competing advertising companies work in a very similar way to this Google model. Revenue from advertisements can be significantly high for website owners participating in a display advertisement system, if traffic is correspondingly high. However, revenue is only earned by the website owner if someone clicks on an advertisement. One way to increase the number of people who do click on any given advertisement is to make the advertisement relevant to the consumer viewing it. Google’s advertising system for example uses information about each website visitor to customise what advertisement is shown to them, and therefore make the advertisements more relevant. This feature is called “remarketing”, whereby website business owners can display their advertisements to people who visited their website in the past, on other websites in the AdWords network. For example, a surfing goods website can display advertisements about surfing goods to past visitors to their website. Google will also use variables such as geographical location and language to display more relevant advertisements to specific individuals. Advertising on social media networks such as LinkedIn and Facebook are usually controlled by the social media networks themselves, and can enable much finer targeting of advertisements than the Google model. That is because users of social media networks often give quite detailed profile information about themselves, such as company and title of employment, personal interests, education level, and location of residence to name a few. Advertising on social media platforms can therefore be highly targeted to specific groups based on detailed demographic and psychographic consumer variables. As a result, click through rates (CTR) of social media platform advertisements can be higher relative to the amount of traffic. 5

Freemium Another common business model for online services that has emerged in recent years is called the “Freemium” model (“Free + Premium”). In this model, a certain bundle of features of a particular service are offered free, but more comprehensive versions of the service are offered at a cost. The free version offered is usually a bare minimum offering, but with enough value to entice potential consumers to sign up. After new users begin to use the service, the theory is they will desire additional features, such as an increase in the capacity of existing features, or additional features not already available. An example of this is Dropbox, a service that allows users to upload, store, and share files online. A certain amount of storage is given free for new users. However, if a user requires more storage then they have to upgrade to a paying account. Freemium business models may include several different feature enhancements, and several different plans, laddered in a way that each plan costs more and includes more features. Brokerage The convenience and removal of geographical boundaries on the internet has spurred the popularity of the brokerage business model, which matches buyers with sellers sharing a goal to buy and sell within product categories. The brokerage business typically takes a percentage of the transaction involved. Examples of the brokerage business model include: Ebay and Alibaba.com. It can often be difficult to estimate from a user’s perspective how a business makes revenue online. Sometimes the business simply aims to attract as much market share as possible in order to build a strong brand presence. The value, and potential revenue available, is oftentimes held in the equity of the brand if the enterprise corners enough market share.

Internet Consumer Evaluation and Consumption The nature of the internet environment enables businesses to offer additional features of the product evaluation and consumption experience that would otherwise be more 6

problematic or impossible to provide offline. The evaluation of some types of products by consumers online may be easier for example when key features and attributes of the product are ordered systematically in a table. This format eases the evaluation phase of decision making considerably. This is particularly pertinent for products or services that do not necessarily require trialling to evaluate quality, such as electronic goods. Other types of products such as holidays and used cars (“experience products”) are less easy to compare online, because they must be physically trialled for the consumer to make a sufficiently accurate estimation of quality (Klein, 1998). To compensate for this inability for consumers to make accurate evaluations of quality, consumer reviews are often used (Sénécal & Nantel, 2004). It is however not always immediately obvious whether or not any given product is an experience good. For example, with apparel one might assume it is an experience good since consumers need to “try it on” to make an accurate estimation of quality (fit and so on). However, “fit” is just one element of the evaluation process that might be estimated from past experience with the brand, not necessarily at the time of consideration. Other elements of the evaluative process such as colour, style, and brand name can be easily evaluated online. Therefore, although some products might appear to be experience products, they are in fact “search” products—easy to evaluate without physically trialling. For products that can be digitised, the internet offers additional benefits in comparison to analogue versions (e.g., books, CDS, DVDs). For example, digitized photos can be more easily stored and shared than paper versions of the photo. They can even be edited. Music can similarly more easily be transferred, shared and stored than when the music is on a CD, and again, digitized music can be edited. Software can be more easily downloaded and updated than purchasing it on a traditional CD. For businesses, offering content in digital form enables them to offer more value to consumers than could be otherwise offered when made available in analogue (offline) form. Offering consumers customisation options is one example, where businesses can tailor their offerings more precisely to consumer preferences (Coker & Nagpal, 2013).

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Dell.com for example uses the internet to enable consumers to customise which features they would like on their computer, Nike.com enables consumers to specify colour schemes on their shoes, and Apple iTunes enables consumers to customise which songs they would like to hear rather than having to purchase an entire album. Given these unique opportunities the internet affords businesses, digitized content can offer more value to consumers when served online than when made available offline. For example, with television it is not possible (without purchasing additional hardware) to stop, play and record television programs. Moreover, for advertisers it is not possible to specifically target individual consumers and match their advertisements more closely to their preferences. As a result, consumers watching television are often exposed to advertisements that have little or no relevance to them, and may be much more likely to switch channels when content that does not appeal to them displays. On the internet however, it becomes easier to offer the ability for consumers to skip an advertisement or specific program if it does not appeal.

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