E-Commerce Defination

Introduction

The objectives of this chapter are to:

  • Describe Electronic Commerce
  • Describe M-Commerce
  • Provide an overview of the main E-Commerce Payment Systems

A. 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).

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.

 

Channel 1 Channel 2 Channel 3
Manufacturer

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Consumer

Manufacturer

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Wholesaler

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Retailer

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Consumer

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Figure 10.1: Three different distribution channels

Internet business models for electronic commerce

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

  • Virtual storefront: These sell physical products directly to consumers or individual businesses. Online retail stores are also called e-tailers.
  • Information broker: These provide product, pricing, and information to individuals and businesses. They generate revenue from advertising and from directing buyers to sellers.
  • Transaction broker: The transaction broker processes online sale transactions for consumers and generates a fee each time.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.

 

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.

    ELECTRONIC COMMERCE

Categories of Electronic Commerce

The three major types of electronic commerce are:

  • Business-to-Consumer (B2C): Business-to-consumer e-commerce involves retailing products and services to individual shoppers. Amazon.com is an example of business-toconsumer electronic commerce.
  • Business-to-Business (B2B): Business-to-business e-commerce involves the sale of goods and services among businesses. In this type of e-commerce all participants are businesses. B2B is an efficient tool for connecting business partners in a virtual supply chain to cut costs and supply times.
  • Consumer-to-consumer (C2C): Consumer-to-consumer e-commerce involves consumers selling directly to consumers. eBay.com is an example of consumer-toconsumer e-commerce company

Electronic commerce transactions can also be categorised based on the participants’ physical connections to the Web. Participants can use wired networks or mobile commerce (mcommerce).

Distinctive features of retailing using the Internet

The Internet enables companies to create closer, cost-effective relationships with its customers. The company can use the Internet to provide information, services, support, and in many instances deliver the product over the Web. The Internet facilitates direct sales over the Web, interactive marketing and personalisation, blogs and customer self-service.

The Internet digitally enables the firm. The firm can link to customers and suppliers so that electronic commerce, business-to-business transactions such as invoices, purchase orders, and payments can be carried out.

Direct Sales

The customer can purchase a product or service directly from a company’s Web site. A Web site also allows potential customers to obtain information about the products and services and also about who distributes them. A frequently asked questions (FAQ) section on the Web site can be used to provide cost effective support for the product and customer.

Interactivity

The Internet provides a number of ways for companies to interact and communicate with customers and build relationships with them.

Personalisation and Customisation

Marketers can use the interactive features of Web pages to keep consumers engaged and to capture information about their tastes and interests as they move around the Web site. This information may be obtained by asking visitors to “register” online and provide information about themselves. Companies can then analyse this information to develop more precise profiles of their customers and modify the web pages presented to each customer.  This web feature is called personalisation and involves directly tailoring the Web content to the specific user interests to achieve the benefits of personal treatment but at much lower cost than having an individual salesperson deal with each customer. Personalisation can help firms build long lasting relationship with the customer.

Another Web personalisation technique used in online marketing compares information collected about specific user behaviour at a web site such as what links they clicked on and pages they visited to information stored about other customers with similar interests. This information can be used to predict what the user may want to see next. Amazon use similar technology to suggest suitable books or other products to a shopper – “Customers Who Bought This Item Also Bought…” Or when a regular shopper logs in Amazon will present a set of recommendations which are based on what that particular customer purchased in the past.

Blogs

Blogs (short for Weblog) are usually maintained by an individual with regular entries of commentary, descriptions of events, etc. Businesses are increasingly using blogs to communicate with customers and suppliers to announce new products or services and to get feedback about company services.

Social Networks

Businesses are realising the value of providing easy ways for interaction with customers to enable a sharing of ideas and collaborate with each other. Starbucks is an example of a company that has started to leverage this emerging social computing trend. My Starbucks Idea (http://mystarbucksidea.force.com/) gives customers an opportunity to share ideas on how the company can make improvements. Social computing has the potential to transform business as dramatically as the Internet has already done.

Using the Internet to support Customer Service 

Customer service starts with the ease that customers have in researching products themselves, and then the ease of purchasing them.  After the product has been delivered (whether physical or digital product), the customer can obtain help and support on using the product over the Internet. This support could include information on how to assemble or use the products or services. Answers to questions can be e-mailed from the Web site without making customers wait for telephone support.      

Business to Business e-Commerce

Much of B2B e-commerce is still based on electronic data interchange (EDI). Electronic data interchange (EDI) enables automated computer-to-computer exchange between two organisations of standard transactions such as invoices, shipment schedules, or purchase orders. Companies use EDI to automate transactions for B2B e-commerce and supply chain management transactions. Suppliers can automatically send data about shipments to purchasing firms. The purchasing firms can use EDI to send details of inventory requirements and payment data to suppliers.

Today companies are progressively moving to the Internet for this purpose because it provides a much more flexible and low-cost platform for linking to other firms. Business-tobusiness transactions can occur via a company’s Web site, net marketplace, or private exchange and utilise intranets and extranets.

Private Industrial Networks (Private Exchanges)

These typically consist of a large firm using an extranet to link to its suppliers and other business partners. The Volkswagen Group opted for a private industry network (private exchange) instead of an industry sponsored net marketplace because it wanted to have control over supplier relationships and because of its business processes for supply chain management.

Net Marketplaces

A net marketplace is a single digital marketplace based on Internet technology linking many buyers to many sellers. The net marketplace is a business model for B2B e-commerce and some net marketplaces serve vertical markets for specific industries (such as the chemical and steel industries), while other net marketplaces serve horizontal markets, selling goods that are available in many different industries. Also, net marketplaces can sell either direct goods or indirect goods.

Benefits of E-Commerce

The benefits of e-commerce have started to materialise but will increase in significance as ecommerce expands. Both organisations and consumers can benefit from e-commerce.

BENEFITS TO ORGANISATIONS

The benefits to the organisation include:

  • Global reach: e-commerce expands the company’s marketplace to national and international markets.
  • Cheaper supplies: Enables companies to buy materials and services from other companies rapidly and at less cost.
  • Reduced Costs: Decreases the cost of creating, processing, distributing, storing, and retrieving information by digitising the process.
  • Speeds up the flow of goods: Allows businesses to carry lower levels of inventories by facilitating just in time strategies.
  • Improved customer service: It enables companies to provide product support and creates the possibility of a 24 hour service. It also allows companies to provide enhanced services to customers.
  • Others: It helps small businesses compete against large companies and it provides advertising opportunities.

BENEFITS TO CONSUMERS

The benefits to the consumer include:

  • Providing less expensive products and services by allowing customers to do quick online comparisons
  • Enabling customers to shop or make other transactions 24 hours a day from almost any location
  • Giving customers more choices in terms of products and suppliers
  • Delivering relevant and detailed information quickly
  • Enabling consumers to get customised products such as PCs

 

Limitations of E-Commerce

The limitations of e-commerce include:

  • Lack of universally accepted standards for quality, security and reliability
  • Difficulty in integrating e-commerce software with some existing applications and databases
  • Unresolved legal issues related to fraud and buyer and seller protection
  • Customer resistance to changing from real to virtual stores
  • Perception that e-Commerce is expensive and unsecured
  • Increasing incidence of internet fraud and other crimes

 

 MOBILE E-COMMERCE (M-COMMERCE)

M-commerce uses the Internet for purchasing goods and services as well as for transmitting messages using wireless mobile devices. It is especially well suited for location-based applications, such as finding local hotels and restaurants, monitoring local traffic and weather, and providing personalised location-based marketing.

Mobile computing increases productivity and worker output by providing communication and access to information regardless of location. Mobile communication helps businesses stay more easily in touch with customers, suppliers, and employees and provides more flexible ways of working.

M-Commerce Services and Applications

The following are categories of m-commerce services:

  • Information-based services: Applications include instant messaging, e-mail, searching for a movie or restaurants using a smartphone or handheld device.
  • Transaction-based services: Applications include purchasing concert tickets, music, or games. It includes searching for the best price for an item using a smartphone and buying it from an e-commerce site.
  • Financial Services: Many banks now allow customer to use their mobile phone to check account balances, transfer funds between accounts and pay bills.
  • Location Based services: Services that anticipate what a customer wants based on that person’s location or data profile, such as traffic information and location of the closest There are many smartphone applications that offer services that enable mobile phone users to access relevant traffic information, calculate journey lengths, and search for nearby garages, hotels and restaurants.
  • Wireless Advertising: In this form of marketing, a company will send a text based add to thousands of mobile users or tailor advertising on Web sites based on the location of the user when they access those sites.
  • Games and Entertainment: Many mobile phone services offer downloadable digital games and ring tones. Many smartphone phone users can view TV programs, store digital music and download and watch video clips on their phone.

Accessing Information from the Wireless Web

Although cell phones and other handheld devices can access the Web at any time and from any place, the amount of information that can be handled at any one time is still limited. Some web sites have been specially designed for m-commerce. They feature Web pages with very few graphics and only enough information to fit on a small mobile handheld screen. These wireless portals feature content and services optimised for mobile devices to steer users to the information they are most likely to need. Many sites are developing smartphone apps that can be installed on the mobile phone and will optimise how the site appears on the mobile device.

Voice portals accept voice commands for accessing Web content, e-mail, and other electronic applications from a cell phone or standard telephone. Sophisticated voice recognition software processes the requests, and the responses are translated back into speech for the customer.

M-Commerce Challenges

M-commerce represents a tiny fraction of all online purchases because wireless mobile devices can’t display merchandise very well. There are a number of factors that contribute to this including:

  • Keyboards and screens on cell phones are still small and awkward to use
  • Relatively slow data transfer speeds on cellular networks, even on third generation networks, results in higher costs to customer
  • Limited memory and power supplies
  • More Web sites need to be designed specifically for small wireless devices.

M-commerce will benefit from new payment systems for wireless devices and faster wireless networks to support more data-rich communications.

 E-COMMERCE PAYMENT SYSTEMS

Special electronic payment systems have been developed to pay for goods electronically on the Internet. Electronic payment systems for the Internet include systems for credit card payments, digital cash, digital wallets, accumulated balance payment systems, stored value payment systems, peer-to-peer payment systems, electronic checks, and electronic billing presentment and payment systems (Laudon and Laudon 2010). The following section describes the main electronic payment systems used on the Internet.

Credit Card

Credit cards are still used for a large proportion of online payments for online purchases. Digital credit card payment systems extend the functionality of credit cards so they can be used for online shopping payments. They make credit cards safer and more convenient for online merchants and consumers by providing mechanisms for authenticating the purchaser’s credit card to make sure it is valid and arranging for the bank that issued the credit card to deposit money for the amount of the purchase in the seller’s bank account.

Digital Wallets

Digital wallets make paying for purchases over the Web more efficient by eliminating the need for shoppers to enter their credit card information each time they buy something. A digital wallet securely stores credit card and owner identification information and provides that information at an e-commerce site’s “checkout” facility. The digital wallet enters the shopper’s name, credit card number, and shipping information automatically when invoked to complete the purchase. Amazon.com’s “One-Click Shopping”, which enables a consumer to fill in shipping and credit card information automatically by clicking one button, uses digital wallet technology.

Accumulated Balance Digital Payment Systems

Micropayment systems have been developed for purchases of involving small amounts of money, such as downloads ring tones that would be too small for normal credit card payments. Accumulated balance payment systems or stored value payment systems are useful for such purposes.

Accumulated balance digital payment systems enable users to make micropayments for purchases on the Web, accumulating a balance that they must pay periodically on their credit card or monthly telephone bills.

Stored Value Payment Systems

Stored value payment systems enable consumers to make instant online payments to merchants and other individuals based on value stored in a digital account. Online stored value systems rely on the value (money or credit) stored in a consumer’s bank, or credit card account.

Smart Cards

Smart cards are another type of stored value system used for micropayments. A smart card is a plastic card the size of a credit card that stores digital information. The smart card can store identification data, and can serve as an “electronic purse” in place of cash. These are contact smart cards that require use of special card-reading devices whenever the cards need to transfer cash to either an online or offline merchant. To pay for a Web purchase, the user would swipe the smart card through the card reader.

Digital cash

Digital cash (also known as electronic cash or e-cash) can also be used for micropayments or larger purchases. Digital cash is currency represented in electronic form and is different from paper currency or credit cards. Users are supplied with client software and can exchange money with another e-cash user over the Internet or with a retailer accepting e-cash. In addition to facilitating micropayments, digital cash can be useful for people who do not have credit cards and wish to make Web purchases.

Peer-to-Peer Payment systems

Web-based peer-to-peer payment systems were initially used to serve people who want to send money to vendors or individuals who are not set up to accept credit card payments. The person sending money uses their credit card to create an account with the payment at a peerto-peer payment Web site. The recipient accesses the payment by visiting the Web site and supplying information about where to send the payment (e.g. a bank account). PayPal is a widely used peer-to-peer payment system.

Digital Checking

Digital checking payment systems, such as eCheck, extend the functionality of existing checking accounts so they can be used for online payments. Digital checks are less expensive than credit cards and much faster than traditional paper-based checks. These checks are encrypted with a digital signature that can be verified and used for payments in electronic commerce. Electronic checking systems are useful in business-to-business electronic commerce.

Electronic Billing Presentment and Payment Systems

Electronic billing presentment and payment systems are used for paying routine monthly bills. They enable users to view their bills electronically and pay them through electronic fund transfers from bank or credit card accounts. These services support payment for online and physical store purchases of goods or services after the purchase has taken place. They notify purchasers about bills that are due, present the bills, and process the payments.  Table 10.2 below summarises the features of some of these payment systems.

 

Table 10.2: Examples of electronic payment systems for e-commerce (Laudon & Laudon. 2010).

 

Payment System Description Commercial Example
Digital credit card payment systems Secure services for credit card payments on the Internet that protect information transmitted among users, merchant sites, and processing banks eCharge

 

Digital wallet Software that stores credit card and other information to facilitate payment for goods on the Web Q*Wallet
Accumulated balance payment systems Accumulates micropayment purchases as a debit balance that must be paid periodically on credit card or telephone bills QPass, Valista, Peppercoin
Stored value payment systems Enables consumers to make instant payments to merchants based on value stored in a digital account eCount, Mondex

card

 

Digital cash Digital currency that can be used for micropayments or larger purchases ClearBit
Peer-to-peer payment systems Sends money using the Web to individuals or vendors who are not set up to accept credit card payments PayPal

 

Digital Checking Electronic check with a secure digital signature ECheck
Electronic billing presentment and payment systems Supports electronic payment for online and physical store purchases of goods or services after the purchase has taken place CheckFree, Yahoo

Bill Pay,

Digital Payment Systems and M-Commerce

M-commerce requires special digital payment systems geared to the type of transactions that are taking place using cell phones, and other small handheld devices. These transactions are mainly small and frequent purchases for items such as sports results, mobile games, ring tones and concert tickets which involve relatively small amounts of money that are not well suited to credit card billing.

Micropayment system

Micropayment systems are where the mobile operator or internet service provider handles the small payments by adding them up and presenting them on a single bill such as the mobile telephone bill.

Mobile Wallets (m-Wallets)

Mobile wallets speed up purchases by storing online shoppers’ personal information and credit card numbers that can be used in online transactions.

  MANAGEMENT CHALLENGE

Electronic commerce and electronic business pose several management challenges, including inadequate security, given the sensitive and nature of information that people might want to communicate through the Internet. Electronic commerce and electronic business require careful coordination of the firm’s divisions, production sites, and sales offices. It also requires closer relationships with customers, suppliers, and other business partners in its network of value creation.

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