Laudon ch.10 new

E-COMMERCE: DIGITAL MARKETS, DIGITAL GOODS

Chapter 10

Eng. Rasha Al Ababseh

Learning Objectives

• What are the unique features of e-commerce, digital markets, and digital goods?

• What are the principal e-commerce business and revenue models?

• How has e-commerce transformed marketing?

• How has e-commerce affected business-to-business transactions?

• What is the role of m-commerce in business and what are the most important m-commerce applications?

• What issues must be addressed when building an e-commerce Web site?


E-commerce and the Internet

• E-commerce today:

– Use of the Internet and Web to transact business; digitally enabled transactions

– Began in 1995 and grew exponentially, still growing even in a recession

– Growing at 15% annually

– Companies that survived the dot-com bubble burst and now thrive

• A large number of e-commerce companies failed.

• Yet for many others, such as Amazon, eBay, Expedia, and Google, the results have been more positive: soaring revenues, fine-tuned business models that produce profits, and rising stock prices


Retail e-commerce revenues grew 15–25 percent per year until the recession of 2008–2009, when they slowed measurably. In 2012, e-commerce revenues are growing again at an estimated 15 percent annually.






• Why e-commerce is different – 8 unique features

1. Ubiquity

– Internet/Web technology available everywhere: work, home, etc., anytime.

• Effect:

– Marketplace removed from temporal, geographic locations to become “marketspace”

– Enhanced customer convenience and reduced shopping costs “transaction costs”



• 8 unique features (cont.)

2. Global reach

• The technology reaches across national boundaries, around Earth

• Effect:

– Commerce enabled across cultural and national boundaries seamlessly and without modification

– the potential market size for e-commerce merchants is roughly equal to the size of the world’s online population

– Marketspace includes, potentially, billions of consumers and millions of businesses worldwide




3. Universal standards • One set of technology standards: Internet standards • shared by all nations around the world and enable any

computer to link with any other computer regardless of the technology platform each is using.

• Effect: – Disparate computer systems easily communicate with each other

– Lower market entry costs—costs merchants must pay to bring goods to market

– Lower consumers’ search costs—effort required to find suitable products




4. Richness

• 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.

• Traditional markets, and small retail stores have great richness.

• Effect:

– Possible to deliver rich messages with text, audio, and video simultaneously to large numbers of people

– Video, audio, and text marketing messages can be integrated into single marketing message and consumer experience




5. Interactivity

• The technology works through interaction with the user

• Effect:

– Consumers engaged in dialog that dynamically adjusts experience to the individual

– Consumer becomes co-participant in process of delivering goods to market




6. Information density • Large increases in information density—the total amount

and quality of information available to all market participants

• Effect: – Greater price transparency; the ease with which consumers

can find out the variety of prices in a market

– Greater cost transparency; the ability of consumers to discover the actual costs merchants pay for products.

– Enables merchants to engage in price discrimination; selling the same goods, or nearly the same goods, to different targeted groups at different prices.




7. Personalization/Customization • Technology permits modification of messages, goods

• Effect

– Personalized messages can be sent to individuals as well as groups

» Merchants can target their marketing messages to specific individuals by adjusting the message to a person’s clickstream behavior, name, interests, and past purchases

– Products and services can be customized to individual preferences

» changing the delivered product or service based on a user’s preferences or prior behavior




8. Social technology

• The technology promotes user content generation and social networking

• Effect

– New Internet social and business models enable user content creation and distribution, and support social networks

– The Internet provides a unique many-to-many model of mass communications.



• Key concepts in e-commerce

– The Internet has changed the way companies conduct business and increased their global reach.

– Digital markets reduce • Information asymmetry; one party in a transaction has more

information that is important for the transaction than the other party • Search costs • Transaction costs • Menu costs; costs of changing prices

– Digital markets enable • Price discrimination • Dynamic pricing, based on time of day, demand for the product • Disintermediation; The removal of organizations or business process

layers responsible for intermediary steps in a value chain • immediate consumption is possible with digital products



THE BENEFITS OF DISINTERMEDIATION TO THE CONSUMER

The typical distribution channel has several intermediary layers, each of which adds to the final cost of a product, such as a sweater. Removing layers lowers the final cost to the consumer.



• Key concepts in e-commerce

– Digital goods

• Goods that can be delivered over a digital network – E.g. Music tracks, video, software, newspapers, books

• Cost of producing first unit almost entire cost of product: marginal cost of 2nd unit is about zero

• Costs of delivery over the Internet very low

• Marketing costs remain the same; pricing highly variable

• Businesses dependent on physical products for sales—such as bookstores, music stores, book publishers—face the possibility of declining sales and even destruction of their businesses

• growth of digital music services (both legal and illegal music piracy)

• the Apple iTunes Store has sold 16 billion songs for 99 cents each since opening in 2001, providing the industry with a digital distribution model



E-commerce: Business and Technology

E-commerce is a fascinating combination of business models and new information technologies

• Types of e-commerce based on the nature of the participants

• Business-to-consumer (B2C)

• Business-to-business (B2B)

• Consumer-to-consumer (C2C)

• Mobile commerce (m-commerce); in terms of the platforms used by participants in a transaction


• E-commerce business models

– Portal

– E-tailer

– Content Provider

– Transaction Broker

– Market Creator

– Service Provider

– Community Provider



• Portal: “gateways” to the Web, and are often defined as those sites which users set as their home page.

– integrated package of content and services.

– the portal business model provides a destination site where users start their Web searching and continue further.

– Portals generate revenue primarily by attracting very large audiences, charging advertisers for ad placement, collecting referral fees for steering customers to other sites, and charging for premium services.



• E-tailer: Online retail stores.

– similar to the typical bricks-and-mortar storefront, except that customers only need to connect to the Internet to check their inventory and place an order.

– The value proposition of e-tailers is to provide convenient, low-cost shopping 24/7, offering large selections and consumer choice.



• Content Provider

– “Content” is defined broadly to include all forms of intellectual property.

– Intellectual property refers to all forms of human expression that can be put into a tangible medium.

– The value proposition of online content providers is that consumers can find a wide range of content online, conveniently, and purchase this content inexpensively, to be played, or viewed, on multiple computer devices or smartphones.

– Providers do not have to be the creators of the content.

– iTunes Store have enabled new forms of digital content delivery from podcasting to mobile streaming “flows a continuous stream of content”.

– They are the fastest growing segment within e-commerce, growing at an estimated 20 percent annual rate.



• Transaction broker: Sites that process transactions for consumers. (PayPal)

– Online stock brokers and travel booking services charge fees that are considerably less than traditional versions of these services.

– The value propositions are savings of money and time, as well as providing an extraordinary inventory of financial products and travel packages, in a single location.



• Market creator. – build a digital environment in which buyers and sellers can

meet, display products, search for products, and establish prices.

– The value proposition of online market creators is that they provide a platform where sellers can easily display their wares and where purchasers can buy directly from sellers.

– Amazon’s Merchants platform, eBay.

– Sharing economy, websites like Uber and Airbnb is based on the idea of market creator.

– Building a digital platform where supply meets demand.

– Spare auto capacity finds individuals who want transportation.



• Service provider – Software is no longer a physical product with a CD in a box, but

increasingly software as a service (SaaS) that you subscribe to online rather than purchase from a retailer, or an app that you download.

– Google has led the way in developing online software service applications.

– Online sites for data backup and storage all use a service provider business model.

• Community Provider. – sites that create a digital online environment where people with

similar interests can transact (buy and sell goods); share interests, photos, videos; communicate.

– Social networking sites have been the fastest growing Web sites in recent years. Often doubling their audience size in a year.



• E-commerce revenue models

1. Advertising

2. Sales

3. Subscription

4. Free/Freemium

5. Transaction Fee

6. Affiliate



• Advertising

– a Web site generates revenue by attracting a large audience of visitors who can then be exposed to advertisements.

– The most widely used model in e-commerce.

– Content on the Web— everything from news to videos and opinions—is “free”.

– Web sites with the largest viewership or that attract a highly specialized, differentiated viewership and are able to retain user attention (“stickiness”) are able to charge higher advertising rates.

– 95% of Google’s revenue derives from advertising



• Sales

– companies derive revenue by selling goods, information, or services to customers.

– Content providers make money by charging for downloads of entire files such as music tracks.

– Micropayment systems provide content providers with a cost-effective method for processing high volumes of very small monetary transactions (Apple iTunes) • is an e-commerce transaction involving a very small sum of money

in exchange for something made available online.

• special type of system is required for such payments, which are too small to be feasible for processing through credit card companies.



• Subscription

• Content providers often use this revenue model.

– To be successful, the subscription model requires that the content be perceived as having high added value, differentiated, and not readily available elsewhere nor easily replicated.

– Netflix is one of the most successful subscriber sites with more than 44 million customers by 2013

• Free/Freemium – firms offer basic services or content for free, while charging a premium

for advanced or special features.

– The idea is to attract very large audiences with free services, and then to convert some of this audience to pay a subscription for premium services.

– “Free” can be a powerful model for losing money.



• Transaction Fee

– a company receives a fee for enabling or executing transaction.

– Example: eBay

• Affiliate

– Web sites (called “affiliate Web sites”) send visitors to other Web sites in return for a referral fee or percentage of the revenue from any resulting sales.



• E-commerce marketing

– Internet provides marketers with new ways of identifying and communicating with customers at lower cost than traditional marketing.

– Behavioral targeting: Tracking online behavior of individuals on thousands of Web sites (Clickstream) to increase the effectiveness of banner, rich media, and video ads. • leads to the invasion of personal privacy without user consent.

When consumers lose trust in their Web experience, they tend not to purchase anything.

– Advertising formats include search engine marketing, display ads, recommender systems, and e-mail.

– Long tail marketing: the Internet allows marketers to inexpensively find potential customers for products where demand is very low.

– The leading online advertising networks are Google’s DoubleClick




E-commerce Web sites have tools to track a shopper’s every step through an online store. Close examination of customer behavior at a Web site selling women’s clothing shows what the store might learn at each step and what actions it could take to increase sales.

WEB SITE VISITOR TRACKING


• All Web sites collect data on visitor browser activity and store it in a database.

– They have tools to record the site that users visited prior to coming to the Web site,

– where these users go when they leave that site,

– the type of operating system they use, browser information, and even some location data.

• Firms analyze this information about customer interests and behavior to develop precise profiles of existing and potential customers.

– to understand how well their Web site is working,

– create unique personalized Web pages that display content or ads for products or services of special interest to each user.




Firms can create unique personalized Web pages that display content or ads for products or services of special interest to individual users, improving the customer experience and creating additional value.

WEB SITE PERSONALIZATION



Advertising networks have become controversial among privacy advocates because of their ability to track individual consumers across the Internet.

HOW AN ADVERTISING NETWORK SUCH AS DOUBLECLICK WORKS


• Most popular Web 2.0 service: social networking – Social networking sites link people through their mutual

business or personal connections.

– Social networking sites sell banner ads, user preference information, and music, videos and e-books

– Ideal to employ online viral marketing technique

• Social shopping sites – The idea behind social shopping is that individuals are

influenced by their friends purchases and recommendations. (ProductWiki).

– Swap shopping ideas with friends (Pinterest).



• Wisdom of crowds/crowdsourcing – Large numbers of people can make better decisions about topics

and products than a single person.

– a way of establishing a relationship with the Customers, and to better understand how the products and services are used and appreciated (or rejected).

– firms can be actively helped in solving some business problems using what is called crowdsourcing

– Netflix campaign in 2006

– Prediction markets:

– Peer-to-peer betting markets on specific outcomes (elections, sales figures, designs for new products)



Social E-commerce and Social Network Marketing • Social e-commerce is commerce based on the idea of the digital social

graph (mapping of all significant online social relationships). • Theoretically, it takes six links for any one person to find another

person anywhere on earth. • The products and services you buy will influence the decisions of

your friends, and their decisions will in turn influence you.

• If you are a marketer trying to build and strengthen a brand, the implication is clear: • Take advantage of the fact that people are enmeshed in social

networks, share interests and values, and communicate and influence one another.

• Facebook and Twitter have become powerful tools for engaging customers.





• Business-to-business e-commerce

– refers to the commercial transactions that occur among business firms. Increasingly, these transactions are flowing through a variety of different Internet-enabled mechanisms

– Electronic data interchange (EDI)

• Computer-to-computer exchange of standard transactions such as invoices, purchase orders

• Major industries have EDI standards that define structure and information fields of electronic documents for that industry

• More companies increasingly moving away from private networks to Internet for linking to other firms

– E.g. Procurement: Businesses can now use Internet to locate most low-cost supplier, search online catalogs of supplier products, negotiate with suppliers, place orders, etc.




Companies use EDI to automate transactions for B2B e-commerce and continuous inventory replenishment. Suppliers can automatically send data about shipments to purchasing firms. The purchasing firms can use EDI to provide production and inventory requirements and payment data to suppliers.

ELECTRONIC DATA INTERCHANGE (EDI)


• Business-to-business e-commerce (cont.)

– Private industrial networks (private exchanges)

• Large firm using extranet to link to its suppliers, distributors and other key business partners

• Owned by buyer

• Permits sharing of:

– Product design and development

– Marketing

– Production scheduling and inventory management




A private industrial network, also known as a private exchange, links a firm to its suppliers, distributors, and other key business partners for efficient supply chain management and other collaborative commerce activities.

A PRIVATE INDUSTRIAL NETWORK



– Net marketplaces (e-hubs)

• Single market for many buyers and sellers

• Industry-owned or owned by independent intermediary

• Generate revenue from transaction fees, other services

• Use prices established through negotiation, auction, RFQs, or fixed prices

• May focus on direct or indirect goods

• May be vertical or horizontal marketplaces




Net marketplaces are online marketplaces where multiple buyers can purchase from multiple sellers.

A NET MARKETPLACE



– Exchanges • Independently owned third-party Net marketplaces • Connect thousands of suppliers and buyers for spot

purchasing • Typically provide vertical markets for direct goods for

single industry (food, electronics) • Proliferated during early years of e-commerce; many

have failed – Competitive bidding drove prices down and did not offer

long-term relationships with buyers or services to make lowering prices worthwhile



What is the Role of m-commerce in business and it’s most important applications

• M-commerce

– the fastest growing form of e-commerce, with some areas expanding at a rate of 50 percent or more per year, and is estimated to grow to $132 billion in 2018.

– The main areas of growth in mobile e-commerce are:

• retail sales, Amazon (about $4 billion).

• Sales of Apple (about $1.1 billion).

• sales of digital content music, TV shows and movies (about $4 billion)

• Location-based services.


• Location-based services include geosocial services, geoadvertising, and geoinformation services. – the foundation for mobile commerce is global positioning system

(GPS) enabled map services available on smartphones.

– Geosocial service can tell you where your friends are meeting. (checking in)

– Geoadvertising services can tell you where to find the nearest Italian restaurant • Geoadvertising sends ads to users based on their GPS locations. • Smartphones report their locations back to Google and Apple.

Merchants buy access to these consumers when they come within range of a merchant.

– Geoinformation services can tell you about special exhibits at a museum you are passing. Or the price of a house you are looking at. (wikitude.me)



• OTHER MOBILE COMMERCE SERVICES:

– Banks and credit card companies are rolling out services that let customers manage their accounts from their mobile devices. (check account balances, transfer funds, and pay bills).

– the mobile advertising market; Apple’s iAd platform and Google’s AdMob.

– 55% of online retailers now have m-commerce Web sites—simplified versions of their Web sites that make it possible for shoppers to use cell phones to place orders; with apps for m-commerce sales.

– Games and Entertainment: Downloadable and streaming digital games, movies, TV shows, music, and ring tones. MobiTv,

• Film companies are starting to produce short films explicitly designed to play on mobile phones




CONSOLIDATED MOBILE COMMERCE REVENUES

Mobile e-commerce is the fastest growing type of B2C e-commerce although it represents only a small part of all e-commerce in 2012.


• an e-commerce presence is not just a corporate Web site.

• The two most important management challenges in building a successful e-commerce presence are:

(1) developing a clear understanding of your business objectives. (What do we want the e-commerce site to do for our business?)

(2) knowing how to choose the right technology to achieve those objectives. (Business decisions drive the technology – not the reverse)

• PIECES OF THE SITE-BUILDING PUZZLE:

• Assembling a team with the skills required to make decisions about:

– Technology – Site design – Social and information policies – Hardware, software, and telecommunications infrastructure

• Customer’s demands should drive the site’s technology and design.


Building an E-commerce Web Site


• Your potential customers use various devices at different times during the day, involve themselves in different conversations.

• You have to consider each of the “touch points” where you can meet the customers.

• And you have to think about how to develop a presence in these different virtual places - e-commerce presence MAP

• And finally develop a timeline.


Building an E-commerce Web Site- Developing an E-commerce presence MAP


An e-commerce presence requires firms to consider the four different types of presence, with specific platforms and activities associated with each

E-commerce presence MAP

Education

Laudon ch.10 new