What is E-Commerce?
Our focus in this book is e-commerce—the use of the Internet, the World Wide Web (Web), and mobile apps 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. (We describe the Internet, Web, and apps more fully later in this chapter and in Chapters 3 and 4.) More formally, we focus on digitally enabled com- mercial 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 apps. Commercial transactions involve the exchange of value (e.g., money) across organiza- tional 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 com- merce” in part to reflect the fact that in 2013, apps account for a growing amount of e-commerce revenues. For our purposes, we consider “e-commerce” and “digital commerce” to be synonymous.
Why study e-commerce?
Why are there college courses and textbooks on e-commerce when there are no courses or textbooks on “TV Commerce,” “Radio Commerce,” “Railroad Commerce,” or “Highway Commerce,” even though these technologies had profound impacts on commerce in the twentieth century and account for far more commerce than e-commerce?
The reason for the interest specifically in e-commerce is that e-commerce tech- nology (discussed in detail in Chapters 3 and 4) is different and more powerful than any of the other technologies we have seen in the past century. E-commerce tech- nologies—and the digital markets that result—have brought about some fundamen- tal, unprecedented shifts in commerce. While these other technologies transformed economic life in the twentieth century, the evolving Internet and other information technologies are shaping the twenty-first century.
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.
eight unique Features OF e-commerce technology
Figure 1.2 illustrates eight unique features of e-commerce technology that both chal- lenge traditional business thinking and 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, personal- ized, and rich messages are available for delivery to segmented, targeted audiences. 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 new information to develop new informa- tion asymmetries, enhance their ability to brand products, charge 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 technolo- gies 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 (Varian, 2000a). We examine these different visions of e-commerce further in Section 1.2 and throughout the book.
Each of the dimensions of e-commerce technology illustrated in Figure 1.2 deserves a brief exploration, as well as a comparison to both traditional commerce and other forms of technology-enabled commerce.
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 (Shapiro and Varian, 1999; Tversky and Kahneman, 1981).
global reach
E-commerce technology permits commercial transactions to cross cultural, regional, and national boundaries far more conveniently and cost-effectively
In contrast, most traditional commerce is local or regional—it involves local mer- chants or national merchants with local outlets. Television and 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 stan- dards 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 the Internet and 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 creating a single, one-world mar- ketspace, where prices and product descriptions can be inexpensively displayed for all to see, price discovery becomes simpler, faster, and more accurate (Banerjee, et al., 2005; Bakos, 1997; Kambil, 1997). Users of the Internet, both businesses and individu- als, also experience network externalities—benefits that arise because everyone uses the same technology. With e-commerce technologies, it is possible for the first time in history to easily find many of the suppliers, prices, and delivery terms of a specific product anywhere in the world, and to view them in a coherent, comparative environ- ment. Although this is not necessarily realistic today for all or even many products, it is a potential that will be exploited in the future.
richness
Information richness refers to the complexity and content of a message (Evans and Wurster, 1999). Traditional markets, national sales forces, and small 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. The Internet has the potential for offering considerably more information richness than traditional media such as printing presses, radio, and television because it is interactive and can adjust the message to individual users. Chatting with an online sales person, for instance, comes very close to the customer
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, for instance, cannot ask viewers questions or enter into conversations with them, or request that customer information be entered into a form. In contrast, all of these activities are possible on an e-commerce site and are now commonplace with smartphones, social networks, and Twitter. Interactivity allows an online merchant to engage a consumer in ways similar to a face-to-face experience.
information density
E-commerce technologies vastly increase information density—the total amount and quality of information available to all market participants, consumers, and mer- chants alike. E-commerce technologies reduce information collection, storage, process- ing, 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. In e-commerce markets, 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 pay for products (Sinha, 2000). 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/customization
E-commerce technologies permit personalization: merchants can target their market- ing 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
social technology: user content generation and social networking
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, use a broadcast model (one-to-many) where 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. The Internet and 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. The Internet provides a unique, many-to-many model of mass communication.
tyPes OF e-cOmmerce
There are several different types of e-commerce and many different ways to charac- terize them. Table 1.3 lists the major types of e-commerce discussed in this book.1 For the most part, we distinguish different types of e-commerce by the nature of the market relationship—who is selling to whom. Social, mobile, and local e-commerce can be looked at as subsets of these types of e-commerce.
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 commerce includes purchases of retail goods, travel services, and online content. Even though B2C is comparatively small (about $419 billion in 2013 in the United States), 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 about $4.7 trillion in transac- tions in the United States in 2013 (see Figure 1.4). There is an estimated $12.9 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.
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 such as eBay or Etsy, or the classifieds site Craigslist. Given that in 2013, eBay is likely to generate around $75 billion in gross merchandise volume around the world, it is probably safe to estimate that the size of the global C2C market in 2013 is more than $90 billion (eBay, 2013). 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, discov- ered, and paid for.
social e-commerce
Social e-commerce is e-commerce that is enabled by social networks and online social relationships. It is sometimes also referred to as Facebook commerce, but in actuality is a much larger phenomenon that extends beyond just Facebook. The growth of social e-commerce is being driven by a number of factors, including the increasing popularity of social sign-on (signing onto Web sites using your Facebook or other social network ID), network notification (the sharing of approval or disapproval of products, services, and content via Facebook’s Like button or Twitter tweets), online collabora- tive shopping tools, and social search (recommendations from online trusted friends). Social e-commerce is still in its infancy, but is estimated to generate about $5 billion in the United States in 2013, and about $8 billion in the rest of the world (eMarketer, Inc., 2012a).