1. Lecture 1
E-Commerce Systems (I)
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Learning Objective
Drivers of E-Business
Product strategy for e-tailor
Pricing strategy for e-tailor
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2. Structure Transformation
The New Industry Structure: E-Commerce
Change the customer value propositions
Value Innovation
The New Economics: E-Business Webs
Reorganizing the business by right
partnerships
Integration
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Major Trends Driving E-Business
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3. The Economics of E-Loyalty
Increasing customer
retention rates by 5%
increases profits by 25%
to 95%
The general pattern –
early losses, followed by
rising profits – is actually
exaggerated on the
Internet
Online Loyal customers
bring profits to the firms
Purchasing more
Referring new customers
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How to Gain the E-Loyalty?
Challenges: risks and uncertainties are magnified
when the business is conducted on the Internet
“Price” does not rule the Web; “trust” does!
Information sharing needs trust
Amazon “one-click” shopping
How to build trust?
No cheating
Be neutral
Take security seriously
Reliability and Fraud
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4. The High Cost of Low Loyalty
An indiscriminate approach to
customers acquisition undermines
profitability.
•Untargeted banner ads and
online coupons
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How to Find the Target Customers?
A lack of focus makes building loyalty much more difficult
Strategies:
Make sense of complexity!
Simplify and speed product searches
Building communities and promoting referrals
Know your customers: bargain hunters or convenience and brand-
driven shoppers
Tracking measures of loyalty
Dell identify three key drivers of loyalty and the measurement
for each driver
Order fulfillment – ship to target
Product performance –initial field incident rate
Post-sale, service and support – on-time, first-time fix
Lifetime ownership cost of products and services
all the costs customers incur in shopping for, ordering,
operating, servicing, and disposing of products -whom
those costs are paid to.
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5. Online Retailing of Physical Goods
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Attributes of Products Good for E-Tailing
Information-rich Products, e.g., travel reservations
Large Selection (Savings in the Search Costs can be
considerable), e.g., electronics, toy, airline tickets
Little Need for Hands-on Service or Product Trials, e.g., books
Easily Customizable Products, e.g., PCs
Digital products, e.g., anti-virus software
Quality is assured, e.g., books
Time and location are crucial factors in the purchase, e.g.,
flowers
When targeted at a very specific group, e.g., sport cards.
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6. Cost Transparency
Erodes the “risk premium”
Makes buyers search more efficiently
Easier for buyers to find the “floor price”
Encourages highly rational shopping
…This is getting tough for the sellers!
•impair a seller’s ability to obtain high margin
•Turns products and services into commodity
•Weakens customer loyalty
•Risking the perception of unfair pricing
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Pricing Strategies on the Net
Two strategies ??
Low prices to capture first-mover advantage
Transfer the off-line prices onto the Internet
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7. Pricing Strategies on the Net
Two observations ??
Internet will be the great equalizer, driving
prices down to the lowest level possible
Price will be the most important factor
differentiating products and services for on-
line consumers
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E-Pricing
Lowering Price Optimizing Price
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8. Optimizing Pricing on the Net
Precision
“pricing indifference band”
Approaches: test customers’ responses to different levels of
discounts; test different approaches to discounting
Examples: MRO products
Adaptability
Price can change with the demand very quickly and cheaply
Ease of response to external shocks to the system
Examples: Chemicals and raw materials
Segmentation (Versioning)
Ability to choose creative, accurate segmentation dimensions
“core” customer and “fill-in” customer
Examples: Industrial components and business services
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Different Versions
Category Definition
Timeliness offer early delivery at a premium
User Interface offer interfaces with different capabilities and price
Convenience restrict the time and place for providing services
Image Resolution offer high resolution images at higher prices
Speed of Operation the higher the speed, the more expensive
Capability& Function the more the features, the higher the price
Comprehensiveness more expensive for more complete information
Annoyance charge more for product offered without annoyance
Technical Support charge premium for offering support
Manipulation offer the ability of the user to manipulate the information
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9. Versioning: The Logic of the Free
Version
Building Awareness
Attracting Eyeballs
Gaining Follow-on Sales
Creating A Network/ Community
Gaining Strategic Advantages
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Evolution Strategy of E-Tailoring
Add functionality,
features or capabilities
to improve current Enter new lines of
Extend
Extend
product/service business and/or add
offerings new business models
Enhance
Enhance
Expand
Expand
Exit a business or
Add new
Exit
Exit
market, or drop a
product/service
product/service
offerings or
offering
enter new
geographic
markets
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10. Evolution Strategy – Amazon.com (1/6)
1995: Enhance Strategy
Amazon.com lunched
Extend
U.S.Books
Enhance its
Enhance
product/service offering
and e-retailing Expand
capabilities by adding
new features, such as 1
Exit
Click shopping,
sophisticated
personalization, wish
lists, and greeting cards Chang 2009
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Evolution Strategy – Amazon.com (2/6)
1998: Expand Strategy
New categories launched
and entry into Europe
Extend
Aggressively expanding into
new product categories
It launched music store Enhance
within the first quarter of
launch and the #1 Expand
DVD/Video store within six
weeks
Exit
Expanding internationally,
acquiring U.K. and German
online bookstores to enter
Europe in the Fall 1998.
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11. Evolution Strategy – Amazon.com(3/6)
Extend Strategy
Late 1998 and 1999:
Auctions and Commerce
Network Launched
Extend
2000: ToysRus.com
Extending by adding Enhance
new business models
Expand
Exchange business
models: Amazon
Exit
Auctions
Marketplace business
models:
Drugstore.com
ASP Business model:
ToysRus.com
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Evolution Strategy – Amazon.com(4/6)
August, 2000: Exit
Strategy
Extend
Amazon.com partner,
living.com, filed for Enhance
chapter 11 bankruptcy
and announced its
Expand
intention to seek an
Exit
outright liquidation.
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12. Evolution Strategy – Amazon.com(5/6)
2002: Enhance Again
Single Store Vision
Allow Amazon’s partner
merchants sell their
products on the same
Extend
pages where Amazon
sold its own goods Enhance
For small business and
individual merchants Expand
(zShop): the book
merchants were given
automated tools to
Exit
migrate their catalogs
of millions of used
and out-of print
books onto the new
single product pages
inside the Amazon
books tab Hsin-Lu Chang 2009
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Evolution Strategy – Amazon.com(6/6)
For large business sellers: continue to develop multiple partnership
strategies with large companies
Merchants@Amazon.com program: enter into partnerships with large
retailers such as J&R Electronics, OfficeDepot, Circuit City, and
Toys”R”Us.
These partners could sell their products on Amazon’s Website while still
retaining ownership and possession of inventory and setting prices on
their inventory
Merchants.com program: Amazon operated third-party Web sites on
behalf of a variety of merchants, e.g. www.target.com. Amazon took
inventory into its distribution centers and completed most
fulfillment functions, from shipping to customer service and returns.
Syndicated stores: like merchants.com, but the syndicated sotres
program charged Amazon with responsibility for all product
development and operational tasks in support of the Web site,
including buying, stocking, pricing, shipping, and servicing product,
e.g., Borders
Marketing deals: Amazon promoted its partner’s products or services
on its Web site and allowed its customers to click over to its
partner’s Web sites, e.g., Hsin-Lu Chang 2009
durgstore.com
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13. Fee Schedule for Amazon “Single Store”
Strategy
zShop
Listing Fee $39.99 per month for up to 40,000 items at any one time
Merchandising Fees (optional)
Featured placement $0.05 per item per day
Bold Listing $2.00 per listing
Cross Link to Amazon single store free
Closing Fees
Sales price $0.01 - $25.00 5%
Sales price $25.00 - $1,000 $1.25 plus 2.5% of amount > $25
Sale price > $1,000 $25.63 + 1.25% of amount > $1,000
Large Business Sellers
Merchants@Amazon.com a small fixed fee + commission on items sold
Merchants.com a fixed fee (varied in the scope of services)+ commission
Syndicated stores revenue sharing
Marketing deals the marketing fee is charged either on the number of
customers exposed to the partner’s marketing message
or on the number of customers referred from Amazon to
the partner
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How Amazon.com Fulfills Orders?
Step1: When a customer places
an order online, a computer
program checks the location of
the item. It identifies the
Amazon.com distribution center
that will fulfill the order.
Alternatively, it may identify the
vendor that will fulfill the order in
those cases where Amazon.com
acts as an intermediary only. The
order is transmitted electronically
to the appropriate distribution
center or vendor.
Step 2: The warehouse operator
at the distribution center receives
all orders and assigns them
electronically to specified
employees
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16. How Amazon.com Fulfills Orders?
Step 3: The items (books,
games, CDs, etc.) are
stocked in bins. Each bin has
a red light and a button.
When an order for an item is
assigned, the red light is
turned on automatically.
Pickers move along the rows
of bins and pick an item
from the bins with red lights;
They press the button to
reset the light. If the light
returns, they pick another
unit, until the light goes off.
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How Amazon.com Fulfills Orders?
Step4: The picked items are placed into a crate moving on a conveyor belt, which
is part of a winding belts system more than 10 miles long in each warehouse. Each
crate can reach many destinations; items in the crate are identified by bar code
readers (automatically or manually) at 15 different points in the conveyor maze.
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17. How Amazon.com Fulfills Orders?
Step5: All crates arrive at a central
location where bar codes are matched
with order numbers. Items are moved
from the crates to chutes where they side
into cardboard boxes.
Step6: Boxes are packed, taped, weighted,
labeled, and routed to one of 40 truck
bays in the warehouse. From there, they
go to UPS or the USPS.
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