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E-Commerce Systems (I)


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E-Commerce Systems (I)

  1. 1. Lecture 1 E-Commerce Systems (I) Hsin-Lu Chang 2009 1 Learning Objective Drivers of E-Business Product strategy for e-tailor Pricing strategy for e-tailor Hsin-Lu Chang 2009 2 1
  2. 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 Hsin-Lu Chang 2009 3 Major Trends Driving E-Business Hsin-Lu Chang 2009 4 2
  3. 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 Hsin-Lu Chang 2009 5 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 Hsin-Lu Chang 2009 6 3
  4. 4. The High Cost of Low Loyalty An indiscriminate approach to customers acquisition undermines profitability. •Untargeted banner ads and online coupons Hsin-Lu Chang 2009 7 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. Hsin-Lu Chang 2009 8 4
  5. 5. Online Retailing of Physical Goods Hsin-Lu Chang 2009 9 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. Hsin-Lu Chang 2009 10 5
  6. 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 Hsin-Lu Chang 2009 11 Pricing Strategies on the Net Two strategies ?? Low prices to capture first-mover advantage Transfer the off-line prices onto the Internet Hsin-Lu Chang 2009 12 6
  7. 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 Hsin-Lu Chang 2009 13 E-Pricing Lowering Price Optimizing Price Hsin-Lu Chang 2009 14 7
  8. 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 Hsin-Lu Chang 2009 15 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 Hsin-Lu Chang 2009 16 8
  9. 9. Versioning: The Logic of the Free Version Building Awareness Attracting Eyeballs Gaining Follow-on Sales Creating A Network/ Community Gaining Strategic Advantages Hsin-Lu Chang 2009 17 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 Hsin-Lu Chang 2009 18 9
  10. 10. Evolution Strategy – (1/6) 1995: Enhance Strategy 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 Hsin-Lu 19 Evolution Strategy – (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. Hsin-Lu Chang 2009 20 10
  11. 11. Evolution Strategy – Extend Strategy Late 1998 and 1999: Auctions and Commerce Network Launched Extend 2000: Extending by adding Enhance new business models Expand Exchange business models: Amazon Exit Auctions Marketplace business models: ASP Business model: Hsin-Lu Chang 2009 21 Evolution Strategy – August, 2000: Exit Strategy Extend partner,, filed for Enhance chapter 11 bankruptcy and announced its Expand intention to seek an Exit outright liquidation. Hsin-Lu Chang 2009 22 11
  12. 12. Evolution Strategy – 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 23 Evolution Strategy – For large business sellers: continue to develop multiple partnership strategies with large companies 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 program: Amazon operated third-party Web sites on behalf of a variety of merchants, e.g. Amazon took inventory into its distribution centers and completed most fulfillment functions, from shipping to customer service and returns. Syndicated stores: like, 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 24 12
  13. 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 a small fixed fee + commission on items sold 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 Hsin-Lu Chang 2009 25 Hsin-Lu Chang 2009 26 13
  14. 14. Hsin-Lu Chang 2009 27 Hsin-Lu Chang 2009 28 14
  15. 15. Hsin-Lu Chang 2009 29 How Fulfills Orders? Step1: When a customer places an order online, a computer program checks the location of the item. It identifies the distribution center that will fulfill the order. Alternatively, it may identify the vendor that will fulfill the order in those cases where 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 Hsin-Lu Chang 2009 30 15
  16. 16. How 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. Hsin-Lu Chang 2009 31 How 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. Hsin-Lu Chang 2009 32 16
  17. 17. How 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. Hsin-Lu Chang 2009 33 17