ELECTRONIC COMMERCE Potential roles of e-commerce  ● Economics of online sales   ●  Obstacles to growth Legal issues  ●  W...
Learning Objectives <ul><li>Understanding opportunities to use e-commerce </li></ul><ul><li>Understanding the economics of...
Basic Internet Economics <ul><li>In most markets, online merchants tend to have HIGHER costs than do conventional retailer...
Considerations in Evaluating E-Commerce Potential <ul><li>Value-to-bulk ratio.  High value, low weight/volume items can be...
The Case of Dell Computer <ul><li>Customizing computers for each customer probably does NOT save money.   It is probably c...
How Suitable For Internet Commerce?  Are There Differences Among Segments?
 
Estimated Margins—Costco Pearl Earrings
Best Seller Book
Bursting the Internet Bubble <ul><li>Selling over the Internet usually does  not  actually save money </li></ul><ul><ul><l...
Reality of Online Competition <ul><li>Intense competition for large demand products (large quantity demanded attracts many...
Sample Exam Question
“ Bricks-and-Clicks” <ul><li>Traditional retail chains and online presence tend to have synergy </li></ul><ul><ul><li>Onli...
Micro-payments:  Opportunities and costs <ul><li>Considerable online content and services could be made profitably availab...
SEARCH ENGINE OPTIMIZATION <ul><li>Search engines </li></ul><ul><li>Search engine rankings </li></ul><ul><li>Optimizing fo...
Search Engines <ul><li>Search engine market dominated by Google </li></ul><ul><li>Microsoft’s new BING search engine—the “...
Search engines <ul><li>Use an algorithm to identify preferred links </li></ul><ul><li>Algorithms may involve </li></ul><ul...
Search Engine Optimization:  Reciprocal Linking <ul><li>Linking from highly rated web sites greatly increases the ranking ...
Search Engine Optimization:  Text <ul><li>Credible  repetition of key words </li></ul><ul><ul><li>Frequently greater credi...
Search Engine Optimization:  Other <ul><li>Domain names </li></ul><ul><ul><li>If the domain name features the keyword, mor...
M-commerce:  Mobile phone/PDA/ “gadget” access and sales <ul><li>High growth in mobile technology with Internet access </l...
Social Media <ul><li>“ Word-of-mouth” or “word-of-click campaigns” </li></ul><ul><li>Targeting of specific demographics  ...
Facebook <ul><li>Targeting by demographics </li></ul><ul><li>Online presences through </li></ul><ul><ul><li>Applications <...
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  1. 1. ELECTRONIC COMMERCE Potential roles of e-commerce ● Economics of online sales ● Obstacles to growth Legal issues ● Web site design and problems ● Consumer cyber behavior
  2. 2. Learning Objectives <ul><li>Understanding opportunities to use e-commerce </li></ul><ul><li>Understanding the economics of e-commerce </li></ul><ul><li>Understanding circumstances when e-commerce is more appropriate </li></ul><ul><li>Understanding influences on a site’s rank on major search engines </li></ul>
  3. 3. Basic Internet Economics <ul><li>In most markets, online merchants tend to have HIGHER costs than do conventional retailers </li></ul><ul><ul><li>Much more of the work is done by the merchant rather than by the customer. </li></ul></ul><ul><li>Intermediaries usually add value through specialization of labor and consolidation of tasks. Eliminating intermediaries usually results in higher costs. </li></ul><ul><li>Customers do a lot of the work when they select, aggregate, bring for check-out, and carry away their products. Employees of e-commerce companies and their transportation services have to be paid to do this work! </li></ul>
  4. 4. Considerations in Evaluating E-Commerce Potential <ul><li>Value-to-bulk ratio. High value, low weight/volume items can be more readily handled and shipped. </li></ul><ul><li>Absolute margin. Even if the percentage margin on a high price item is low (e.g., 15%), the absolute margin can cover considerable expenses (e.g., 0.15x$1,000=$150) </li></ul><ul><li>Ability of consumer to evaluate quality and fit through online description. Standard branded items from a trusted source can be more easily evaluated than items that need to be examined up close. </li></ul><ul><li>Convenience to the customer and willingness to pay for this convenience. Some consumers may be willing to pay more for door-to-door delivery. It is usually more expensive to buy groceries online. </li></ul><ul><li>Sensitivity to delayed delivery . </li></ul><ul><li>Extent of customization needed —highly customized items—e.g., insurance, plane tickets, personalization—allow the customer to do much of the work (i.e., data entry). </li></ul><ul><li>Geographic dispersal of consumers —even if direct-to-consumer sales are not efficient, this may be the only cost effective way to reach customers who are widely dispersed (e.g., bee keepers, Civil War buffs, tall people). </li></ul><ul><li>Extent of inventory value decline over time. A computer can be distributed to consumers at a lower price through retailers, but the process takes longer and computer parts lose value fast. </li></ul>
  5. 5. The Case of Dell Computer <ul><li>Customizing computers for each customer probably does NOT save money. It is probably cheaper to provide a limited number of computers that offer each consumer a little bit MORE than what he or she would have wanted in a customized unit. </li></ul><ul><li>Prices for “upgrades” to default models tend to be very high —e.g., additional RAM often costs more than twice as much as the “street” price for the components. “Base” models usually have low prices, but the final prices paid tend to be high. </li></ul><ul><li>Although the percentage margins on computers tends to be low due to competition (e.g., 10-25%), absolute margins can be significant —e.g., 10% of $1,500=$150. That margin can pay for a lot of work. </li></ul><ul><li>It would probably be cheaper to ship directly to an efficient retailer —e.g., Wal-Mart may take in hundreds of computers and a number of other materials at one time. These items are put out on floors using fork lifts and other efficient transportation methods. The customer does much of the work. </li></ul><ul><li>However, because computer parts may lose as much as 1.5% in value per week. Thus, reducing distribution lag time by five weeks may “rescue” 7.5%. </li></ul><ul><li>If Dell claims to have an inventory turnover time of 48 hours, someone else—probably a supplier—has to carry the needed “buffer” inventory to accommodate fluctuations in demand . </li></ul>
  6. 6. How Suitable For Internet Commerce? Are There Differences Among Segments?
  7. 8. Estimated Margins—Costco Pearl Earrings
  8. 9. Best Seller Book
  9. 10. Bursting the Internet Bubble <ul><li>Selling over the Internet usually does not actually save money </li></ul><ul><ul><li>Still very labor intensive </li></ul></ul><ul><ul><li>High costs of packaging and shipping </li></ul></ul><ul><li>Even if online sales do save money, e-merchants are likely to compete with other e-merchants </li></ul><ul><ul><li>Very easy market entry </li></ul></ul>
  10. 11. Reality of Online Competition <ul><li>Intense competition for large demand products (large quantity demanded attracts many sellers) </li></ul><ul><li>Use of large demand products as loss leaders (e.g., Amazon.com bestsellers) </li></ul><ul><li>Competition will force reduced costs—if any—to be passed on to customers. </li></ul><ul><li>Competition makes charging for shipping and handling difficult. This is often more expensive than traditional distribution. </li></ul><ul><li>Less competition on specialty products </li></ul><ul><li>Established “brick-and-mortar” firms have large cash reserves </li></ul>For more information: Stan Liebowitz (2002), Re-Thinking the Network Economy: The True Forces That Drive the Digital Marketplace , AMACOM/American Management Association. This book is dated, but the economic realities remain.
  11. 12. Sample Exam Question
  12. 13. “ Bricks-and-Clicks” <ul><li>Traditional retail chains and online presence tend to have synergy </li></ul><ul><ul><li>Online access to store information—hours, locations, directions </li></ul></ul><ul><ul><li>Checking on “in stock” status on local stores </li></ul></ul><ul><ul><li>Online orders with store pickup </li></ul></ul><ul><ul><li>Online orders with delivery; store return option </li></ul></ul><ul><li>Brand equity </li></ul><ul><li>Volume purchasing power </li></ul><ul><li>Inventory assortment warranted by combined store and online sales </li></ul>
  13. 14. Micro-payments: Opportunities and costs <ul><li>Considerable online content and services could be made profitably available for a small charge (e.g., 1 ¢-$2.00) </li></ul><ul><li>However, collecting small amounts of money can be </li></ul><ul><ul><li>Costly—credit card firms or debit processing firms may charge a significant per transaction fee </li></ul></ul><ul><ul><li>Inconvenient—the customer may not be willing to enter much information </li></ul></ul><ul><li>Mobile technology—with active login—may be helpful for the higher end (e.g., 50¢+) </li></ul>
  14. 15. SEARCH ENGINE OPTIMIZATION <ul><li>Search engines </li></ul><ul><li>Search engine rankings </li></ul><ul><li>Optimizing for rankings </li></ul><ul><ul><li>Content </li></ul></ul><ul><ul><li>Reciprocal linking </li></ul></ul>
  15. 16. Search Engines <ul><li>Search engine market dominated by Google </li></ul><ul><li>Microsoft’s new BING search engine—the “decision engine” </li></ul><ul><ul><li>Reported to match search results to user IP address  local results possible </li></ul></ul><ul><ul><li>Deals with Facebook and Twitter for better “real time” access </li></ul></ul>
  16. 17. Search engines <ul><li>Use an algorithm to identify preferred links </li></ul><ul><li>Algorithms may involve </li></ul><ul><ul><li>Usage of keywords </li></ul></ul><ul><ul><li>“ Popularity” (number of links pointing inward) </li></ul></ul><ul><ul><li>Other criteria—often proprietary </li></ul></ul><ul><ul><li>“ Click-through” rates from the respective search engine (NOT overall traffic volume on the site) </li></ul></ul><ul><li>Historically, key word repetition was the most important factor. Today, on Google, quality links appear to be more important than key words. </li></ul><ul><li>Internet consultants will make recommendations for a fee. Many have strong opinions on “what works.” Most are short on evidence that they are correct. </li></ul>
  17. 18. Search Engine Optimization: Reciprocal Linking <ul><li>Linking from highly rated web sites greatly increases the ranking of a site </li></ul><ul><li>Linking from low rated sites does not appear to help much </li></ul><ul><li>The weight of a link may be determined by the number of links at that page—one link among many is worth less </li></ul><ul><li>Linking to “spamming” sites may be penalized </li></ul>
  18. 19. Search Engine Optimization: Text <ul><li>Credible repetition of key words </li></ul><ul><ul><li>Frequently greater credit for </li></ul></ul><ul><ul><ul><li>Bolded words </li></ul></ul></ul><ul><ul><ul><li>Words early in the document </li></ul></ul></ul><ul><li>Identification of desirable key words </li></ul><ul><ul><li>Analysis of competing sites </li></ul></ul><ul><ul><li>Customer interviews </li></ul></ul><ul><li>Misspellings </li></ul>
  19. 20. Search Engine Optimization: Other <ul><li>Domain names </li></ul><ul><ul><li>If the domain name features the keyword, more weight is given </li></ul></ul><ul><ul><li>Google considers the underscore a space—e.g., Marketing_Tips.com . </li></ul></ul><ul><li>Listing in the Open Directory Project ( http://www.DMOZ.org ) . </li></ul><ul><li>Most search engines no longer rely on meta tags—”invisible” information from webmasters about the site—since these can be manipulated. Using meta tags, however, tells your competitors what you are trying to accomplish . </li></ul>
  20. 21. M-commerce: Mobile phone/PDA/ “gadget” access and sales <ul><li>High growth in mobile technology with Internet access </li></ul><ul><li>.mobi domain is intended for web sites optimized for small screens </li></ul><ul><li>Google Android project is intended to increase uniformity of display across cell phone models </li></ul><ul><li>Many countries are running ahead of the U.S. </li></ul><ul><li>Useful in making “micro-payments”—buying a soda or other low cost item </li></ul><ul><li>Current advertisements for mobile phone banking </li></ul>
  21. 22. Social Media <ul><li>“ Word-of-mouth” or “word-of-click campaigns” </li></ul><ul><li>Targeting of specific demographics  efficiency </li></ul><ul><li>Exposure through online games </li></ul>
  22. 23. Facebook <ul><li>Targeting by demographics </li></ul><ul><li>Online presences through </li></ul><ul><ul><li>Applications </li></ul></ul><ul><ul><li>“ Managed” (“Fan”) pages </li></ul></ul>

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