Chapter 4. What is the e-commerce?

For conducting business electronically on a global basis the Internet and the Web are well suited. The e-commerce via the web has created many opportunities for marketing.

What is the electronic business?

The electric commerce (EC) is defined as the exchange of services, goods and money supported by communication technologies, especially the Internet. The exchange occurs between firms, between firms and customers and between customers. The online market has become a major part of the global economy nowadays. Therefore, it has become a strategic necessity for companies to be on the Web.

Business-to-consumer (B2C) EC is defined as the transactions between consumers and businesses. However, EC is also used by organizations to conduct business. They make use of business-to-business (B2B) EC, in which there are transactions between business and business partners like intermediaries or suppliers. There are also transactions that do not involve firms. This EC is called consumer-to-consumer (C2C) EC, like eBay. Another form is consumer-to-business (C2B) EC. With C2B consumers offer products, services and labor to companies.

The mobile commerce (m-commerce) is defined as an electronic transaction or information interaction that is made using a wireless, mobile device and mobile networks. This transaction must lead to the transfer of real value in exchange for goods, services or information. The m-commerce trend is the result of the increased use of the mobile devices.

Through social media, organizations try to influence the social networks of their visitors to create a relationship or create other value. This has become a trend and is referred to as social commerce. Because of the Internet and the different trends, organizations have more data and can better understand each individual consumer.

E-government is defined as the use of information systems to provide organizations, citizens and other governmental agencies with information about public services and to enable interaction with the government. We can consider three different relationships when it comes to e-government:

• Government-to-citizens (G2C) EC
  This includes interactions between local, state and federal governments and their citizens.
• Government-to-business (G2B) EC
  This includes business relationships with all levels of government.
• Government-to-government (G2G) EC
  This includes electronic interactions between different levels of a government within a country or interactions between countries.

What is business-to-consumer EC?

Because of the global marketplace, companies face increased competition in all markets. Therefore, they have to position themselves to be able to compete in the EC area.

E-tailing is defined as the online sales of goods and services. There are several different strategies a company can use:

• Brick-and-mortar business strategy
  The company decides to operate solely in the physical market. The business activities are approached in a traditional way by using physical locations like retail stores. Companies using this strategy do not sell their products or services online.
• Click-and-mortar business strategy (also called bricks-and-clicks business strategy)
  Companies using this strategy choose to extend their traditional offline retail channels by using the Internet. So they use both EC and physical locations.
• Click-only strategy
  These companies conduct business electronically in the cyberspace. They focus completely on EC and do not have physical locations.

The EC revolution has affected companies using the click-and-mortar business strategy the most. These companies need to maximize commercial opportunities in both the physical and virtual world. This creates challenges for the company.

The companies that use the click-only strategy can generally compete more effectively in price. This is because they do not need to take the physical aspects into consideration, which allows them to reduce prices to bottom levels. Examples of click-only firms are eBay and Amazon.

When the Web was introduced this created new ways of communication between companies and customers. The Web is not only used for communication between companies and their customers but also to facilitate transactions. This reduced the transaction costs of companies. The Internet has also led to new business and revenue models. Some of these models are:

• Mass customization
  This enables firms to adapt their products and services the meet the particular needs of each of its customers on a large scale. With this model online product configuration systems are linked with just-in-time production. Therefore, companies are able to assemble each product on the preferences of the customer.
• Disintermediation
  The Web makes it possible to sell products directly to the customers without intermediary retailers or distributors. Such a process where the intermediary is cut out is known as disintermediation. This method enables companies to offer their products and services at a lower price.
• Group buying
  Some companies offer large scale discounts. If many people agree to buy the product or service then the customers get significant discounts.
• New revenue and pricing models
  Because of the Internet, companies can generate revenue by advertising on the Web. A new pricing model that developed is menu-driven pricing. With this model companies set the prices that the customers pay for the products. In a reverse pricing model, customers specify which product they want and how much they want to pay for it and then the bids from the customers are matched with the offers from companies
• Social commerce
  When companies try to influence the social networks of their visitors in order to build lasting relationships, create value or advertise then we speak of social commerce.

The use of e-tailing can provide a company with several benefits over the traditional model with physical locations. E-tailing is able to offer a virtually unlimited amount of different products because it is not restricted by the space of physical locations. Furthermore, as the Web can be reached from computers at any location, e-tailers can compete more effectively. E-tailers are also able to compete more efficiently in prices. This is because they are able to turn over their inventory more often than companies using the traditional model.

The Long Tail business model is centered around these three benefits in terms of product, place and price. This business model refers to catering to niche markets while also purely selling mainstream products. The distribution of the customers is a standard normal distribution. The mass market is reflected by the center of the distribution and the niche markets are reflected by the long tails.

However, e-tailing also has some drawbacks. One of the main drawbacks of e-tailing is trust. Customers hesitate to purchase products online from companies they never heard off. This is especially a challenge for companies that are new. The trust issues arise because customers do not have direct product experience and they are questioning product delivery and returns.

The customers can only see the product online and read additional information but they do not know how the product feels or tastes. Customers often have to pay first and then delivery of the product follows. This might keep them from ordering a product from a company online. It can also be that they do not want to share their credit card information via the Internet.

What is Internet marketing?

The success of an e-commerce website is measured with the conversions rate. This is the percentage of visitors that perform the desired action, like a purchase or subscription. There are several recommendations to increase the conversion rate of your website:

• It must offer something unique
• The website must motivate people to visit, stay and return
• Advertise your presence on the Internet
• Learn from your website

The exit rate of a page is the percentage of visitors who leave the site after viewing that page. The bounce rate is defined as the percentage of people who visit only one page. To increase the performance of a Website, the behavior of the visitors of the Web is analyzed. This process of analyzing is called Web analytics.

Companies design their websites such that the online experience of their customers is improved. The online needs of customers can be categorized in terms of three concepts. These concepts are:

• Structural firmness
  This refers to the characteristics that influence the security and performance of the Web site.
• Functional convenience
  This refers to the characteristics that make interacting with the Web site more convenient and easier.
• Representational delight
  This refers to the characteristics that stimulate the senses of the customer. People are more likely to visit sites that look good.

Companies want to maximize all these three concepts. However, in reality this is not possible and they have to make trade-offs between different factors. In order to do this it is important to know the relative needs of the customers. Each website must have a basic level of all the three sets of characteristics.

For the success of a Website, marketing is crucial. Before 2013, most of the budget for advertising was spent on noninteractive campaigns, like billboards and television ads. However, after 2013 more money was spent on Internet marketing, like:

• Search marketing
• Display ads
• E-mail marketing
• Social media
• Mobile marketing

If you enter the name of a product in a search engine you obtain several pages with information. Because of this trend, search marketing has grown. The search engine shows results which can be categorized into organic results and sponsored results. The organic results are based on the content of the page.

Search advertising (or sponsored search) means that a company bids to be listed at the first page that users see when they search for a specific term. The search engine (like Google) then determines which pages are most relevant and will be listed at the top. There are also search engines that raise the position of a company after they pay a fee. This is called paid inclusion.

Search engines order the organic results of a specific search term with the use of complex, proprietary formulas. The position of a particular page in the search results is largely outside the control of the owner of the Web site. Companies use search engine optimization (SEO) to try to improve their ranking on the organic search engine results. Companies do this because visitors often do not look further than the first page of results.

When the beginning, the main form of online advertising was display advertising. Companies advertised their company on other Web sites. Nowadays, a popular trend is contextual advertising. With this type of advertising the ads that are placed on a page are in some way related to the content of that particular page.

95 percent of the marketers makes use of e-mail marketing. This has been, and continuous to be a very popular form of internet marketing.

A more recent trend is the use of the power of social media. More and more people use social media, like Facebook, to stay in contact with friends or business associates. Therefore, it is natural for companies to use this type of Internet marketing. Social networking sites are used by companies to get interactive communication with their customers.

Since 2011 the use of tablets and smartphones has increased substantially. Marketers can also advertise through this channel. For instance, in 2010 Apple allowed that ads could be placed into the iPhone apps. Because of this, app developers could offer apps for lower prices.

To measure the performance of Internet marketing you can use the click-through rate or the conversion rate. The click-through rate reflects the number of surfers who click on an ad divided by the number of times it was displayed. The conversion rate is the percentage of visitors who perform the desired action.

There are several advertising models. In a pay-per-click model the company who places the advertisement only pays when someone actually clicks on the advertisement. However, one could repeatedly click on a link to influence revenue. This is a drawback of the pay-per-click model and is called click fraud.

What is mobile commerce?

The mobile commerce is defined as any electronic transaction or information interaction that is made using a wireless mobile device and mobile networks. The mobile commerce has grown substantially the past few years. The mobile commerce is primarily driven by the use of tablets. Tablets are often used as couch computers.

Location-based services are defined as highly personalized mobile services based on the location of the user. This is another key driver of the e-commerce and allows the provider of the service to offer information or services that are tailored to the needs of the customer.

Because of mobile devices people have all the information available wherever they are. The increased use of the smartphone has also led to showrooming, which refers to shoppers going to a store to evaluate the feel and look of a product and then purchase it online or from a competitor.

Since the use of the mobile devices has increased, people increasingly make purchases of products or services online on the go. Because of this trend, many retailers that sell online have made a mobile version of their Web site. These mobile version should enhance the shopping process on mobile devices. Some companies even develop a mobile app, even though this is very costly.

Consumers use the Internet to sell things to other consumers, which is the C2C EC. The two most popular mechanisms that consumers use to trade with other consumers online are e-cautions and online classifieds.

Electronic cautions (e-cautions) provide a place where sellers can offer goods and products for sale and where buyers can bid on the items. This generally occurs on a one-to-one basis. The largest e-caution site we know is eBay. Another popular mechanism are online classifieds, which are sites that use the Web capabilities but where the transaction does not occur online.

C2C EC is beneficial because it allows consumers to buy and sell to broader markets, it is available anytime, it eliminates the middleman and it increases the number of buyers and sellers. However, C2C EC also has a downside since there is no quality control, there is a possibility of fraud and it is harder to use traditional payment methods, like ATM cards.

Consumers cannot only sell to other consumers but they can also sell their products or services to businesses. For instance, on the site shutterstock you can sell pictures or videos to newspapers or advertising agencies. The photos and videos on this site are from amateur photographers.

How to manage finances and legal issues?

Related to EC, there are some legal issues and Web-based financial transactions that a company must consider. Nowadays, people do not have to go to the bank anymore to conduct financial transactions. We can manage our cards and saving accounts using online banking and we can pay our bills using electronic bill pay services.

Not only online banking increased over the past few years but also online investing has experienced growth. The Internet has affected the landscape of investment since people can now use the Internet to manage their portfolios or to obtain information about stock quotes.

Financial companies also want to follow the trend of mobile devices. Many banks have created mobile apps, to enable consumers to check account balances or make transactions with their mobile devices. There are also online brokerage services that have created trading apps for mobile devices.

A crucial part for EC and m-commerce is that the transactions on Web sites are secure. Even though we think that people are critical when it comes to online transactions, there are many people that do not hesitate to reveal sensitive information to sites that are unknown or fraudulent. There are many people that have become a victim of fraudulent sites.

The most accepted forms of payment in B2C EC are the credit card and the debit card. With a credit card it is very easy to make a transaction online. To authorize a transaction one must enter some card information and the Card Verification Value (CVV2), which is digital code with three digits. To make a transaction you often have to enter more personal information. People are scared that this information will be abused.  

The merchant is financially responsible for the online transactions of consumers. If cardholders of credit cards dispute a transaction then the credit card issuers will charge back the transaction. For the merchant this results in a loss. Therefore, it is for online merchants important to minimize chargebacks.

To make a transaction the information of the issuer's card must be entered. If a transaction is made with the credit card this does not mean that the person that makes the transaction is the actual holder of the card. The card could be lost or stolen. To prevent becoming a victim of fraudulent transaction you could look at indicators like:

• E-mail addresses: legitimate addresses often contain the name of the customer while fraudulent addresses consist of meaningless characters
• Shipping and billing addresses: often with fraud addresses are not correctly spelled and the merchandise is shipped to a foreign country
• Transaction patterns: fraudulent transactions generally show distinct patterns

Because of the security concerns there are now independent payment services, like PayPal. If you make an online purchase using such an independent service then you do not have to reveal much private information to the actual seller. You can just use your account of the payment service and only have to reveal private information to the payment service.

Businesses that engage in EC need to consider several legal issues. The two most important issues are the protection of intellectual property and the taxation of online purchases. These two will be discussed next.

In the Internet Tax Freedom Act is stated that sales on the Internet are treated the same as mail-order sales. Furthermore, a company is required to collect sales tax only from customers that live in a state where the business has substantial presence. Therefore, companies often strategically choose a home base such that they can offer tax-free shopping to most of the consumers.

Taxation especially raises issues on the international level. If you order a product from the US you do not have to pay the US tax on sales but you do have to pay the tax in your home country on the arrival of the shipment.

Besides taxation there are also other issues a company can face. A company must have explicit, enforceable terms of contract. When a company posts content on its site it must ensure that this content does not contain any trademarks or copyrights.

Digital rights management (DRM) allows publishers to control their digital media in order to limit, discourage or prevent illegal copying and distribution. Such DRM restrictions include how many times the media can be played, in which devices the media will play and on how many devices the media will play.

Because people try to illegally share DRM-free content, there are often watermarks placed which can be traced back to the original purchaser. A digital watermark is defined as an electronic version of physical watermarks that are placed on paper currency to prevent copying.

The principle of net neutrality means that all data on the Internet should be treated the same. Not everyone agrees with the principle of net neutrality. The proponents argue that the Internet should allow anyone to freely communicate with any content or application without the interference of a third party. Furthermore, they believe strong laws are necessary to protect the Internet.

Bulletpoint

• The electric commerce (EC) is defined as the exchange of services, goods and money supported by communication technologies, especially the Internet. The exchange occurs between firms, between firms and customers and between customers.
• Business-to-consumer (B2C) EC is defined as the transactions between consumers and businesses. However, EC is also used by organizations to conduct business. They make use of business-to-business (B2B) EC, in which there are transactions between business and business partners like intermediaries or suppliers.
• There are also transactions that do not involve firms. This EC is called consumer-to-consumer (C2C) EC, like eBay. Another form is consumer-to-business (C2B) EC. With C2B consumers offer products, services and labor to companies.
• The mobile commerce (m-commerce) is defined as an electronic transaction or information interaction that is made using a wireless, mobile device and mobile networks. This transaction must lead to the transfer of real value in exchange for goods, services or information.
• E-government is defined as the use of information systems to provide organizations, citizens and other governmental agencies with information about public services and to enable interaction with the government. We can consider three different relationships when it comes to e-government:
  • Government-to-citizens (G2C) EC
  • Government-to-business (G2B) EC
  • Government-to-government (G2G) EC
• E-tailing is defined as the online sales of goods and services. There are several different strategies a company can use:
  • Brick-and-mortar business strategy
    The company decides to operate solely in the physical market. The business activities are approached in a traditional way by using physical locations like retail stores. Companies using this strategy do not sell their products or services online.
  • Click-and-mortar business strategy (also called bricks-and-clicks business strategy)
    Companies using this strategy choose to extend their traditional offline retail channels by using the Internet. So they use both EC and physical locations.
  • Click-only strategy
    These companies conduct business electronically in the cyberspace. They focus completely on EC and do not have physical locations.
• The Internet has also led to new business and revenue models. Some of these models are:
  • Mass customization
  • Disintermediation
  • Group buying
  • New revenue and pricing models
  • Social commerce
• Companies design their websites such that the online experience of their customers is improved. The online needs of customers can be categorized in terms of three concepts. These concepts are:
  • Structural firmness
    This refers to the characteristics that influence the security and performance of the Web site.
  • Functional convenience
    This refers to the characteristics that make interacting with the Web site more convenient and easier.
  • Representational delight
    This refers to the characteristics that stimulate the senses of the customer. People are more likely to visit sites that look good.
• Companies want to maximize all these three concepts. However, in reality this is not possible and they have to make trade-offs between different factors.
• More and more people use social media, like Facebook, to stay in contact with friends or business associates. Therefore, it is natural for companies to use this type of Internet marketing.
• To measure the performance of Internet marketing you can use the click-through rate or the conversion rate. The click-through rate reflects the number of surfers who click on an ad divided by the number of times it was displayed. The conversion rate is the percentage of visitors who perform the desired action.
• The mobile commerce is defined as any electronic transaction or information interaction that is made using a wireless mobile device and mobile networks.
• Consumers use the Internet to sell things to other consumers, which is the C2C EC. The two most popular mechanisms that consumers use to trade with other consumers online are e-cautions and online classifieds.
• Electronic cautions (e-cautions) provide a place where sellers can offer goods and products for sale and where buyers can bid on the items. This generally occurs on a one-to-one basis.
• Financial companies also want to follow the trend of mobile devices. Many banks have created mobile apps, to enable consumers to check account balances or make transactions with their mobile devices. There are also online brokerage services that have created trading apps for mobile devices.
• A crucial part for EC and m-commerce is that the transactions on Web sites are secure. Even though we think that people are critical when it comes to online transactions, there are many people that do not hesitate to reveal sensitive information to sites that are unknown or fraudulent. There are many people that have become a victim of fraudulent sites.
• Because people try to illegally share DRM-free content, there are often watermarks placed which can be traced back to the original purchaser. A digital watermark is defined as an electronic version of physical watermarks that are placed on paper currency to prevent copying.

Tentamentickets

• Know what EC is and which different types there are.