E-Commerce (1)

1. E-Commerce (1) • What is E-Commerce? • Business Models • Issue: organisational change

2. What is E-Commerce? • Business (commerce) over Internet/Web • Wide range • E-stores (Amazon) • Auction (EBay) • Business-to-Business (Cisco) • etc

3. Benefits to Customer • Open 24 hours a day • More choices • Better prices • Product information in seconds • Interact with other customers • Easy to switch to competitor

4. Benefits to Company • More potential customers • Decrease costs (no shop, less paper) • Better supply chain management • New services, eg customization

5. Challenge: Competition • Competition is intense • Compete with 1000s (1000000s?) of e-retailers around the world, not just other high street shops • Customers can quickly/easily compare prices, which drives them down

6. Porter’s Five Forces Prentice Hall, 2002

7. Middleman Problem • Retailers are “middleman” between manufacturer/provider and customer • Traditionally make money by mark-up • Buy product from supplier for £10, sell it to customer for £15 • Difference (£5) is profit margin

8. Middleman problem • Competition drives profit margin down • If you have a £5 markup, customers will go to competitor with £4 markup • Suppliers may sell direct to customer • If supplier sells product to customer for £12, he and customer benefit • disintermediation • Hard to make money by mark-up

9. Example: Flights • Pre-Internet, airlines sold flights to consumers via travel agents. • Travel agent charged £100, gave airline £80 and kept £20 as markup • If customer bought directly from airline, would be charged £100 (same as from travel agent)

10. Example: Flights • In Internet age, airlines sell flights directly to customer • Airline sells flight to both customer and travel agent for £80. • If travel agent sells flight to customer for £80, he won’t make any money • If travel agent charges £100, customer will buy direct from airline for £80

11. Example: Flights • How can travel agent make money in Internet age? • Especially a small one, not Expedia

12. Business Models • Sell flight at cost, extras at high markup • Eg, insurance, delivery • Sell advertising space on website • Sell customer data • Niche market • Specialise in travel to Poland • Flights, hotel, airport transfer, tours • Specialise in selling flights to universities

13. Business Models • Branding • Build up a good reputation, so customers trust you to offer OK deals, good delivery • If you’re trustworthy and “cheap enough”, it isn’t worth hassle of looking at competitors • Satisfice • Means trusted shop can charge a bit more • Marketing helps branding • Customers visiting site helps • Even if no purchase, just looking

14. Long Tail • E-commerce makes it much easier to sell obscure products from obscure suppliers. • Unusual books from small publishers • Can be sold at full price (sometimes even with a surcharge added)!

16. Business Must Change • Successful Internet travel agents differ from successful pre-Internet trav agent • Old: small shop selling generic flights to local customers with high mark-up • Joe’s travel agency • New: focus on product niche, high-markup extras, advertising revenue, brand • Expedia, escape2poland.co.uk

17. Internet Business Model • Internet requires new business model • Management issue, not technology • But must be resolved in order for e-commerce to really take off • Poor business models one cause of dot-com boom/bust • Pouring in money before business model issue resolved is a mistake!

18. Organisational Change • Internet (and most new tech) cannot be fully exploited unless society changes • Change is painful for companies • Many bankrupt small travel agents • Many bankrupt dot-com investors

19. Organisational Change • Change is painful for individuals • Loss of skills: Joe has worked for 30 years selling generic hols to Spain, does this well • Must ditch this, learn new skills • Dislike model: Joe dislikes “encouraging” customers to buy overpriced insurance • Loss of income: average income of travel agents may go down, even if they adapt