Unless you have been living under a rock for the last few years, you have probably heard about e-commerce. And you have heard about it from several different angles. You may have:
- heard about all of the companies that offer e-commerce because you have been bombarded by their TV and radio ads
- read all of the news stories about the shift to e-commerce and the hype that has developed around e-commerce companies
- seen the huge valuations that Web companies get in the stock market, even when they don't make a profit
- purchased something on the Web, so you have direct personal experience with e-commerce
Still, you may feel like you don't understand e-commerce at all. What is all the hype about? Why the huge valuations? And most importantly, is there a way for you to participate? If you have an e-commerce idea, how might you get started implementing it? If you have had questions like these, then this article will help out by exposing you to the entire e-commerce space.
Before we get into a complete discussion of e-commerce, it is helpful to have a good mental image of plain old commerce first. If you understand commerce, then e-commerce is an easy extension.
Merriam-Webster's Collegiate Dictionary gives a few definitions of commerce:
com.merce n [MF, fr. L commercium, fr. com- + merc-, merx merchandise] (1537) 1: social intercourse: interchange of ideas, opinions, or sentiments 2: the exchange or buying and selling of commodities on a large scale involving transportation from place to place 3: sexual intercourse
We tend to be interested in the second definition, but that third one is interesting and unexpected -- maybe that's what all of the hype is about?
So commerce is, quite simply, the exchange of goods and services, usually for money. We see commerce all around us in in millions of different forms. When you buy something at a grocery store you are participating in commerce. In the same way, if you cart half of your possessions onto your front lawn for a yard sale, you are participating in commerce from a different angle. If you go to work each day for a company that produces a product, that is yet another link in the chain of commerce. When you think about commerce in these different ways, you instinctively recognize several different roles:
- Buyers - these are people with money who want to purchase a good or service.
- Sellers - these are the people who offer goods and services to buyers. Sellers are generally recognized in two different forms: retailers who sell directly to consumers and wholesalers or distributors who sell to retailers and other businesses.
- Producers - these are the people who create the products and services that sellers offer to buyers. A producer is always, by necessity, a seller as well. The producer sells the products produced to wholesalers, retailers or directly to the consumer.
You can see that at this high level, commerce is a fairly simple concept. Whether it is something as simple as a person making and selling popcorn on a street corner or as complex as a contractor delivering a space shuttle to NASA, all of commerce at its simplest level relies on buyers, sellers and producers.
When you get down to the actual elements of commerce and commercial transactions, things get slightly more complicated because you have to deal with the details. However, these details boil down to a finite number of steps. The following list highlights all of the elements of a typical commerce activity. In this case, the activity is the sale of some product by a retailer to a customer:
- If you would like to sell something to a customer, at the very core of the matter is the something itself. You must have a product or service to offer. The product can be anything from ball bearings to back rubs. You may get your products directly from a producer, or you might go through a distributor to get them, or you may produce the products yourself.
- You must also have a place from which to sell your products. Place can sometimes be very ephemeral -- for example a phone number might be the place. If you are a customer in need of a massage, if you call "Judy's Massages, Inc." on the telephone to order a massage, and if Judy shows up at your office to give you a massage, then the phone number is the place where you purchased this service. For most physical products we tend to think of the place as a store or shop of some sort. But if you think about it a bit more you realize that the place for any traditional mail order company is the combination of an ad or a catalog and a phone number or a mail box.
- You need to figure out a way to get people to come to your place. This process is known as marketing. If no one knows that your place exists, you will never sell anything. Locating your place in a busy shopping center is one way to get traffic. Sending out a mail order catalog is another. There is also advertising, word of mouth and even the guy in a chicken suit who stands by the road waving at passing cars.
- You need a way to accept orders. At Wal-Mart this is handled by the check out line. In a mail order company the orders come in by mail or phone and are processed by employees of the company.
- You also need a way to accept money. If you are at Wal-Mart you know that you can use cash, check or credit cards to pay for products. Business-to-business transactions often use purchase orders. Many businesses do not require you to pay for the product or service at the time of delivery, and some products and services are delivered continuously (water, power, phone and pagers are like this). That gets into the whole area of billing and collections.
- You need a way to deliver the product or service, often known as fulfillment. At a store like Wal-mart fulfillment is automatic. The customer picks up the item of desire, pays for it and walks out the door. In mail-order businesses the item is packaged and mailed. Large items must be loaded onto trucks or trains and shipped.
- Sometimes customers do not like what they buy, so you need a way to accept returns. You may or may not charge certain fees for returns, and you may or may not require the customer to get authorization before returning anything.
- Sometimes a product breaks, so you need a way to honor warranty claims. For retailers this part of the transaction is often handled by the producer.
- Many products today are so complicated that they require customer service and technical supportdepartments to help customers use them. Computers are a good example of this sort of product. On-going products like cell phone service may also require on-going customer service because customers want to change the service they receive over time. Traditional items (for example, a head of lettuce), generally require less support that modern electronic items.
You find all of these elements in any traditional mail order company. Whether the company is selling books, consumer products, information in the form of reports and papers, or services, all of these elements come into play.
In an e-commerce sales channel you find all of these elements as well, but they change slightly. You must have the following elements to conduct e-commerce:
- A product
- A place to sell the product - in e-commerce, a Web site displays the products in some way and acts as the place
- A way to get people to come to your Web site
- A way to accept orders - normally an on-line form of some sort
- A way to accept money - normally a merchant account handling credit card payments. This piece requires a secure ordering page and a connection to a bank. Or you may use more traditional billing techniques either online or through the mail.
- A fulfillment facility to ship products to customers (often outsource-able). In the case of software and information, however, fulfillment can occur over the Web through a file download mechanism.
- A way to accept returns
- A way to handle warranty claims if necessary
- A way to provide customer service (often through email, on-line forms, on-line knowledge bases and FAQs, et cetera)
In addition, there is often a strong desire to integrate other business functions or practices into the e-commerce offering. An extremely simple example -- you might want to be able to show the customer the exact status of an order.
Why the Hype?
There is a huge amount of hype that surrounds e-commerce. Given the similarities with mail order commerce, you may be wondering why the hype is so common. Take, for example, the following quotes:
- "...the estimate of U.S. retail e-commerce sales for the third quarter of 2005, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, was $22.3 billion, an increase of 5.7 percent (±1.7%) from the second quarter of 2005."-- U.S. Census Bureau
- "2004 online retail sales rose 23.8 percent to $89 billion, representing 4.6 percent of total retail sales. Including travel, online sales also rose 23.8 percent to $141.4 billion. Online retail sales will reach $109.6 billion [in 2005]. Online sales including travel will rise to $172.4 billion this year." -- Forrester
- "Online ad growth of 33.7 percent is expected in 2005 to $12.7 billion, raising a previous estimate of $11.5 billion for the year. eMarketer had estimated 2004 ad revenue at $9.5 billion." -- eMarketer
This sort of hype applies to a wide range of products. According to eMarketer the biggest product categories include:
- Computer products (hardware, software, accessories)
- Financial Services
- Home Electronics
- Gifts and flowers
- Travel services