Unless you have been living under a rock for the last two years, you have heard about e-commerce! And you have heard about it from several different angles. For example:

  • You have heard about all of the companies that offer e-commerce because you have been bombarded by their TV and radio ads.
  • You have read all of the news stories about the shift to e-commerce and the hype that has developed around e-commerce companies.
  • You have seen the huge valuations that web companies get in the stock market, even when they don't make a profit.
  • And you may have actually 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 edition of will help out by exposing you to the entire e-commerce space. Let's have a look!

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 defines commerce as follows:

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 or at Wal-mart 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.

The Elements of Commerce
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:

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:

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 from
this page:

  • "On the retail side alone, Forrester projects $17 billion in sales to consumers over the Internet by the year 2001. Some segments are really starting to take off." --Forrester Research, "Content and Context..," DMA Insider, Spring 1998.
  • "Worldwide business access to the Web is expected to grow at an even faster rate than the US market--from 1.3 million in 1996 to 8 million by 2001." --O'Reilly & Associates
  • "Home continues to be the most popular access location, with nearly 70% of users accessing from their homes...almost 60% shop online. The most popular activities include finding information about a product's price or features, checking on product selection and determining where to purchase a product." --IntelliQuest Information Group, Inc., WWITS Survey
  • "In general, the more difficult and time-consuming a purchase category is, the more likely consumers will prefer to use the internet versus standard physical means." 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)
  • Books
  • Music
  • Financial Services
  • Entertainment
  • Home Electronics
  • Apparel
  • Gifts and flowers
  • Travel services
  • Toys
  • Tickets
  • Information

The Dell Example
But this doesn't explain the frantic rush by companies, both large and small, to get to the web. Nor does it justify a small business making a big expenditure on an e-commerce facility. What is driving this sort of frenzy? To understand it a bit, let's take a look at one of the most successful e-commerce companies:

Dell is a straightforward company that, like Gateway 2000, Micron and a host of others, sells custom-configured PCs to consumers and businesses. Dell started as a mail-order company that advertised in the back of magazines and sold their computers over the phone. Dell's e-commerce presence is widely publicized these days because Dell is able to sell so much merchandise over the web. According to this page from IDG, Dell currently sells something like $14,000,000 in equipment every day. 25% of Dell's sales is over the web.

Does this matter? Dell has been selling computers by mail over the phone for more than a decade. Mail order sales is a standard way of doing things that has been around for over a century (Sears, after all, was a mail order company originally). So if 25% of Dell's sales move over to the web instead of using the telephone, is that a big deal? The answer could be YES for three reasons:

  • If Dell were to lose 25% of its phone sales to achieve its 25% of sales over the web, then it is not clear that e-commerce has any advantage. Dell would be selling no more computers. But what if the sales conducted over the web cost the company less (for example, because the company does not have to hire someone to answer the phone)? Or what if people purchasing over the web tend to purchase more accessories? If the transaction cost on the web is lower, or if the presentation of merchandise on the web is more inviting and encourages larger transactions, then moving to the web is productive for Dell.
  • What if, in the process of selling merchandise over the Web, Dell lost no sales through its traditional phone channel? That is, what if there just happens to be a percentage of the population that prefers to buy things over the Web (perhaps because there is more time to think, or because you can try lots of different options to see what happens to the final price, or because you can compare multiple vendors easily, or whatever). In building its web site to attract these buyers, Dell may be able to lure away customers from other vendors who do not offer such a service. This gives Dell a competitive advantage that lets it increase its market share.
  • There is also a widely held belief that once a customer starts working with a vendor, it is much easier to keep that customer than it is to bring in new customers. So if you can build brand loyalty for a web site early, it gives you an advantage over other vendors who try to enter the market later. Dell implemented its Web site very early, and that presumably gives it an advantage over the competition.
These three trends are the main drivers behind the e-commerce buzz. There are other factors as well.

The Lure of E-commerce

The following list summarizes what might be called the "lure of e-commerce":

  • Lower transaction costs - if an e-commerce site is implemented well, the web can significantly lower both order-taking costs up front and customer service costs after the sale by automating processes.
  • Larger purchases per transaction - Amazon offers a feature that no normal store offers. When you read the description of a book, you also can see "what other people who ordered this book also purchased". That is, you can see the related books that people are actually buying. Because of features like these it is common for people to buy more books that they might buy at a normal bookstore.
  • Integration into the business cycle - A Web site that is well-integrated into the business cycle can offer customers more information than previously available. For example, if Dell tracks each computer through the manufacturing and shipping process, customers can see exactly where their order is at any time. This is what FedEx did when they introduced on-line package tracking - FedEx made far more information available to the customer.
  • People can shop in different ways. Traditional mail order companies introduced the concept of shopping from home in your pajamas, and e-commerce offers this same luxury. New features that web sites offer include:
    • The ability to build an order over several days
    • The ability to configure products and see actual prices
    • The ability to easily build complicated custom orders
    • The ability to compare prices between multiple vendors easily
    • The ability to search large catalogs easily
  • Larger catalogs - A company can build a catalog on the web that would never fit in an ordinary mailbox. For example, Amazon sells 3,000,000 books. Imagine trying to fit all of the information available in Amazon's database into a paper catalog!
  • Improved customer interactions - With automated tools it is possible to interact with a customer in richer ways at virtually no cost. For example, the customer might get an email when the order is confirmed, when the order is shipped and after the order arrives. A happy customer is more likely to purchase something else from the company.
It is these sorts of advantages that create the buzz that surrounds e-commerce right now.

There is one final point for e-commerce that needs to be made. E-commerce allows people to create completely new business models. In a mail order company there is a high cost to printing and mailing catalogs that often end up in the trash. There is also a high cost in staffing the order-taking department that answers the phone. In e-commerce both the catalog distribution cost and the order taking cost fall toward zero. That means that it may be possible to offer products at a lower price, or to offer products that could not be offered before because of the change in cost dynamics.

However, it is important to point out that the impact of e-commerce only goes so far. Mail order sales channels offer many of these same advantages, but that does not stop your town from having a mall. The mall has social and entertainment aspects that attract people, and at the mall you can touch the product and take delivery instantly. E-commerce cannot offer any of these features. The mall is not going to go away anytime soon...

Easy and Hard Aspects of E-commerce
The things that are hard about e-commerce include:

There are so many web sites, and it is so easy to create a new e-commerce web site, that getting people to look at yours is the biggest problem.

The things that are easy about e-commerce, especially for small businesses and individuals, include:

  • Creating the web site
  • Taking the orders
  • Accepting payment
There are inumerable companies that will help you build and put up your electronic store. We'll discuss some options in the next section.

Building an E-commerce Site

The things you need to keep in mind when thinking about building an e-commerce site include:

When you think about e-commerce, you may also want to consider these other desirable capabilities:
  • Gift-sending
  • Affiliate programs
  • Special Discounts
  • Repeat buyer programs
  • Seasonal or periodic sales
The reason why you want to keep these things in mind is because they are all difficult unless your e-commerce software supports them. If the software does support them, they are trivial.

Affiliate Programs
A big part of today's e-commerce landscape is the affiliate program (also known as associate programs). This area was pioneered by
Amazon. Amazon allows anyone to set up a specialty book store. When people buy books from the specialty store, the person who owns the specialty bookstore gets a commission (up to 15% of the book's list price) from Amazon. The affiliate program gives Amazon great exposure because hundreds of thousands of specialty bookstores popped up all over the web. Therefore this model is now copied by thousands of e-commerce sites. If you are setting up an e-commerce site you will want to consider an affiliate program as one way to get exposure. BeFree and Link Share are two companies that help e-commerce sites set up affiliate programs.

A relatively new twist on affiliate programs is the CPC Link (CPC=Cost Per Click), also known as affiliate links or click-thru links. You put a link on your site and the company pays you when someone clicks on the link. A typical payment ranges from 5 cents to 20 cents per click. Affiliate links represent the middle ground between banner ads and commission-based affiliate programs. With banner ads, the advertiser takes all the risk -- if no one clicks on the banner then the advertiser wastes money. Commission-based affiliate programs place all the risk on the web-site. If the web site sends a bunch of people to the affiliate e-commerce site but no one buys anything, then it has no value for the web site. In CPC links, both sides share risks and rewards equally. You may want to consider setting up this sort of affiliate program to gain exposure for your e-commerce site.

Similar companies:

Implementing an E-commerce Site
Let's say that you would like to create an e-commerce site. There are three general ways to implement the site with all sorts of variations in between. The three general ways are:

These are in order of decreasing flexibility and increasing simplicity.

Enterprise computing means that you purchase hardware and software and hire a staff of developers to create your e-commerce web site. Amazon, Dell and all of the other big players participate in e-commerce at the enterprise level. You might need to consider enterprise computing solutions if:

  • You have immensely high traffic - millions of visitors per month
  • You have a large database that holds your catalog of products (especially if the catalog is changing constantly)
  • You have a complicated sales cycle that requires lots of customized forms, pricing tables, etc.
  • You have other business processes already in place and you want your e-commerce offering to integrate into them.

Virtual hosting services give you some of the flexibility of enterprise computing, but what you get depends on the vendor. In general the vendor maintains the equipment and software and sells them in standardized packages. Part of the package includes security, and almost always a merchant account is also an option. Database access is sometimes a part of the package. You provide the web designers and developers to create and maintain your site.

Simplified e-commerce is what most small businesses and individuals are using to get into e-commerce. In this option the vendor provides a simplified system for creating your store. The system usually involves a set of forms that you fill out online. The vendor's software then generates all of the web pages for the store for you. Two good examples of this sort of offering include Yahoo Stores and Verio Stores (if you'ld like to speak with someone at Verio, Eric Lacy at 800-226-7996 ext. 1158 has been very helpful). You pay a couple of hundred dollars a month for these services.

Useful E-commerce Links


Big Players
Small Site Examples