Dr. Ehud Reiter, Computing Science, University of Aberdeen1 E-Commerce (1) l What is E-Commerce? l Business Models »Issue: organisational change.

Dr. Ehud Reiter, Computing Science, University of Aberdeen 1

E-Commerce (1)

What is E-Commerce? Business Models

» Issue: organisational change

Dr. Ehud Reiter, Computing Science, University of Aberdeen 2

What is E-Commerce?

Business (commerce) over Internet/Web

Wide range» E-stores (Amazon)» Auction (EBay)» Business-to-Business (Cisco)» etc

Dr. Ehud Reiter, Computing Science, University of Aberdeen 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

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Benefits to Company

More potential customers Decrease costs (no shop, less paper) Better supply chain management New services, eg customization

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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

Dr. Ehud Reiter, Computing Science, University of Aberdeen 6Prentice Hall, 2002

Porter’s Five Forces

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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

Dr. Ehud Reiter, Computing Science, University of Aberdeen 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

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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)

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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

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Example: Flights

How can travel agent make money in Internet age?» Especially a small one, not Expedia

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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

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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

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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)!

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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

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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!

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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

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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