What Is E-Commerce? – Definition, Types, Advantages & Disadvantages
DEFINITION OF ELECTRONIC COMMERCE:
Electronic commerce has evolved with time – as of today, it draws on technologies such as Internet transaction processing, mobile commerce (which involves buying and selling items via mobile devices), supply chain management, electronic money transfer, data collection systems, electronic data interchange, and inventory management systems – all using the word wide web (internet in general).
E-commerce enables customers, consumers, and companies to form powerful new relations that would not be possible without enabling technologies like the internet. Behind the scenes; it is commerce that drives e-commerce because people buy and sell to each other. Internet technology and other related technologies just facilitate the all process – by making it smoother and easy.
CATEGORIES OF E-COMMERCE:-
We have 4 main perspectives of eCommerce and these include; (1) Business to Business (B2B), Business to Consumer (B2C), Consumer to Business (C2B), and Consumer to Consumer (C2C). I will explain each perspective in detail below:
4 CATEGORIES OF E-COMMERCE:
BUSINESS-TO-BUSINESS E-COMMERCE (B2B):
B2B e-commerce is a term used when explaining / defining e-commerce that takes place between business organizations. Much as most of us put the emphasis on B2C, B2B is where the most money is spent in the e-commerce world. This is because many businesses spend large sums of money buying and selling from and to each other. For example; Manufactures buy parts and raw materials from specific suppliers – these transaction can be done online using B2B marketplace sites like Alibaba.com & Aliexpress.com.
Payment gateways have made it simple to do business online. For example – Paypal and Paymate make it easy to move funds from one bank account to another at a minimum fee. Once goods are paid for, the supplier of the materials can work hand-in-hand with a shipping company and send products to the recipient. The receiver / recipient will track the progress of their shipment and clear taxes using online platforms set in that location.
Purchasing Segments In A B2b:
In B2B space, attention is given to the ways that e-commerce could streamline purchasing of materials. But this does not mean that other e-commerce applications like, in sales, transportation and payments are not catered for. The main reason why the all attention is centered at the purchasing of materials is because it is where the most money is being spent. Purchasing applications can be segmented into 3 parts and these include:
- Purchasing of direct materials:- Direct materials are used in production of goods and services. These are used in a manufacturing company or placed on shelf for sale to end consumers. The main reason why they’re called direct materials is because of their direct relationship to the company’s primary business model.
- Purchasing of indirect materials (MRO):- Indirect materials are commonly known as MRO materials – basically these are materials that are required in running a modern corporation, but are not related to the company’s primary business activities. MRO stands for Maintenance, Repair, and Operations materials. Examples of MRO’s include; printers toners, ball-point pens, printer lubricating oil, three-ring binders and so much more.
- Purchasing of services:- A company or business organization can pay for specific services which help it accomplish specific tusks. Services might be corporate travel, consulting services, hiring part-time workers and so much more.
Electronic Data Interchange:
When it comes to B2B e-commerce, electronic data interchange works like the foundation of B2B e-commerce. An Electronic data interchange (EDI) is the direct computer-to-computer transfer of transaction information contained in standard business documents such as invoices and purchase orders. An EDI is a technological system which replaces paper documents with digital records that can be exchanged between trading companies / partners thus facilitating B2B e-commerce. It supports purchase of direct materials and MRO’s.
These are internet-based services which bring together buyers and sellers. B2B Marketplaces have the potential and infrastructure to host billions of sellers and buyers in one place – so it is very easy for the buyer to compare prices and products from various manufactures with just a single click. One of the most successful B2B marketplaces is Alibaba.com – it is a Chinese based company which serves the all globe. China has an added advantage (it is the center of industrialization – in that they manufacture everything – so it was very easy for Alibaba to gather 70% of all manufacturers in China and host them under one B2B marketplace).
We Have 4 Categories Of B2b Marketplaces And These Include;
- MRO hubs:- These facilitate the sourcing of MRO materials without putting focus on one particular industry. For example – MRO.COM
- Yield Managers:– These create spot markets for operating resources such as manufacturing capacity, labor and advertising. For example: Airlines use specific websites to sell unsold airline seats to the highest bidder at the last minute. Such offers are not available all the time – companies put them up with a specific agenda / goal.
- Online exchanges:– These make it easy for purchasing managers to purchase commodities needed for production when demand for a particular item peaks all of a sudden or a traditional source of supply is disrupted. An online exchange marketplace makes it easy and smooth for buyers and sellers to conduct transactions without the need for negotiating contracts or establishing long term business relationships. For example IMX Exchange …. imxexchange.com
- Catalog hubs:– These are like MRO hubs – but they are specific to a certain industry. For example plasticsnet.com
BUSINESS-TO-CONSUMER E-COMMERCE (B2C):
Business to consumer e-commerce (B2C-e) is an internet or electronic based commerce where by a business sales products & services to end consumers goods. It involves exchange of products and services from a business to a consumer (all done electronically – supported by the internet). This model is quite different from Business-to-Business model (which is between businesses). Majority of online e-commerce companies are B2C companies and those who have become successful have mastered the technique of serving their customers. A good example of successful Business to consumer e-commerce Company is Amazon.com – they have the best customer care and platform which hosts lots of products at a reasonable price.
Mobile commerce has contributed to the growth of BC2 – simply because e-commerce companies have created mobile shopping applications (APPS) which can be installed on a smartphone to speed up mobile shopping process.
Business to consumer is wider than just online retailing; it involves activities like travel services, online banking, online auctions, real estate management, apartment booking, health & insurance services, online education services and so much more…
B2B e-commerce model is mainly focused on direct selling & marketing of products / services to end consumers using the internet. Consumers have a chance of comparing prices between different e-commerce businesses and decide on whom to buy from. Since it is very easy for a customer to switch tabs and buy from a competing business – e-commerce companies like Amazon use pricing and advanced technology to stand out from the competition. Amazon has invested lots of cash in acquiring potential e-commerce business as a way of blocking out direct competition. Other companies like Wal-Mart and Ebay are copying the same technique to win more customers.
”This model depends on individual transactions – so it eliminates wholesalers who sale goods in bulk. Companies like Alibaba.com serve businesses not individual consumers who buy single items.”
B2C ‘s can be both big / small – a consumer does not mind about the size of the business. All they need is a service / product sold by that online business. But customer care, pricing and product delivery are crucial factors in B2C. A customer does not want to wait for too long to receive their product. That is to why online marketplaces like Amazon have a premium shipping policy where a customer pays a few extra dollars / Euros for quick delivery (which is always less than 24 hours) – this option works for last minute shoppers.
Types of B2C:
Business 2 consumer companies are divided into 5 categories and these include: Direct sellers, Advertising Based models, Online Intermediaries, Community-based models and fee-based models. Each of these models operates differently but they all aim at serving the end consumer. For example; direct sellers – these are online retailers who sell products & services directly to end consumers via the internet (website). Online Intermediaries – work like brokers. They link you to end sellers and earn a commission for doing so. Advertising Based models – these offer online advertising services to e-commerce companies so that they reach targeted consumers (in most cases they create community based platforms like social networks to attract lots of users which they turn into salable products)
BUSINESS-TO-GOVERNMENT E-COMMERCE (B2G):
Business-to-government e-commerce is a business model where businesses sell products and services to a government / governments. It is not a popular business model but it is very lucrative because governments order for goods in bulk.
Under this model, businesses have to bid for specific contracts – the winner of the contracts gets the chance to supply goods and services. The screening process takes a while – because each company has to be examined to see if they meet required standards. The internet can be used to submit bids for a particular contract and whoever wins can still conduct business with any government via the internet.
CONSUMER-TO-CONSUMER E-COMMERCE (C2C):
Customer-to-customer e-commerce is a business model where customers trade; sell and buy goods and services from each other. This business model is mainly powered by the internet – where people go to a particular ”buy & sell” platform like olx.com – upload what they are selling and do business directly with users of that platform.
Good examples of C2C platform would be ”craigslist.org, olx.com and ebay.com”. Sellers found on these platforms don’t have too much stock because they do this as a side business. Always they sell what they own (used items in particular). Customers on C2C networks have an added advantage of finding very rare products at a reasonable price.
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19 ADVANTAGES OF E-COMMERCE:
- Product offers and prices can be changed instantaneously: – E-retailers have an advantage of being able to change prices instantaneously in response to customer demand and behavior. Top online retailing companies like Amazon & Walmart change prices for products on a daily basis and this keeps customers glued to these two major players in the e-commerce world. During holiday seasons like Easter / Mothers Day / Fathers day / Black Friday and Christmas – prices change on an hourly basis – so users depend on price alerts to help them grab highly priced items on a discount price.
- Around-the-clock availability:- Unlike physical stores and business which have opening and closing hours. Online business / e-stores have no opening and closing hours. Systems are programmed to operate 24 hours – so you can place your order for products or services at any given time of the day which makes e-commerce convenient (especially for last minute shoppers). However delivery of goods is not as instant as it would be in a physical store – but majority of online shoppers are used to a 24hr deliver time.
- Easy to start and operate:- When it comes to starting a new business – capital is the major obstacle. However, an e-commerce business is very easy to start. You don’t need to have too much inventory and advanced technology to run an e-commerce business. Creating a store has been made simple by Shopify and other related e-commerce platforms. But still if you don’t have the money to subscribe with Shopify, you can partner-up with Amazon under their program called Amazon FBA program (where Amazon stocks, sells and ships your products at a small charge). It is also very easy to operate an e-commerce business. You can use online chatting services, email and your phone to interact with customers. 1 or 2 people can run an e-commerce business.
- Speed of access: – E-commerce is powered by the internet – so you can easily buy / sell products / items from anywhere. Advancement of internet technology from 1G to 4G has made online transactions smooth. Things like mobile commerce and payment gateways have made online transactions smooth. You don’t have to travel with money to pay for something online, all you need is a Visa card – funds will be deducted from your bank account and the goods will be delivered on your door the next day.
- Wide variety of goods to choose from:- E-commerce platforms host billions of products sold by various vendors. So as a buyer, you will have a wide selection of goods & services to select from. This gives you a chance to compare prices thus opting for the best price. Well designed platforms like Amazon & EBay make it possible for customers to post reviews on products they have purchased. These reviews and ratings can easily help you filter the best product thus saving you time and money.
- Easy access:- Since e-commerce is powered by the internet – you can easily access any store from any device connected to the internet. The growth of mobile commerce is due to the wide spread of cheap internet. So it does not matter where you’re, a transaction can take place. Internet technology enables cross-border transactions without the need of boarding flights thus making life easier for both consumers and sellers.
- International Reach:- Electronic commerce opens closed boarders to entrepreneurs’ who want to sell their products and services to people across the globe. As an entrepreneur, you don’t need too much capital to sell to the right audience beyond your geographical location. All you need is a shopify store / an Amazon FBA account and start selling to people all over the world. Many sellers have embraced Amazon’s FBA program because it allows them to stock their products in Amazon’s warehouse and let Amazon do the rest. According to stats, Amazon is no:1 online retailer – meaning majority of buyers online prefer Amazon to other retailing platforms. So selling your products on Amazon gives you an opportunity of tapping on its global traffic.
- It is easy to obtain real-time information on how sales are going on – against expectations:- E-tailers can easily manage their business and adjust prices according to demand and market conditions. Majority of E-tailers have clearance areas on their websites which alert their customers to last minute bargains.
- Improve relationships with trading partners:- In a Business-to-Business environment, communication is very important. It cements a strong bond between suppliers and buyers which leads to business growth between 2 parties. B2B platforms like Alibaba enable a buyer and supplier to send messages to each other before and after making an order. The supplier will also get all contacts of the buyer and follow them up through private email communication. So every time a supplier / manufacturer has a new product – they contact the buyer privately and conclude the deal.
- Reduced costs by reducing labor:- It is very cheap and easy to run an e-commerce company. You don’t need to spend too much money on paper work (if any it is minimal), reduced labor, less errors in recording data, you can start with small inventory and expand basing on demand of your products.
- Flexibility with efficiency:- E-tailers are able to handle complex situations and customer demands in real-time without getting overwhelmed. Some set up customer care desks – with 12 – 24hr employees who handle customer issues. But those with limited budgets opt for feedback forms which are sent directly to the companies email.
- Reduced time:- In terms of investment – you will get back your investment on both inventory and advertisement in a short period of time. On the side of consumers, products can be delivered in less than 24hours.
- Lock in Customers:- E-tailers have an opportunity of locking in customers and lock out competitors from accessing those customers. This is done through good customer care and easy system navigation. Customers want good prices (every one can provide that) – but not everyone can provide good customer care. Good practices can lock in customers and at the same time improve on the way you do business – because you will tailor your business basing on customer’s needs.
- New Markets:- Unlike other business models which are restricted by geographical boundaries, e-tailers have an opportunity of accessing new markets without spending too much money. Online advertising platforms like Google Adwords and Facebook make it easy to reach new markets at a reasonable price. If you own an online store – you can advertise your products to targeted audiences on Facebook.com. The budget for each audeince is different.
- It serves as an equalizer between small & big businesses: – Starting an e-commerce business is easy. All you need to compete with big brands is to identify the right niche and serve your clients well. Big brands might have a strong establishment on the market but you can still penetrate through the walls and become successful. Let’s take a simple example of Amazon and Wal-Mart. In reality, Wal-Mart is a strong brand when it comes to retailing business – but they are only strong offline – when it comes to online retailing business, Amazon takes it all – yet all they do is stock other vendors’ products, sell them & take off a cut on each sale. Amazon.com makes more money than Walmart.com and Barnes & Noble
- Makes mass customization possible:- In some industries like the auto industry, a customer can customize a product they want and the manufacturer will make it and sell it to them at a special price. I have seen this option on car dealers’ websites like bmw.com & Toyota.com. For a business to offer online mass customization of products it must have an organized system and resources to deliver the right product at the right time.
- Allow Network Production:- This might be a new term to you – but in a network production environment, an e-commerce company can network with another company from any part of the world to complete the production of a specific product . This network is facilitated by the internet. So these two parties will share information on what the final product should be. A good example is APPLE – it is a USA based company but they have a product assembly line in China – simply because China has cheap labor. However, all products assembled / manufactured under the Apple brand should meet set standards. Once the products are finished, they are shipped to USA / EUROPE for sale. This production network makes it easy to do e-business at a minimal cost.
- Broadens Consumer Choice:– E-commerce provides customers with a wide choice. It is very easy for a customer to navigate more than 3 big stores online and compare both price and customer service provided by various stores. Lots of information is provided on each product thus making it easy for a customer to reach a final purchase decision.
- Price Transparency: – Since customers have the option of comparing prices among stores using price comparison systems. E-tailers make sure they price their commodities in the right manner so that they don’t miss out on potential customers.
7 DISADVANTAGES OF E-COMMERCE
- Limited Customer services: – Since everything is done electronically, there is less attachment between the seller and buyer. In most cases, sellers focus on selling the product / service to the buyer but they never follow up on the buyer after the purchase is made. Others don’t even have money back guarantee – so the buyer ends up losing money if they don’t like the product or services. On platforms like Amazon which hosts millions of vendors – you will find that some sellers post pictures of high quality products but when you buy the product – its not what they say.
- Poor Relationship management:- When it comes to Business-to-Business e-commerce – strong communication and relationship between 2 parties is very important. But the electronic model of doing business affects that bond. Both the manufacture / supplier never get a chance to meet the buyer on the other end. So once goods are shipped to the buyer, the relationship stops there – or the seller will continue communicating via email promoting their products to the buyer and the buyer can choose to ignore those emails thus affecting the growth of their relationship.
- Lack of personal touch prior to purchase:- Some products like clothes and jewelry require a personal touch before purchasing them. In most cases buyers receive non fitting shoes, clothes and jewelry if purchased online and it is quite inconveniencing to send back the product to the seller.
- Wait time for shipping:- E-commerce does not work the same way as traditional commerce where you buy and take the product with you after making a purchase. With e-commerce, you have to wait for days to receive a product. If you want express delivery, you have to pay an extra cost for that service thus making the process expensive.
- Fraud:- Many people have lost money online due to fake e-commerce companies that pose like real authentic companies. Most of these companies provide services like Forex Trading, BitCoin, Multilevel Marketing and so much more. Customers are persuaded to join specific programs to get rich but they end up losing lots of money.
- No guarantee on product quality:- It is very difficult to spot a counterfeit product online. Many vendors buy and sell cheap copycats from China. So as a buyer, you get fooled thinking that a showcased product online is a real one. Google has tried to fight websites selling counterfeit products but they still find their way to the customer. Marketplaces like Ebay host lots of these products and they come at a very affordable price. For example, you can buy a Gucci Handbag / Watch at $100 online.
- Database failure / Related mechanical failure results into delay:- Technology is unpredictable. You will never know when the system is attacked or when it will have a bug. E-tailers find it expensive to keep their online stores running 24/7 – especially when traffic grows. Amazon has experienced server outages so many times and this leads to losses.
CHAPTER 2:- HOW TO SET UP AN E-COMMERCE STORE?
Now that you know the exact definition of e-commerce and its advantages & disadvantages – you might have interest in starting an e-commerce business. So – in this 2nd Chapter, Let us learn how to set up an e-commerce store.
- Choosing What To Sell:- This is the most tricky part. It is far more difficult than building a store its self. Not every product sells – so you have to do enough research on the market you want to target, find out who sells to them and what they sell and how they do it. Some products are not on the market but people are searching for them. A good example is a ”Product that makes black gums Pink” – this product has a moderate market size but it does not exist on the market. So finding such products with ready market can make you successful. The other thing you can do is to sell a product that everyone sells – it is quite competitive to succeed with this technique but once you capture a certain portion of the market – the rest will be history.
- Sourcing The Products To Be Sold:- When it comes to outsourcing products for sale on your website or any other marketplace like Amazon / Ebay – you have to deal with trusted sources. Alibaba.com is the best B2B platform – hosting millions of manufactures wholesaling billions of products. Search Alibaba’s database for a product you want to sell but make sure you opt for manufacturers with a ”Golden Supplier seal”. If the product is not available on Alibaba, you can ask a manufacturer who makes products related to the one you want and get a quote for custom manufacturing. While on Alibaba, send messages to various manufactures and tell them your needs and the price you’re willing to pay for each item. Most manufactures on Alibaba offer private labeling services at a small fee. Selling a private labeled product helps you grow your brand (customers will know you by your brand name).
- Choosing how and Where to sell your products: – Now that you have got the right supplier for your product – it is time to choose the right platform for selling your product/s. We have Shopify & Amazon FBA program – but these two platforms are different. Shopify gives you tools to create your own store under your brand name & domain. So you will be fully in control of your store but you might pay a few dollars to shopify for additional services like ”Card processing, Hosting, Store theme and so much more”. When you open up your store using Shopify, you will have a challenge of driving traffic to that store – most e-tailers add blogs to their stores – doing this will help you rank faster in search engines. On the other hand, I always recommend people to have both Amazon FBA & Shopify Store. Amazon has its own traffic (it works like a search engine for products – so your product can easily be discovered on Amazon without spending any dime on advertisement). Shopify has integrated Amazon FBA program – so you can store your products in the Amazon warehouse but sell them through 2 different channels. With Amazon’s FBA program, all orders are fulfilled by Amazon – thus making the all process passive.
- Driving Traffic To Your Store:- The only way you can make sells online is by driving relevant traffic to your store – be it Amazon hosted / Shopify hosted. You can drive traffic to your store in 4 ways. (1) Search engine optimization – this method will require you to optimize your store for specific keywords. Use keyword search tools like ”Long Tail Pro / Google Adwords Keyword tool” to land on some non competitive keywords. If you’re to go for this option, you have to create content on your product pages so that each product ranks in search engines. SEO is broad but you have to start on day one to optimize your site. Create relationships with bloggers in your niche and ask them to write reviews linking back to your product. Engage in forum discussions…..and also embrace product reviews (these increase on the amount of content on the product page and at the same time increase on product conversion). (2) Google Adwords advertisement – with this option, you can set a small budget and test out different adverts to see which one converts well. You will have to bid on specific keywords and targeted audience. I always prefer my ads to be placed on top of search results. Google adwords is largely used by most e-commerce companies including Amazon, so test it and see how you can milk honey out of it. (3) Facebook Advertisement – so far the best advertising program online. Your adverts will be displayed in data feeds for targeted users of Facebook. However, you have to be very careful when using Facebook Advertisement – Choose the right audience to target, Choose the right photos to display as thumbnails for your advert, Test different keywords / Titles, Start with a small budget until you figure out which advert gets the most attention, (4) Pinterest Advertisement – this one is still new but it might be a game changer in the e-commerce world in the near future. Display your products next to pinned images. ( I have no proof on how Pinterest traffic converts, but test it out with a small budget and see what happens.)