SMART COOKIES - VIRTUAL NECESSITY - E-commerce is possibly today's hottest business topic. We look at what it is, why it is revolutionary and how it will change most customer relationships.
What is 'e-commerce'?
The infotech revolution, and particularly the internet, is transforming ways of doing business. IBM's 'e-business' and Fortune's 'e-corporation' concepts embrace this revolution, which impacts on a firm's internal operations as well as its external dealings with customers and suppliers. 'E-commerce' refers to the latter - doing business on the internet.
Why is it so significant?
It changes the basis of markets and competition - by lowering distribution and transaction costs, by creating more efficient marketplaces and by forming opportunities for new, more effective customer relationships.
It does all this for business-to-business and business-to-consumer commerce.
How does it lower costs?
Sales and service over the internet is much cheaper than field sales forces, bricks-and-mortar branches or telephone call centres. A recent study in the US calculated average transaction costs in financial services as $1.08 (67p) at a bank branch, 54 cents for call centres, 26 cents for a dedicated PC link and 13 cents on the internet.
In the travel industry, cost of distribution via travel agency branches historically is from 10% to 20% of ticket value, or £30 to £60 on an average £300 ticket. The internet, combined with e-ticketing, cuts that to less than £10. British Airways has projected that half its bookings will be via the internet by 2002. Cheaper distribution can turn an industry on its head, as with Dell's direct marketing of PCs.
The internet cost model is particularly revolutionary for products and services that can be distributed electronically, such as publishing, software, financial services, music and video, and employment and travel agency services. Physical products (such as groceries or clothes) still require expensive distribution to customers.
How does it create new and more efficient markets?
The internet delivers low-cost, real-time connectivity between an infinite number of buyers and sellers on a global scale. The equivalent of worldwide stock or commodities trading can now be created for any product or service where markets are typically local and fragmented and transactions time-consuming and inefficient. A classic example is eBay in the US, which operates an internet auction for 'collectables' such as stamps and comics. The US market for these collectables is $180 billion but, before the internet, they were traded through local auctions or at car boot sales.
Founded in 1995, with annual sales of less than $100 million and profits under $5 million, eBay's market value is now over $5 billion.
Finding the best deal on a new or used car is a lengthy and frustrating process - visiting car dealers, checking the car's condition, haggling over prices, compromising on specification. The internet creates an online auction between buyers and sellers - and the ability to write your own specification. Chrysler projects that 25% of its cars will be sold online by 2002.
The internet's real-time nature is particularly powerful in handling products or services where value changes over time. Airlines and tour operators can offer last-minute deals direct to consumers. Conversely, the consumers can submit a price that they would be prepared to pay to travel to a distination at a specific time (a 'reverse auction' now offered by priceline.com in the US). Both the company and the consumers benefit.
How does it create effective customer relationships?
Via 'interactive profiling'. An e-commerce supplier tailors its customer interaction to individual characteristics and buying behaviour. In the future, there will be high-quality, high-interactivity multimedia.
Once you put a book in amazon.com's shopping cart, the site suggests titles purchased by other buyers of that book. On eToys, you can set up birthday reminders for all your nieces and nephews and be prompted in advance with ideas for eight-year-old girls or five-year-old boys. The present will then be wrapped, signed and mailed for you. The Wall Street Journal (wsj.com) gives you a daily front page tailored to your personal business interests, and will store it so you can catch up after a holiday.
Future multimedia will enable you to shop for clothes by putting them on to 'live' models. Choosing a package tour will involve a virtual stroll through an island resort, with virtual cocktails at sunset.
Once consumers become accustomed to the personalised service, convenience and pleasure of the internet, they will choose it over the mass-market, uninformed, time-consuming and unpleasant alternatives of traditional channels - particularly bricks-and-mortar retailing.