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2013 Summer Semester

Chapter 10. E-Commerce: Digital Markets, Digital Goods

(donghee.info@gmail.com)

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Management Information Systems

Electronic Commerce (1/8)


E-commerce
Use of Internet and Web to transact business Digitally enabled transactions

History of e-commerce
Began in 1995 and grew exponentially; still growing at an annual rate of 16% Rapid growth led to market bubble While many companies failed, many survived with soaring revenues E-commerce today is the fastest growing form of retail trade in U.S., Europe, and Asia
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Management Information Systems

Electronic Commerce (2/8)


The Growth of EE-Commerce

Retail e-commerce revenues have grown exponentially since 1995 and have only recently slowed to a very rapid 16 percent annual increase, which is projected to remain the same until 2010.

Management Information Systems

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Electronic Commerce (3/8)


Online vs. Offline Travel Booking

Management Information Systems

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Electronic Commerce (4/8)


8 unique features of e-commerce technology
Ubiquity
Internet/Web technology is available everywhere: work, home, etc. and any time

Global reach
The technology reaches across national boundaries, around earth

Universal standards
One set of technology standards: Internet standards

Richness
Supports video, audio, and text messages

Management Information Systems

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Electronic Commerce (5/8)


8 unique features of e-commerce technology
Interactivity
The technology works through interaction with the user

Information density
Vast increases in information density the total amount and quality of information available to all market participants

Personalization/customization
Technology permits modification of messages, goods

Social technology
The technology promotes user content generation and social networking

Management Information Systems

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Electronic Commerce (6/8)


Key concepts in e-commerce
Digital markets reduce
Information asymmetry Search costs Transaction costs Menu costs

Digital markets enable


Dynamic pricing Disintermediation

Management Information Systems

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Electronic Commerce (7/8)


The Benefits of Disintermediation to the Consumer

The typical distribution channel has several intermediary layers, each of which adds to the final cost of a product, such as a sweater. Removing layers lowers the final cost to the consumer.

Management Information Systems

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Electronic Commerce (8/8)


Key concepts in e-commerce
Digital goods
Goods that can be delivered over a digital network (e.g., music, video, software, newspapers, books) Cost of producing first unit is almost entire cost of product: marginal cost of producing 2nd unit is about zero Costs of delivery over the Internet is very low Pricing is highly variable

Management Information Systems

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Electronic Commerce Business Models


Internet business models
Pure-play models Clicks-and-mortar models
Also known as bricks-and clicks Traditional retailers with Web sites

(1/11)

Multichannel store operating both physical stores and an online store E.g., Hyundai department store, Kyobo bookstore Channel conflicts: For multi-channel e-tailers, each channel may have real or perceived differences over incentives, rewards, policies or support can cause serious problems

Management Information Systems

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Electronic Commerce Business Models


Business model

(2/11)

A set of planned activities to result in a profit in a marketplace

8 key elements of a business model


Value proposition Revenue model Market opportunity Competitive environment Competitive advantage Market strategy Organizational development Management team
Management Information Systems
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Electronic Commerce Business Models


Value proposition
Why should the customer buy from you?

(3/11)

What can your company provide that other companies do not or cannot? E.g., freshest food, lowest prices, transaction convenience, personal/customized offerings, best customer services, variety, etc.

Management Information Systems

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Electronic Commerce Business Models


Revenue model
How will you earn money?

(4/11)

How the firm will earn revenue and produce profits greater than alternative investments
There are many different EC revenue models (can be one or combinations of multiple models)

Management Information Systems

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Electronic Commerce Business Models


Major revenue models
Advertising revenue model

(5/11)

A website provides a place for advertisements and receives fees from advertisers (Yahoo, Google)

Subscription revenue model


A company provides users with contents or services for a subscription fee for access (online magazines)

Transaction fee revenue model


A company charges a fee for executing a transaction Fee based on the volume of transactions or per transaction Online stock brokers (Ameritrade, E-trade), auction sites (eBay)
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Management Information Systems

Electronic Commerce Business Models


Sales revenue model

(6/11)

A company derives revenue by selling goods, information, or services to customers


E.g., Dell.com, etc.

Affiliate revenue model


A company directs business to its business affiliates (partner websites) and receives a referral fee or percentage of the revenue (commission) from any resulting sales
E.g., Golf reservations

Management Information Systems

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Electronic Commerce Business Models


Market opportunity

(7/11)

What marketspace do you intend to serve, and what is its size? Refers to a companys intended marketspace and revenue potential in each of market niches in which company hopes to compete

Management Information Systems

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Electronic Commerce Business Models


Competitive environment
Who else occupies your intended marketspace?

(8/11)

Refers to the other companies selling similar products and operating in the same marketspace Influenced by
How many competitors are active How large their operations are What is the market share for each competitor How profitable these firms are How they price their products

Management Information Systems

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Electronic Commerce Business Models


Competitive advantage

(9/11)

What special advantages do your firm bring to the marketspace? Capability to create superior values that allow your company to outperform rivals Most competitive advantages are short term
How we sustain the competitive advantages has become an important issue

Management Information Systems

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Electronic Commerce Business Models


Market strategy

(10/11)

How do you plan to promote your products or services to attract your target audience? How do you maximize/sustain your competitive advantages to outperform your rivals over a long time period?
A good market strategy is the major source of firms competitive advantages (Michael Porter)

Management Information Systems

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Electronic Commerce Business Models


Organizational development

(11/11)

What types of organizational structures within the firm are necessary to carry out the business plan? Describes how the company will organize the work that needs to be accomplished

Management team
What kinds of experiences and background are important for the companys leaders to have? Employees of the company responsible for making the business model work

Management Information Systems

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Competition in the Digital Economy (1/7)


Porters 5 forces
In every industry, competition depends on the collective strength of 5 forces
Buyer power Supplier power Threat of new entrants Threat of substitutes Intensity of intra-industry rivalry

Understanding these forces can help companies develop their strategies to increase their profitability

Management Information Systems

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Competition in the Digital Economy (2/7)


How the EC affects competitive forces
Increased bargaining power of buyers
Easier access to information about sellers and products Lower switching costs

Bargaining power of suppliers


More suppliers over the Internet (fierce competition; decreased suppliers bargaining power) More buyers by widening the market, elimination of intermediaries between them and customers (increased suppliers bargaining power)

Management Information Systems

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Competition in the Digital Economy (3/7)


How the EC affects competitive forces
Increased threat of new entrants
Reduces barriers to entry by mitigating the need for such things as access to channels and physical assets Internet applications are difficult to keep proprietary from new entrants (easy to be copied) Outsourcing can lower barriers to entry because a new entrant may need only use outsourced inputs rather than build its own capabilities

Management Information Systems

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Competition in the Digital Economy (4/7)


How the EC affects competitive forces
Threat of substitutes
Internet can help improve companies positions relative to traditional substitutes by boosting efficiencies, broadening customer base Internet can create new substitutes by enabling new approaches to meeting needs and performing new functions

Management Information Systems

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Competition in the Digital Economy (5/7)


How the EC affects competitive forces
Increased intensity of rivalry
Lower barriers to entry increases competition Widens the geographic market, increasing the number of competitiors Lower switching costs increase competition Fierce price competition (price comparison websites; more competitors selling largely undifferentiated products)

Management Information Systems

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Competition in the Digital Economy (6/7)

Management Information Systems

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Competition in the Digital Economy (7/7)


Strategies for gaining competitive advantage
Low-cost leadership Differentiation Creation of new marketspace

Other strategies
Brand Scale Network effects Switching costs Alliances Patents
Management Information Systems
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Electronic Commerce and the Internet


Content provider

(1/6)

Providing digital content, such as digital news, music, photos, or video over the Web
E.g., ESPN, iTunes, WSJ, HBR, etc.

Online syndicators
Aggregate content from multiple sources, package for distribution, and resell to third-party Web sites

Utilizes a subscription or advertising revenue model

Management Information Systems

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Electronic Commerce and the Internet


Market creator (Online marketplace)

(2/6)

Provide a digital environment where buyers and sellers can meet, search for products, display products, and establish prices for those products
E.g., eBay.com

Utilizes a transaction fee revenue model

Management Information Systems

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Electronic Commerce and the Internet


Service provider

(3/6)

Provide Web 2.0 applications such as photo sharing and interactive maps, and services such as data storage
E.g., Google maps, YouTube.com

Utilizes subscription fee revenue model

Management Information Systems

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Electronic Commerce and the Internet


Portal

(4/6)

Supersite that provides comprehensive entry point for huge array of resources and services on the Internet
E.g., Naver, Google, etc.

Typically combines subscription/advertising, and transaction fee revenue models

Virtual storefront
Sells physical products directly to consumers or to individual businesses
E.g., Amazon.com

Management Information Systems

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Electronic Commerce and the Internet


Information broker

(5/6)

Provides product, pricing, and availability information to individuals and businesses

Transaction broker
Saves users money and time by processing online sales transactions and generating a fee for each transaction
E.g., financial services, travel services

Utilizes a transaction fee revenue model

Management Information Systems

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Electronic Commerce and the Internet


Types of e-commerce
Business-to-consumer (B2C) or Consumer-to-business (C2B)
Retailing transactions with individual shoppers

(6/6)

Business-to-business (B2B)
Transactions between business organizations

Consumer-to-consumer (C2C)
A market creates a marketplace where consumers can transact goods directly to others E.g., auction (eBay.com), buy/sell community websites

Mobile commerce (m-commerce)

Management Information Systems

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Achieving Customer Intimacy


Interactive marketing and personalization

(1/3)

Web sites are bountiful source of details about customer behavior, preferences, buying patterns used to tailor promotions, products, services, and pricing Clickstream tracking tools
Collect data on customer activities at Web sites Used to create personalized Web pages

Collaborative filtering
Compares customer data to other customers to make product recommendations

Management Information Systems

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Achieving Customer Intimacy

(2/3)

Web Site Visitor Tracking

E-commerce Web sites have tools to track a shoppers every step through an online store. Close examination of customer behavior at a Web site selling womens clothing shows what the store might learn at each step and what actions it could take to increase sales.

Management Information Systems

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Achieving Customer Intimacy

(3/3)

Web Site Personalization

Firms can create unique personalized Web pages that display content or ads for products or services of special interest to individual users, improving the customer experience and creating additional value.

Management Information Systems

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Mobile Commerce

(1/5)

M-commerce services and applications Although m-commerce represents small fraction of total ecommerce transactions, revenue has been steadily growing
Location-based services Banking and financial services Wireless advertising Games and entertainment

Management Information Systems

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Mobile Commerce

(2/5)

Global MM-commerce Revenue 20002000-2012

M-commerce sales represent a small fraction of total ecommerce sales, but that percentage is steadily growing.

Management Information Systems

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Mobile Commerce

(3/5)

Limitations in mobiles access of Web information


Data limitations Small display screens

Wireless portals (mobile portals)


Feature content and services optimized for mobile devices to steer users to information they are most likely to need

Management Information Systems

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Mobile Commerce

(4/5)

Types of electronic payment systems


Digital wallet
Stores credit card and owner identification information and enters the shoppers name, credit card number, and shipping information automatically when invoked to complete a purchase

Accumulated balance digital payment systems


Used for micropayments ($10 or less: 3 ) Accumulating debit balance that is paid periodically on credit card or telephone bills

Management Information Systems

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Mobile Commerce

(5/5)

Stored value payment systems


Enable online payments based on value stored in online digital account May be merchant platforms or peer-to-peer
E.g., game money

Electronic billing presentment and payment systems


Paying monthly bills through electronic fund transfers or credit cards

Management Information Systems

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Trust in Online Transactions

(1/4)

Management Information Systems

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Trust in Online Transactions

(2/4)

In the online transaction process, trust has been considered crucial


On the Internet, no one knows you are a dog

Uncertainty about product quality can also be a problem for buyers in the online environment
Bidders may not have easy access to information regarding the true quality of the product

Information asymmetry may give rise to opportunistic behavior


Opportunism could erode the foundations of electronic markets

Trust is a catalyst in many buyer-seller transactions


When uncertainty and incomplete product information are present, trust is especially critical
Management Information Systems
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Trust in Online Transactions


Feedback mechanism

(3/4)

Management Information Systems

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Trust in Online Transactions


Price premium

(4/4)

Buyers are willing to compensate reputable sellers with price premiums to assure the safe transactions
<feedback score : 115 : US $ 222.5>

<feedback score : 1149 : US $ 275.01>

Management Information Systems

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The Long Tail

(1/3)

Not just focusing on the center or the head, but also paying attention to the long tail and the edges
Chris Anderson
The long tail (e.g., Amazon) No more 20/80 rule in the traditional sense Can create revenue from selling low-demand products (traditionally, stores are forced to sell only big hits due to the storage and distribution costs)

Management Information Systems

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The Long Tail

(2/3)

In the past: the world of scarcity


Hit driven economy
Summer blockbusters, million-sellers Without enough room to carry everything for everybody (e.g., limited book shelf space, limited number of screens/channels) Blockbuster strategy: focusing marketing resources on a small number of hits (occasional hits huge payoff will cover the losses of many misses)

Now: a world of abundance


Unlimited selections Cheap storage and distribution costs, recommendation systems

Management Information Systems

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The Long Tail

(3/3)

Now people want more than just hits


Enough non-hits on the long tail A market bigger than the hit market (its getting bigger at this moment)

Chris Anderson claims that the biggest money is in the smallest sales
Wise companies will stop relying on blockbusters and focus on the profits to be made from the long tail (niche offerings)

Management Information Systems

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