Marketing and Eletronic Commerce

A Transactional Medium, Part 1

  1. Retail vs. Wholesale Transactions
  2. Retail vs. Promotion
  3. In-store vs. Non-Store Retailing
  4. Issues in Designing an Effective Retail Site
    1. Trust
    2. Ease of Purchase
    3. Incentive to Purchase Now
  5. Applications of WWW for Transactions
    1. Changing the Limiting Factors for Retailing Reach
    2. Bringing Buyers and Sellers Together
    3. Disintermediation
    4. Business to Business Transactions

Retail vs. Wholesale Transactions

The primary focus of this section will be on retail transactions. A retail transaction is a transaction with the final consumer. WWW also facilitates wholesale transactions (all transactions that do not include the final consumer) and these will be discussed under Applications of WWW for Transactions (Business-to-Business Transactions).

Retail vs. Promotion

Before we discuss online retailing we should first clarify the difference between promotion and retailing. Retailing involves the request of a transaction, and in most cases allows for the close of a transaction, with the final consumer. Promotion is used to inform consumers about products and encourage them to purchase products. Because WWW, which is the first "mass" transactional medium, allows for both retailing and promotion to occur side-by-side on a web-site (that facilitates transactions), the differences do become blurry. It is important to note that retailing and promotion are not mutually exclusive business applications.

In-store vs. Non-store Retailing

It is also important to understand the differences between a non-store retailing transaction versus a traditional store retailing transaction. When a consumer goes to a store and purchases a product this is clearly a retailing transaction. When a consumer purchases a product by calling a 1-800 number from a catalog this is still a retailing transaction, although the transaction is closed outside of the medium that initiated the sale.

Popular non-store retailing methods include TV shopping (need to find out) and mail order retailing ($75 billion in 1996). While both these media have developed a significant portion of the non-store retailing dollar sales they have fundamental flaws when compared with WWW (approx. $500 million, 1996).

Using WWW as the non-store retailing medium a company may offer the consumer two options, to close the sale online, through the medium, or to close the sale offline, perhaps through a 1-800 number or a fax (currently 2/3rds of WWW transactions are completed outside the medium). The second option is similarly to a catalog or TV shopping purchase. The first option highlights a key advantage of WWW as a non-store retailing medium. The customer can interact with the medium and make the purchase requests directly with the medium . Other advantages of using WWW as a retailing medium compared with other retail environments include:

Issues in designing an effective retail site

There are basic rules to effective design of consumer-oriented web-sites regardless of whether the site is for retailing, promotion, customer service or other business applications. These have been discussed in both sessions 5 and 6.
The following design issues are specific to online retail sites. They are derived from the need to resolve the following issues:
  1. Trust
  2. Ease of purchase
  3. Reason to purchase now
Online retailing is essentially a transaction between two computers, the customer is unable to "see" the retailer. There are considerably less barriers to entry in online retailing than any other form of retailing, allowing for growth in non-conventional retail businesses utilizing WWW as a retail environment. These two issues create a critical need (more so than with any other form of retailing) of gaining consumers' trust that the online retail store is a legitimate retail organization.

Companies with strong brand names are able to gain consumers' trust. The brand name creates familiarity with the organization and hence reduces the reliance on online information to educate the consumer about the product/organization. Smaller companies must take additional steps to develop consumers' trust online. This can be achieved by offering:

  1. extensive product warranties, moving the risk of purchase from the consumer back to the retailer.
  2. significant discounts to first time consumers (free shipping etc.), the first transaction then creates the confidence the consumer initially lacks. Once satisfied the customer is more likely to return.
  3. detailed information on the company including history, philosophy and executive biographies with pictures. A seal of approval from a WWW business that authenticates WWW retailers, eTRUST for example.
Security (and perceived security) of the transaction is another concern that the retailer needs to address. The customer's perception of security is the issue. If the customer feels uncertain about sending a credit card number to a computer s/he doesn't know, s/he will not close a transaction online (a reason why online retailers must always develop an offline purchasing option.) It is important to realize that there has been no documented case of fraud from an online transaction to date, and consumers using a credit card cannot be liable for more than $50.

One possible solution to security concerns is to ask the customer to set up an account offline, one time. This allows the retailer to obtain all the sensitive information. The customer can then purchase products online without sending a credit card number along with the purchase. The First Virtual Payment System is an independent third party that performs the above for both retailers and customers. Once a customer has registered with First Virtual, s/he can make online purchases with any retailer which has also registered with First Virtual, using a unique PIN number.

A number of companies are developing (have developed) secure payment systems online. These systems use encryption technology to keep sensitive information secure. Companies that are poineering this field include:

A second issue that the retailer must be aware of is the security of the server itself. Firewalls must be in place to stop unwanted "guests" from accessing sensitive information that is maintained on the server. The area of transaction security will be covered in detail in session 8. For now, it is important to understand that the issue of security is of real concern to the consumer.

Ease of purchase
It is very important that the online retailer makes the purchase as simple as possible. Since this is a new retailing environment customers need to adopt new buying behaviors. The online retail store should allow a customer to:

Incentive to Purchase Now.
As with other forms of direct selling there must be a reason why the consumer should purchase now. Incentives can include:
  1. reduced Product Cost
  2. Availability of Product
One critical incentive that should be apparent is that the product is less expensive to purchase via WWW. Since the cost of the transaction is significantly less than a traditional retail transaction this cost saving should (at least in part) be passed on to the consumer.

Cost savings occur through the following areas:

Another key advantage is the scalability of WWW. As the consumer base increases the cost per transaction will be reduced as the cost to maintain a store that has a turnover of $1,000,000 is not significantly greater than the cost of maintaining a store with a turnover of $10,000.

If WWW is the only source (or at least significantly more accessable than other sources) for purchasing the product then this will give the target audience incentive to purchase. via WWW.

Applications for WWW for Transactions

The following applications are considered effective use of WWW as a transactional medium.
  1. Changing the Limiting Factors for Retailing Reach
  2. Bringing Buyers and Sellers Together
  3. Disintermediation
  4. Business to Business (Wholesale) Applications
Changing the Limiting Factors for Retailing Reach
WWW allows niche marketers to develop a retail environment that has a global presence. The limiting factors of the retailer's reach is consumer access to WWW, not the traditional geographic barriers of a retail store. This gives niche marketers immediate access to a global audience, inexpensively.

Culinary Software is a good example of an existing niche marketer benefiting from a global audience. 15% of its revenue now comes via its web-site. All business derived from its web-site is new business, and 15% of it is from overseas. The site has only been open since September, 1996, so growth in business from WWW can be expected.

Large retailers are also able to take advantage of WWW as a global retailing presence, to complement other retailing efforts. L.L. Bean and Land's End and two good examples. Success for these retailing efforts should be measured in two ways. The revenue generated from the sites, as well as the cross-promotion the sites create, increasing the revenue from traditional sources.

Bringing Buyers and Sellers Together
WWW allows for the gathering of buyers and sellers on a scale that no other medium, or in store retail environment, can facilitate. The following examples illustrate the ability of WWW for achieving this. You will note that each example is of a virtual company that has no off-line presence.

  1. Provenance
    Provenance is an example of using WWW to bring buyers and sellers together in a way that no other medium can facilitate. Provenance is an online art gallery. The goal of Provenance is to fill the online gallery with digital images of 5,000 works by artists worldwide. Customers can search the site by entering price ranges, size, medium, and school of art and can see the results of the search immediately. This gives customers choice in one store that they have never had available before, a choice that is not overwhelming due to the effective site design and search capabilities. Each artist (many very small) is exposed to a target audience they have never had before, truly bring buyers and seller together in a powerful fashion.

  2. is another excellent illustration of bringing buyers and sellers together in a unique fashion. It is a comprehensive bookstore with over a million titles. does not actually stock the books but will order them from the publisher once an order has been requested.'s various services include book reviews, fostering communication among its users with chat rooms (developing a sense of community), offering discounts of 10-30% on over 300,000 books, and Emailing users when a new title is available that may be appropriate for that user. The cost to "stock" a book virtually is much less significant than in a traditional store, thus books that are usually out of stock may be available through Much like the Provenance example above (bringing artist and art affecianados together in great numbers), brings book publishers and readers together to facilitate mutually benefical transactions.

  3. CD Now
    CD Now facilitates online retailing for CDs much like does for books. CD Now boasts 165,000 shoppers per month who can purchase CDs, browse through the 12,000 biographies of recording artists or take advantage of many other WWW enabled services.
  4. Internet Liquidators
    Internet Liquidators allows WWW shoppers to bid against other shoppers for a wide range of products. Shoppers can participate in real-time dutch auctions. A dutch auction is a little different from the traditional bidding-up style auction. A dutch auction steadily reduces the price until all the stock, for the product, has been taken. Thus the later you bid, the cheaper the product, but you increase the risk the product has already been purchased. Shopper can see current auction status as information changes. The site continuously shows the current price of the item, the number of items remaining and the time left. WWW has truly broadened the target audience of the auction and creates a significant market place for many items.

Disintermediation refers to the ability of WWW to allow companies to bypass traditional channel intermediaries to deal directly with their customers. The following examples of good illustrations of WWW allowing for this.
  1. Quick Quote
    Traditionally when you consider life insurance or other similar products you would deal with a salesman that specializes in this area. That person would advise you on appropriate actions and would be compensated by commission based on the value of your investment. Now you can use Quick Quote, which includes a database of products, nationwide. Customers can now order policies online avoiding the need to use an intermediary (salesperson). This is a real time saver for those who cannot arrange to meet with a sales person, and the reach of the search insures that the results are very competitive.
  2. Microsoft Expedia Travel Services
    Microsoft Expedia Travel Services is an excellent example, from the travel industry, of being able to use WWW to avoid an intermediary (traditional travel agents). At this site, a travel customer can reserve hotel rooms, rent a car and purchase airline tickets. Users can receive Email of low cost flights to favorite destinations, links to weather sites, a currency converter and forums for sharing travel tips among other travellers. This is a richer service than a customer would usually expect from their regular travel agent.
  3. E*Trade
    E*Trade is a good illustation of how personal investing is very suitable for WWW, and can replace the need for your traditional stockbroker. Investors can access a wealth of information on individual stocks. You can look at basic company information, charts showing a stock's performance history, up-to-minute stock quotes and earnings estimates. E*Trade also has an excellent new feature that will give breaking news of a company that the customer queries. The cost per trade is very competitive, at $14.95 and a receipt is sent to the customer the instant a transaction has been made. All the remaining resources are free.
Business to Business (Wholesale) Transactions
As a transactional medium, WWW has already proven very valuable in business-to-business (wholesale) transactions. In fact, the total value of business-to-business transactions performed on WWW is greater than the value of retail transactions and the growth outlook is also very favorable. According to Forrester Research, retail transactions will increase from $518 million in 1996 to $6.6 billion in 2000. When business-to-business selling is factored in, web-initiated sales will increase from $1 billion to over $117 bilion during the same period. Since a higher percentage of businesses are online (when compared to consumers); the number of businesses each business transacts with is small (when compared to retail); and the average value of a business-to-business transaction is significantly higher than a retail transaction, then business-to-business commerce makes sense. The following examples are good illustrations of business-to-business commerce.
  1. Dell Computer Corp.
    The majority of sales for Dell Computer Corp. are to businesses. They are a direct marketer who began in 1984 using mail order to market their computers. Dell reports that it does $1 million in sales a day from its web-site, and this is increasing at a rate of 20 percent a month. Dell tailors web pages to individual corporate customers for online ordering and is implementing new features like a digital order confirmation that is sent to customers within five minutes of placing an order. According to Michael Dell "The Internet is the ultimate direct sales model." Dell's aggressive use of the web compliments its internal processes that create very efficient customer order turnaround. An order placed at 9:00 AM one morning is on a delivery truck by 9:00 PM the following evening.
  2. is an excellent example of innovative use of WWW in business-to-business commerce. Companies can post their supply requirements such that anyone can now bid on them. This is a reversal to the more conventional purchasing model where companies may request bids of a few suppliers.
  3. GE Trading Process Network
    This site was established in 1994 so that vendors could quickly make bids on GE electronics component contracts. GE is able to get more companies competing for business by offering the opportunity for vendors to bid and suppliers incur lower selling costs. GE has opened up the site to all businesses as a place to conduct business-to-business commerce. Buyers can browse an electronic catalog of goods and services, generate electronic purchase orders and pay for their purchases on-line (or off-line for small companies who are not equipped to receive electronic funds.)
  4. Manheim Online
    Manheim Online brings WWW to the supply chain for used automobiles. This includes a network of auto makers, banks, leasing companies, rental companies and users of fleet vehicles. Used car dealers can now browse through vast inventories of used cars nationwide and order the cars online. This really brings together the buyers and sellers of used cars together in such a way for the first time.