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

Dr. Ehud Reiter, Computing Science, University of Aberdeen 4

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

Dr. Ehud Reiter, Computing Science, University of Aberdeen 5

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

Dr. Ehud Reiter, Computing Science, University of Aberdeen 7

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

Dr. Ehud Reiter, Computing Science, University of Aberdeen 9

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)

Dr. Ehud Reiter, Computing Science, University of Aberdeen 10

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

Dr. Ehud Reiter, Computing Science, University of Aberdeen 11

Example: Flights How can travel agent make money in

Internet age?» Especially a small one, not Expedia

Dr. Ehud Reiter, Computing Science, University of Aberdeen 12

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

Dr. Ehud Reiter, Computing Science, University of Aberdeen 13

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

Dr. Ehud Reiter, Computing Science, University of Aberdeen 14

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)!

Dr. Ehud Reiter, Computing Science, University of Aberdeen 15

Dr. Ehud Reiter, Computing Science, University of Aberdeen 16

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

Dr. Ehud Reiter, Computing Science, University of Aberdeen 17

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!

Dr. Ehud Reiter, Computing Science, University of Aberdeen 18

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

Dr. Ehud Reiter, Computing Science, University of Aberdeen 19

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