Training Module III: Buying and selling online

Objectives

The module 3 aims to provide perspectives of buyers and sellers, introduction to different e-business models with classic cases.

Materials

Flip charts, PowerPoint presentations, a computer for web site demonstrations, and/or an overhead projector.

This module will go through the essentials of possible strategies, based on buyers and sellers' perspectives, to engage in e-business, their advantages and disadvantages and their particular benefits.

First of all, before we begin into buying and selling, let's examine why people shop online? Here are a few reasons behind this:

Enables consumers to shop or do other transactions 24 hours a day, all year round from almost any location

Provides consumers with more choices Provides consumers with less expensive products and services by allowing them to shop in

many places and conduct quick comparisons Allows quick delivery of products and services, especially with digitized products Consumers can receive relevant and detailed information in seconds, rather than in days or

weeks Allows consumers to interact with other consumers n electronic communities and exchange

ideas as well as compare experiences Facilitates competition, which results in substantial discounts

At the same time, there is a big myth about the unknown world of the Internet. So, many people are still keeping away from the Internet shopping based on a few following reasons:

Security and Privacy o Difficult to convince customers that online transactions and privacy very secure

Customers do not trust:o Unknown faceless sellerso Paperless transactionso Electronic money

Switching from a physical to a virtual store may be difficult Lack of touch and feel online Many unresolved legal issues Expensive and/or inconvenient accessibility to the Internet E-payment is not in place in many places

A. How it works: Expectation and Reality

Buying and selling something is an event when two parties or more engage in a commercial transaction. So, an e-commerce transaction has two roles: buyer(s) and seller(s). Each of these roles has its own agenda, but the logical assumption of a commerce transaction is that both parties want to cooperate to find a mutually acceptable solution. Each of these roles as a set of beliefs, and expectations about its own purpose and agenda in a transaction, as well as beliefs and expectations about the other role's.1

Both buyer and seller roles have "comfort zones" built into the relationship based on their expectations and experience: perhaps the buyer believes that s/he can trust a car dealer only so far, or perhaps, a merchant will extend credit to people whom s/he knows. This flexibility can be exploited by dishonest participants, but

1 www.philosophe.com/commerce/roles.html

should one of the parties have reason to doubt this search of a mutually acceptable outcome, the entire commerce transaction becomes more difficult and may fall apart in distrust.

Figure 1: Online consumer behaviour model

E-commerce is still new enough that participants are still trying to get a handle on how the rules of commercials interaction apply to this new medium. The burden of smoothing the transition to online commerce falls to the creators and owners of e-commerce sites, because when a commercial transaction falters through misunderstanding or distrust, a typical buyer-to-be won't spend any effort analyzing the contradictory message cues or violated role-playing expectations. When a potential customer is frustrated, s/he will exit; the merchant has the investment in fostering the relationship, and so had better understand the mechanics of the relationship, starting with the roles.

1. Buyer: From the Point-of-View of the Buyer

Buyers expect three important actions from a typical transaction; anything that interferes with these three actions is going to bother the buyer:

1. Want to make the decision to purchase something (what, when, budget, trust, etc.)2. Want to effect payment for this something (correct charges, security, protection, etc.)3. Want to assume ownership of what they purchased (status of order, delivery, etc.)

If the merchant fails to meet the buyers’ expectations – whether the expectations are fail or accurate – the buyer will be dissatisfied. Delayed orders face the possibility of cancellation.

2. Buyer: From the Point-of-View of the Seller

The larger ecommerce web sites tend to treat individual buyers as statistics. Sales count as indications of trends: more click-through, more page hits, more traffic all means more revenue. Pleasing the individual user is usually not a priority. Getting the users to recognize the site’s branding is a priority, however, because the assumption is that exposure will translate to patronage.

3. Seller: From the Point-of-View of the Buyer

Buyers (online shoppers) seem to look for some of the following general characteristics when choosing between sellers (e-commerce merchants):

The perception of the cheapest price : Numerous studies show that people comparison shop online for the cheapest price.

The perception of fewer hassles : The different commerce “engines” or applications accommodate user of expectations (e.g., user-friendliness) with different degrees of success.

The perception of trustworthiness : A user must decide to trust an e-commerce site before making a purchase, and this decision is based on a perception and judgment of the site’s trustworthiness.

The visibility of the site : The user’s awareness of a site has an obvious effect on their potential to purchase from the site. Advertising, public relations, and media play all contribution to increase consumer awareness about a site, but none of these speaks to the quality or trustworthiness of the site.

4. Seller: From the Point-of-View of the Seller

From the seller’s point of view, the e-commerce site is out there on the web to make money. The goal is to generate always increasing traffic, so visibility is essential. Advertising, press releases, media exposure, partnerships –these all are tremendously important for creating and maintaining public awareness of the site. The critical concerns governing the decision making process become: will a proposed change drive traffic to the site, and will it interfere with the basic ability to purchase from the site?1

5. Intermediaries

There are many other players or roles in the world of e-business/e-commerce called intermediaries, who may process the merchandise in the warehouse, may ship the merchandise, may deliver it, may process transactions, may support post-sales, etc.

6. Buyers-sellers-intermediaries: Put all together

There are four major categories of e-business/e-commerce based on dynamic pricing:

One buyer, one seller –negotiation, bargaining Many buyers, many sellers – dynamic exchanges One seller, many potential buyers –forward (regular) auctions One buyer, many potential sellers –reverse auction, tendering

Figure 2: Buyers and sellers in B2B e-business

Figure 3: Buy-side and sell-side e-commerce

B. Types of E-Business Models

E-Business models have been defined and categorized in many different ways. In the implementation, a business can combine several different models as part of its overall e-business strategy. The basic categories of business models are as follows:

Brokerage model Advertising model Merchant model Manufacturer model Subscription model Affiliate model

1. Brokerage model

Brokers are market-makers. They bring buyers and sellers together and facilitate transactions. Brokers play a frequent role in business-to-business (B2B), business-to-consumer (B2C), or consumer-to-consumer (C2C) markets. Normally, they generate revenues from charging a broker fee or commission for each transaction they enables. The formula for fees can vary. The types of this model that are frequently seen include;

Types Function

Auction Broker It is the oldest form of brokerage model. It conducts auctions for sellers (individuals or merchants).

Broker charges the seller a listing fee and commission scaled with the value of the transaction. Auctions vary widely in terms of the offering and bidding rules.

Visit www.ebay.com, and www.alibaba.com for reference. Auctions (Annex):

o English auctiono Yankee auctiono Reverse auctiono Proxy format auctiono Dutch auctiono Express or flash auction

Transaction Broker. It acts as a third-party payment mechanism for buyers and sellers to settle a transaction. Transaction cost is the major revenue.

Visit www.paypal.com, and www.escow.com for more references.

Search Agent. A software agent used to search-out the price and availability for a good or service specified by the buyer, or to locate hard to find information. For example, a job search site (www.jobdb.com)

Virtual Marketplace (virtual mall).

It offers a hosting service for online merchants that charges setup, monthly listing, and/or transaction fees. It sometimes provides automated transaction and relationship marketing services.

Visit www.amazon.com for a reference.

2. Advertising model

The web advertising model is an extension of the traditional media broadcast model. In this case, a web site is working as if a broadcaster. It usually offers all users a free of charge content and services. The site can generate revenues form posting advertising messages in the form of banner ads. The broadcaster may be a content creator or an aggregator of content created elsewhere. The advertising model works best when the volume of viewer traffic is large or highly specialized.

Types Function

Portal It is a search engine that may include varied content or services. A high volume of user traffic makes advertising profitable and permits further diversification of site services. A personalized portal allows customization of the interface and content to the user. A niche portal cultivates a well-defined user demographic.

Visit www.yahoo.com for a reference

Classifieds It consists of listed items for sale or wanted for purchase. Listing fees are common, but there also may be a membership fee.

Content-Targeted Advertising

Pioneered by Google (www.google.com), it extends the precision of search advertising to the rest of the web. Google identifies the meaning of a web page and then automatically delivers relevant ads when a user visits that page.

3. Merchant model

The merchant may like to expand their offline businesses into selling online, or even start with selling only on the web. Sales may be made based on list prices or through auctions. Online merchandising is defined by the site’s look and feel; its functionality including site performance and customer shopping options; and customer experiences. The model deals with the following factors:

Product presentation Site map -how the user gets around the site Online ordering – shopping cart Functional use of technology – search, personalization features Customer service – on phone, communication by email The backend – order processing through shipping company Programs fostering customer loyalty and retention

Retailers and wholesalers that sell goods and services online are also known as “e-Tailers.” The merchants may be extending their physical or “brick and mortar” store into an online store, or starting from scratch and selling only on the Internet. Many mail-order businesses have successfully moved their catalogue and ordering systems to the Internet. 2

4. Manufacturer model (or Direct model)

One of the key opportunities for the Internet is the capacity for manufacturers to reach buyers directly, therefore improving the efficiency of the distribution chain. An online presence has become essential for manufacturers. The Internet provides the ultimate way to get in touch with customers, to conduct market

2 www.business.vic.gov.au/BUSVIC/STANDARD/1001/PC_50918.html

research, and to establish loyal relationship with individuals. Customers have been suggested a new way to shop, search for a global products and brands. Moreover they feel more comfortable because of time and cost saving, and availability of 24 hours a day. The model allows a manufacturer to reach directly and thereby compress distribution channel. So, the heart of this model is based on having a better understanding of customer preferences, and improved customer service. Visit www.dell.com for reference.

5. Subscription model

A user needs to pay a fee while getting more in depth information that they would like to know. For example, web sites offering news, market survey may provide a brief summary at first. A user may be asked to pay for a subscription on a periodical daily, weekly, or monthly basis before having the whole version.

6. Affiliate model

The affiliates provide purchase/service-point-check through to the merchant e.g., banner exchange, revenue sharing.

C. Classic Cases

1. Ebay (www.ebay.com) – B2B/C2C

Ebay.com is one of the phenomena of the Internet age. It is the world’s largest online auction for individuals and now they are expanding their services beyond the auction. An individual can go to the web site (ebay.com) and find what he or she wants to buy through selecting featured items, browsing by category, and/or doing a search the whole site or selected categories. eBay popularized the concept of buying and selling online, and both individuals and commercial enterprises list items for sale. There is no charge to browse the site or make bids and purchases, but there is a fee to list items. If an item is purchased, the seller pays eBay an additional fee. Millions of items are offered, and billions of dollars worth of merchandise are sold every year through this services.3

Launched in 1995, eBay has made numerous acquisitions over the years, including the PayPal payment service in 2002 and the Skype voice over IP (VoIP) service in 2005. Through its PayPal service, eBay enables various businesses or consumers with email in 45 countries to send, and in 44 countries to receive online payments. On February 23, 2005, it acquired Rent.com, an Internet listing web site in the apartment and rental housing industry.3

At December 31, 2004, the Company had web sites directed toward many countries in different parts of the regions including the United States, Australia, China, France, India, Italy, Malaysia, Philippines, Singapore, South Korea, and the United Kingdom. In 2005, it had the revenue of US$4.55 billions and net income of US$1.08 billions.

What make eBay work? eBay connects people who previously could not be connected economically (new possibility). Now, that creates users’ motivation to participate (buy/sell) stronger, which leads to rapid success over the years.

In consequences, there is a rapid growth of person-to-person auctions, rise of “questionable” auction items, end of flea markets and garage sales, creation of new markets, specialized trading, and facilitation others.

2. Amazon.com (www.amazon.com) - B2C

3 www.answers.com/ebay

Amazon.com is an online retailer which has been one of the most successful e-commerce companies. It mainly focused on selling books, but expanded its scope to DVDs, software and music, later added more consumer items ranging from apparels to gourmet foods. The success stems from the fact that the company maximizes the power of databases to analyze customer preferences, undertake individualized marketing, allow the sales of second hand items and facilitate customer participation by encouraging reviews and creation of recommended book lists.

By the year 2000, more than 60,000 other web sites were linked to Amazon.com. The number is likely triple that today. Amazon’s net sales for 2005 rose to almost $8.49 billion. This number is so far above any other online shopping site as to make comparisons difficult or meaningless. 4

Based on the success in the United States, the company also expanded geographically to Canada (www.amazon.ca), UK (www.amazon.co.uk), Germany (www.amazon.de), France (www.amazon.fr), Japan (www.amazon.co.jp) and China (www.joyo.com), to attract people in over 24 countries around the world to open an Amazon account and buy from any site as long as they pay shipping fee and other additional fees and duties.

Meanwhile, these web sites are designs to enable millions of unique products to be sold by companies and by third parties across the product items including apparel, books, camera, DVDs, tools, toys, and so on.

The item of amazon.com apparel section (www.amazon.com/apparel) is a good example to claim its success. More than one million customer accounts continue to purchase many brand name items offered by 200 apparel sellers since its launch in November 2002. Sales in the first two months of 2004 were up approximately 90 per cent year on year. The most online purchases included 52,000 pairs of shoes, 48,000 pairs of pants and jeans, 25,000 pairs of underwear, 21,000 jackets, coats and fleeces, and 15,000 men’s dress shirts. The www.joyo.com offers more than 300,000 books, music, video and DVD titles, making it the largest Chinese bookstores in the world.

4 How to sell anything on amazon and make a fortune

3. Dell Computer (www.dell.com) – B2C/B2B

Dell Computer is another good example exploiting the power of Internet and uses it to breakdown traditional boundaries. The company started in 1984 with $1,000 to sell computers directly to consumers. By using the Internet to receive orders with personalized specifications, Dell could slash the inventory cost and time which normally takes to assemble a computer. The inventory turnover was shortened to 7 days when the industry average was 80 days or more.

Presently, the company becomes the world’s no.1 direct sale computer vendor that designs, develops, manufactures, markets, sells, and supports a full range of computer systems and services by customizing to customer’s requirements. These include enterprise systems (servers, storage, workstations, and networking products), client systems (notebook, and desktop computer system), printing and imagining system, software and peripherals, and global services. The company markets and sells directly to customers who are corporate account, and government, healthcare and education industries, as well as small and medium businesses and individual customers.

The company’s strategy focuses on customer. It set up and manages the manufacturing facilities and sales offices throughout North America, Europe, Asia and South America to stay close with customers wherever they are. The company also launched the Internet sites at www.dell.com, making another channel to customers to not only take advantage of online tools, but also be able to communicate directly when they have requirements before and after sale service.

4. Alibaba.com (www.alibaba.com) - B2B/C2C

Alibaba.com, one of the best know Chinese Internet companies, is a global B2B marketplace for products and services in various categories including Agriculture, Chemicals, Telecommunications, Office Supplies, Home Appliances, Security & Protection, Food, and Gifts&Crafts. Its vision is to become the number one destination for buyers and sellers among small and medium sized enterprises (SMEs) to find trade opportunities and promote their business online.

Through the use of Internet search engine technology, buyers and sellers will be able to find new business partners and make modifications to their strategic approach after evaluating the product offerings and prices of competitors.

Beginning the business with $60,000 and a dream, Alibaba.com was officially established in Hangzhou, China in March 1999, by a group of young Chinese Internet pioneers led by Mr. Jack Ma. Today, it has registered approximately 1,000,000 business members worldwide. Its business model soon drew great attention in the international IT industry and attracted various institutional investors, including Goldman Sachs and Softbank. Additionally, governments and non-governmental organizations in the USA, Japan, Singapore, India, Taiwan, and Europe recommend Alibaba as the B2B website of their choice.

Alibaba.com was selected by Forbes magazine as "Best of the Web: B2B" twice (2000 and 2001) and was voted as the most popular B2B website by readers of the Far Eastern Economic Review in November, 2000. Harvard University has twice chosen Alibaba for MBA case studies.

Alibaba.com CEO Jack Ma was nominated one of the Global Leaders for Tomorrow by the World Economic Forum in 2001, also being honored as a recipient of the Asian Business Association Business Leadership Award in the same year.

5. TARAD Dot Com 5(www.Tarad.com) – B2C

Founded in 1999 by a middle aged Thai Mr. Pawoot Pongwittayapanu, TARAD Dot Com is a provider of innovative and integrated e-Marketplace, e-Commerce, Merchant Service, advertising tool, and e-Marketing consultation. The www.tarad.com is Thailand’s biggest “B2C” e-marketplace. There are over 47,000 merchants signing up to open stores in the site. By taking advantage of building a concept of virtual community mall, the web site can generate revenues from selling online advertising.

Presently, it operates three web sites of www.tarad.com (B2C, 47,000 merchants), www.thaisecondhand.com (C2C), and www.taradebid.com, (C2C, eAuction), all of which record over 2 million users per month relatively)

By taking advantage of building a virtual community concept, they also generate revenues from selling online advertising, product listing fees, etc.

5 Note: Tarad is a Thai word meaning a market.

Reference

Alibaba, www.alibaba.com Amazon, www.amazon.com Bellomo, Michael, How to sell anything on amazon and make a fortune, 2006 Business.vic.gov.au, www.business.vic.gov.au/BUSVIC/STANDARD/1001/PC_50918.html, Types of

eBusiness Dell, www.dell.com Ebay, www.ebay.com Escow, www.escow.com Google, www.google.com JobDB, www.Jobdb.com Paypal, www.paypal.com Philosophe.com, www.philosophe.com/commerce/roles.html, A thoughtful approach to web site quality Tarad, www.tarad.com, www.taradebid.com, www.thaisecondhand.com Yahoo!, www.yahoo.com