Read an Excerpt
The Promise and
Reality of Electronic
Reality of Electronic
Do you like big numbers? Good, because we've got some numbers for you that are big enough to challenge Bill Gates's accountant. Take these projections on the future of e-commerce:
- Jupiter Communications (an Internet market research firm in New York City) said in an August 4, 1999, report that consumer-related e-commerce in the United States is doubling every year and should amount to about $41 billion in 2002.
- International Data Corporation (or IDC, yet another market research firm, this one based in Framingham, Massachusetts) disagrees, saying that consumer e-commerce spending will amount to $56 billion that year. IDC was also bold enough to state (in June 1999) that total worldwide Internet commerce (both consumer and business-to-business) will amount to about $1 trillion in 2003. Six months later, it decided that the world Internet economy would reach $1 trillion a trifle sooner--in 2001. IDC now maintains that by 2003, the volume of trade will have reached $2.8 trillion, thanks to a surge in the numbers of users as well as in the average transaction size.
- Even bolder is a forecast made by Forrester Research, a market research firm in Cambridge, Massachusetts, that no high-tech journalist can go long without quoting. It predicted in December that business-to-business online commerce in the United States alone will amount to $1.3 trillion in 2003, or more than 9 percent of total business sales. Few industry supply chains will be immune, but e-commerce will be particularly prevalent in fields involving computers, electronics, aerospace, defense, petrochemicals, utilities, and motor vehicles, according to its analysis. Participation will accelerate because of the network effect--the more entities that participate, the more gains result from the participation. (This report included a retraction of Forrester's 1997 prediction that U.S. Internet business commerce would amount to $327 billion in 2002. Instead, hypergrowth is at hand, it announced.)
- Analysts at the Gartner Group, a market research firm in Stamford, Connecticut, estimated in January 2000 that by 2004, 7 percent of the globe's business-to-business commerce will take place online. That percent equals $7.3 trillion.
The predictions of the Boston Consulting Group (or BCG, colocated, somehow, in Boston and Toronto) are so remarkable as to deserve special attention. BCG says that by the year 2003, one-fourth of all business-to-business purchasing in the United States will be done online, amounting to a staggering $2.8 trillion. (Financial products, labor, and insurance are not included in this estimate.) Business-to-business e-commerce will be growing by 33 percent yearly in the meantime. Previous attempts to estimate business-to-business e-commerce fell short because they ignored the volume of electronic data interchange (EDI) transactions over private networks, which will amount to $780 million in 2003, explains BCG.
Companies that move aggressively into business-to-business e-commerce report cost reductions of up to 15 percent for materials by using that method, says BCG. Savings on transaction processing alone can reach almost 65 percent, thanks to the simplification of the buyers' internal purchasing and record-keeping processes.
The North American business-to-business e-commerce market is currently twice the size of the rest of the world's business-to-business e-commerce markets combined, and Western Europe lags by about 18 months. But there will be strong growth in all sectors, BCG predicts, as global supply chains go online. By 2003, it expects penetration to include:
- Twenty-four percent in North America, growing from the current 7 percent.
- Eleven percent in Western Europe, growing from the present 3 percent.
- Nine percent in Asia and the Pacific Rim, growing from the present 2 percent.
- Seven percent in Latin America, growing from the present 2 percent.
Back in the United States, by 2003 six industrial sectors will represent 65 percent of all business-to-business e-commerce, adds BCG: retail, motor vehicles, shipping, industrial equipment, high technology, and government. Cost savings (that 15 percent mentioned previously), rather than strategic opportunities, will drive most of the early adoptions.
Now, what conclusions are we to draw from this crescendo of nine-figure numbers? Indeed, as we face an uncertain future, with what wisdom derived from these learned predictions from the finest minds on the East Coast can we arm ourselves? Two insights come to mind:
- Golly, e-commerce is the wave of the future, a modern gold rush. We have the once-in-a-lifetime opportunity to get aboard on the ground floor, empowering ourselves through socially conscious wealth creation; we should grab what we can, or something in between. Research firms, brokerage houses, and consultancies sure do like to one-up each other by issuing press releases on the latest hot topics.
Congratulations if you were leaning seriously toward number two. But bear in mind that research and predictions such as those we've presented here have some value--much in the way that gold has value, even though it doesn't taste good and is too soft to make into anything useful. Yet everyone assigns it value, and in most situations it lives up to expectations. Likewise, all those predictions must be viewed in light of your own situation, but in doing so, keep these context considerations in mind:
- You can't even define e-commerce to everyone's satisfaction.
- This being a new frontier in human experience, the predictions are based more on assumptions than on data.
- The wildest of these assumptions is that as the e-commerce settlers arrive on the frontier, they will behave like the pioneers did, and (to continue the metaphor) the city folk (when they later arrive in serious numbers) will behave like the settlers did. Alas, the only data that have come in so far concerns the behavior of the pioneers, who (as pioneers always do) make a point of acting in nonstandard ways and of not flinching at arrows.
- By the time these near-future predictions arrive, the U.S. gross national product will have grown to something over $10 trillion, if it's not there already. In other words, although some of those numbers we quoted are quite tidy, they don't represent a total takeover of the economy. Offline holdouts will not (in the near future) be relegated to shantytowns along the railroad tracks. Plenty of action will remain offline, especially in the retail arena. (BCG's huge figures represent an accumulation of transactions as items in business-to-business supply chains are resold several times before final consumption.)
- What do you care about these statistics? You have your business to run, and it stands or falls on its own, not as part of some national average.
You'll notice that the pundits did agree on one general trend: e-commerce is headed through the roof. Along the way, they also show general agreement on one nonnumeric fact:
- In the future there will not be any Internet companies. Because everyone will be doing business on the Internet. Or they won't be in business. (See Chapter 17.)
Now let's talk about that gold-rush theme. Somehow, the metaphor keeps coming up. Indeed, if you take a look at some of the big names in e-commerce, you do see gold, and it is indeed rushing--out the door. Consider the following cases in point:
Doubtless the most visible success story in the consumer e-commerce field, Amazon.com is based in Seattle and sells books online. Millions of them. Plus, it has gotten into CDs, videos, toys, electronics, gifts, and anything else that comes to hand. It has also started an auction service. In its last fiscal year it grossed $1.64 billion--and lost $720 million.
- CDNOW ONLINE, INC.
Selling music CDs, cassettes, videos, T-shirts, and DVDs, this firm (located in New York City) recently tried unsuccessfully to sell itself to a conglomerate. In its latest fiscal year, it lost $119.2 million on sales of $147.2 million.
- VALUE AMERICA, INC.
This is a price club located in Charlottesville, Virginia, that sells about one hundred thousand products from about eight hundred different vendors and has no physical stores. In fact, it has no inventory--the vendors drop-ship (a practice defined a little later in this chapter) the orders for Value America from their factories or warehouses. During its latest fiscal year it grossed $182.6 million and lost $143.5 million. The stock price fell from 40 to 2, and the press was reporting "inner turmoil" and "palace coups."
Located in Aliso Viejo, California, buy.com bills itself as an "e-commerce portal" instead of a price club (embracing new buzzwords over the old, as it were) but otherwise operates like Value America in that it processes orders while warehousing and shipping is handled by the vendors. In its latest fiscal year it grossed $125.3 million and lost $17.8 million. (On the day it went public, it nevertheless opened at $13 per share and zoomed to $30. It fell below $5 in about ten weeks.)
These and other firms have bought into the idea that you need to spend money today to be a dominant player tomorrow, when all the world will be buying over the Internet and those who got there early will own the turf. Brand awareness is everything, and because they are starting from scratch, the only thing they can do is buy brand awareness, cost what it may. You can easily see why they have an obsession with brand awareness, because (thanks to a reliance on drop shipping) their brand name is all they have--they don't do any of the things normally associated with commerce. For example, they don't:
- Invent technology.
- Develop products.
- Manufacture products.
- Market products.
- Mine raw materials.
- Process raw materials.
- Produce anything through any method.
- Grow crops.
- Ship anything themselves (typically).
They just put up Web pages and take orders--and spend tons of money on advertising.
At last report, Silicon Valley was said to be bulging at the seams with emulators, frantically pushing and shoving to get office space, clerical employees, technical employees, publicity and advertising representation, and even parking space--everything but money, which they got after dropping by one of the venture capital firms on Sand Hill Road.
Don't go. The opportunity of e-commerce is that you have another channel for doing what businesses must always do to be successful: satisfy the buyer and especially the buyer's perception of quality. And a big part of that perception is the expectation that you can be found on the Web. After all, you might not judge a company by the size of its advertisement in the Yellow Pages, but you would think it a little odd if it were not in the phone book. After that, there is the old foursome of price, convenience, product, and knowledge. Each has its place.
Yes, the low costs of e-commerce compared with those of having a store may indeed let you offer lower prices online. However, those cost savings can be eaten up by the shipping department or by your frantic efforts to create brand awareness. Basing your business on having the lowest prices is like bragging of being the fastest gun in Dodge City. At any moment someone faster may emerge, with catastrophic results for you. And online, the latest gunslinger can find you at the speed of light.
Here is where e-commerce shines. Buyers don't have to fight their way through traffic to reach you. You, meanwhile, don't even have to be awake to take the call.
It really helps to be selling something of genuine value that's unique as well. We'll assume you are. But taking quiet satisfaction from that fact is not enough--you need to be touting it where people expect to see you, and increasingly that means the Web. If your product or service is not unique, don't despair, because your Web site can be. It should be well organized so that everything about your offering is displayed in loving detail and buying is easy.
People do more shopping online than they do buying. On the Web, they can gather information: They can see what products are available, what features those products offer, and what prices those features involve, and then they can judge whether the benefits of those features are worth the price--all without putting up with overbearing, glad-handing, plastic-haired salespeople.
The percentage of lookers that you can turn into buyers is called your site's conversion rate. But although you want to boast of a high conversion rate, you do not want to do this by spurning the unconverted surfers at your site. You need to go ahead and give them the information they are looking for. Some will find that what you are offering is not what they want, and if they had made a purchase, they would have been unhappy customers. So you are spared that headache. Others will learn what they sought to know, and even if they don't buy from you, they will thereupon associate you with a positive shopping experience, leaving open the possibility of positive word-of-mouth references. And you were able to provide that positive shopping experience without having to lease, stock, and staff a store or to produce and mail out expensive, full-color catalogs.
Remember that prediction we mentioned earlier: eventually there won't be any Internet companies as distinguished from those that are not online because everyone will be doing business on the Internet--or they won't be in business.
- EXPERTS SPEAK
Bargains are not what drive people to shop online, according to a study by Mercer Management Consulting of New York City based on a survey of more than a thousand Internet shoppers. Instead, 82 percent said they liked to use the Internet because they could find the information that helped them make better decisions. Meanwhile, 72 percent cited the Internet's convenience. Only 49 percent cited the Internet's ability to save them money.
- EXPERTS SPEAK
Jupiter Communications, mentioned earlier, reports that $7 billion was spent online during the 1999 Christmas shopping season. Ninety percent of surveyed shoppers said they were largely satisfied with their online buying experience, up from 78 percent in 1998. But they were concerned about the same things they had worried about in 1998: security, inventory shortfalls, shipping costs, and slow Web site performance. Half spent less than $200, but 35 percent said they would likely spend more online during the following Christmas shopping season based on their experience, and only 4 percent said they were so discouraged that they would probably spend less.
- Drop shipping means that you, the e-commerce merchant, take an order for an item and pass it on to the manufacturer (or, in many cases, distributor) of the item. The manufacturer then ships the item to the buyer with your label, invoice, and so on, and for all the buyer knows, it was sent from your vast warehouse via your fleet of trucks. In reality, all you may have is your Web site and an agreement with the manufacturer. You take orders, pass them on to the manufacturer, and the price differential is your profit. But other challenges may arise.
- Drop shipping is a common practice, especially with furniture and large appliances, because it cuts down on shipping--instead of your product being shipped from the manufacturer to a distributor and then to a store and then to the consumer, it's sent directly to the consumer.
- "If done well, drop shipping does not add any problems," says John Schulte, chairman of the National Mail Order Association in Minneapolis. "But you can go overboard if you are trying to get by with no money and drop shipping everything, down to $9.95 items. What if the buyer is trying to coordinate an ensemble and buying a number of small things from multiple vendors? The buyer will be waiting for several shipments, the supplier will have a hard time coordinating it, and it ends up being a mess.
- "In most cases you can't have both 100 percent drop shipping and a high customer satisfaction rate--unless most of the product is coming from one large distributor," Schulte warns.
- The problem is especially acute with start-ups by new-comers who have been told--typically in a get-rich seminar or book--that they can start a business with no money by relying on drop shipping, he notes.
- "I spend a lot of time telling people not to waste their money buying schemes about setting up a business with $500 in three steps, or something," Schulte adds. "There are so many people out there trying to convince you to start a business without any forethought, to sucker you into thinking you can do it all by drop shipping. Of course, it sounds great, since you don't have to put any money into inventory. We see it all the time since we deal with so many start-ups."
- THE VIRTUAL BUYERS
Meanwhile, we have to remember that these people whose expectations you need to satisfy are not the same as the ones hanging out at the mall. They're online. True, there is considerable overlap, as mall rats return home and turn on their computers and Web surfers venture out of their houses to check out the face-to-face world. But whoever they are in real life, when online they tend to adopt a set of behaviors and expectations molded by cyberspace. Let's look at their chief characteristics, as determined by recent surveys and polls by market research firms. (As before, their figures do not always agree. This is new territory, after all. Plus, there are disagreements on terms, such as what an adult is--a 16-year-old? an 18-year-old?--and if Mexico is part of North America.)
- Their Present Numbers
Based on analyses of published studies, Nua Ltd. (an Internet firm in Dublin, Ireland) estimates that as of March of 2000 there were 304.36 million people online around the world. The breakdown:
According to Nielsen Media Research of New York City, in a June 17, 1999, report, the number of Internet users in North America (defined as the United States and Canada) who were 16 and older reached 92 million in mid-1999. That figure had gone up 16 percent in nine months, which means that 40 percent of the population was online by then.
For the United States alone, other figures (from a May 19, 1999, report by Mediamark Research, Inc., a market research firm in New York City) show that in mid-1999, 64.2 million adults were going online each month. The number of U.S. adults with Internet access stood at 83.7 million, which means that 42.2 percent of Americans over 18 were regular Internet users--a 20 percent increase over the previous year. Other factoids from Mediamark about the U. S. Internet user population:
- A tiny majority was male: 51.4 percent, versus 48.6 percent female.
- Home users led office users by about two to one.
- Asked if they ever used an online service, 28.6 million named America Online (AOL), 7.96 million named Microsoft Network (MSN), 1.96 million named CompuServe, and 1.93 million named Prodigy.
And let's not forget the study in late 1998 by Roper Starch Worldwide, another market research firm in New York City, which found that two-thirds of U. S. Internet users would rather give up their phone and TV than their Internet access. Of those with laptops, 50 percent took them along on vacation.
- Their Future Numbers
There will be 545 million users online in 2003, estimates Data-monitor, a market research firm in London. And the Computer Industry Almanac (a publication of Computer Industry Almanac, Inc., of Arlington Heights, Illinois, that prefers to render its initials as C-I-A rather than CIA) estimates that there will be over 717 million Internet users worldwide by the end of 2005. It defines user as an adult who gets on the Internet at least once a week. Its breakdown for 2005 in a September 9, 1999, press release:
In North America, a little more than a third of all homes were online in 1998, and by 2003 the number is expected to reach 56 percent, says Forrester Research.
- E-commerce Becoming Global
According to IDC, non-U.S. e-commerce will grow rapidly, from 26 percent of the global total in 1998 to 46 percent in 2003. In Western Europe it will grow from $5.6 billion in 1998 to $430 billion in 2003--a compounded annual growth rate of 138 percent. Over the same period, Asia/ Pacific (including Japan) will see its e-commerce grow from $2.7 billion to $72 billion. IDC figures that worldwide e-commerce will amount to just over $1 trillion in 2003, even assuming that, like today, only 36 percent of online users will buy anything.
- Frequency of Online Purchasing
Dataquest, a market research firm in San Jose, Califiornia, reports that in the first half of 1999, there were 37 million U.S. households online. In about a third of the cases, someone in the house bought something or made a reservation online during that period.
Navidec, a market research firm in Englewood, Colorado, got even more favorable results in a phone poll in mid-1999, which showed that 53 percent of U. S. Internet users had made an on-line purchase during the previous year. (That's compared with 26 percent in 1997.)
Nielsen reports that about 30 percent of North American Internet users in 1999 were online consumers according to its criteria and that about 60 percent had used the Internet to compare prices. Of the 28 million people whom Nielsen estimates had made purchases via the Web, 9 million people bought something at least once a month, and 1 million people bought something at least once a week. Of all online buyers, 13 percent had made their first purchase via the Internet in the preceding month.
Other sources put the percent of the online population who buy via the Internet at between 32 and 36 percent.
As for what they are buying online, Greenfield Online, a research firm in Westport, Connecticut, has this breakout of what percentage of the online U. S. population has bought what kind of product:
Navidec, meanwhile, reports that the most popular products to buy online are books and publications (52 percent had bought them), computer software (42 percent), and travel products or services (37 percent.)
- Buying Online = Not Buying Offline
An August 4, 1999, report by Jupiter Communications forecast that less than 10 percent of online commerce in 2002 would be "incremental," meaning that the sales would not have occurred without the advent of e-commerce. Therefore, about 90 percent of the anticipated growth in e-commerce will be at the expense of offline commerce: Those online sales will take place in lieu of offline sales that would have been otherwise captured by a traditional channel.
The report complains that most traditional merchants' Internet strategies were paralyzed by indecision, allowing newcomers to seize the high ground. The traditional merchants rationalize their inactivity by assuming that any Web sales they achieve would simply cannibalize their traditional channel sales. Hence, there is no point in investing in e-commerce.
But the danger is that buyers will switch to online competitors. Merchants must accept the idea that cannibalized sales are better than no sales at all, said the report.
Navidec reports that 35 percent of online consumers said they were purchasing less from offline stores because of the Internet and that 38 percent said they were purchasing less from mail-order catalogues because of the Internet.
- Attitudes toward E-commerce Problems
Dataquest also reports that overall customer satisfaction with the online buying experience was 88 percent, despite the fact that 20 percent of those who bought something experienced some kind of problem. (For the problem cases, 49 percent involved something that did not arrive, and in half of those cases they were billed anyway. For another quarter, the complaint was that they were unable to reach the vendor's customer support department by e-mail.)
Navidec finds that overall satisfaction of Internet users with their online purchases was a whopping 99 percent, with 79 percent describing themselves as "very satisfied." Although 36 percent remained concerned about the security of shopping online, only 21 percent were worried about credit card fraud--half the percentage found in 1997.
- Women and E-commerce
A lot of recent growth in Internet use and e-commerce appears to come from a greater participation by women in the online world. Of North American Internet users, the number that were women suddenly rose to 46 percent in 1999, says Nielsen, after several years of staying at 43 percent. Of those who shop via the Internet, 41 percent were women, having risen from 36 percent. Among those who bought something over the Internet, the percentage of women rose from 29 to 38.
Women bought 45 percent of the books sold online during the previous year, reports Nielsen, plus 38 percent of the CDs and videos, 24 percent of the computer hardware, and 53 percent of the clothing.
- E-commerce Isn't Small Change
The average value of an online transaction is $4,600, according to a survey by ActivMedia, a market research firm in Peterborough, New Hampshire. But actually this figure is the average for two clusters, one for business-to-business and the other for consumer transactions; the former's average ranged between $1,000 and $10,000, and the latter's ranged between $100 and $500. About 60 percent of consumer transactions were for $500 or less, and a third were for less than $100. Of business-to-business transactions, 1 in 10 were under $100, and a third were between $100 and $500.
In a telephone poll of Internet users, Navidec found that the average online purchase was $206--up 17 percent from 1998.
- Age and E-commerce
A survey in 1999 of Americans 50 and older by Charles Schwab & Co., Inc., (the New York City brokerage house) found that 40 percent of them had a computer at home, as opposed to 29 percent three years earlier. Seventy percent of those computer owners had Internet access. Fifteen percent of those were heavy users, defined as people who spent more than 10 hours week online.
Greenfield, quoted previously concerning what online shoppers buy, has also gathered figures specifically concerning Americans over 55 years of age. Here's what they buy:
Notice that the figures are about twice that of the general population. When senior citizens go online, they mean business. Of those who are online, 78 percent had bought something, and 92 percent had window shopped. They tended to be familiar with the technology, as well as the use of peripherals such as scanners and printers. Only 19 percent expressed any discomfort with the complexities of computers, the report found.
- Youth and E-commerce
Forrester Research estimates that 47 percent of U. S. citizens between the ages of 16 and 22 are online. That's about 12.4 million people. Someone invested in a computer for each of them, meaning they have a presence in the economy. In fact, they have average annual incomes of $3,000 each, most of it presumably disposable, creating a $37 billion market right there.
Jupiter Communications, meanwhile, has found that two-thirds of U.S. teenagers and one-third of U.S. children with Internet access had shopped or bought something online. At that rate, the U.S. youth market will be worth $1.3 billion in 2002, the firm concludes.
The figures foretell a future population of adults who are as comfortable online as offline and are likely to do their shopping in either domain.
- Young but Not Stupid . . .
Forrester Research has found that on-line youths fell into two categories:
- Netizens who spend more than 10 hours weekly online and whose lives seemed to be dominated by the Web. Cliquers who spend less time online and for whom the Web was just another daily activity. Both groups tended to multitask--eating, listening to music, or watching TV while online.
- . . . In Fact, Smarter than You Think
Forrester Research has also found that the hottest leading brands in the real world had no impact on their surfing, and they showed no interest in visiting the Web sites of those brands, a survey showed. Only usefulness and interesting interaction mattered--brand recognition had no pull at all.
- Web-Grown Instincts
Young Netizens have developed specific attitudes and expectations that Web vendors must comply with at their peril, adds Forrester. The firm lists five Net rules:
- Information is everything--extensive and accurate information should be available anywhere at any time. This agrees with a Navidec poll that found that 70 percent of polled Internet consumers cited the quality of the information available on a product as a crucial factor in their decision to make an online purchase. (Of course--if they were satisfied to be passive recipients of canned propaganda, they would be watching TV. They expect your Web site to be an encyclopedia about your products.) They know that personal information about themselves has value, which means marketers must offer something of value in exchange if they are going to poll Netizens about their preferences and behavior. Choice is a basic right. Suppliers must offer a wealth of options and configurations. (Weren't computers invented to make such things easy?) There is such a thing as a free lunch--your lunch, when they eat it. If you want to get consumers' attention, you have to be prepared to offer no-strings giveaways. Spontaneous online trust is entirely possible. They don't need face-to-face trust-building interaction. (Apparently, they leave face-to-face interaction for non-commercial settings.)
- Delivery Issues
Order fulfillment typically means residential delivery. If you previously had thought in terms of shipping pallet loads of products to distributors or stores, you have to adjust to the idea of delivering individual items to the doorsteps of buyers. (And Forrester Research has found that 85 percent of Web merchants made no attempt to sell internationally because they could not handle the complications of cross-border shipping.)
- Pockets of Resistance
The two-thirds of Netizens who have not bought anything online express a number of reservations about the medium, according to The Intermarket Group, a research firm in San Diego, including the following areas of concern:
(Of those who were buyers, a depressing 48 percent complained about confusing Web sites, meaning they made their purchase despite the site.)
Of course, that two-thirds have not taken part in e-commerce does not mean they never will, leaving room for considerable expansion.
- WRAPPING IT UP
Where does this leave us? Basically, with a phenomenon--e-commerce--that will soon cease being a novelty and become a major part of the retailing scene. An ever-larger part of the public is online, is buying things there, and expects to see you there, too. If you are not there, a competitor will be and will siphon off more and more of your business.
Your move is obvious. As we'll show in the next chapter, it takes less time and money than you'd think.
- EXPERTS SPEAK
Forget disintermediation, advises Harry Hoyle, vice president of the market research firm GartnerGroup Dataquest in Stamford, Connecticut (although he's in the London office.) (Disintermediation is the removal of intermediaries so that the public buys directly from the manufacturers.) Basically, unless they are buying commodities, the buying public needs intermediaries, he says.
- "What has been successful in e-commerce so far has been CDs, books, flowers and gifts--low-cost commodity products that do not need an intermediary, because you know exactly what you want to buy when you go online," Hoyle notes. "But when you look at total consumer expenditure, there are huge areas, like health and beauty aids, apparel, and food and drink, that have barely been scratched."
- In such areas, the purchase decision involves countless options and is based largely on personal taste, he continues. (And, he added, buyers may prefer "touch and feel" shopping.) All this creates what he called "friction."
- "Our view is that there will be great success with these categories only with the help of intermediaries of some sort, who can come along and grease the wheel," he concludes.
You thought this was easy, huh? You thought this was what the book was about, so the definition must be obvious. Guess again. Try this:
- While watching QVC, you see a Beanie Baby that steals your heart, so you dial the 800 number and buy it with a credit card. Is that e-commerce? After all, everything happened electronically. Or consider an electrical engineer who spends hours on the Web hunting down the specifications of components he is considering using in a design. When he finally makes his decision, he turns the part numbers over to the purchasing department, who negotiates a deal during a power lunch. The purchase may or may not take place online, but the shopping took place there. There are plenty of e-commerce Web sites that show you their wares in glorious detail, but when you click the "place order" button, you get a screen telling you to call an 800 number.
- Basically, we take e-commerce to mean, "buying and selling things when the Internet is used to make the transaction." The two previous examples are Internet-assisted commerce, and that is the route to take in certain situations. (Some prices have to be negotiated--there is no way around it.) As for QVC, we're not sure what to call it.
- Meanwhile, there are those who would reject this definition. E-commerce, they'd say, means that everything must be integrated. Data from Internet sales must be warehoused and then mined for insight, creating a loop-back mechanism that continually modifies your electronic-marketing efforts. Plus you need links to your inventory, accounting, and planning systems. They'll tell you to your face that if you are not spending a million dollars, then you are not with the program.
- Go out and prove them wrong.
- Business-to-Business E-commerce
You'll notice that the previously quoted predictions mentioned something called business-to-business e-commerce, foreseeing it to be about twice as big as consumer e-commerce. That is because it generally involves selling wholesale quantities in some segment of a supply chain. Electronics distributors, for instance, often have Web sites where a "qualified reseller" can log in, find what she needs at prices adjusted according to the discount level she has earned through previous orders, what the inventory level is and at which warehouse, and what the likely delivery schedules might be. Plus she can examine a wealth of technical data about the item. There may even be what's called a configurator to check if it will work with another specific item. There are PC vendors with Web pages for specific customers, where they can log in and order merchandise based on their contracted prices. But achieving such levels of sophistication takes a major effort, with deep, custom-programmed integration between the e-commerce function and the existing information systems of the entire enterprise. It is not something a small operator should be contemplating, initially or ever. (Meanwhile, business-to-business e-commerce is nothing new, having been done with EDI for about three decades now.)
- Electronic Data Interchange (EDI)
EDI invoices the transmission of predefined, formatted messages from the computer of one business to the computer of a trading partner, covering about everything you'd expect: orders, acknowledgments, invoices, shipping notices, receipts, and even press releases. In fact, there are hundreds of possible EDI messages, many of them specific to an industry. Some corporations require their suppliers to use EDI, and if you need EDI, you have doubtless heard all about it by now. Otherwise, rest easy.
- The previously consulted Boston Consulting Group estimates that the volume of EDI in the U. S. amounted to $579 billon in 1998, of which 86 percent took place over private networks.
That's right, tulips. You'll eventually hear someone make reference to those bulbous herbs of the lily family in the course of any discussion of e-commerce and Internet companies. There was a financial bubble in Holland in 1634 caused by a speculation craze in tulip bulbs that makes today's Beanie Baby trade look stone-cold sane. It was the early days of large-scale capitalism, and people were just getting used to the idea that they could invest in something besides land. And here we are in the early days of the Internet, when people are just catching on to the idea of nonphysical commerce. The result: Although conventional firms are typically valued at 10 to 40 times their earnings, Internet firms have found they can get away with being valued at 10 to 40 times their gross revenue. That puts them in a stock-price range about 16 times higher than conventional firms. Let's just hope the bulbs sprout.
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- Prior to e-commerce hitting the scene, the splashiest gold rush was the one that took place in 1897 and 1898 in the Klondike region of the Yukon Territory. About one hundred thousand people set out, spending fortunes to equip themselves and get to Skagway, Alaska. From there, they struggled up a frozen mountain pass or took the well-named Dead Horse Trail, and then (when the ice broke) they rafted down the treacherous Yukon River to Dawson City. About thirty thousand showed up at that end, and maybe one-third of 1 percent got rich. (The man who made the biggest find blew it all and died penniless.) But about half of them just stood around on street corners until the summer thaw allowed steamboat service to resume, and then they trickled home.
- The demands of the e-commerce gold rush, as we'll show, are dramatically less rigorous. With a little planning, you won't be left standing dazed on a street corner, happy to let the world pass you by. As for striking it rich, that's not the issue--the issue is staying in business. Having done that, well, maybe you can go on and be in that 0.33 percent.
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- "Anyone you talk to, nine out of ten will say they want to be self-employed," notes John Schulte. "And in the mail-order business there has always been the allure of a pot of gold."
- Schulte warns, "There are people who say they will sell you their catalogue which you can put your name on and mail out, and be in business. But they just throw junk into it. Now they are doing the same with Web sites, saying 'Yes, honey, you can get rich on the Internet. ' Just look at the ads in the business section of major newspapers."
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- J. D. Power and Associates, the automotive industry research firm (whose awards are often seen touted in car ads), estimates that as many as 40 percent of U. S. consumers who bought a car or truck in 1999 used the Web for shopping. That is up from 25 percent in 1998. But only 2.6 percent actually bought their vehicle over the Internet (although that amounted to 24,000 online purchases per month.) Among used car buyers, 26 percent went on the Internet to make a decision. (Other researchers found that 36 percent of car buyers used the Internet.)
- EXPERTS SPEAK
The advantage of e-commerce (at least compared to mail-order business) is not that it lowers the cost of doing business but that it makes a business more agile. At least that's John Schulte's opinion. "When a company has a dynamic Web site, they can make instant modifications or clear out merchandise that they ordinarily could not afford to put in their catalog," Schulte says. "If you have 500 blue size-10 skirts, that is not enough to put in the catalogue, and in the past you would only be able to close them out to a liquidator for a couple of cents on the dollar. Now you can put them on your Web site in the clearance section."