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eCommerce Site Types and Techniques (part 4)

Types of eCommerce Solutions
Extending the Physical Store:
Pure eCommerce Solution
Auctions Sites

An eCommerce Management Primer. Part 4 of a five part series by guest writer Leon Salvail of Global Village Consulting Inc.

Over the last few years, eCommerce has become the buzzword of the business and the finance communities. As a result, more and more companies are jumping into the Internet and eCommerce for fear of being left behind. Boards are directing CEO's to get eCommerce initiatives going and to get them going fast! The problem is that in a lot of cases the managers responsible do not have a clear understanding of what eCommerce is or can be, and how it is different from the traditional bricks and mortar commerce.

This is the fourth of a series of articles that attempt to provide a basic technical overview of the elements of eCommerce and to detail some of the differences these systems have over traditional commerce. Part four focuses on the different types of eCommerce sites and some of the challenges that these types bring with them.

Types of eCommerce Solutions

While eCommerce solutions in general can be divided between business to consumer (B2C) and business to business (B2B), even within the two genres, there are a number of different types of solutions that can be implemented. These solutions can be broken down into three main types: the extension of a physical store, the pure eCommerce store, and the auction store.

Extending the Physical Store:

The first type of eCommerce solution to discuss is the extension of an existing physical retailer. This eCommerce solution is the most familiar to consumers, as everything from well established brand stores to the local corner store are getting online. The process of extending a physical store to have an eCommerce portion can provide additional positive sales to an existing store, but carries with it additional issues, including some that pure eCommerce solutions may not have to face. These concerns include: integration with legacy technology, integration with business legacies, and added competition from pure eCommerce solutions.

First of all, the traditional stores may already have an inventory and a distribution system. These legacy systems (i.e., the systems that existed before the eCommerce solution) can require custom solutions for integration with the new eCommerce technologies. Often these solutions can be difficult, and as a result a good number of existing stores have taken the approach of making the eCommerce solutions act as separate online entities.

The idea is that these online stores will be better able to compete with other eCommerce stores without having the difficulties or burdens of the existing physical stores. This solution to the technological legacies can result in conflicts with the existing business systems.

As a result of or in addition to the technical legacies, physical stores that extend to have an eCommerce presence can also run into a number of business legacies. The most profound issue can be that the eCommerce site will often be viewed as a competitor to the existing stores within a chain. If not managed properly, this issue can be an area of contention, given that an eCommerce store has a potentially infinite territory. In addition to territory overlap, eCommerce stores may also carry different pricing than the physical stores. As a result, customers can come to expect eCommerce stores to be tied to their local physical store and be able to make returns and pick up purchases. Failure to accommodate this may result in a situation in which the customer is poorly serviced and the brand as a whole suffers.

Finally, traditional stores that attempt to use the eCommerce solution as an extension of their physical store are faced with a serious challenge from new pure eCommerce competitors. These new players in the market have yet to prove themselves as viable business units, but during this process of discovery physical stores can be faced with additional price and supply pressures that have not previously been experienced.

Pure eCommerce Solution

A pure eCommerce solution is one in which the web based store is the only commerce solution for that particular company. This area of eCommerce solutions brings some of the most recognizable names to our computer screens (GaltBooks, eToys) with the key being that the eCommerce solution for these stores are the only solution used; that is that they have no physical stores. Still, this type of eCommerce solution has a number of difficulties that are in some ways trade-offs from the difficulties experienced by existing stores: no infrastructure to build on, zero brand recognition, and low retention of customers.

Unlike extensions to physical stores, pure eCommerce solutions do not have any existing infrastructure to build upon. While in some cases this can be easier to implement as a result of not having to deal with integration, this also means that the pure eCommerce solutions cannot leverage any of that infrastructure. As a result, pure eCommerce solutions are often faced with greater upfront development / software costs, or they decide to manually handle some functions. While the manual functionality works for a smaller site, at a certain point this solution is not cost effective as volume rises.

The second area in which pure eCommerce solutions have challenges is that of establishing brand recognition. This problem represents the fact that pure eCommerce solutions need (or at least think they need) to spend large amounts of capital to establish a brand name. With traditional retail solutions, the brand names have already been established and can be leveraged online. The question that remains is whether or not the pure eCommerce strategy will result in long run sustainable brand recognition, or whether they will expire before reaching critical mass.

Related to the brand recognition issue is that of customer loyalty. As the ballooning sales and marketing costs result in higher costs per customer for pure eCommerce solutions, the entire industry is beginning to question whether the current approach to this type of eCommerce solution is sustainable. According to recent studies, it costs the average eCommerce site $82 to attach one customer of which they keep 27 percent, in comparison to $12 per customer with 34 percent retention rate for traditional retail (Boston Consulting Group). Not surprising, at this rate of capital burn, a number of pure eCommerce solutions in recent months are rethinking their solution in light of declining war chests and potential bankruptcy fallout in the industry.

Auctions Sites

The final type of eCommerce solution that has come online to date is that of an auction site. In this solution, the site acts as a broker for the various parties, be they business or consumers. This area of eCommerce solution takes a different approach in that they make available their technology to all parties for a fee. Rather than being a store and selling goods, the eCommerce solution is selling services. While there exists some promise to this type of eCommerce solution, there still exists a number of difficulties for this type: market saturation with competition, similar high costs of brand awareness, and the need for strategic alliances to provide a consistently desirable flow of goods.

As with pure eCommerce solutions, auction sites face the potential problem that eCommerce competition has the tendency to sprout up over-night. The result is that this area is quickly becoming saturated with all purpose and special purpose auction sites. The potential difficulty with this can be the fragmentation of this type of approach with users being unsure of who to use (i.e., what site will get me the highest price or offer the best selection). This problem leads directly into the same problem as pure eCommerce sites: brand awareness costs.

As with pure eCommerce solutions, auction sites often have a high cost for developing brand awareness. The result can often be that large sums of money are also spent promoting the auction site (see bid.com for a prime example). Since the business offers a low per unit margin, these sites rely on traffic from sellers and buyers. As the market shakes out, it is likely that the numerous sites will under go consolidation with the better positioned sites winning. And the positioning that matters is …?

In a phase the key to auction site success comes from strategic alliances. The most success sites will have alliances with the major players in the suppliers of goods. This will often mean that auctions sites will take on the position as acting as the re-seller for larger players in specific industries. A prime example of this can be seen in the airline industries, where a number of carriers release unsold inventory to auction sites for resale. For the suppliers of goods that go stale rapidly, the solution allows them to recoup some of the value of these goods prior to their expiry.

Conclusions

While all types of eCommerce solutions have potential advantages, they all also have difficulties that need to be overcome in order to be successful. In most cases, these difficulties are not truly technical difficulties, but rather business issues that can be resolved through clear leadership and innovative strategies. As with any technology, the Internet eCommerce solutions simply provide options for companies, with the good companies being distinguished by the path they choose.

In the next article, we will review some of the technology that is used to build eCommerce sites and discuss some of the pros and cons of the available choices.

By: Leon Salvail, CEO
Global Village Consulting Inc.
lsalvail@global-village.net

© Copyright 2001. Galt Western Personnel Ltd. Unless otherwise specified, you may reprint this article, quote from it, use it in research or projects, duplicate it or distribute it. Credit of authorship and source MUST be given to galtglobalreview.com. Ownership of Copyright remains with Galt Western Personnel Ltd.

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