IEEE ComSoc Seminar, 20061 E-Commerce: An Overview Partha Sarathi Dasgupta MIS Group Indian Institute of Management Calcutta Email - [email protected]

1IEEE ComSoc Seminar, 2006

E-Commerce: An Overview

Partha Sarathi Dasgupta

MIS Group

Indian Institute of Management Calcutta

Email - [email protected]


What is E-Commerce?

Commerce

- negotiated exchange of Products and Services between several

(usually two) parties, usually but not exclusively for money.

- includes all activities done by the parties to carry out a transaction.

- involves buyers and sellers.

E-Commerce

– Commerce transacted over Electronic Media, specifically over the

Internet.


References and Copyright

Some of the Slides used (and suitably modified):

ACM Digital Library


E-Commerce Applications - I

• Retail stores such as those selling books, music, toys, etc.

• Auction sites using which an individual buyer/seller can buy/sell goods

• Cooperating businesses connected using their own private telecomm network carrying out transactions in a semi-automated way

• Banks connected to their customers providing services such as deposits, payments, and providing information on status of an account


E-Commerce Applications - II

• Railways, airlines, etc. permitting booking of tickets on-line and paying for them on-line using credit cards or electronic cash

• Filing tax returns with government agencies on-line and obtaining immediate acknowledgements

• Electronic publishing to promote marketing, advertising, sales and customer support

• Web-based educational materials which allow to learn anytime and anywhere


• All Business processes may not lend themselves to E- Commerce such as perishable foods, high-cost items, etc.

• Costs and benefits are hard to quantify => difficult to calculate the ROI

• Difficult to integrate new technologies with existing databases, and software

• Cultural and legal obstacles (customer fear, conflicting legal issues across the border, etc.)• ……

Why and why not E-Commerce?


• Application layer B2B, B2C, C2B, C2G

• Middleman services layer Value-added networks Digital signature certifying authority Electronic payment schemes Electronic cash

• Messaging layer Digital Encryption standard (DES) Advanced Encryption standard (AES) Public key encryption Digital signature EDI

E-Commerce systems : A layered architecture


• Network services layer E-mail, WWW, browsers, HTTP, HTML, XML Search engines, Software agents

• Logical layer Internet/Intranet/Extranet/Firewalls

• Physical layer LAN PSTN Private Communication networks Optical fibre/coaxial cable networks Routers Wireless networks …….

E-Commerce systems : A layered architecture


E-Commerce Websites: Objectives

• Revenue generation

• Advertising

• Reduce costs

• Improve customer relations


Transaction

Three basic business processes:

• Supply information to customers such as features and benefits of Products and Services terms of payment and servicing techniques to negotiate terms

• Provide the means to purchase – invoices, delivery

modes, shipment tracking, payment modes, payment

histories, etc.

• Provide customer service and support for products and

services purchased


Total E-Commerce Year Transactions (Rs. Crore)

1998 –1999 131

1999 –2000 450

2000 –2002 1400

2006 (expected) 2300

Source: NASSCOM

E-Commerce transactions in India


Evolution of E-Commerce - I

70s – 80s :

• Electronic data Interchange (EDI) using private e-

commerce networks provided by value added network

(VAN) providers or E-mails

• First Generation business-to-business (B2B) e-commerce

• Used only by large companies and the government

• Very expensive and complicated


• Developed in 1960s to accelerate the movement of documents pertaining to shipments and transportation

• Involves the exchange of electronic documents between business partners by using private networks or a public switched network

• Standardized electronic forms are used which can be interpreted and used directly by application programs

• Data may be exchanged over the internet, extranet, or a VAN provided by some vendors (e.g., IBM Global Services, GE Infoserver) for reliable, secure communications between business partners

Electronic Data Interchange (EDI)


EDI

Business Application

Format of forms Translator

EDI standard format

Public or Private n/wTranslator

Format of application

Business Application

Company A

Company B

Steps

Advantages

• Handling of paper documents is eliminated.• No need to manually re-enter data in documents such as

purchase order, etc. by participating businesses• Reduced cost, increased accuracy and reliability• Saving of time


EDI: An Example

Buyer Seller

Purchase-order

delivery

Automated order confirmation

Product delivery

Finance Department

Purchase Request Initiated

Purchase Department

Inventory ReceivingDepartment

Computer

Finance DepartmentBilling

Details

ComputerSales

Department

Shipping Department

Mfg. Department


Evolution of E-Commerce - II

Late 80s – early 90s:

• Web used mainly by researchers and university

academicians

• Online services like emails, chat, news

• First generation business-to-consumer (B2C) e-

commerce


1995

• Browser and associated HTTP protocol introduced

• Concept of Home Page is a required component for a

business

• Real e-commerce infrastructure begins

Evolution of E-Commerce - III


HTML links

• Web organizes interlinked pages of information

residing on sites around the world

• Linear hyperlink structure – resembles conventional

paper documents

• Hierarchical hyperlink structure – start with a home

page, which has links to other pages, which, in turn link

to other pages. Structure of an inverted tree.


Evolution of E-Commerce - IV

Late 1990s

• Dot-coms emerge, which use the Web as their primary

channel for product and service sales and distribution

• Brick-and-mortars become click-and-mortars

• Web used for both B2B and B2C transactions

• E-Marketplaces (virtual Web-based) introduced

• Emergence of Web portals


E-Business vs E-Commerce

• An e-commerce site must enable a buyer to make a

Purchase, make payment and track fulfillment

• An e-business site might just provide information about

products and services and post-purchase support

• Generally, e-business is regarded as a superset of e-

commerce

• An e-business site need not be very secure unless it

also does e-commerce

• E-commerce requires more reliability and technical

sophistication and has more risk


Terminologies: Web Storefront

It is the portion of an e-commerce Web site used to

• act as an interface of business and the customer

• displays products and services offered

• stores information about the products and services

• typically offers pricing information, customer service

features, shipping/freight information, and a means to

actually perform payment.


Terminologies: Fulfillment

• It is the process of supplying a finished consumer

product directly from a manufacturing facility to a

distributor / end user

• fulfillment cycle may include receiving customer

orders, configuring the products to order, shipping

and invoicing products to distribution outlets or end

users


Terminologies: Stickiness of a Website

• Ability of a Web site to keep visitors at the site, and

attract repeat visitors

• Users spend more time at a sticky website, and are

thus exposed to more advertising


Terminologies: Web Portal

• It is a site that people use as a launching point

to enter the Web

• Web Portal typically includes

Web directory and search engine

Additional features that help visitors to find what

they are looking for, such as shopping directories,

white pages and yellow pages, lookup databases,

free e-mail, chat rooms, file storage services,

games, personal and group calendar tools, etc.


Core elements of a Portal

• Search services: search engines, directories, Yellow pages services for locating local businesses “people” finder for tracking phone numbers/email ids, MP3 finders for locating downloadable music files, “shopping bots”

• Content : topical information such as news headlines, stock quotes, sports scores, weather forecasts, local event listings………….; maps and dictionaries, entertainment options such as games, travel, health, etc.

• Community-building features: chat rooms, message boards, instant- messaging services, online greetings cards, exchanging digital photos, personal classifieds, and free personal home pages

• Commerce offerings: classified ads for jobs, cars, and homes, auctions, shopping malls

• Personal productivity applications: web-based email, address books, calendar, file storage, and bill payment services.


E-Commerce initiatives in India - I

TELCO –Managing Supply chain on the Internet

Connecting strong dealer network online with the company’s Internet-based system

Developing interfaces with its back-end ERP systems Currently covers major manufacturing location and its headquarters Negotiating with certain banks for creating payment gateways


ICICI –Comprehensive transactions

Using the Internet to acquire more customers by offering them a host of services

Offers the entire chain, from Demat account in which a customer’s shares are credited to the savings account from which the money is debited for settling the transaction for access

Electronic bill payment service

Targets both B2B and B2C markets

E-Commerce initiatives in India - II


Influence of e-commerce on business dynamics

• Expands market reach and makes it global

Example. A tiny business industry, like a handmade sweater

maker of Ludhiana can "become" a huge multinational

company overnight by selling to buyers in Africa. Third-party

service providers, like financial institutions, freight providers,

and warehouses have access to an entirely new universe of

partners over the Web.



• offers the opportunity for businesses to dramatically

alter the flow of products and services, and to change

the playing field in many industries.

Start-up Web specialty businesses ("dot-coms") took early

mover advantage of the opportunities afforded by the Web's

reach. Brick-and-mortar companies reacted to the changes

set in by the dot-coms, and fought back with their own Web-

based e-commerce. In many cases, the brick-and-mortars

became "click-and-mortars" and creatively went beyond

even the dot-coms in their application of e-commerce.



• Great business opportunity increases the competition

• Might result in changes in product mix, pricing, branding,

and supply-chain relationships.

• Marketing – often differentiates between companies. On

the Web, buyers can easily compare the marketing

differences of companies (Web sites, products, prices,

and associated services of the competitors)

• The Web generates new prospects and customers for

companies, which must devise new strategies for these

and the existing customers



• One-to-one marketing - The technique of making a Web experience feel unique to each site visitor or customer, making a Web site look and act like a personal shopping experience for each prospect.

• E-Marketing – a new branch of Marketing to deal directly with the marketing challenges for doing business on the Web in which “personalization” (simulate one-to-one marketing) plays an important role

• The notion of “brand” remains important, notion is extended on the Web by offering customers self-service



• New opportunities for providing superior customer service

customer self-service

Extensive product/service information on the Web

Access to customer service specialists through e-mail and

chat

Increased customer satisfaction

Reduced operational costs of customer service



• Sales – maximum direct impact by Web E-Commerce

• Drastically reduces the cost of sales

• Many sites allow the Web customers to perform their own

product/service comparisons, configure their own pricing,

choose their own shipping, make payment, track the

fulfillment – without the aid of an actual salesman.


Mindshare and Marketshare

These are the e-commerce era concepts of “brand.”

Web sites compete with one another to gain notoriety in order to

drive traffic to their sites; they compete for “mindshare.”

Mindshare - how marked is the presence of the company

in the public consciousness – determines number of visits

to website.

Marketshare – actual measure of relative penetration in the

market of a particular product by competitors.


E-commerce Business Models

• B2B and B2C - The generally accepted terms for the two

basic categories of e-commerce sites are B2C, which

stands for business-to-consumer, and B2B, which stands

for business-to-business.

• B2C e-commerce sites market, sell, service, and fulfill

products and services to consumers

• B2B sites offer products and services to businesses.



• e-marketplace – earlier on Web, private, shared B2B

sites were developed ("extranets“). An extranet, however,

that can dynamically expand to new buyers and

suppliers, is an e-Marketplace, and in many cases the

term "e-Marketplace" has replaced or become

interchangeable with extranet.

• Virtual bazaar: suppliers with a wide range of products

and services put their goods up for sale, and buyers can

browse the marketplace for goods /services they might

be interested in purchasing. Prices are often negotiable.



• E-Marketplace is no longer a Private network (Value-Added

Network: VAN), and is currently a generalization of the

Extranet

• Internet auctions – generally used for B2C commerce,

but can be used for B2B commerce also (such auction

sites = e-marketplaces).


B2B Goals and Examples

Goal – Transactions between businesses via the Internet

Examples –

• Purchase ordering of supplies

• Stock or raw materials/components used in

manufacturing

• Transmission of Financial Payment data


Processes in B2B model

• Review catalogues

• Identify specifications

• Define requirements

• Post RFPs

• Review vendor reputation

• Select vendor

• Fill out POs

• Send PO to vendor

• Prepare invoice

• Make payment

• Arrange shipment

• Organize product inspection and reception


B2B sites and E- Marketplaces: Characteristics

• Purchases carry much higher price tags than in B2C

• Purchases represent Critical Exchanges of raw

materials, parts, services and commercial finished

goods (enabling receiver to carry out business)

• B2B sites thus have stringent requirements for security

and reliability

• Business goods buyers tend to be sensitive to

availability and delivery schedules and costs, B2B sites

thus need to display inventory information and offer a

variety of freight options. A detailed visual catalog must

be provided containing all these


B2B sites and E- Marketplaces: Characteristics

• Negotiation of contracts must be permitted, and the

existing contracts may be displayed. Price negotiation,

obtaining order confirmation and tracking orders in real

time are important

• Third parties are often involved such as warehouses,

financial institutions (e.g., for letters of credit ), and

other servicing intermediaries

• Third parties have links from a B2B site, or may actually

provide their services directly on the B2B site of a

supplier or buyer


Processes in B2C model


B2C Goals and Examples

Goal – Transactions between a business and an individual

via the Internet

Examples –

• Home shopping for Consumer Goods

• Online Banking

• Insurance Purchase

• Vacation travel and hotel reservations

• Stock market share purchasing


B2C sites : characteristics

• Businesses typically create a web storefront

• High volume and low prices (e.g., a customer buying

several books at much lesser price compared to brick-

and-mortar prices)

• Purchase is discretionary, so storefront must be made

attractive and the sale must be efficient (a late delivery

can spoil a business by driving a customer to another

retailer, who’s just a click away)

• The consumer must be motivated to buy for reasons

beyond price (enough information availability, easy to

use, excellent customer service)


Model Description Examples

B2C Sells products or services directly amazon.comto consumers autobytel.com

eDiets.com

B2B Sells products or services to other MetalSite.combusinesses or brings multiple buyers and VerticalNet.comsellers together in a central marketplace

B2G Business selling to local, state or iGov.com national agencies

C2C Consumers sell directly to other ebay.comconsumers

C2B Consumers fix price on their own, Priceline.com which businesses accept or decline

Summary of E-business transaction models


Relation between B2B and B2C models

• B2C market over internet is an open system: number of participants is unknown

• B2B is a closed market: number of participants involved in trading is limited and known a priori


• Matching buyers and sellers• Facilitating commercial transactions• Providing legal infrastructure

Main functions of an Electronic market


Security issues

• Most B2B sites and e-marketplaces run in a fully secure mode

• Typically, it is easy to surf (peruse the virtual store) a B2C site

• Only the payment operations / transactions are secure

• A casual visitor would be denied entry into a B2B site, as such

a site often involves sensitive timing and information, as well as

complex, high-value payments

• many B2B sites require some kind of preauthorization based on

proof of legitimacy (such as a pre-existing contract, or credit

line) in order to gain access.


E-Commerce Technology Requirements

• Telecommunications and Networking

• Computer hardware

• Software – functions to Create and display the Web-based storefront or catalog

Handle payments and interfacing with payment service

providers

Capture site traffic information to support marketing activities

Implement security

Integrate e-commerce solutions with other enterprise software

applications (e.g., DBMS softwares, DSS)

Provide transaction processing capabilities to handle orders

through fulfillment (e.g., sufficient inventory) and shipping


Risks of E-Commerce

• Credit card fraud - particularly in B2C implementations,

as the network carrying computerized e-commerce

transactions (complete with names and addresses of

buyers and credit card numbers) is public. Early rate of

adoption of Web-based e-commerce was definitely

decelerated due to consumer concern with payment

risk. Thus, standard techniques have evolved to solve

the credit card risk problem (Any legal protection?)


Risks of E-Commerce

• Intellectual Property - Organizations must determine

how much of their intellectual property they should

expose on e-commerce sites.

• Confidentiality - The confidentiality of the activities of

users of e-commerce sites, and partner activities, must

be protected.


Risks of E-Commerce

• Taxation and Financial Reporting - The Web affords

businesses with the opportunity of selling to buyers

without any geographical barriers. However, this might

lead to dealing with new sets of tax laws, different forms

of currency, and more complex financial reporting

• Customs - Cross-border traffic often puts businesses

into new types of risk

• Regulations - Before going global, companies need to

understand import/export regulations of all countries/

regions


Risks of E-Commerce

• Fraud and Trust - before e-commerce, buyers and

sellers usually knew the identity of each other. On the

Web, however, in many cases the transacting parties do

so blindly. Several cases of fraudulent purchases, and

even fraudulent suppliers, have already materialized on

the Web.

• Security - a basic computerization issues, like access

control and data protection, are amplified on the Web


Risks of E-Commerce

• Marketing – an established brand might run a risk due to

poor site design/execution and poor customer support

• On a day-to-day business level; it is hard for e-retailers

to predict buyer volumes and so merchandise shortages

can occur. Additional risks for legacy retail shops include

having limited experience in shipping freight


Types of Web Advertising

• Portals: E.g., a search engine that may include varied

content or services. A high volume of user traffic makes

advertising profitable, and permits further diversification of

the site services. A personalized portal allows customization

of the interface and content to user (Yahoo!).

• Classifieds: Lists items for sale or wanted for purchase.

Listing fees but there may also be a membership fee

(Monster.com) (moving sale)

• User-based registration: Content-based sites that that

provide free access to users but require the user to submit

demographic details by registration. (NYTimes Digital,

Telegraph/Anandabazar on net)


Types of Web Advertising

• Query-based paid placement: Sells favourable link

positioning (sponsored links) or advertising keyed to

particular search terms in a user query (Google)

• Contextual advertising: Freeware developers who

bundle ads with their product. For example, a browser

extension that automates authentication and form fill,

installs, delivers advertising links or pop-ups as the

user surfs the Web (eZula, www.digitalenterprise.org)


Advertising formats

• Banners: An ad appearing at the top of a Web page

• Vertical columns: On a frame Web page positions

alongside requested content (as a sponsorship)

• Pop-up windows: Java script opens a browser window

with an ad

• Interstitials: Full screen ads that appear on a Web

browser while a page is loading.


Advertising formats

• Advertorials: Content-based advertising related to an

article or other site content

• Intromercials: Animated full-screen ads placed at entry

of a site before a user reaches the intended contents

• Ultramercials: Interactive online ads that require the

user to respond intermittently in order to wade through

the message before reaching the intended content.


Channel conflict

• Companies having existing sales outlets and

distribution networks

• Concern is about taking away sales from these outlets

through the use of net

• Channel conflicts occur whenever sales activities on

the Web interferes with existing sales outlets

• Web sites’ sales eat up the company’s sales through

the other channels: cannibalization


Web Pricing Schemes

• CPM (Cost per Mille) : Cost per thousand impressions (cost

per thousand of ad views)

• Click-through: advertiser pays based on the number of times

the banner is clicked by a user

• Sponsorships: packaged deals of impressions and click-

throughs

• Cost-per-lead: advertiser pays when a viewer registers or

submits personal information

• Cost-per-sale: agreed upon charge for the viewers who

actually purchase a product or service based on the ad

• Straight revenue sharing deal: publisher receives a

commission which is paid upon sale from an ad


Pricing Schemes in E-Commerce-detailsImpression - A single instance of an online advertisement displayed.

page view - Request to load a single HTML page.

CPM • Cost per thousand impressions• refers to advertising bought on the basis of impression.• Different from the various types of pay-for-performance advertising, where

payment is only triggered by a mutually agreed upon activity (i.e. click-through, registration, sale).

• total price paid in a CPM deal is calculated by multiplying the CPM rate by the number of CPM units.

Example: One million impressions at $10 CPM equals a $10,000 total price.

1,000,000 / 1,000 = 1,000 units1,000 units X $10 CPM = $10,000 total priceAmount paid per impression is calculated by dividing the CPM by 1000.E.g., a $10 CPM equals $.01 per impression.$10 CPM / 1000 impressions = $.01 per impression


Pricing Schemes in E-Commerce-details

click-through • Process of clicking through advertisement to the advertiser's destination.• It is often the most immediate response to an advertisement, but not the

only interaction.• Visitors may choose to type a company's URL directly into the browser bar,

or type the company's name into a search engine box. This assumes, of course, that the company's name and/or URL appears in its advertisements.

click-through rate (CTR)• The average number of click-throughs per hundred ad impressions,

expressed as a percentage.• Measures what percentage of people clicked on the ad to arrive at the

destination site, but does not include the people who failed to click, yet arrived at the site later as a result of seeing the ad.

• Measure of the immediate response to an ad, but not the overall response to an ad.

• Trend towards profitability, along with better tracking tools, has resulted in less interest in click-through rates and more interest in conversion rates.

• A high click-through rate does not assure a good conversion rate, and the two rates may even share an inverse relationship. An advertisement geared towards curiosity clicks will result in fewer sales, percentage-wise, than an advertisement geared towards qualified clicks.


Pricing Schemes in E-Commerce-detailscost-per-action (CPA)

• Online advertising payment model in which payment is based solely on qualifying actions such as sales or registrations.

• The actions defined in a CPA agreement relate directly to some type of conversion, with sales and registrations among the most common.

• Does not include deals based solely on solely clicks, which are referred to specifically as cost-per-click or CPC.

• CPA model is at the other end of the spectrum from the CPM, with the CPC model somewhere in the middle.

• In a CPA model, the publisher is taking most of the advertising risk, as their commissions are dependant on good conversion rates from the advertiser's creative units and Web site.

cost-per-click (CPC) - The cost or cost-equivalent paid per click-through.

E.g., consider a campaign where payment is based on impressions, not clicks.

Impressions are sold for $10 CPM with a click-through rate (CTR) of 2%.

1000 impressions x 2% CTR = 20 click-throughs

$10 CPM / 20 click-throughs = $.50 per click


Advertising on Google: Adwords

• AdWords works by having businesses purchase certain keywords.

• When a user goes to Google to perform a Web search, they enter in their

search terms or keywords. Google then displays not only the search results,

but also short ads from companies using AdWords.

• They will normally be displayed on the right side of the screen as well as in

shaded bars above the search results.

• Companies purchase these keywords and decide how many clicks they

want to pay for. Each keyword is assigned a value, based on popularity.

Some key words will cost as much as $5 or more per click, while other

keywords will only cost as little as 5 or 10 cents.

Advertising on Google

• Study the keywords that are appropriate for your business.

• Try to find at least twenty keywords that describe the products you sell.

• Once you have your master list, you can then begin the sign-up process

with Google AdWords.


E-Commerce: Revenue Generation Models

• Web Catalog Revenue Model

• Digital Content Revenue Model

• Advertising Supported Revenue Model

• Advertising-Subscription Mixed Revenue Model

• Fee-for-transaction Revenue Models

• Fee-for-service Revenue Model


Web Catalog Revenue Model

Catalog Revenue Model

• Seller establishes a brand image that conveys quality and low cost; then uses the strength of that image to sell through printed catalogs mailed to prospective buyers

• Buyer’s place orders by mail or by calling the seller’s toll-free telephone number

Web Catalog Revenue Model

• Extension of the catalog revenue model to the Web.

• The firm replaces or supplements print catalog distribution with information on its Website.


Web Catalog Revenue Model - Examples

• Computer manufacturers – Apple, Dell, Gateway, Sun

Microsystems

• Retailer of consumer electronics – Radio Shack, The Good

Guys!

• Books, Music and Videos – Amazon.com, Barnes & Noble,

Alibris.com

• Luxury Goods – Tiffany & Co.

• Cloth Retailers – Talbots, Wet Seal

• General Discount Retailers – Costco, Kmart, Target, Wal-Mart


Digital Content Revenue Model

• Organizations owning IPR use the Web as a new and highly

efficient distribution mechanism.

• Users may purchase the information through Web, or subscribe to

access the information

• Examples:

ProQuest sells digital copies of published documents

Lexis.com provides full-text search of court cases, laws, patent

databases, and tax regulations, and sells the information

ACM Digital Library offers subscription to electronic versions of its

journals to its members, etc.


Advertising Supported Revenue Model

• Free services (e.g., TV broadcasts, email

service, etc.) offered to audience along with

advertisements

• Web advertising is an extension of the above,

initiated through a Web Portal

• Examples- AOL, AltaVista, Excite, Lycos,

Google, Yahoo


Targeted Advertising Sites - Examples

• Internet Public Online Newspapers pages links to hundreds of

newspaper sites all over the world (cannibalization?)

• Monster.com targeted at management-level job applicants, offers

links to articles, reports, a message board, and chat sessions

• CareerSite offer international distribution of employment

advertisements

• CheckMyTrip.com for booking of tickets, hotels, etc. For global

travellers

• AutoTrader.com – accepts paid ads from individuals and companies

willing to sell cars, motorcycles, boats, airplanes.


Advertising-Subscription Mixed Revenue

• Subscribers pay a fee and accept some level of advertisement

• Subscribers in this model usually have less advertising exposure

than they are on advertising-supported sites

• Examples – The New York Times is mostly advertising-supported,

with a small subscription fee for visitors willing to have online access

to specific sections such as crossword puzzles. Allows viewing

articles older by more than a week through some fees

• Wall Street Journal’s mixed model is weighted more heavily to

subscription revenue. Allows non-subscribers to view the classified

ads and certain stories from the newspaper, but most of the

contents reserved for subscribers paying an annual fee


Fee-for-Transaction Revenue Model

• Businesses offer services for which they charge a fee that is based

on the number or size of transactions they process

• Companies typically offer much of the service formerly offered by

personnel, on the Web. Customers can utilize the Web to execute

transactions at a cheap price (disintermediation and

reintermediation)

• Examples – Travel Agents such as Travelocity, Expedia, Orbitz

Automobile sales through Car information providers such as Autobytel, MSN Carpoint

Stock brokerage firms like ICICI

Online banking and Financial services such as Citibank Online


Fee-for-Service Revenue Model

• Companies offer a wide variety of services on the Web for which

they charge a fee

• These services are neither broker services nor services for which

charges are based on the number or size of the transactions

• Fee charged is based on the value of the service provided

• Fee-for-service revenue models range from games and

entertainment to financial advice and professional services of

accountants, lawyers, and physicians

• Examples – MyDocOnline, WebMD for health services, etc.


Problems of Web advertising

• Presence of multiple metrics, such as the number of

visitors, number of unique visitors, number of click-

throughs, other attributes of visitor behaviours. No

consensus on how to measure and charge for site

visitor views, and hence no standard.

• Very few Web sites have sufficient numbers of visitors

to interest large advertisers. Most successful

advertising on the Web is targeted to very specific

groups.


Need of Payment Processing

• To process B2C payment, the electronic storekeeper verifies and transfers funds from the consumer's credit card, checking account, or ATM card to the merchant's bank.

• Approval must be quick so the merchant can expedite shipment of the order and still be sure of getting paid.

• B2B sites often need to offer a more sophisticated range of payment processing. These may include wire transfer, letters of credit, and other forms of commercial transactions and finance.


Traditional Models of Payment

• Cash

• Check

• Credit


• Payment cards

• Electronic cash

• Electronic wallets

• Stored-value cards

Models of Payment in E-Business


Concerns in Electronic Payment

• Privacy and security

• Portability

• Convenience


Common Payment Systems (in US$)


Payment Cards

• Credit card

– Has spending limit based on a user’s credit history

– Deferred payment

– MasterCard or Visa are examples

• Debit card

– Removes an amount from a cardholder’s bank account

– Transfers it to the seller’s bank account

• Charge card

– Carries no spending limit

– Amount charged is due at the end of the billing period

– American Express or Diner’s Club are examples


Pros and Cons of Payment Cards

• Pros

– Worldwide acceptance

– Built-in security for merchants

• Cons

– Per-transaction fees and monthly processing fees

– Fraudulent Practices

– Young adults do not have credit cards

– Majority of the people cannot afford cards or are considered poor risks

– Credit cards not ideal for micropayments


Payment Acceptance and Processing

• Steps followed once a merchant receives a consumer’s payment card information

– Merchant authenticates payment card

– Merchant checks with payment card issuer

• To ensure that credit or funds are available

• Puts a hold on the credit line or the funds needed to cover the charge

– Settlement occurs


How Online Credit Card Transaction Works


Types of Systems

• Closed loop systems

– Card issuer pays merchants that accept the card directly and does not use an intermediary

– e.g. American Express and Discover Card

• Open loop systems

– Involve three or more parties

– Systems using Visa or MasterCard are examples


Merchant Accounts

• To process payment cards for Internet transactions an online merchant must set up a merchant account

• New merchant must supply

– Business plan

– Details about existing bank accounts

– Business and personal credit history

• Type of business and credit information are main factors


Electronic Cash

• Describes any value storage and exchange system created by a private entity that

– Does not use paper documents or coins

– Can serve as a substitute for government-issued physical currency

• Attractive in two arenas

– Sale of goods and services of less than $10

– Services to those without credit cards

• Advantages of electronic cash

– Independent

– Portable


Electronic Cash Systems - Examples• CheckFree

– Largest online bill processor in the world

– Provides online payment processing services

• Clickshare

– An electronic cash system aimed at magazine and newspaper

publishers

• PayPal

– Provides payment processing services to businesses and to

individuals

– Peer-to-peer (P2P) payment system

• Free payment clearing service for individuals


Holding Electronic Cash

• Online cash storage– Trusted third party is involved in all transfers of

electronic cash – Holds consumers’ cash accounts

• Offline cash storage– Virtual equivalent of money kept in a wallet– No third party is involved in the transaction


Pros and Cons of ECash

• Pros of electronic cash

– Transactions are more efficient

– Transfer on the Internet costs less than processing credit card transactions

• Cons of electronic cash

– Use provides no audit trail

– Problem of money laundering arises

– Susceptible to forgery


How Electronic/Digital Cash Worked


Electronic Wallets

• An encryption software that works like a physical wallet in electronic commerce transactions. A wallet can hold– a user's payment information

– a digital certificate to identify the user

– shipping preferences to speed transactions

• Function– Hold credit card numbers, electronic cash, owner identification,

and contact information

– Give consumers the benefit of entering their information just once

– Make shopping more efficient

• Electronic Commerce Modeling Language – is a standard of digital wallets

• Examples

– Microsoft. NET passport, Yahoo! Wallet


Cash Model of Payment in B2C

• Electronic value tokens, which are issued by some third party, usually an established bank.

• A digital wallet must be stored on the consumer's PC.

• Buyer buys the digital equivalent of money from an established bank, and deposits in a digital wallet stored in his PC. When purchase is made from a Website that accepts e-cash, the ordering software automatically deducts the correct amount from the consumer’s digital wallet.

• During a transaction, funds are transferred immediately and no back-end processing is required.

• Hardest to implement on the Web.


Types of Electronic Wallets

Server-side electronic wallet

– Stores a customer’s information on a remote server belonging to a particular merchant or wallet publisher

– Cons -> Security Breach

Client-side electronic wallet

– Stores a consumer’s information on his or her own computer

– Cons -> Not portable


Stored-Value Cards

• Stored value payments systems are accounts created by depositing funds into an account and from which funds are paid out or withdrawn as needed

• Can be an elaborate smart card with a microchip that records currency balance

• Common stored-value cards

– Prepaid phone, subway, and bus cards

• Types of stored value cards

– Magnetic Strip Cards

– Smart Cards


Magnetic Strip Cards

• Cannot send or receive information

• Cannot increment or decrement value of cash stored on the card

• Processing must be done on a device into which the card is inserted


Smart Cards

• Stored-value cards

• Can hold private user data, such as financial facts

• Can store about 100 times more information than a magnetic strip plastic card

• Safer than conventional credit cards

• Smart Card Alliance– Promotes benefits of smart cards

– Promotes widespread acceptance of multiple-application smart card technology

– Members include companies in banking, financial services, computer technology, and healthcare

– Promotes compatibility among smart cards, card reader devices, and applications


Cheque Model of Payment in B2C

• A consumer presents a digital version of a cheque to a Web

storefront.

• Assumes a digital wallet is stored in the consumer's PC.

• Digitized cheque is encrypted, Web storefront verifies the

cheque through its financial institution, which in turn consults

the financial institution of the consumer for processing

• Easy to implement; clearing mechanisms are highly dependable

• Funds are not transferred immediately; back-end processing is

required

• Susceptible to fraud.


Credit Model of Payment in B2C

• A merchant in a traditional transaction scans the card

through a reader and in turn authorizes the transaction

through its financial institution.

• This authorization may be performed over the existing

phone network using modems.

• The credit payment system leverages existing network

infrastructure, and is familiar to consumers.

• Susceptible to fraud; not appropriate for high value

transactions.


Debit Model of Payment in B2C

• A consumer enters a Credit Card information on a Web

order form

• This is delivered to an Authorization server

• Assuming the authorization was granted, and the

consumer has sufficient funds available in his account,

the fund is transferred from the consumer’s account to

the merchant’s account


Summary of Payments

• Most popular forms of payment on the Internet– Credit card– Debit card– Charge cards

• Electronic cash– Form of online payment– Slow to catch on in the United States– Especially useful for making micropayments– Portable, anonymous, usable for international transactions

• Electronic wallets – Provide convenience to online shoppers– Eliminate the need to reenter payment card and shipping information at

a site’s electronic checkout counter

• Smart cards – Intended to replace the collection of plastic cards people now carry


Security for payment transactions

• Web site security can vary from section to section on

the site, depending on security needs. For example,

HTTPS, a secure mode of Web processing where a

portion of the Web site is encrypted, is used for all

forms of B2C payment

• B2B may involve more sophisticated forms of security,

including digital signatures.


Digital Signatures

• A digital code attached to an electronically transmitted

message that uniquely identifies the sender.

• Like a written signature, the purpose of a digital

signature is to guarantee that the individual sending the

message really is who he or she claims to be.

• Digital signatures are especially important for electronic

commerce and are a key component of most

authentication schemes.


Security for payment transactions

• As a business person, it is important to grasp the

financial risk associated with accepting payments over

the Web. It is equally important to recognize that many

consumers, and even some businesses, remain afraid

of actually paying on an e-commerce site.

• Consumers may feel more secure about transmitting

personal information over the Internet using certificates

authenticating both parties in a transaction and

encrypting the transaction.


Auctions: Definition

• A structured method of selling or buying items or services with formal rules in which bidders and/or sellers place bids.

• Item: A, Bids: Bi

Allotted: Max Bi


Auctions: Definition

• Rules:• Eligibility of Bidders for Participation.

• Rules governing Bidding Process.

• Mechanism for Identification of Winning Bid(s).

• Mechanism for Revenue to the Seller.


Why Auctions ?

• Value of an item to prospective buyer is not known or hard to determine.

• Parties to an auction:– Seller.– Buyer.– Agent/Auctioneer.


Categories of Auction:

• Traditional / Non Combinatorial – Single Unit.– Multi Unit.

• Combinatorial Auctions.– Single Unit.– Multi Unit.

• Reverse Auctions


Standard Types of Auctions:

• Ascending bid auction (English auction)» (general, multiple rounds till no more bid)

• Descending bid auction (Dutch auctions)» (perishable items, multiple rounds till first accept)

• First price sealed bid» (tender processes)

• Second price sealed bid (Vickery)» (tender processes)


Combinatorial Auction.

• Sometimes bidders want bundles of items– Components to assemble a product, inputs for

making steel, …


Examples: Rail Roads

• Segments connecting locations form items. No two operators can have the same segment.

• Combination of segments form a route (Bid).

A

1 2

34

56

7

8

9

10 11

121314

B

C

DE

F

G


Example: Mining Lease

Plots of Land with Exploratory data form the item on Auction.

1

23

6

54

89 7

10


Airport Take-Off & Landing Slots

• Time Slots at the runway form items on auction.

A

D

C

B


Valuations

• Asymmetric information

• Basic Private Value Modelexample - Artifacts

• Pure Common Value Modelexample – Oil lease

• General Modelexample - Paintings


Valuations: Private

• Bidder knows his worth of an item.• Does not know Valuation of Other bidders.• Bid not affected by Valuation of Other• Valuation not fn. Of Auction time.• Item for own consumption.• Simplified model for Auction Analysis.• Combinatorial: More Suited.


Valuation: Common

• The value is same for all bidders.

• Bidder uncertain of worth at time of bidding.

• Valuation can change during the course of an auction as market opinion pours in.

• Most appropriate when value of item derived from a Market Price initially unknown.


Types Of Bidders

• Risk Neutral

• Risk Averse

• Risk seeking


Dynamic Pricing

It is the Dynamic Adjustment of prices to consumers

depending upon the value the consumers attribute to

a product or a service.

Price dispersion

• Spatial – several sellers offer a given item at different prices.

• Temporal – variation of price with time based on the time of sale and supply-demand situation


Why Dynamic Pricing in E-Commerce?

• Transaction costs for implementing dynamic pricing have been reduced by eliminating the need for people to be physically present in time and space

• Reducing the search costs

• Reducing menu costs of informing the changed prices

• Increased uncertainty and demand volatility due to– increased number of customers– increased number of competitors– increased amount of information


Dynamic Pricing Categories

• Posted price mechanisms

• Price discovery mechanisms


E-Commerce: Some Research issues

• Winner determination problems in auctions

• Utility maximization in auctions

• Recommender systems

• Web mining

• Efficient Dynamic Pricing schemes

• ………..


Documents

IEEE ComSoc Seminar, 20061 E-Commerce: An Overview Partha Sarathi Dasgupta MIS Group Indian Institute of Management Calcutta Email - [email protected]