eCommerce Business Models

eCommerce has been a dominant theme of internet for the last one decade. The interest in eCommerce was at its peak during dotcom boom of year 2000 and after the bubble got burst, for a long time there was little activity in this space. However, there is a renewed interest in online commerce in the last 2-3 years due to the economic downturn and with online companies offering great deals and value. By definition, eCommerce is buying and selling of products and services over internet but I like to include the online services that influence the buying decision in the offline world as well. This means even review sites like the are part of eCommerce.In fact, I would like to expand the scope of eCommerce from merely internet to other carriers like voice (telephone) and data (SMS) and hence mobile phones are emerging as key access medium.

Factors driving the online commerce:

1. Creative business models have emerged which are focusing on substantial value to the consumer, e.g. Daily Deal sites offer upto 60-70% discount on services.

2. Merging of online and offline space has created a unique proposition for the consumer rather than only digitizing the commerce, e.g. today the mobile phone users can be informed about the deals in the vicinity leading to higher foot falls in the brick and mortar store. Even the daily deal sites are driving users to the offline stores leading to better profitability for merchants.

3. Greater Consumer Trust on online commerce now due to years of existence and specific steps taken by credit card companies around security. Alternate billing mechanism like Paypal, Alipay have emerged that limit the consumer’s exposure to fraud.

4. Cash on Delivery (COD) is emerging as a leading factor in building trust especially in the eastern countries like China and India. In COD, the risk to the consumer is minimal as the payment is made in cash when the goods are delivered.

5. Economic Downturn has resulted in higher adoption of online commerce as consumers look for cheaper products and deals. A lot of offline merchants are also looking at online channel to increase sales and reduce cost by shrinking the offline presence.

eCommerce Business Models

There are multiple business models for online commerce but they can be broadly classified into three categories:

1. Stores Model– In this model there is a direct online transaction between the buyer and seller. The model is similar to the brick and mortar shop with the only difference being no face to face interaction between the buyer and seller. The seller has to hold inventory and is responsible for the entire supply chain. Within the store model, there are multiple variations like

* Manufacturer selling directly to the consumers thereby removing all the intermediaries, e.g. Dell

* Multi-Branded Retailers selling to the consumers to provide variety, e.g. Amazon

* Flash sales or Private sales sites offering luxury brands at a deep discount to their registered users. This model helps the brands to liquidate their past season products and are put up on the website as a limited period, limited quantity offer, e.g. Gilt Groupe, HauteLook

* Curated products selected by experts are put up for online sale. Here the variety is low but the product quality is very high, e.g. Everlane – finds out the best goods around the web and bring them to the consumer. Everlane has a bunch of curators who are trendsetters within various industries selecting stylish and cool products

* Subscription model is another variation of the store model where for a fixed monthly subscription fee the retailers send the products selected by experts suiting the style and needs of the consumers, e.g. Shoedazzle provides regular supply of shoes for a monthly fee of $39.95 based on the consumer’s style

2. Brokerage Model– The brokerage models brings together the buyers and sellers but do not necessarily participate in the transactions. This model has seen the most innovation in the last one decade and it is expected to continue innovate in the coming years. The various sub-models in this model are:

* Online Market Place – similar to a physical mall where the mall owners do not own the inventory and are not responsible for the supply chain but host the retailers so that the consumers can get options as well as variety. The market place became very popular during the dotcom boom and it is interesting to see that they are still very popular. The market place can be Business to Business (B2B) or Business to Consumers (B2C) or Consumer to Consumer (C2C). The most popular market places are Amazon, TaoBao. TaoBao of China in particular is an interesting C2C  market place which did business of over $30 billion last year

* Group Buying offers products and services at significantly reduced prices on the condition that a minimum number of buyers would make the purchase.  Group Buying sites have suddenly become a rave after the success of Groupon but interestingly, origins of Group buying can be traced to China where Tuángòu or team buying was executed to get discount prices from retailer when a large group of people were willing to buy the same item

* Comparison Shopping model allows individuals to see different lists of prices for specific products. Most price comparison services do not sell products themselves, but source prices from retailers (online and offline) from whom users can buy, e.g., Thefind, Goodzer, Nextag etc. Price comparison sites typically do not charge users anything to use the site. Some, like Newegg, offer online coupons. Instead, they are monetized through payments from retailers who are listed on the site (also called the affiliate fee). Some of the comparison shopping sites have released a mobile application that allows the users to compare pricing while shopping in the offline world

* Online Auction model is one in which participants bid for products and services over the internet. In this model, the site does not own the inventory and is only responsible for conducting the auctions, e.g. eBay. Another interesting variation that has emerged in the last couple of years is unique bid auction which is a type of strategy game related to traditional auctions where the winner is usually the individual with the lowest unique bid. Yet another variation is penny auction, a type of  all-pay auction in which participants must pay a non-refundable fee to place a small incremental bid. When time expires, the last participant to have placed a bid wins the item and also pays the final bid price, which is usually significantly lower than the retail price of the item, e.g. Auctionair

3. Social Commerce – In this model, the social media supports social interaction and user contributions, to assist in the online buying and selling of products and services, e.g. in Shop Socially, users can ask shopping questions to their friends. User usually get their shopping questions answered quickly by their friends who may have already done the research or bought a similar product. User can also share info about their recent purchases to get compliments, comments and reactions from friends.

The above classification of eCommerce models is not mutually exclusive, e.g. the group buying sites would qualify for both brokerage as well as social commerce models. e Commerce is still very small and emerging and hence I expect many model new models to emerge in the next few years. Indeed a very interesting space to watch out for.

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Disclaimer: The views expressed in this article are my personal views and do not reflect the views of my employer.

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