How does e-commerce work?
E-commerce is powered by the internet, where customers can access an online store to browse through, and place orders for products or services via their own devices.
As the order is placed, the customer’s web browser will communicate back and forth with the server hosting the online store website. Data pertaining to the order will then be relayed to a central computer known as the order manager — then forwarded to databases that manage inventory levels, a merchant system that manages payment information (using applications such as PayPal), and a bank computer — before circling back to the order manager. This is to make sure that store inventory and customer funds are sufficient for the order to be processed. After the order is validated, the order manager will notify the store’s web server, which will then display a message notifying the customer that their order has been successfully processed. The order manager will then send order data to the warehouse or fulfillment department, in order for the product or service to be successfully dispatched to the customer. At this point tangible and/or digital products may be shipped to a customer, or access to a service may be granted.
Platforms that host e-commerce transactions may include online marketplaces that sellers simply sign up for, such as Amazon.com; software as a service (SaaS) tools that allow customers to ‘rent’ online store infrastructures; or open source tools for companies to use in-house development to manage.
Types of e-commerce
Business-to-business (B2B) e-commerce refers to the electronic exchange of products, services or information between businesses rather than between businesses and consumers. Examples include online directories and product and supply exchange websites that allow businesses to search for products, services and information and to initiate transactions through e-procurement interfaces.
In 2017, Forrester Research predicted that the B2B e-commerce market will top $1.1 trillion in the U.S. by 2021, accounting for 13% of all B2B sales in the nation.
Business-to-consumer (B2C) is the retail part of e-commerce on the internet. It is when businesses sell products, services or information directly to consumers. The term was popular during the dot-com boom of the late 1990s, when online retailers and sellers of goods were a novelty.
Today, there are innumerable virtual stores and malls on the internet selling all types of consumer goods. The most recognized example of these sites is Amazon, which dominates the B2C market.
Consumer-to-consumer (C2C) is a type of e-commerce in which consumers trade products, services and information with each other online. These transactions are generally conducted through a third party that provides an online platform on which the transactions are carried out.
Online auctions and classified advertisements are two examples of C2C platforms, with eBay and Craigslist being two of the most popular of these platforms. Because eBay is a business, this form of e-commerce could also be called C2B2C — consumer-to-business-to-consumer.
Consumer-to-business (C2B) is a type of e-commerce in which consumers make their products and services available online for companies to bid on and purchase. This is the opposite of the traditional commerce model of B2C.
A popular example of a C2B platform is a market that sells royalty-free photographs, images, media and design elements, such as iStock. Another example would be a job board.
Business-to-administration (B2A) refers to transactions conducted online between companies and public administration or government bodies. Many branches of government are dependent on e-services or products in one way or another, especially when it comes to legal documents, registers, social security, fiscals and employment. Businesses can supply these electronically. B2A services have grown considerably in recent years as investments have been made in e-government capabilities.
Consumer-to-administration (C2A) refers to transactions conducted online between individual consumers and public administration or government bodies. The government rarely buys products or services from citizens, but individuals frequently use electronic means in the following areas:
- Education. Disseminating information, distance learning/online lectures, etc.
- Social security. Distributing information, making payments, etc.
- Taxes. filing tax returns, making payments, etc.
- Health. Making appointments, providing information about illnesses, making health services payments, etc.
Mobile e-commerce (M-commerce) is a type of e-commerce on the rise that features online sales transactions made using mobile devices, such as smartphones and tablets. M-commerce includes mobile shopping, mobile banking and mobile payments. Mobile chatbots also provide e-commerce opportunities to businesses, allowing consumers to complete transactions with companies via voice or text conversations.
Advantages and disadvantages of e-commerce
Benefits of e-commerce include its around-the-clock availability, the speed of access, the wide availability of goods and services for the consumer, easy accessibility and international reach.
- Availability. Aside from outages or scheduled maintenance, e-commerce sites are available 24×7, allowing visitors to browse and shop at any time. Brick-and-mortar businesses tend to open for a fixed number of hours and may even close entirely on certain days.
- Speed of access. While shoppers in a physical store can be slowed by crowds, e-commerce sites run quickly, which is determined by compute and bandwidth considerations on both consumer device and e-commerce site. Product pages and shopping cart pages load in a few seconds or less. An e-commerce transaction can comprise a few clicks and take less than five minutes.
- Wide availability. Amazon’s first slogan was “Earth’s Biggest Bookstore.” They could make this claim because they were an e-commerce site and not a physical store that had to stock each book on its shelves. E-commerce enables brands to make a wide array of products available, which are then shipped from a warehouse after a purchase is made. Customers will likely have more success finding what they want.
- Easy accessibility. Customers shopping a physical store may have a hard time determining which aisle a particular product is in. In e-commerce, visitors can browse product category pages and use the site search feature the find the product immediately.
- International reach. Brick-and-mortar businesses sell to customers who physically visit their stores. With e-commerce, businesses can sell to any customer who can access the web. E-commerce has the potential to extend a business’ customer base
- Lower cost. pure play e-commerce businesses avoid the cost associated with physical stores, such as rent, inventory and cashiers, although they may incur shipping and warehouse costs.
- Personalization and product recommendations. E-commerce sites can track visitors’ browse, search and purchase history. They can use this data to present useful and personalized product recommendations, and obtain valuable insights about target markets. Examples include the sections of Amazon product pages labeled “Frequently bought together” and “Customers who viewed this item also viewed.”
The perceived disadvantages of e-commerce include sometimes limited customer service, consumers not being able to see or touch a product prior to purchase and the wait time for product shipping.
- Limited customer service. If a customer has a question or issue in a physical store, he or she can see a clerk, cashier or store manager for help. In an e-commerce store, customer service may be limited: The site may only provide support during certain hours of the day, or a call to a customer service phone number may keep the customer on hold.
- Not being able to touch or see. While images on a webpage can provide a good sense about a product, it’s different from experiencing it “directly,” such as playing music on speakers, assessing the picture quality of a television or trying on a shirt or dress. E-commerce can lead consumers to receive products that differ from their expectations, which leads to returns. In some scenarios, the customer bears the burden for the cost of shipping the returned item to the retailer.
- Wait time. If a customer sees an item that he or she likes in a store, the customer pays for it and then goes home with it. With e-commerce, there is a wait time for the product to be shipped to the customer’s address. Although shipping windows are decreasing as next day delivery is now quite common, it’s not instantaneous.
- Security. Skilled hackers can create authentic-looking websites that claim to sell well-known products. Instead, the site sends customers forfeit or imitation versions of those products — or, simply collects customers’ credit card information. Legitimate e-commerce sites also carry risk, especially when customers store their credit card information with the retailer to make future purchases easier. If the retailer’s site is hacked, hackers may come into the possession of customers’ credit card information.
E-commerce is conducted using a variety of applications, such as Email, online catalogs and shopping carts, Electronic Data Interchange (EDI), the file transfer protocol, web services and mobile devices. This includes B2B activities and outreach, such as using email for unsolicited ads, usually viewed as spam, to consumers and other business prospects, as well as sending out e-newsletters to subscribers and SMS texts to mobile devices. More companies now try to entice consumers directly online, using tools such as digital coupons, social media marketing and targeted advertisements.
The rise of e-commerce has forced IT personnel to move beyond infrastructure design and maintenance to consider numerous customer-facing aspects, such as consumer data privacy and security. When developing IT systems and applications to accommodate e-commerce activities, data governance-related regulatory compliance mandates, personally identifiable information privacy rules and information protection protocols must be considered.
E-commerce platforms and vendors
An e-commerce platform is a tool that is used to manage an e-commerce business. E-commerce platform options exist for clients ranging in size from small businesses to large enterprises. These e-commerce platforms include online marketplaces such as Amazon and eBay, that simply require signing up for user accounts, and little to no IT implementation. Another e-commerce platform model is SaaS, where store owners can subscribe to “rent” space in a cloud-hosted service that does not require in-house development or on-premises infrastructure. Other e-commerce platforms may come in the form of open source platforms that require a hosting environment (cloud or on premises), complete manual implementation and maintenance.
A few examples of e-commerce marketplace platforms include:
- Walmart Marketplace
Vendors offering e-commerce platform services for clients hosting their own online store sites include:
- Salesforce Commerce Cloud (B2B and B2C options)
- Oracle SuiteCommerce
Government regulations for e-commerce
In the United States, the Federal Trade Commission (FTC) and the Payment Card Industry (PCI) Security Standards Council are among the primary agencies that regulate e-commerce activities. The FTC monitors activities such as online advertising, content marketing and customer privacy, while the PCI Security Standards Council develops standards and rules, including PCI Data Security Standard compliance, which outlines procedures for the proper handling and storage of consumers’ financial data.
To ensure the security, privacy and effectiveness of e-commerce, businesses should authenticate business transactions, control access to resources such as webpages for registered or selected users, encrypt communications, and implement security technologies, such as the Secure Sockets Layer and two-factor authentication.
History of e-commerce
The beginnings of e-commerce can be traced to the 1960s, when businesses started using EDI to share business documents with other companies. In 1979, the American National Standards Institute developed ASC X12 as a universal standard for businesses to share documents through electronic networks.
After the number of individual users sharing electronic documents with each other grew in the 1980s, the rise of eBay and Amazon in the 1990s revolutionized the e-commerce industry. Consumers can now purchase endless amounts of items online, from e-tailers, typical brick-and-mortar stores with e-commerce capabilities. Now, almost all retailer companies are integrating online business practices into their business models.
Disruption to physical retail
Given the large rise in e-commerce in recent years, many analysts, economists and consumers have debated whether the online B2C market will soon make physical, brick-and-mortar stores obsolete. There is little question that online shopping is growing at a significant rate.
Research from BigCommerce has found that Americans are about evenly split on online versus offline, traditional retail shopping, with 51% of Americans preferring e-commerce and 49% preferring physical stores. However, 67% of millennials prefer shopping online over offline. According to Forbes, 40% of millennials are also already using voice assistants to make purchases, with that number expected to surpass 50% by 2020.
An example of the impact e-commerce has had on physical retail is the post-Thanksgiving Black Friday and Cyber Monday shopping days in the United States. According to Rakuten Marketing data, in 2017, Cyber Monday, which features sales that are exclusively online, saw 68% higher revenues than Black Friday, which is traditionally the biggest brick-and-mortar shopping day of the year.
According to data from ShopperTrak in 2017, physical store traffic on Black Friday declined by 1% year over year, and the two-day Thanksgiving-Black Friday period saw a 1.6% decline in traffic. Nearly 40% of sales on Black Friday came via a mobile device, up nearly 10% from the previous year, an indication that e-commerce is becoming m-commerce. Along with physical retail, e-commerce is transforming supply chain management practices among businesses, as distribution channels become increasingly digitized.