IT 361: E-Commerce Systems
Chapter 6
Online Retail and Services
Readings: Chapter 9 - Online Retail and Services
Slide 6-1
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Blue Nile Sparkles For Your Cleopatra
Class Discussion
Why is selling (or buying) diamonds over the
Internet so difficult?
How has Blue Nile built its supply chain to
keep costs low?
How has Blue Nile reduced consumer anxiety
over online diamond purchases?
What are some vulnerabilities facing Blue Nile?
Would you buy a $5,000 engagement ring at
Blue Nile?
Slide 6-2
Major Trends in Online Retail, 2007-2008
See also Table 9.1, Page 551.
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Social shopping…
Online retail increasingly profitable
Buying online becomes normal, mainstream experience
Selection of goods online increases, including customized goods
Average annual amount of purchases increases
Specialty retail sites show most rapid growth
Increased emphasis on improved shopping experience
Increased use of interactive multimedia marketing
Retail intermediaries strengthen in many areas
Retailers increasingly efficient at integrating multiple channels
Personalized goods, especially in apparel, become financially successful.
Online shopping becomes more multi-seasonal
Most online shopping occurs at work, evenings at home
Slide 6-3
The Retail Sector
• Durable vs. nondurable goods
• Goods vs. Services, “product-based services”
• Most important theme in online retailing is effort to
integrate online and offline operations
• Retail industry can be divided into segments, each of
which offers opportunities for online retail
• Biggest opportunities for online retail sales: Those
segments that sell small ticket items (specialty stores,
general merchandisers, mail-order catalogs, groceries)
• Specialty stores success depends on building a unique
product for a market segment, strong customer service,
persuasive shopping experience)
• Mail order/telephone order (MOTO) sector most similar to
online retail sector – fastest growing (have fulfillment
system, sophisticated inventory control system, customer
Slide 6-4
database, large scale)
Composition of the U.S. Retail Industry
Each offer opportunity for online retail, yet the use of internet may
differ (information and purchasing)
SOURCE: Based on data from U.S. Census Bureau, 2007.
Slide 6-5
Online Retailing: The Vision
• Greatly reduced search & transaction costs on the Internet
would encourage consumers to abandon traditional
marketplaces in order to find lower prices for goods (costdriven vs. brand-driven). Only low-cost high quality
merchant will survive.
• Market entry costs would be much lower than those for
physical storefronts, and online merchants would be more
efficient than offline competitors. Low customer
acquisition cost because of the search engines.
• Traditional offline physical store merchants would be
forced out of business. First-mover advantage will lock
competitors.
• Some industries would become disintermediated as
manufacturers built direct relationship with consumer
Slide 6-6
• hypermediation
Online Retailing: The Vision
• Ultimately, few of the above assumptions proved to be
correct, and structure of retail marketplace in the U.S. has
not been revolutionized
• Few pure online businesses were successful
• Consumers consider brand name, trust, reliability and
delivery time.
• Internet
– created new venue for multi-channel firms to strengthen their
offline brands
– supported both general and specialized merchants
– Created marketplaces for consumers to conveniently shop
– Multi-channel can be manage and turned into strength
Slide 6-7
The Online Retail Sector Today
• Online retailing segment, although smallest
segment of retail industry, is growing at
exceptionally fast rate
• Online retail revenues: $137 billion, 120
million consumers estimated for 2007
• Primary beneficiaries of growing consumer
support: Established offline retailers with an
online presence
Slide 6-8
Online Retail and B2C E-commerce is Alive and
Well
Figure 9.2, Page 556
SOURCES: Based on data from eMarketer, Inc. 2007a; U.S. Department of Commerce,
2007; Forrester Research, 2006; authors’ estimates.
Slide 6-9
Challenges
Online: turn visitors to customers, and develop
efficient operations to achieve profitability
Offline: Integrate offline and online channels so
customer can move seamlessly from one
environment to another
Slide 6-10
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Multi-Channel Integration
Integration methods
In the past, tradition physical store retailers
moving towards the web. In the future, online
retailers may develop physical retails stores
Intermediaries continue to play
Consumers are attracted to stable, wellknown, trusted retail brands
Slide 6-11
Analyzing the Viability of Online Firms: Strategic
Analysis
• Strategic analysis of economic viability of a
firm focuses on both industry as a whole and
firm
• Key industry strategic factors:
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Barriers to entry
Power of suppliers
Power of customers
Existence of substitute products
Industry value chain
Nature of intra-industry Slide
competition
6-12
Analyzing the Viability of Online Firms:
Strategic Analysis (cont’d)
• Strategic factors that pertain to firm include:
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Firm value chain
Core competencies
Synergies
Technology
Social and legal challenges
Slide 6-13
Analyzing the Viability of Online Firms: Financial
Analysis
• Financial analysis helps us understand how
a firm is performing
• Includes two main parts:
– Statement of Operations: Tells us how much income or
loss a firm is achieving based on current sales and costs
– Balance sheet: Provides a financial snapshot of a
company’s assets and liabilities
Slide 6-14
Analyzing the Viability of Online Firms: Financial
Analysis (cont’d)
• Factors in assessing Statements of Operations
– Revenues: growing and at what rate?
– Cost of sales: compared to revenues
– Gross margin (gross profit divided by net sales): increasing or
decreasing?
– Operating expenses: What are they; increasing or decreasing?
– Operating margin: Indication of company’s ability to turn sales
into pre-tax profit after operating expenses are deducted
– Net margin (net income or loss divided by net sales or
revenue): increasing or decreasing?
Slide 6-15
2006
Is the firm
gaining or losing
market power vs
suppliers?
Revenue
Net Sales
Cost of Sale
Gross Profit
Gross margin
Operating Expenses
Marketing
Fulfillment
Technology
Ability to turn
sales into pre-tax
profit after
deducting
operation
expenses
Total non-operating expenses
income before income taxes
Provision (benefit) from income
taxes
Net income
Net margin
2004
10,711
8,255
2,456
23%
8,490
6,451
2,039
24%
6,921
5,319
1,602
23%
259
913
608
176
-
192
729
406
146
-
158
590
251
112
57
10
47
7-
1,966
490
5%
1,520
519
6%
1,161
441
6%
G&A
Stock-based compensation
Other operating expenses
Total operating expenses
Income from operating
operating margin
2005
12
4
478
187
515
95
291
3%
84
357
-232
420
5%
589
9%
2006
2005
2004
Assets
Cash
2,019
2,000
1,779
Current Assets
3,373
2,929
2,539
Assets
4,363
3,696
3,248
Current liabilities
2,532
1,899
1,620
long-term debts
1,400
1,521
1,855
working capital
841
1,030
919
Liabilities
sustainability
Analyzing the Viability of Online Firms:
Financial Analysis (cont’d)
• Factors in assessing a Balance Sheet:
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Current assets
Current liabilities
Ratio of current assets to liabilities (working capital)
Long-term debt
Slide 6-18
E-tailing Business Models
• Four main types of online retail business
models:
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Virtual merchant
Bricks-and-clicks
Catalog merchant
Manufacturer direct
Slide 6-19
Virtual Merchants
• Single channel Web firms that generate almost all
revenues from online sales
• Challenges: Build a business and brand from scratch,
quickly, new channel and confront virtual merchant
competitor
• Costs: web site, order fulfillment system and brand
name, and customer acquisition
• Low gross margin
• To preserve profit and cover operation cost
– High efficient operation
– Build brand name quickly to attract customers
• Example: Amazon
Slide 6-20
E-commerce in Action: Amazon.com
• Vision: Earth’s biggest selection, most customercentric
• Business Model:
– Retail
– Service
• Merchant
– Amazon Enterprise Solutions
– Marketplace (Individuals * small business)
– Merchant@ (large; rent, order entry, payment)
– Amazon Service Program (operate other business)
• Developer (computing power; S3, EC2)
Slide 6-21
• Business Model
– No inventory – specialized store
– Retailer
– Trading platform
Slide 6-22
2006
Revenue
Net Sales
Cost of Sale
Gross Profit
Gross margin
Operating Expenses
Marketing
Fulfillment
Technology
Total non-operating expenses
income before income taxes
Provision (benefit) from income
taxes
Net income
Net margin
2004
10,711
8,255
2,456
23%
8,490
6,451
2,039
24%
6,921
5,319
1,602
23%
259
913
608
176
-
192
729
406
146
-
158
590
251
112
57
10
47
7-
1,966
490
5%
1,520
519
6%
1,161
441
6%
G&A
Stock-based compensation
Other operating expenses
Total operating expenses
Income from operating
operating margin
2005
12
4
478
187
515
95
291
3%
84
357
-232
420
5%
589
9%
Financial Analysis: Greatly improved overall operational position, but not yet consistently profitable
2006
2005
2004
Assets
Cash
2,019
2,000
1,779
Current Assets
3,373
2,929
2,539
Assets
4,363
3,696
3,248
Current liabilities
2,532
1,899
1,620
long-term debts
1,400
1,521
1,855
working capital
841
1,030
919
Liabilities
E-commerce in Action: Amazon.com
• Business strategy:
– Maximize revenue
• Expand 3rd party seller
• More focused stores
– Cutting costs
• SCM
• Fulfillment system
• Mathematicians (warehouses, size of shipment, consolidation of
orders)
• Competition: General merchandisers who are both offline
and/or online
• Technology: Largest, most sophisticated collection of
online retailing technologies available
• Social, Legal: Securities, anti-trust lawsuits
• Future Prospects: Long-term profitability still uncertain
Slide 6-25
Multi-channel Merchants: Bricks and Clicks
 Companies that have network of physical stores as
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primary retail channel, but also online offerings
Cost: physical building and sales staff. low customer
acquisition cost
Advantages: brand name, customer base,
warehouses, large scale and trained staff
Challenges:
 Leverage their strength and assets to the web
 Building credible web site
 New skilled staff
 Raped response order entry and fulfillment system
 Examples: Wal-Mart, J.C. Penney, Sears
Slide 6-26
JCPenny
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1902: Department store
Catalog mail-order
1998: online catalog
Return either at store or mail
Essence: complete integration of offline and online
Understanding customer preferences
(products/channel)
• Interactivity and imaging tools (zoom, custom)
Slide 6-27
Catalog Merchants
 Established companies that have national offline
catalog operation as largest retail channel, but also
have online capabilities
 Examples: Lands’ End (personal shopper, Virtual
model, land’s End custom), Victoria’s Secret
 High cost of printing and mailing
 Efficient operation, few-No physical stores, fulfillment
system
 Challenges (bricks-&-clicks)
 Leverage their existing assets and competencies
 Credible web site
 New staff
 Advantage: already posses very efficient fast response
Slide 6-28
Manufacturer-Direct
 Single or multi-channel manufacturers who sell
directly online to consumers without intervention
of retailers
 Challenges
 Channel conflict (compete in price and currency of
inventory)
 Developing fast-response online order & fulfillment
system
 Acquiring customers
 Coordinating supply chain with market demand
 Supply-push model vs. demand-pull model
 Advantage: low cost structure – high gross margin
Slide 6-29
Common Themes in Online Retailing
• Online retail fastest growing channel, has fastest growing
consumer base, growing penetration rate across many
categories of goods
• Many online retail firms have begun to raise prices
• Disintermediation has not occurred, and most manufacturers
use Web primarily as an informational resource
• Most significant online growth has been that of offline giants
who are focusing on extending brand to online channel
• Second area of rapid growth: specialty merchants
Slide 6-30
Insight on Technology: Using the Web to Shop ‘Till
You Drop
Class Discussion
• What do shopping bots and comparison
sites offer consumers?
• Why are shopping bots more successful
with hard goods than soft goods?
• What is the strategy of Shopping.com?
• How can shopping bots compare luxury
goods?
• How will adding content to comparison
sites help consumers?
Slide 6-31
The Service Sector: Offline and Online
• Service sector: Largest and most rapidly
expanding part of economies of advanced
industrial nations
• In the United States, services employs about
76% of labor force; accounts for $7.1 trillion of
GDP in 2007
Slide 6-32
What are Services?
• Service occupations: “Concerned with performing tasks”
in and around households, business firms, and institutions
• Service industries: “Domestic establishments providing
services to consumers, businesses, governments, and
other organizations”
• Major service industry groups:
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FIRE (Finance, insurance, real estate)
Travel
Professional services (legal, accounting)
Business services (consulting, advertising & marketing, Info
Processing)
– Health services
– Educational services
Slide 6-33
Categorizing Service Industries
• Within service industry groups, can be
further categorized into:
– Transaction brokers
– Hands-on service provider
• Services industry features:
– Knowledge- and information-intense, which makes
them uniquely suited to e-commerce applications
– Amount of personalization and customization required
differs depending on type of service
Slide 6-34
Online Financial Services
Online Banking, Mortgage, Insurance, Real estate
• Online financial services sector example of ecommerce success story, but success is
somewhat different from what had been
predicted
– Pure online firms were instrumental in
transforming the brokerage industry
– Less impact in banking, insurance & real estate)
• Multi-channel established financial services
firms are showing fastest growth and
strongest prospects
Slide 6-35
Online Financial Consumer Behavior
• Consumers attracted to online financial sties
because of desire to save time and access
information rather than save money
• Most online consumers use financial services
firms for mundane financial management
(check balance)
• Once accustomed, customers move to more
sophisticated capabilities (paying loans)
• Greatest deterrents are fears about security
and confidentiality
Slide 6-36
Online Banking
• Online banking pioneered by NetBank and
WingSpan
• Established brand name national banks have
taken substantial lead in market share
• Over 80 million people use online banking,
and around 40 million households
• Movement toward online banking is global
Slide 6-37
Online Brokerage
• Early online brokerage leaders, such as
E*Trade and Ameritrade have been displaced
at top by established firms (Fidelity and
Charles Schwab)
• About 6 million U.S. households trade online
Slide 6-38
Multi-channel vs. Pure Online Financial Service
Firms
• Online consumers have made it known that
they prefer multi-channel firms with physical
presence
• Multi-channel firms are growing faster and
have lower customer acquisition, conversion,
and retention costs
• However, users of pure online firms utilize
them more intensively & has strong telephone
presence. Limited services.
• Pure online customers are price-driven
Slide 6-39
Financial Portals and Account Aggregators
• Financial portals: Provide comparison shopping services,
independent financial advice and financial planning
– Examples: Yahoo! Finance, Quicken.com, MSN Money, AOL’s
Money and Finance channel
• Account aggregation: Process of pulling together all of a
customer’s financial (and even non-financial) data at a
single personalized Web site
– Yodlee, a leading provider of account aggregation technology;
used by Merrill Lynch, Citigroup, Chase, others
– Raises issues about privacy and control of personal data, security,
etc.
Slide 6-40
Online Mortgage and Lending Services
• Early entrants envisioned market in which mortgage value
chain would be simplified and loan closing process
speeded up, with resulting cost savings passed on to
consumer
• However, many of early-entry, pure online firms failed
(e.g., Mortgage.com) due to difficulties of developing
brand and simplifying mortgage generation process (high
startup rate, acquisition cost, rising interest rate, poor
execution)
• Today, four basic types of online mortgage vendor:
– Established online banks, brokerages, and lending organizations
– Pure online mortgage bankers
– Mortgage brokers
Slide 6-42
• Customer benefit from online mortgage:
– Reduced application times
– Market interest rate intelligence
– Process simplification
• Lender benefits
– Cost reduction
Online mortgage industry has not transformed the
process of obtaining mortgage, but the ability to shop
online
Online Insurance Services
• Online term life insurance: one of few product groups in
which Internet actually lowered search costs, increased
price comparison, and resulted in lower prices to
consumers
• However, in other insurance product lines, Web has
offered insurance companies new opportunities for
product and service differentiation and price
discrimination
• Leading players include InsWeb, Progressive and
Insure.com
• Like mortgage, online insurance was successful in
attracting shoppers
Slide 6-44
Online Real Estate Services
• Early visions (that the historically local, complex, and
agent-driven real estate industry would be transformed
into a disintermediated marketplace where buyers and
sellers would transact directly) has not been realized
• Extream benefit for buyers, sellers and agets.
• Major impact is influencing of purchases offline and not
completing the entire process
• Primary service is listing of properties (Rich, tools, reports)
• Despite revolution in available information, there has not
been a revolution in the industry value chain
Slide 6-45
Online Travel Services
• Arguably, single most successful B2C e-commerce
segment; attracts single largest audience, and largest slice
of B2C revenues
• Internet becoming most common channel used to
research travel and book reservations
• 2007: $94 billion in revenue, expected to grow to $146
billion by 2010
• Popular because they offer consumers more convenience
(one stop; offers content, commerce, community,
customer service) than traditional travel agents
• For suppliers, offers a singular, focused customer pool that
can be efficiently reached
Slide 6-46
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Travel as an Ideal Internet Product/Service
Information-intensive product
Electronic product in the sense that travel
arrangements can be accomplished for the
most part online
Does not require inventory
Suppliers are always looking for customers to
fill excess capacity
Do not require an expensive multi-channel
presence
Slide 6-47
Online Travel Services Revenues
Online Travel Services Components
• Airline reservations the largest single component (2/3 of all
online travel spending)
• Hotel reservations (19% of online travel spending)
• Car reservations (9% of online travel spending)
• Cruise/tour reservations: fairly slow growth since not as well
suited for online environment
• Major segments:
– Leisure
– Business travel – expected to be a major growth area as corporations
seek better control of corporate travel expenses (COBS)
Slide 6-49
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Insight on Business: Zipcars
Class Discussion
What is the Zipcar business model? How does
it make money?
How does Zipcar use the Internet?
Does Zipcar compete with traditional car
rental firms?
Will Zipcar work only in urban markets? Can it
expand to the suburbs?
Slide 6-51
Online Travel Industry Dynamics
• Meta-search engines, Competition among online
providers is intense (commodity, focus on scope, ease of
use, payment options and personalization)
• Industry is going through a period of consolidation as
stronger, offline established firms purchase weaker and
relatively inexpensive online firms
• Suppliers (the large national airlines, hotel chains, auto
rental companies, etc.) are attempting to eliminate the
intermediaries such as the global distribution systems and
travel agencies, using Web as means
• Mobile
Online Career Services
• Next to travel services, one of Internet’s most successful
online services.
• Dominated by CareerBuilder, Monster (owned by Monster
Worldwide), and Yahoo HotJobs
• Online recruiting provides more efficient and costeffective method of linking employers and potential
employees, while reducing total time-to-hire
• Enables job hunters to more easily build, update, and
distribute resumes while gathering information about
prospective employers and conducting job searches
• Ideally suited for Web due to information-intense nature
of process
Slide 6-53
Recruitment Market Segments
• Three major segments
– General job recruitment: Largest segment and primary
focus
– Executive search: highest revenue potential
– Specialized job placement services: often run by
professional societies
Slide 6-54
Online Recruitment Industry Dynamics
• Major trends:
– Consolidation: CareerBuilder, Monster, and HotJobs
together dominate the market
– Diversification of product line: niche sites
– Localization: Local boards compete with local
newspapers, Craigslist
– Job search engines “scrape” listings: Indeed.com,
SimplyJobs, JobCentral
– Social networking: LinkedIn; Facebook apps
– Mobile
Slide 6-55