1. ELECTRONIC COMMERCE AND INTERNET MARKETING, PART I

2. Basic Internet Economics
In most markets, online merchants tend to have HIGHER costs than do conventional retailers
Much more of the work is done by the merchant rather than by the customer.
Intermediaries usually add value through specialization of labor and consolidation of tasks. Eliminating intermediaries usually results in higher costs.
Customers do a lot of the work when they select, aggregate, bring for check-out, and carry away their products. Employees of e-commerce companies and their transportation services have to be paid to do this work!

3. In a Supermarket or Discount Store:
The customer walks around the store and assembles his or her purchases
The customer takes the purchases up to the checkout stand and puts the items on the conveyor belt
If the customer does not use self-check-out, the clerk rings up the purchase
Either a clerk or the customer bags the items
The customer hauls away the purchases

4. Yes, when you sell online, you may not need as many store locations—which will save money—but you will face other costs (e.g., labor to compile and deliver orders) which may more than cancel out the savings from having fewer store outlets. Online merchants often have higher overall costs.
The actual cost effectiveness of online selling depends on the specific product, customer practices, and firm characteristics.

5. Online/Brick and Mortar Costs vs. Service Levels
Service levels offered by online merchants and different retail chains vary
Walmart offers very low cost retail distribution, but with limited service
Best Buy offers high levels of customer service—well trained “blue shirt” employees
High and low service levels can be offered both at online and brick-and-mortar stores
Retail chains that also sell online can offer services for online customers through retail stores (e.g., easier returns) (“Bricks-and-Clicks”)

6. Amazon.com—possibly the most efficient and well run major online merchant—is estimated to lose money on the tangible merchandise it ships to customers but usually reports some profits because of:
Sales of electronic content (e.g., books, movies, music)
Extensive web site hosting (including Netflix!)
eBay like “brokering” of used merchandise shipped from the seller to the buyer (no labor for Amazon)

7. Considerations in Evaluating E-Commerce Potential
Value-to-bulk ratio. High value, low weight/volume items can be more readily handled and shipped.
Absolute margin. Even if the percentage margin on a high price item is low (e.g., 15%), the absolute margin can cover considerable expenses (e.g., 0.15x$1,000=$150)
Ability of consumer to evaluate quality and fit through online description. Standard branded items from a trusted source can be more easily evaluated than items that need to be examined up close.
Convenience to the customer and willingness to pay for this convenience. Some consumers may be willing to pay more for door-to-door delivery. It is usually more expensive to buy groceries online.
Customer sensitivity to delayed delivery.
Extent of customization needed. Highly customized items—e.g., insurance, plane tickets, personalization—allow the customer to do much of the work (i.e., data entry).
Geographic dispersal of consumers. Even if direct-to-consumer sales are not efficient, this may be the only cost effective way to reach customers who are widely dispersed (e.g., bee keepers, Civil War buffs, tall people).
Extent of inventory value decline over time. A computer can be distributed to consumers at a lower price through retailers, but the process takes longer and computer parts lose value fast.

8. “Because Amazon’s costs are about the same whether it is shipping a $10 book or a $1,000 skirt, ‘gross profit dollars per unit will be much higher on a fashion item.” Jeff Bezos Clifford, 2012

9. Value-to-Bulk Ratio Value generally refers to market price
Bulk involves anything making it difficult and/or costly to ship:
Large volume
Heavy object
Oddly shaped object
Perishable object
Fragile object
Hazardous object

10. Considerations in Evaluating E-Commerce Potential
Value-to-bulk ratio. High value, low weight/volume items can be more readily handled and shipped.
Absolute (dollar) margin. Even if the percentage margin on a high price item is low (e.g., 15%), the absolute margin can cover considerable expenses (e.g., 0.15x$1,000=$150)
Ability of consumer to evaluate quality and fit through online description. Standard branded items from a trusted source can be more easily evaluated than items that need to be examined up close.
Convenience to the customer and willingness to pay for this convenience. Some consumers may be willing to pay more for door-to-door delivery. It is usually more expensive to buy groceries online.
Customer sensitivity to delayed delivery.
Extent of customization needed. Highly customized items—e.g., insurance, plane tickets, personalization—allow the customer to do much of the work (i.e., data entry).
Geographic dispersal of consumers. Even if direct-to-consumer sales are not efficient, this may be the only cost effective way to reach customers who are widely dispersed (e.g., bee keepers, Civil War buffs, tall people).
Extent of inventory value decline over time. A computer can be distributed to consumers at a lower price through retailers, but the process takes longer and computer parts lose value fast.

11. Absolute (Dollar) Margins
When the term “margin” is used without further specification, this usually refers to a percentage figure. For example, if you buy a book for $5 at wholesale and sell it for $10, you have a 100% markup and a gross margin of (10-5)/10) =50%. The 50% gross margin may sound impressive, but it only amounts to an absolute amount of $5.00, a figure for which you can only do a limited amount of work. It may not cover the cost of retrieving the item, packing it, and shipping.
Absolute margins refer to dollar amounts. In the above case, the absolute margin is $ Note that if there is a 15% gross margin (a much smaller percentage) on a $1,000 notebook computer, that amounts to $150—a figure that can cover much greater costs even though the percentage margin is less.