E-commerce

Last updated: November 26, 2009.

No one knows exactly when people first started trading with one another—or how. We do know that metal coins have been used to buy and sell things for at least 4000 years. From horses and handcarts to ships, trucks, and airplanes, the need to trade goods has spurred on innovations in transportation for just as long. Today, though, it's all change: many of us are now buying and selling with a new form of commerce that involves neither money nor transportation—at least not in the traditional sense. You just sit in your armchair, click your mouse a few times, enter your credit card number, and wait for the goods to show up on your doorstep. E-commerce, as this is known, has grown enormously in the last decade, making life more convenient for consumers and opening up all kinds of new opportunities for businesses. Let's take a closer look at what it is and how it works.

Photo: Amazon.com: perhaps the world's most succesful e-shop. Originally just a bookstore, now it sells almost anything you can imagine. It even allows third-party vendors to sell products alongisde its own offerings with something called Amazon Marketplace. Amazon has consistently set the standard for online retailers with pioneering features like one-click shopping.

The basic components of an e-commerce system

Whether you're buying in a store or buying online, everything you do is geared around a transaction: the basic exchange of money for goods or services. In a real-world store, you simply take your new jeans to the checkout, hand over some cash, and leave the store with your purchase in a bag—that's a transaction. It works in a similar way if you're buying online, but there's one important difference: you never actually get to handle (or even see) the goods until they arrive at your home sometime later.

If this makes buying online slightly problematic for the purchaser, it also introduces two extra problems for the retailer (or e-tailer, as online retailers are sometimes known). Apart from having some means of processing transactions online, it means they also need a way of checking that the goods you've ordered are actually in stock, and a means of dispatching and delivering the goods to your address.

In short, then, e-commerce is about combining three different systems: a Web server that can manage an online storefront and process transactions (making appropriate links to bank computers to check out people's credit card details), a database system that can keep a check of the items the store has in stock (constantly updating as people make orders and ideally making new orders with suppliers when stocks run low), and a dispatch system linked to a warehouse where the goods can be instantly located and sent to the buyer as quickly as possible.

Only the first of these three systems is strictly necessary for e-commerce. Many people successfully run small-scale online stores without either complicated databases or dispatch systems: they simply have a website to publicise their business and take orders and then they manage the stock control and dispatch in more traditional ways. Small traders who sell items on the auction website eBay often work in this way, for example. Their "databases" are in their head; their "dispatch system" is simply a walk to the local post office.

How do you design an ecommerce website?

The design of virtual stores is often the most important factor in the success or failure of online businesses. That doesn't simply mean that e-commerce web sites have to look attractive (though they do): they have to be usable (quick and easy to navigate around without irritating or confusing people), reliable (customers expect sites to be online 24 hours a day, seven days a week, and for pages to load without delay), and secure (because no one is prepared to type their credit card details into a website that isn't safe).

Setting up an online store used to be quite an undertaking. Not only did you have to build a dedicated website from scratch, you also had to develop your own merchant system that could securely process credit card details and ship transactions to and from bank computers. These days, anyone can set up an online store in minutes. Websites like PayPal make it possible to build a store very quickly and, since they have built-in credit card processing features, handling transactions couldn't be simpler. Many people set up virtual storefronts on the auction site eBay and then use PayPal (now a part of eBay too) to process their transactions. Some websites (notably Amazon) allow you to incorporate mini versions of their store inside your own website—so you make a small commission selling their products within your own site.

It used to be said that the right domain name was an essential requirement for a successful online business but some of the most memorably named web sites (including pets.com, etoys.com and garden.com) were early casualties of the dot.com boom and bust. As successful Web businesses such as eBay and Amazon have proved, there doesn't necessarily have to be an obvious connection between the name of a website and things it actually does or sells: all that matters is that, over time, people will come to know, love, and trust the brand and visit the site instinctively when they want to buy something.

Using e-commerce to sell information

There's lots of money to be made online, but not all of this involves selling goods in the traditional way. Many online businesses try to make money by offering a mixture of free and premium services. Yahoo! (which originally stood for Yet Another Hierarchical Officious Oracle), is probably the best-known example of a website like this. Created as a comprehensive directory of other websites, it mutated into a search engine and then a portal, offering a gateway to all kinds of other premium services. For example, you can get free e-mail through Yahoo!, but you can also pay extra for a more sophisticated e-mail system; you can store your photographs for free on Yahoo!, but you can pay an extra sum to have them printed out or processed in various ways.

Newspapers, magazines, and book publishers also try to make money through a mixture of free and premium services. While most of them offer their basic content (the horrible, unappealing name that online businesses give to the words and pictures they publish) for free, using advertising to make money, some also offer a proportion of their articles for a one-off fixed fee or subscription). Buying an article involves a transaction similar to the ones you'd make on Amazon or eBay, so this kind of online publishing is also clearly a variety of e-commerce.

Advantages and disadvantages of e-commerce

Although early reactions to online shopping websites were often mixed ("It takes too long to find what you want", "I'm not sure they're secure", "The things I want are never in stock", "You can't see what you're buying"), things have improved greatly over the last decade and online businesses have found ways round most of the drawbacks. (For example, some online clothing stores sensibly offer free returns if you don't like the clothes you've bought or if they turn out not to fit.) Many people now swear by online shopping and wouldn't dream of setting foot in a real-world store where prices are often higher, queues are longer, and the doors open only during normal business hours.

For businesses too, e-commerce has opened up all kinds of new opportunities. Not many can compete with huge businesses like Amazon or eBay, but anyone can open an online store and start trading within a matter of minutes. Small local stores, long threatened by the growth of giant retailers like Wal-Mart and Tesco, have found a new lease of life by trading online and selling their products mail order.

E-commerce has also threatened many traditional ways of doing business. When people flock to online shopping sites for the Christmas rush, they naturally spend less in real-world stores. Savvy existing businesses such as Wal-Mart have tried to offset the threat by seizing the opportunity: "bricks and clicks" (having real world stores and a seamlessly integrated website) is now generally seen as the way to go. Shoppers have become equally savvy and are adept at inspecting products in real-world stores before buying online, or using websites to locate local branches of stores where they can inspect and purchase exactly the goods they want. It's important to bear in mind that e-commerce still represents only a small fraction of all the trade that we do (for the 1st quarter of 2008, the US Department of Commerce reported that e-commerce made up only 3.4 percent of total sales, as shown in the chart below).

The steady growth of e-commerce: This chart shows the percentage of total retail sales that e-commerce has represented since 2000. More formally, it shows "Estimated Quarterly U.S. Retail E-commerce Sales as a Percent of Total Quarterly Retail Sales: 4th Quarter 1999 to 3rd Quarter 2009". By courtesy of US Census Bureau.

As ever, customers call the shots and will continue to do so. While some traders (notably car dealers, opticians, and realtors) have tried to resist the threat from online shopping, protectionist tactics are bound to fail in the long term. It's all too easy now for customers to take their money and their spending power somewhere else—even to retailers in another country. The customer, and their mouse, is always right. And always will be.

A brief history of e-commerce

• 1887: US statistician Herman Hollerith (1860–1929) sets up the forerunner of IBM (International Business Machines), a company that will pioneer electronic forms of doing business in the decades that follow.
• 1960s: IBM pioneers online transaction processing (OLTP): a way of handling money transactions instantly (in "real-time") using sophisticated computerized systems. With American Airlines, IBM develops an OLTP system called SABRE (Semi-Automatic Business Research Environment) that revolutionizes airline reservations.
• 1970: US company Docutel invents the ATM (automated teller machine, also known as the "cashpoint"), which works using online transactions made through bank computers. The popularity of ATMs leads to even more sophisticated forms of transaction processing.
• 1980s: CompuServe, Prodigy, and AOL (America Online) let people shop from home using their computers and telephone lines.
• 1989: Tim Berners-Lee (1955–) invents the World Wide Web, unwittingly laying the foundations for an explosive growth of e-commerce in the years that follow.
• 1994: Jeff Bezos (1964–) founds Amazon.com, the iconic e-store.
  
• 1994: Marc Andreessen (1971–) develops the Netscape Navigator web browser ships with a feature called SSL (Secure Sockets Layer): built-in encryption that allows credit card transactions to be carried out securely online. There is a huge explosion in online shopping and business and the dot.com phenomenon begins.
• 2000/2001: The dot.com bubble bursts and over 750 online businesses go to the wall. At one point, Amazon.com's share price plunges to less than 10 percent of its original value.
• 2008: E-commerce is more successful than ever, now representing 3.4 percent of total commercial sales. According to the US Census Bureau, total US e-commerce retail sales for the first quarter of 2008 were $32.4 billion (estimated and not adjusted for seasonal variation).