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E-commerce

by Chris Woodford. Last updated: August 11, 2014.

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: the world's most successful e-shop. Originally just a bookstore, now it sells almost anything you can imagine. It even allows third-party vendors to sell products alongside 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 publicize 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 e-commerce works

Here's one example of how a sophisticated, fully computerized e-commerce system might work. Not all e-commerce systems work in exactly this way:

Labelled artwork showing how e-commerce works

  1. Sitting at her computer, a customer tries to order a book online. Her Web browser communicates back-and-forth over the Internet with a Web server that manages the store's website.
  2. The Web server sends her order to the order manager. This is a central computer that sees orders through every stage of processing from submission to dispatch.
  3. The order manager queries a database to find out whether what the customer wants is actually in stock.
  4. If the item is not in stock, the stock database system can order new supplies from the wholesalers or manufacturers. This might involve communicating with order systems at the manufacturer's HQ to find out estimated supply times while the customer is still sitting at her computer (in other words, in "real time").
  5. The stock database confirms whether the item is in stock or suggests an estimated delivery date when supplies will be received from the manufacturer.
  6. Assuming the item is in stock, the order manager continues to process it. Next it communicates with a merchant system (run by a credit-card processing firm or linked to a bank) to take payment using the customer's credit or debit card number.
  7. The merchant system might make extra checks with the customer's own bank computer.
  8. The bank computer confirms whether the customer has enough funds.
  9. The merchant system authorizes the transaction to go ahead, though funds will not be completely transferred until several days later.
  10. The order manager confirms that the transaction has been successfully processed and notifies the Web server.
  11. The Web server shows the customer a Web page confirming that her order has been processed and the transaction is complete.
  12. The order manager sends a request to the warehouse to dispatch the goods to the customer.
  13. A truck from a dispatch firm collects the goods from the warehouse and delivers them.
  14. Once the goods have been dispatched, the warehouse computer e-mails the customer to confirm that her goods are on their way.
  15. The goods are delivered to the customer

All of these things are invisible—"virtual"—to the customer except the computer she sits at and the dispatch truck that arrives at her door.

How do you design an e-commerce 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's Flickr site, 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, waiting lines 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 2nd quarter of 2012, the US Department of Commerce reported that e-commerce made up less than 5 percent of total retail sales, as shown in the chart below).

Chart showing the growing of retail e-commerce sales for the last decade, 2005 to 2014
The steady growth of e-commerce: This chart shows the percentage of total retail sales that e-commerce has represented since 2005. More formally, it shows "Estimated Quarterly U.S. Retail E-commerce Sales as a Percent of Total Quarterly Retail Sales: 1st quarter 2005 to 1st Quarter 2014". 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.

The mobile future of e-commerce

If you're running a long-established retail business, chances are you now have a website gathering orders from your customers and processing them through e-commerce. But just as you've got used to the rules of the online game, along comes something new that shifts the goalposts: mobile commerce, also known as m-commerce. You can't help but notice that more and more people are going online through cellphones, iPads, and other handheld devices. Once we hunched over desktop PCs clicking mice; now we're increasingly likely to poke at touchscreen tablets while we slouch on the sofa and simultaneously watch TV.

Screenshot of Amazon.com mobile app on iPod Touch

If you've any doubt about whether m-commerce is the future, you've only to look at the giants of the online world and see how seriously they're taking it. Amazon, Google, and Facebook all see mobile computing as a decisive battleground in the next few years. Google has repeatedly highlighted the importance of running a mobile-friendly site; in one recent Google survey, 74 percent of users said they were more likely to return to mobile-friendly sites and 67 percent said they were more likely to buy from mobile-friendly sites. However, a massive 96 percent reported that they'd encountered incompatible websites while going online with their mobile.

What can you do to go mobile?

The first step is to check out how your existing site works on a mobile device. There are emulators and testers you can use that simulate mobile devices on a PC, but it's much better to get yourself a modern cellphone with a browser or a tablet computer and see how your website works for real. If you've never seen it working on a tiny screen, you might be amazed by how it looks. If your site has been designed to work for a typical widescreen laptop, you'll probably find it looks terrible: columns probably wrap and overlap, the text may be too small to read, links may be too small to click, and so on. Don't worry! once you've assessed the scale of the problem, you can start to do something about it.

There are essentially four options if you want to "go mobile":

  1. Redesign your existing site in such a way that it works on both desktop and mobile. This is called responsive design and explainthatstuff.com is currently designed (after a fashion) to work in this way. For example, the text is deliberately quite large so that when you view it on a mobile device, it remains fairly readable. The pages are designed to work at more or less any width and wherever possible I've avoided things like tables and frames, which cause problems on small screens.
  2. Use common web pages but format them with a different stylesheet for desktop and mobile devices. You can use javascript or PHP to test for a mobile device and then serve either a desktop or mobile stylesheet that reformats your pages accordingly. If you want, you can set a cookie to remember which version of the site to serve as users hop from page to page. It's a good idea to give mobile users the option to view your full site, if they prefer.
  3. Detect whether users are on a desktop PC or a handheld device and then redirect to a completely separate mobile version of your site. This means you can optimize your site for mobile users without compromising usability for people on the desktop, but the drawback is having to maintain a second, duplicate version of your site—and the risk of different versions of your pages getting out of step. Remember that search engines such as Google dislike duplicate content, so use techniques like canonical URLs to help them understand where to find the definitive version of each page.
  4. Develop a free app for mobile devices that effectively bypasses your website altogether. There's an upfront expense in having apps developed, but they generally give a much better user experience that mobile websites. Not only that, but they prevent users getting distracted, clicking other links, going off to competitor sites, and so on!

Further reading

Photo: Amazon.com's mobile app running on an iPod Touch.

A brief history of e-commerce

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Text copyright © Chris Woodford 2008, 2012. All rights reserved. Full copyright notice and terms of use.

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Woodford, Chris. (2008) E-commerce. Retrieved from http://www.explainthatstuff.com/ecommerce.html. [Accessed (Insert date here)]

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