What Is Electronic Commerce (Ecommerce)?

The term electronic commerce (ecommerce) refers to a business model that allows companies and individuals to buy and sell goods and services over the Internet. Ecommerce operates in four major market segments and can be conducted over computers, tablets, smartphones, and other smart devices. Nearly every imaginable product and service is available through ecommerce transactions, including books, music, plane tickets, and financial services such as stock investing and online banking. As such, it is considered a very disruptive technology.

Key Takeaways

  • Ecommerce is the buying and selling of goods and services over the Internet.
  • It is conducted over computers, tablets, smartphones, and other smart devices.
  • Almost anything can be purchased through ecommerce today.
  • It can be a substitute for brick-and-mortar stores, though some businesses choose to maintain both.
  • Ecommerce operates in four market segments, including business-to-business, business-to-consumer, consumer-to-consumer, and consumer-to-business.
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Electronic Commerce

Understanding Ecommerce

As noted above, ecommerce is the process of buying and selling tangible products and services online. It involves more than one party along with the exchange of data or currency to process a transaction. It is part of the greater industry that is known as electronic business (ebusiness), which involves all of the processes required to run a company online.

Ecommerce has helped businesses (especially those with a narrow reach like small businesses) gain access to and establish a wider market presence by providing cheaper and more efficient distribution channels for their products or services. Target (TGT) supplemented its brick-and-mortar presence with an online store that allows customers to purchase everything from clothes and coffeemakers to toothpaste and action figures right from their homes.

Ecommerce operates in all four of the following major market segments. These are:

  • Business to business (B2B), which is the direct sale of goods and services between businesses
  • Business to consumer (B2C), which involves sales between businesses and their customers
  • Consumer to consumer, which allows individuals to sell to one another, usually through a third-party site like eBay
  • Consumer to business, which lets individuals sell to businesses, such as an artist selling or licensing their artwork for use by a corporation

Providing goods and services isn't as easy as it may seem. It requires a lot of research about the products and services you wish to sell, the market, audience, competition, as well as expected business costs.

Once that's determined, you need to come up with a name and set up a legal structure, such as a corporation. Next, set up an ecommerce site with a payment gateway. For instance, a small business owner who runs a dress shop can set up a website promoting their clothing and other related products online and allow customers to make payments with a credit card or through a payment processing service, such as PayPal.

Ecommerce may be thought of like a digital version of mail-order catalog shopping.

Special Considerations

Ecommerce has changed the way people shop and consume products and services. More and more people are turning to their computers and smart devices to order goods, which can easily be delivered to their homes. As such, it has disrupted the retail landscape. Amazon and Alibaba have gained considerable popularity, forcing traditional retailers to make changes to the way they do business.

But that's not all. Not to be outdone, individual sellers have increasingly engaged in e-commerce transactions via their own personal websites. And digital marketplaces such as eBay or Etsy serve as exchanges where multitudes of buyers and sellers come together to conduct business.

$4.28 trillion

The total of global ecommerce sales in 2020. This figure is expected to grow to $5.4 trillion by 2022.

History of Ecommerce

Most of us have shopped online for something at some point, which means we've taken part in ecommerce. So it goes without saying that ecommerce is everywhere. But very few people may know that ecommerce has a history that goes back before the internet began.

Ecommerce actually goes back to the 1960s when companies used an electronic system called the Electronic Data Interchange to facilitate the transfer of documents. But it wasn't until 1994 that the very first transaction. took place. This involved the sale of a CD between friends through an online retail website called NetMarket.

The industry has gone through so many changes since then, resulting in a great deal of evolution. Traditional brick-and-mortar retailers were forced to embrace new technology in order to stay afloat as companies like Alibaba, Amazon, eBay, and Etsy became household names. These companies created a virtual marketplace for goods and services that consumers can easily access.

New technology continues to make it easier for people to do their online shopping. People can connect with businesses through smartphones and other devices and by downloading apps to make purchases. The introduction of free shipping, which reduces costs for consumers, has also helped increase the popularity of the ecommerce industry.

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Image by Sabrina Jiang © Investopedia 2020

Advantages and Disadvantages of Ecommerce

E-commerce offers consumers the following advantages:

  • Convenience: E-commerce can occur 24 hours a day, seven days a week.
  • Increased selection: Many stores offer a wider array of products online than they carry in their brick-and-mortar counterparts. And many stores that solely exist online may offer consumers exclusive inventory that is unavailable elsewhere.

But there are certain drawbacks that come with ecommerce sites, too. The disadvantages include:

  • Limited customer service: If you shop online for a computer, you cannot simply ask an employee to demonstrate a particular model's features in person. And although some websites let you chat online with a staff member, this is not a typical practice.
  • Lack of instant gratification: When you buy an item online, you must wait for it to be shipped to your home or office. However, e-tailers like Amazon make the waiting game a little bit less painful by offering same-day delivery as a premium option for select products.
  • Inability to touch products: Online images do not necessarily convey the whole story about an item, and so e-commerce purchases can be unsatisfying when the products received do not match consumer expectations. Case in point: an item of clothing may be made from shoddier fabric than its online image indicates.
Pros
  • Is convenient

  • Offers a wider selection of goods and services

Cons
  • Limited customer service

  • Lacks instant gratification

  • Products can't been seen or handled until delivered

Example of Ecommerce

Amazon is a behemoth in the ecommerce space. In fact, it is the world's largest online retailer and continues to grow. As such, it is a huge disrupter in the retail industry, forcing some major retailers to rethink their strategies and shift their focus.

The company was launched its business with an ecommerce-based model of online sales and product delivery. It was founded by Jeff Bezos in 1994 as an online bookstore but has since expanded to include everything from clothing to housewares, power tools to food and drinks, and electronics.

Company sales increased by 38% in 2020 from the previous year, totaling $386.1 billion compared to $280.5 billion in 2019. Amazon's operating income also jumped to $22.9 billion for the 2020 fiscal year from $14.5 billion in 2019. Net income rose from $11.6 billion in 2019 to $21.3 billion by the end of 2020.

The company also expanded beyond ecommerce, providing cloud storage services, video and music streaming, electronic devices (such as Alexa, the personal assistant, and its Fire TV digital media player).

How Do You Start an Ecommerce Business?

Make sure you do your research before you start your business. Figure out what products and services you're going to sell and look into the market, target audience, competition, and expected costs.

Next, come up with a name, choose a business structure, and get the necessary documentation (taxpayer numbers, licenses, and permits if they apply).

Before you start selling, decide on a platform and design your website (or have someone do it for you).

Remember to keep everything simple at the beginning and make sure you use as many channels as you can to market your business so it can grow.

What Is an Ecommerce Website?

An ecommerce website is any site that allows you to buy and sell products and services online. Companies like Amazon and Alibaba are examples of ecommerce websites.

What Is the Difference Between Ecommerce and Ebusiness?

Ecommerce involves the purchase and sale of goods and services online and is actually just one part of an ebusiness. An ebusiness involves the entire process of running a company online. Put simply, it's all of the activity that takes place with an online business.

The Bottom Line

Ecommerce is just one part of running an ebusiness. While the latter involves the entire process of running a business online, ecommerce simply refers to the sale of goods and services via the internet. Ecommerce companies like Amazon, Alibaba, and eBay have changed the way the retail industry works, forcing major, traditional retailers to change the way they do business.

If starting an ecommerce site is something you're considering, make sure you do your research before you start. And make sure you start with small, narrow focus to ensure that you have room to grow.