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How E-commerce Works


The Dell Example

The hype doesn't explain the frantic rush by companies, both large and small, to get to the Web. Nor does it justify a small business making a big expenditure on an e-commerce facility. What is driving this sort of frenzy? To understand it a bit, let's take a look at one of the most successful e-commerce companies: Dell.

Dell is a straightforward company that, like a host of others, sells custom-configured PCs to consumers and businesses. Dell started as a mail-order company that advertised in the back of magazines and sold their computers over the phone. Dell's e-commerce presence is widely publicized these days because Dell is able to sell so much merchandise over the Web. According to IDG, Dell sold something like $14,000,000 in equipment every day in 2000, and 25 percent of Dell's sales were over the Web.

Does this matter? Dell has been selling computers by mail over the phone for more than a decade. Mail order sales is a standard way of doing things that has been around for over a century (Sears, after all, was a mail order company originally). So if 25 percent of Dell's sales move over to the Web instead of using the telephone, is that a big deal? The answer could be yes for three reasons:

  • If Dell were to lose 25 percent of its phone sales to achieve its 25 percent of sales over the web, then it is not clear that e-commerce has any advantage. Dell would be selling no more computers. But what if the sales conducted over the web cost the company less (for example, because the company does not have to hire someone to answer the phone)? Or what if people purchasing over the web tend to purchase more accessories? If the transaction cost on the web is lower, or if the presentation of merchandise on the web is more inviting and encourages larger transactions, then moving to the web is productive for Dell.
  • What if, in the process of selling merchandise over the Web, Dell lost no sales through its traditional phone channel? That is, what if there just happens to be a percentage of the population that prefers to buy things over the Web (perhaps because there is more time to think, or because you can try lots of different options to see what happens to the final price, or because you can compare multiple vendors easily, or whatever). In building its web site to attract these buyers, Dell may be able to lure away customers from other vendors who do not offer such a service. This gives Dell a competitive advantage that lets it increase its market share.
  • There is also a widely held belief that once a customer starts working with a vendor, it is much easier to keep that customer than it is to bring in new customers. So if you can build brand loyalty for a web site early, it gives you an advantage over other vendors who try to enter the market later. Dell implemented its Web site very early, and that presumably gives it an advantage over the competition.

These three trends are the main drivers behind the e-commerce buzz. There are other factors as well.


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