Economics of E-Commerce

Introduction

When was the last time you bought something online? Maybe you even got a discount. Was it delivered quickly or did it take ages to arrive?

There is an intricate mechanism involved in getting the goods you ordered online to your doorstep. Let's explore the economics behind that. 

E-Commerce and Markets

E-Commerce is driven by one single factor: ease of access. There is absolutely no difference between the products you buy at your local mall and the products delivered by an E-Commerce giant like Amazon. But there is a difference in how you acquire these products. The easy access to products is what gives an edge to E-Commerce based markets as opposed to physical markets. 

Secondly, an online market is more efficient than a physical one. Every purchase made online is immediately registered by complicated algorithms which judge demand and provide operators with immense amounts of data on how to manage their supply. On the other hand, physical markets take time to be efficient. There is a lot of trial and error involved, and a shift in demand can take days if not weeks to register with the suppliers.

Over time, E-Commerce has given rise to its markets. Traditionally, E-Commerce has four different forms of markets contained within it. These are:

1.B2C- Business To Consumers, where businesses sell their products directly to buyers (Amazon).

2.B2B- Business To Business, where businesses trade amongst themselves.

3.C2B- Consumer to business, where consumers sell their goods to business (Upwork). 

4.C2C- Consumer to consumer, where consumers trade amongst themselves. The E-Commerce platform serves as a middleman. 

Logistics

One of the most important parts of E-Commerce is the management of the company's supply chain and delivery.

Without products arriving on time and without a cost-efficient manner of acquiring products, a new company can drown in losses. 

Therefore, many E-Commerce websites hire middlemen to supply products to them at a cheaper rate in bulk. At the same time, they outsource delivery to another trusted company. Essentially, a successful E-Commerce platform does very little work itself, except for showing the products on its website. It outsources most of its other work but does it in bulk so it can keep its prices competitive. 

Larger E-Commerce companies have a grander way of managing their supply chain. Amazon, for example, has massive automated storehouses which store its various products. On receiving an order, the product is selected for dispatchment automatically. 

However, the capacity for a company to acquire such technology and efficiency is dependent on one thing: profit. 

Profit Generation 

For every firm, profit maximization and cost reduction is the rational behavior. 

With the rising competition in the E-Commerce sector, profit generation depends upon the USP - unique selling point - of the firm and how it differs or is better than the other firms. For E-Commerce firms, profit margins are also affected by the quality and efficiency of logistics i.e. the distribution system, manufacturing costs, etc. 

However, one of the main factors that contribute to profit generation is the sourcing of products. Sourcing of products and manufacturing the final goods for cheaper than the price at which they are sold make up the profit margins of E-Commerce entrepreneurs. 

Selling of products at a discount also contributes to profit generation. Through this, companies retain existing customers and also attract new ones. When consumers are convinced of the quality of the product and are seemingly loyal to it, the firm can then bump up prices to the original selling price they had in mind, which now significantly contributes to the increase in profits. 

But to generate profit or even to keep business going, technology is the key element that defines the existence of E-Commerce businesses. 

Technology

Technology is the basis of E-Commerce. It forms the crux of every E-Commerce activity, especially promotion. E-Commerce businesses use artificial intelligence to create a personalized user experience for their customers, providing recommendations to users based on their search and purchase history, and for market campaigning, targeting potential and current customers. 

Businesses also use AI for bot-powered chat boxes, a tool that makes business smoother and more user-friendly. These chat boxes are equipped to answer frequently asked questions and direct customers to their desired section of the webpage. The bots also ask for feedback, which is essential for firm owners, to gauge their standing on the online experience provided and any improvements that they can make. 

Improved securities especially for payment gateways prevent the frequency of online fraud. “Blockchain Technologies” are an evolving form of securities that store information about customer transactions and other user information in a permanent and immutable way, which is decentralized through a peer-to-peer network, preventing any unnecessary human access to records. When applied to the e-commerce industry, this advanced technology can help to secure transactions, prevent fraud, improve supply chain management, and generate genuine reviews.

Technology is ever-evolving and ever-advancing. New tools and services, which are easily accessible and affordable, are available every day, which makes business easier for E-Commerce firms.

Conclusion

E-Commerce indeed does facilitate ease. It has a far-reaching impact, providing access to the experience of shopping from anywhere in the world. The prominence of its impact is such that it has formed an entirely new economic sector, separate from the physical business sector. Its inception has opened up a world full of possibilities for both consumers and producers. It is indeed an evolution. 

Written by Rayandev Sen and Zoyah Virani; edited by Alidar Kuatbekov