Merchant Model

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MERCHANT MODEL

The merchant model of e-commerce involves the establishment of an electronic storefront on the World Wide Web, an information-technology infrastructure capable of receiving and processing orders, appropriate security measures to assure the safety, secrecy, and authenticity of transaction information, and means for procuring payments—either online or in the physical world—and completing orders via shipping and delivery. Under this broad outline, however, there are myriad considerations dependent on market conditions, financial ability, and technological capabilities.

The most important first step in implementing a successful e-commerce merchant strategy is drawing visitors to the company's Web site, and then turning those visitors into customers—preferably repeat customers. There are several ways a merchant may go about achieving this. One very popular method in the late 1990s was for merchants to contract with affiliate Web sites to place advertisements on the affiliates' pages. These advertisements, such as banners—the equivalent of cyberspace billboards—are clickable graphics or links that direct users to the merchant's site. In such an arrangement, the merchant agrees to pay the affiliate for posting the advertisement—either a flat fee or a tiny commission for each visit or sale based on a user clicking through from the affiliate's site. However, this method was losing favor in the early 2000s, as studies showed that the click-through model and banner advertisements were generating paltry returns. Increasingly, savvy marketing schemes were another favored method of drawing traffic to e-merchants' sites.

To maintain users and turn them into content shoppers, e-merchants need to give great consideration to the design of their Web sites, striking the right balance between aesthetic attractiveness, user-friendliness, and simplicity. For example, sites with heavy graphics and complex layout schemes may please some Web designers, but if a customer gets lost trying to purchase a product, they may be unlikely to return to the site. The general rule of thumb holds that customers should be able to find or purchase whatever they want in as few clicks as possible.

Perhaps the most heavily prized value-added component of online shopping for which merchants strive is the personalized shopping experience. Virtually unavailable at any large physical outlet, personalized shopping was the special purview of the e-merchant. In the late 1990s and 2000s, e-merchants invested heavily in technologies and applications that allow them to create sophisticated user profiles—or have customers create them themselves—which can then be fed to an application that tailors the online shopping experience to those specific customers. This was obviously a primary means of generating repeat business, and of taking maximum advantage of the kind of convenience the Web offers.

The late 1990s and early 2000s saw the rapid escalation but slower maturation of the merchant model. The dot-com craze propelled online merchants to the forefront of the e-commerce revolution, but the merchant model was plagued by a number of serious problems that culminated in the 2000 dot-com bust in the stock market, which forced e-commerce merchants to rethink their strategies and business models.

THE MERCHANT MODEL ADAPTS TO A TOUGHER ENVIRONMENT

The merchant model was challenged in the late 1990s by the industry dynamic of competing directly with established, bricks-and-mortar businesses. As a result, the merchant model was largely characterized by a number of unorthodox strategies. Perhaps the most dramatic of these were the competitive pricing schemes, whereby dot-com merchants sought to undercut their competitors—sometimes drastically—in order to draw customers to their sites, in hopes that the sheer volume of sales would enable them to stay afloat and increase their chances of attracting future venture financing, or find them favor in the stock market. However, as e-commerce merchants soon found, to their dismay, this business strategy, while for a time successful in gaining customers, wasn't much of a money maker, since the sale prices were often so low they barely covered the costs of the goods sold. At the most general level, one myth that proved untenable as bricks-and-mortar merchants began to shore up their Internet strategies was the idea that dotcom merchants were immune from traditional business rules, that e-commerce somehow transcended the standard economic wisdom. Thus, strategies such as these had to be overhauled to reflect a more stable scheme for turning a profit in the longterm.

One of the most pressing problems facing the e-commerce merchant model in the early 2000s was the issue of credit card fraud and chargebacks—the transactions enacted to remedy bogus charges. According to Visa International, chargebacks occur in Internet transactions three times as often as in all other credit-card processing mediums combined. If a chargeback occurs, it is the sole responsibility of the merchant. In the early 2000s, the major credit card companies were bringing pressure to bear on e-merchants to shore up their defenses against credit card fraud. According to Meridian Research, about 10 percent of all 1999 Internet sales involved credit-card fraud of some kind, which, without some sort of intervention, would cost U.S. e-merchants $30 billion by 2005.

Another major difficulty facing e-merchants in the late 1990s and early 2000s was order fulfillment. While merchants were often highly successful at drawing traffic to their sites and generating customers eager to take advantage of their low prices and innovative offerings, getting the products to those customers via the dot-com infrastructure proved much harder than anyone realized. Since much of the dot-com merchant model relied on the elimination of as much inventory as possible, combined with a heavy reliance on logistics outsourcing, e-merchants frequently exercised little direct control over their order-fulfillment capacities, and the relative newness of this approach in the Internet world made for complicated and bumpy relationships, as well as large numbers of dissatisfied customers. In this case, too, established bricks-and-mortar firms building their merchant Web operations enjoyed a distinct advantage over their pure-play dot-com competition by virtue of the former's ability to leverage their existing networks, rather than building, and relying so heavily on, brand new ones.

In addition, customer expectations of online shopping matured rapidly. When e-retailing picked up in the mid-1990s, the experience and convenience of making purchases over the Internet was often enough to keep customers visiting a merchant's site. By the end of the decade, however, convenience wasn't enough; online merchants were expected to make online shopping a value-added experience. In other words, customers demanded features in their online shopping experience—other than convenience—that they just couldn't get at a physical retail outlet.

In the early 2000s, the merchant sector witnessed a slow convergence between the maintenance of company warehouses and logistics operations incorporating sophisticated information technology for supply-chain management; improved and streamlined relationships between merchants and logistics specialists; and a greatly enhanced focus on customer relations to ensure that once customers are drawn to a site, they are enticed to stay by quality order fulfillment and overall service.