Wednesday, February 8, 2012

Factors driving the success of E-commerce business



1. Introduction

E-commerce is not only about buying and selling of product or services, it involves many others activities to have successful transaction online/offline. It is changing the business process and the structure to meet the demand of buyer and seller goal. Most of us are ordering products from online stores on regular basis. In this article, I have discussed how in online commerce trust and knowledge of the sellers, affect buyers decision to enter into negotiations and potentially complete the transaction.
Trust is a critical component for any business transaction, and is particularly essential in the e-Commerce environment, where transactions are more impersonal, anonymous and automated. Trust is an important factor in determining whether an individual chooses to, or not to, acquires goods or services via the Web. Whenever an exchange relationship is characterized by uncertainty, vulnerability, and dependence, the issue of trust arises.
Some of the common unknowns that are usually seen in online commerce are:
  1. How do the participating parties know whom are they transacting with?
  2. What if one of the parties denies the occurrence of transactions?
  3. What are the credentials of the participating buyers and sellers of products and services in an online market place?
The buyers raise questions like
-Is the seller who it claims to be?
-Does he have sound business fundamentals?
-Would he be able to service my transaction in terms of on-time delivery, product quality or after sales service?
Similarly, sellers raise several questions about the buyers:
-Is the buyer who it claims to be?
-Should I grant credit to the buyer? What credit terms shall I negotiate with the buyer?
-Should I engage in this transaction?
The ability to check the credentials and genuineness of transacting parties will enhance the online trust and will be an important driver for e-commerce. Trust tends to influence
consumer’s general buying decisions. There are studies done which indicates that trust impacts decisions to engage in business-to-consumer e-commerce
Reputation of the seller is another factor that plays equally important role as trust, in facilitating a successful business between the buyer and seller. Since the trading involves money, so buyer wants to make sure that the seller has a desired level of credibility in the market (in our case online market). Buyers generally feel comfortable in trading with a seller who has a good reputation. Most of the popular e-commerce sites define a matrix to evaluate the reputation of the seller. One of the important tool is word of mouth i.e. listen to what other customers are telling about the seller. Ranking, reviews, feedbacks given by other buyers are general ways of assessing the credibility of the seller. It has been seen that the feedback score as well as the number of people who have participated in the review both have the equal effect in determining the overall feedback. Positive feedbacks have obviously a more comforting effect on the buyers but the negative feedbacks do have some tolerance level so in 30 feedbacks if 2 are negative they are probably ignored. There have been studies that suggest that the buyers are not comfortable to bid for heavy amounts with a seller whose ranking is low on the auction sites like eBay.
Reputation in turn leads to building of trust between buyer and seller so both are interrelated. In this article I will discuss how the popular e-commerce has implemented their ranking mechanisms.
Some of the factors that affect the outcome of the online commerce:
.
  1. Prior experience with the seller. The buyer has got some opinion about the seller based on the previous experience, which dilutes the factor of anonymity.
  2. Multiple numbers of transactions done with the seller (Repeated Exposure). The buyer has done trade with the seller many times so the buyer is well aware of credentials of the seller. Also buyer feels that he can get better deals with the known seller rather than trying a new person
  3. Number of items that have been traded (Level of processing): Number of items is a measure of amount of trade that has been done with the seller. The buyers generally give bulk orders to the seller whom they know well.
  4. Forgetting Rate: This indicates how often the transactions have been made. If the frequency of engaging in trade with the same seller is more, then the buyer will remember the profile of the seller. Also the buyer will have the updated information about the market reputation of the seller. But if the trade with the seller is done once in a while then the buyer will have to again do a survey of the seller’s current reputation in the market, which might have changed a lot.
There might be a case that buyer does not directly know the seller but he might get the reference of the seller from his friends. This is like online feedback mechanism in real life where the friends replace the unknown buyers. In this study we will see how social networks have an effect on building the trust. “A is friend of B who is friend of C so A can trust C” kind of situations is common in social networks. But in case of online commerce it is difficult to find out the true identity of the seller so to find his friends and known ones are remote. However if the buyer keeps trading with the same seller for a long time, some kind of familiarity develops.
Buyers feel confident to make a deal with sellers whom they can meet in person and talk. They feel it easy to negotiate about the price and to also return back to the seller if he fails to fulfill his promise. The buyer also feels ease in finding out the credibility of the seller if the location of the seller is known. There might be chances that some of the buyer’s friends know the seller so the trust builds up. This is one of the prominent reasons why most of the buyers hesitate to make expensive deals on the Internet. In this article I will also discuss how the knowledge about the seller’s location influences buyers to get into a transaction.
Negotiation is another activity that is often carried out in the offline businesses. During business negotiations, the business partners try to arrive at an agreement that is acceptable to both partners Buyers like to meet the sellers in person and try to get the best deal possible. In online businesses negotiation is difficult since most of the time the buyer has got no personal contact with the seller. Negotiation becomes an important activity when the product in question is of high value. In this article I will discuss what is the extent of negotiation supported by the various major online businesses. Also we will see how the social networks can facilitate this activity.
I have analyzed four different online businesses to see how much trust a buyer has when he engages in a transaction using their model. I have tried to understand to what extent the following aspects of the business have been supported by these businesses:
  1. Information of Product/Service: How well the buyer can get the information about the product/service from the online commerce?
  2. Buyer/Seller Interaction: Can the buyer have any interaction with the seller?
  3. Review/Rating: Is there any review/ranking mechanism for seller in place?
  4. Location: Is the location of the seller provided by the online commerce?
  5. Negotiation: Does the online commerce provide any means for the buyer and seller to negotiate on the price of the product?
  6. Knowing the Seller: Is the identity of the seller revealed by the online business?
7.   Social Network: Is there any social network in place?
Later in the article I will also discuss about how introduction of social networks can influence the trust that buyer feels while doing an online business.
2. Businesses

2.1. eBay.com (http://www.ebay.com)
Ebay is one of the major online auction sites where both the buyers and sellers even though unknown people, engage in transactions. There is thus high degree of anonymity and uncertainty involved during the entire trading. Last minute bids are a popular practice used by buyers. This give the buyer some lead about the worth of the product on sale and also number of people bidding gives an indication about the reputation of the seller. There is also lack of surety whether the product on auction is what is finally delivered. For e.g. Seller has put a brand new iPod on sale but what he delivers is an old model. The buyer will get to know about the actual product only at the time of delivery.
EBay as such does not give a guarantee of the foolproof transaction but there are some tools that help buyers to evaluate the credibility of the seller. There is a feedback mechanism in place that allows the buyers to write their experiences with the seller. It is basically the rating/ranking system. The sellers have to take the feedback seriously since eBay disallows the sellers with the lower ratings to trade on eBay. Once the item is delivered to the buyer, the buyer gives a rating to the seller on the basis of accuracy of item description, communication, delivery time, and postage and packaging charges. This rating system is a way to build a trustworthy environment for the buyers. It has been seen that buyers generally look into feedback before making their final decisions to trade with the sellers.
But there are certain flaws in the rating system due to which ranking alone cannot guarantee the credibility of the seller. For e.g. Most sellers feel that there are chances that buyers can deliberately give the seller low rating and bring a bad name for the seller. Also the buyers might not be able to differentiate between a seller who got 1 negative feedback among 2 or 50% negative versus a seller who got 2 negative reviews out of 8 or 25% negative image. One problem that the ranking system alone cannot solve is that most sellers are trading under some false name, so even if they score low on their feedbacks, they can always create a new account and start afresh.
The sellers describe the product they want to sell on eBay. It is generally advisable to have lot of keywords in the description so that the product is easily searchable. But it is the onus of the sellers to decide what details they want to put for their product. Therefore the information about the product/services varies depending upon the seller. So the quality of the information is not guaranteed.
Sometimes buyers have some queries regarding the products that they want to resolve before finally placing their bids. EBay allows the buyers to post their questions to the sellers directly. This way the buyer/seller interaction is enforced on the site. In case the seller did not answer to buyer’s questions, buyer can request eBay to provide the seller’s phone number so as to directly contact them over phone.
Buyers can also exercise this option to negotiate on the bid with the sellers. It is a means to get into communication with the seller.
The familiarity is one thing that is not evident directly on eBay, but over a period of time if buyer trade with the same seller then chances are that buyer becomes familiar with the seller. But even then the extent of knowingness is limited to the business, i.e. buyer will think that he knows that this seller provides good quality products, which is more like building trust.
Every user either buyer or seller has a profile page on eBay. The user can decide how much personal information he/she wants to provide. So location specific information depends on the profile. So buyer may or may not have the possibility of knowing the location of the seller.
Ebay is not a social networking site but it has got some features, which enables users to improve their social networks. The feedback page for a seller contains the name of the buyers against each feedback. Buyer can view the profiles of the users who have given the feedbacks and get the contact details. Sometimes buyer might find some familiar names in the feedback page of the seller, which might boost the confidence of the buyer to trade with the seller. There are communities where the buyer can post questions or get into a discussion about a product/service or trading related issues. There is a huge scope of word of mouth exchanges taking place between buyers on various topics.
2.2. Amazon.com (http://www.amazon.com)
Amazon is different than eBay. In case of Amazon mostly the products are sold by Amazon and not by some third person. So there is a trust that buyer is trading with a reputed company. There is a provision to auction also but the items to be listed are scrutinized by Amazon and are not left solely on the third party seller. The buyer and seller do not interact in the sense that Amazon as a company is the seller and buyer is any person who is buying the items on sale on Amazon. The way the buyer will trust seller is by the quality of item that is delivered to him. Studies suggest that “A consumer’s trust in an Internet store is positively related to the store’s perceived size”. Since Amazon is one of the world’s largest online stores, buyers have certain degree of trust in Amazon’s way of doing the trade. Also higher the trust in the Web merchants will be associated with higher intention to purchase goods or services over the web
Amazon tries to provide enough details about a product when it places it on the site. It will try to include lots of keywords so as to make the product searchable. But there is always a scope for improvement.
Amazon’s review model is a major feature provided by the site that is responsible to build reputation for a product. The users write the reviews for a product. They give product a ranking based on their experience with the product. The reviews get listed when a potential buyer is browsing the product. It’s likely that a positive review is going to make the product to sell and a negative review will let it down. However, Amazon in order to keep the reviews transparent and not doing favor to positive reviews displays together both the positive and negative reviews. Amazon has taken lot of steps to make the review mechanism robust and transparent. To prevent reviewers to unduly praise or disregard a product, there is an option given to the customers to choose if the review was helpful. The useless reviews are subsequently removed from the review list. So the reviews are basically representing what majority of the customers thought about the product. It is not that Amazon is controlling the ranking of the reviews; it is the entire buyer community that is guiding the new buyers which product to consider and which to discard. In order to encourage people to write correct and useful reviews, Amazon has a scheme of praising the reviewer by listing them in the top reviewer list. The products, which get a review from the top reviewers, are likely to sell fast.  In nutshell, the review mechanism is highly moderated and robust and in most cases helps the buyer to make right choice.
The reviewers have a profile page on Amazon where they can tell about themselves, their hobbies, the products they have recently bought, their interests and so on. The buyer can check out the profile pages, the communities that the reviewer belongs to. The buyer can contact the reviewer, there is a possibility of expanding the social network.
Familiarity in case of vendors like Amazon would be the knowledge of how to search for books and information about them, and how to order these books through the website interface. Familiarity would reduce complexity through an understanding of how to inquire and buy books through the site (structure of the interface) and what the procedure involved is (structure of the interaction). Buyers will return to Amazon because of two reasons 1.Buyers are familiar with the way to do business on the site. 2. Amazon is one of the largest repositories of the books, electronics, apparels, which make it the one stop destination to check out what’s new in the market.
One way that the buyers interact with Amazon is by creating their wish list of the products that they want Amazon to get for them.  Amazon suggests users on the basis of their shopping history about the products that they would be interested in. Also when the buyer is browsing any product, Amazon suggests similar kind of products as “Customers Who Bought This Item Also Bought ”.  Amazon also allows third party to sell their products on its site. Generally they provide the used and slightly old products. The buyers can directly interact with these sellers by writing them emails. These are few ways Amazon supports the Buyer/seller interaction.

Amazon does not provide any means to negotiate. The buyer cannot interact with Amazon to negotiate for the price of the product or the shipping charges. There might be some special offers provided by the Amazon itself, but buyer has no say in that.

Location specific information does not make any sense when the seller is Amazon. But when the buyer intends to buy a used product from some other seller through Amazon, he/she might want to find out about the seller so that he/she might meet personally. Amazon provides the contact information about the sellers and hence help the buyer to know the location of the seller.
2.3. Craigslist.org (http://www.craigslist.org)
Craigslist (Like http://www.sulekha.com/) is like classified section of an online newspaper where anybody can post advertisements for his/her products. The site does not provide any profile of the seller or the trading history to judge his/her credibility.  Ranking mechanism is totally missing in Craigslist so the buyer is left to his/her own judgment call or word of mouth about the seller’s reputation.
Familiarity comes from the fact that you get the address or some contact place/phone of the seller and can talk to the seller.
There is a buyer and seller interaction, which gives the opportunity for the buyer to negotiate with the seller. The buyers are generally more comfortable in closing the deals by meeting the sellers personally rather than interacting with them online. There might be chances that the seller with whom the buyer is trading with happens to be a friend or a friend’s friend. So the buyer has means to find out details and credentials about the seller. One the studies have shown that face-to-face interactions evoke higher levels of trust. As such, it can be expected that higher levels of trust would emerge in exchange relationships where the consumer has the possibility of physical access to the online marketer
The scope for negotiation is immense since the buyers personally meet the sellers to finalize the deal.
Through Craigslist the buyer get to meet new people and know about them. It is a way of enhancing the social network.
Localization is guaranteed since the advertisements on Craigslist are location specific. The buyers can actually go and see the product on sale before actually buying it. Locality of the seller matters, if a seller is placed in an expensive locality, the buyer feels more confident about the credibility of the seller. Being able to return items to a marketer with ease is both convenient and assuring. Thus, purchases from land and electronic marketers will likely be perceived as less risky purchases, regardless of the perceptions of the marketers’ trustworthiness from the Web site. Meeting the seller in person also enables the building of the social network between the buyer and the seller.
2.4. Yelp.com (http://www.yelp.com/)
Yelp is a local search web site, that has allows social networking among its users and gives the users opportunity to write reviews for businesses/services listed on Yelp. Every business that is listed on Yelp is a local business so the buyer can easily check the credentials of the seller and then take the final call. Also each business gets a rating that is based on the reviews posted by the various users, this helps in choosing the correct service provider more easily. Every user who gives the review comment has a profile on Yelp. Some of the reviewers might be expert in the business for which they are giving the review. Buyers can check the profile of the reviewers and take decision how much to trust a review. Buyers can also increase their social sphere by interacting with the reviewers. Also some of the reviewers might turn out to be friends of the buyer, so the buyer can find out the more details about the business/service by directly interacting with him. The buyer might want to try a service because some known person has recommended it for him/her. Other than interacting with the friends in the offline mode, there is a provision to chat with any reviewer online on Yelp. So the buyer can resolve their queries if any by talking to the reviewers. This online interaction increases the level of confidence in buyer since he/she has a way to find out the authenticity of the review also it is a great way of building the social networks.
Yelp helps the viral marketing or the word-of-mouth model a big time. It encourages the users to write the reviews. Yelp has a “First to Review” reward system to encourage the users to contribute to the site by writing useful comments. The review system is not moderated by Yelp in the sense it does not define the number of reviews or kind of reviews. The reviews are also not removed from the site.
Familiarity aspect is not guaranteed since you are still buying services most of the times from unknown people. But since the buyer personally meets the service provider to complete the transaction so the buyer can assess the seller. Buyer might want to repeat the services from the same service provider and hence get familiarized.

Localization is a strong advantage of Yelp. The business is all about local search. Yelp marks the businesses on Google map and buyer can exactly pin point how to meet the service provider. The buyer can also take decision to choose a service provider based on accessibility aspects and the reviews about the service provider. So the buyer can see which is the best closest sea food restaurant in the New York’s 5th Avenue. The buyer will use the knowledge of location and the reviews to make a good decision.

3. Conclusion
In order to see how social networking, viral marketing can improve the building of trust for the sellers we can develop a Facebook application (also known as f-commerce). Users (buyers and sellers) have profiles on the Facebook, which will give the information related to seller background, your friends/family, interests, hobbies, etc. This helps the buyer build a better business relationship with the seller. Some of the functionalities that we can provided are:
  1. Users (sellers) can add items/services they want to sell
  2. Only user’s (seller) friends can write feedback comments for the user (seller).
  3. Only friends can rate the seller.
  4. User location can be viewed on the Google map
  5. User friends location can be viewed on the Google map
The above functionalities will help buyers to have more trust on the seller since all the sellers are friends or friend’s friend. There is a strong possibility of interaction between the seller and buyer using the Facebook tools and other informal offline ways. The reputation of the seller is known. There is an obvious familiarity associated with the seller and finally the buyer knows the location specific details about the seller. So we see that social networks help in making the online commerce more trustful and have better relationship with the seller.
Following matrix summarizes the above discussed models.
Areas
Amazon
Facebook
Yelp
EBay
Craigslist
Information of Product/Service
Broad
Broad
Broad
Broad
Board
Buyer/Seller Interaction
Average
Strong
Yes
Strong
Strong
Review/Rating
Strong
Strong
Strong
Strong
None
Location
Broad
Broad
Strong
Broad
Strong
Negotiation
No
Yes
No
Yes
Yes
Knowing the Seller
Yes
Yes
Yes
Yes
Yes
Social Network
Yes
Yes
Yes
Yes
Yes

4. References
Head, M.M., & Khaled, H. (2004). Building Online Trust through Socially Rich Web Interfaces. Proceedings of the 2nd Annual Conference on Privacy, Security and Trust, Fredericton, New Brunswick, Canada, 15-22.

Mahadevan, B., & Venkatesh, N.S. (2000). A framework for building online trust in business to business E Commerce: Issues & Challenges. IT Asia Millennium Conference, Bombay.

Weinberg, B.D., & Davis, L. (2005). Exploring the WOW in online-auction feedback. Journal of Business Research, 58(11), 1609-1621.

Huberman, G. (2001). Familiarity breeds investment. Journal of Review of Financial Studies, 14(3), 659-680.

Carter, J., & Ghorbani, A. A. (2004). Towards a formalization of value-centric trust in agent societies. Journal of Web Intelligence and Agent Systems, 2(3), 167-184.

Zhang, J., Ghorbani, A. A., & Cohen, R. (2006). An improved familiarity measurement for formalization of trust in e-commerce based multiagent systems. Proceedings of the 2006 international Conference on Privacy, Security and Trust: Bridge the Gap between PST Technologies and Business Services, Markham, Ontario, Canada.

Jarvenpaa, S.L., Tractinsky, N., Saarinen, L., & Vitale, M. (1999). Consumer trust in an Internet store: A cross-cultural validation. Journal of Computer-Mediated Communication, 5(2). Retrieved September 15, 2004 from http://jcmc.indiana.edu/vol5/issue2/jarvenpaa.html


Gefen, D. (2000). E-commerce: The role of familiarity and trust. Omega: The International Journal of Management Science, 28(6), 725-737.

Cassell, J., & Bickmore, T. (2000). External manifestations of trustworthiness in the interface. Communications of the ACM, 43(12), 50-56.

Belanger, F., Hiller, J.S., & Smith, W.J. (2002). Trustworthiness in electronic commerce: the role of privacy, security, and site attributes. The Journal of Strategic Information Systems, 11(3/4), 245-270.

Fung, R.K.K., & Lee, M.K.O. (1999). EC-trust (trust in electronic commerce): exploring the antecedent factors. Proceedings of the Fifth Americas Conference on Information Systems, 517–519.

Schoop, M., Jertila, A., & List, T. (2003). Negoisst: a negotiation support system for electronic business-to-business negotiations in e-commerce. Data & Knowledge Engineering, 47(3), 371-401.

Quelch, J.A., &  Klein, L.K. (1996). The Internet and international marketing. Sloan Management Review, 37, 60-75.

Bradach, J.L., & Eccles, R.G. (1989). Markets versus hierarchies: From ideal types to plural forms. Annual Review of Sociology, 15, 97-118.

Hosmer, L.T. (1995). Trust: the connecting link between organizational theory and philosophical ethics. Academy of Management Review, 20(2), 379-403.

Slyke, C.V., Belanger, F., & Comunale, C.L. (2004). Factors Influencing the Adoption of Web-Based Shopping: The Impact of Trust. The Data Base for Advances in Information Systems, 35(2), 32- 49.

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