How does eCommerce reduce business transaction costs for a typical retail store?

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How does eCommerce reduce business transaction costs for a typical retail store?
Internet shopping has become increasingly popular since the mid-1990s (Jupiterimages/Comstock/Getty Images)

eCommerce, the process of selling goods or services via the internet, started gaining momentum for retailers in the mid-1990s. The internet-only retailer, Amazon, was launched in 1995. At the same time, established retailers started offering online stores to complement their traditional "bricks and mortar" shops. The principal selling point for online-only retailers is that, without the high overheads involved in maintaining a high-street shop, they can make savings which they then pass on to the consumers. For a typical retailer with both a physical shop or shops and an online presence the value proposition to consumers will be more complex as they cannot cut costs to the same extent. However, eCommerce can still enable them to make savings on overall business transaction costs.

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A wider customer base

With an online store, a retailer's customers are no longer limited to the people within reasonable travelling distance of the shop building. Potentially, customers can be found all over the world which can mean a greater number of sales. Buying online is an automated procedure: after the initial set-up the transaction costs for each purchase are close to zero. Even if the retailer maintains a physical presence on the High Street, by increasing online sales they are reducing the average transaction cost and therefore reducing transaction costs as a proportion of sales.

Inventory savings

Selling via the internet means that stock can be shipped directly from warehouses rather than having to be displayed attractively in expensive retail premises. Many retailers have enabled further savings by making arrangements for goods to be shipped directly from the manufacturer. This is known as "drop shipping". For some products it is even possible to manufacture to order, thus disposing of storage costs entirely.

Changing consumer expectations as a result of the increase in online shopping also means that retailers are comfortable keeping smaller stocks in their shop premises. They can typically offer next-day delivery for a garment in a size that is currently out-of-stock, for example. As a result, many retailers are reducing costs by maintaining smaller shop premises.

Spreading the supply chain

When a consumer buys a product online they will generally also pay shipping or delivery charges. An increasingly popular alternative is a "click and collect" service, in which the customer orders and pays for a product online then collects it (free) from in-store. Essentially, the customer is absorbing the costs for this part of the supply chain, which reduces the transaction costs for the retailer. As supply chain costs are built into basic pricing models, some retailers offer discounts for online purchases. This improves the value proposition for customers and therefore increases sales, but has little impact on overall margins.

Reducing assembly

Just as customers are prepared to accept responsibility for the delivery part of the supply chain as part of the online shopping experience, so too will they take on the job of final assembly of the products. Long before the advent of eCommerce, stores such as Argos and IKEA discovered that customers were willing to put furniture together in exchange for lower prices. Now that they are shopping online, customers do not even question snapping together electrical items or toys, putting in batteries and downloading drivers. In fact, these elements of self-assembly have become the norm and retailers who do not require customers to do them are able to charge a premium. Manufacturers and retailers are also reducing print costs by publishing manuals, warranties and other literature online.

Utilitarian packaging

Items that have been bought online will usually be delivered in a plain cardboard box. Protective packaging is chosen for its effectiveness rather than its aesthetic value. Customers do not expect beautiful packaging from online retailers without paying an additional cost for gift-wrapping. This makes packaging more time-efficient and therefore reduces costs.

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