23 January 2023 - 13 min read

Online Payments Education

What is eCommerce and how does it work?

What is eCommerce?

eCommerce, meaning electronic commerce, refers to the buying and selling of goods and services over the internet. It’s a modern way of shopping that allows people to make purchases from their mobiles, computer, tablets, and other smart devices, at home, or on the go without needing to enter a physical premises.

History of eCommerce

The first instance of eCommerce dates back to 1994, when Dan Kohn – founder of American retail platform NetMarket – sold a Sting CD to a friend who used a credit card to make the purchase. The New York Times characterised this moment as “apparently the first retail transaction on the internet using a readily available version of powerful data encryption software designed to guarantee privacy”.¹

Since then, eCommerce has evolved to what we know it as today – an easy way for customers to buy what they want online, and an easy way for businesses to sell their goods and services at a scale that isn’t possible with traditional brick-and-mortar locations.

Global eCommerce trends

eCommerce has changed the way people shop and consume products and services.

With more and more people turning to their smart devices to order goods, eCommerce has disrupted and become a prominent part of the retail landscape.²

eCommerce continues to grow in popularity, with research conducted by eMarketer and Statista projecting that online retail sales will reach $6.51 trillion by 2023, $7.36 trillion by 2024, and $8.5 trillion by 2025.

Impact of Covid-19 on eCommerce

When the Covid-19 pandemic was at its peak, consumers headed online rather than in-store to do their shopping to stop the spread of the virus³.

This shift in consumer behaviour has brought about a set of eCommerce trends, with customers now expecting more from their favourite brands when it comes to the online experience.

Types of eCommerce

eCommerce takes many different forms. Here are the main eCommerce business models that exist and how they differ from one another:

Business to Consumer (B2C)

B2C is when an individual consumer buys goods or services from an online business, say a t-shirt from an online clothing store.

Business to Business (B2B)

B2B is when one business buys from another. For example, a cafe buying a coffee machine or a marketing agency purchasing graphic design software.

Business to Business to Consumer (B2B2C)

This business model involves a company selling a product or service in partnership with another organisation to an end consumer. With B2B2C, the end consumer knows that they are buying a product or using a service from the original company.

Business to Government (B2G)

B2G occurs when a business sells to governments or government agencies. This often takes the shape of a business contract with a public organisation to carry out a mandated service. An example would be an IT firm accepting a proposal to manage the city’s computer hardware or a custodial firm bidding online for a cleaning contract.

Consumer to Business (C2B)

C2B is when a consumer sells their own products or services to a business or company. A modern-day example of C2B would be an influencer offering exposure to their online audience in return for a fee. A more classic example would be a photographer licensing their photo for a business to use.

Direct to Consumer (D2C)

A D2C business sells its own products directly to its end user, without the help of a third-party wholesaler or online retailer. Unlike B2B2C, there’s no middleman involved.

Consumer to Consumer (C2C)

C2C can be thought of as a digital garage sale or auction where individuals sell goods, whether handmade or secondhand, to each other. C2C models often manifest on platforms such as eBay, Etsy and Facebook Marketplace.

eCommerce revenue models

As well as there being different types of eCommerce businesses, there are also different ways to make money as an eCommerce business. Here are a few options for processing orders, carrying inventory, and shipping products:

Private labeling

Private label retailers send plans to a contracted manufacturer to make an exclusive, branded product for them. The retailer then sells and markets the product how they like.

Subscription

Subscription services are a way to leverage repeating orders and loyal customers. Subscriptions can span anything from health and wellness boxes to digital products like magazines.

Wholesalers

A wholesaler is a business that sells products in bulk to retailers for onward sale. Wholesalers are able to sell their products at low prices because they’re selling large amounts at one time, which reduces handling times and costs.

Dropshipping

Dropshipping is an order fulfilment method where retailers sell products without handling any stock. When they receive an order, they send it through to a third party who is then responsible for packaging the products and sending them directly to customers.

White labeling

White labeling is when you choose a product that’s already successfully sold by another company and brand it as your own to sell to customers. This involves switching out the original packaging and labels before sending them in the customers’ direction.

How does eCommerce work?

The eCommerce definition up top is the premise of this shopping method. Let’s take a look at how eCommerce works, so you can understand it on a deeper level:

Understanding eCommerce

Electronic commerce – the process of buying and selling goods and services online – involves more than one party and the exchange of data or currency to make a transaction happen.

Customers come to where the products are up for sale and place an order using electronic payments. Upon receiving the money, the merchant ships the goods or provides the service to the customer, completing the eCommerce cycle.

eCommerce government regulations

The Electronic Transactions Act 1999 is the foundation of eCommerce law in Australia. The Act attempts to ensure that transactions through electronic communication remain valid. For example, if you want to give information in writing or provide a signature, these can all be done electronically, and will remain valid. The Act applies to all laws of the Commonwealth unless they’re specifically exempted by the Electronic Transactions Regulations 2020.

The lowdown on logistics

Just like brick-and-mortar, eCommerce is made up of a network of moving parts. From people to processes, let’s go through each one below:

Retailers

At the heart of eCommerce are retailers selling goods to customers over the web. Retailers can exclusively sell online or use eCommerce as part of a broader strategy that involves physical stores and additional revenue streams.

Customers

Customers are the individuals who buy from the retailer, using their desired payment method, and wait for their item/s to be delivered. Keeping businesses in business, they are a vital part of the eCommerce ecosystem.

Supply chain management

An eCommerce supply chain is the set of systems, processes, and infrastructure that gets the product to the customer. Core components of an eCommerce supply chain include:

the supplier or manufacturer
inventory management system
warehouses
fulfilment centres
distribution centres
sorting facilities
the delivery carrier

As an eCommerce business, it’s essential that every link in the supply chain is running as efficiently as possible. That way it’s cost-effective and keeps customers happy.

Starting an eCommerce business

If you want to go down the eCommerce avenue, make sure you start off on the right foot. Here are the steps you’ll need to take to get an eCommerce business off the ground:

Research
First things first, you’ll want to conduct plenty of research so you know what you’re getting yourself into. You’ll need to read up on the products and services you wish to sell, as well as the market, audience, competitors and projected business costs of starting and running an eCommerce business.

Once you’ve laid these firm foundations, you’ll need to come up with a name, choose a business structure, and get the necessary documentation (e.g. taxpayer numbers, licenses, and permits if they apply) so you’re operating professionally from day one.

Setting up

Making your products available on an online platform is the key to turning your eCommerce idea into a reality. Here’s what you need to do when it comes to setting up an online store:

Choose a platform

A website is crucial to eCommerce. It facilitates the transaction between the buyer and seller, bringing your business to life. An eCommerce website can be thought of as a digital version of a brick-and-mortar store, where customers browse products and services by clicking buttons rather than moving through aisles.

As an eCommerce business, you can choose to create a brand experience on your own independent website or on a hosted one such as Amazon. To help you decide where to go live, here are 5 ways to start selling your products online.

Test everything

Testing is an invaluable exercise that will help you make the most of your online store and ensure customers are having a good experience. You should test your website functionality and internal systems to make sure everything is up to scratch. You may even want to hire an eCommerce testing firm to set up tests for you. After the tests are complete, you can evaluate the results, make any necessary changes, and repeat them.

Pick your payment gateway

The next step is giving your customers a way to pay. Your eCommerce website will need a payment gateway so customers can make their orders easily and efficiently.

Tyro eCommerce is an excellent choice, providing you with the capability to accept all kinds of payments including Visa, Mastercard®, American Express and JCB. It’s also embedded with handy features to make your life easier as a small business owner. This includes electronic invoicing so you can generate, send and track your invoices with ease and Virtual Terminal – a web-based tool that allows you to process payments in one place, wherever you are.

Invest in advertising

The final step of setting up an eCommerce store is spreading the word about it. You can conduct advertising campaigns across all sorts of platforms, including social media, to let people know that your business is up and running.

Is eCommerce the best solution?

eCommerce is exciting, but isn’t for everyone. We break down the pros and cons of eCommerce below to help you work out whether it might work for you.

Pros of eCommerce

Rooted online, eCommerce has a lot of unique advantages compared to traditional shopping. The benefits include:

Lower operating costs

A big advantage of electronic commerce is that it’s less expensive to run than a traditional brick-and-mortar store. It removes the need to rent a retail space and hire staff to operate the store, keeping overhead costs down while keeping revenue up.

Market reach

Another perk of running an online store is having a global audience at your fingertips. Thanks to the internet and international shipping, you can send products to consumers in all corners of the world and engage with people you may never have engaged with if you had a brick-and-mortar store.

Growth

In a similar vein, it can be easier to scale your business when you’re doing digital operations. This is because you can just adjust your budget based on your needs, instead of investing in more retail space or hiring more staff.

Consumer access

Another pro of electronic commerce is that brands can build relationships directly with their target audience. You can tailor experiences and marketing – down to special offers and personalised recommendations – to meet your customer’s unique wants and needs.

Easy ordering

Customers just need to click a few buttons to make an order and have their parcel on its way. This makes purchasing quick, easy and convenient – which is a win in anybody’s book.

Cons of eCommerce

Despite the benefits, electronic commerce does have potential pitfalls. This includes:

Data security requirements

Doing things digitally comes with unique security risks. You’ll have to have the right measures in place to deal with any breaches that could hurt your eCommerce business.

Since customers are increasingly wary of how their information is stored and shared, you’ll also need to create a privacy policy to give them peace of mind that you’ll keep their personal identifiable information safe.

Shipping

Although customers can buy something with the click of a button, they will have to wait a bit longer, compared to shopping in-store, for their purchase to arrive. Shipping times can be lengthy, especially during festive seasons, which can be frustrating for consumers.

Fulfilment

As an eCommerce retailer, you also have a lot more steps to fulfil when it comes to processing and shipping, that you wouldn’t have with a physical store. This system is something you’ll want to be comfortable with if you decide to enter the world of eCommerce.

Technical difficulties

Since electronic commerce is oriented online, there’s a greater chance of experiencing technical difficulties. Whether it’s a website crash or a hiccup in your hard drive, these could cost you time and money and negatively impact sales.

Less face-to-face interaction

Another downside of eCommerce is the lack of face-to-face customer experience. When you swap a counter for a screen, there can be a lack of connection between the brand and the buyer. eCommerce also eliminates customers being able to try before they buy.

Chargeback and fraud risk

Unfortunately, eCommerce opens itself up to a higher risk of fraud because scammers can hide behind the internet making false, illegal, or illegitimate commercial transactions. If people do this, this can mean making more chargebacks and thus losing money. While the consumer may be the primary target of a payment fraud scheme, eCommerce attacks can negatively impact your business in both the short and long term.

Fraudsters can also use deceptive strategies to access customer data which they can then use for future criminal attacks.

Wrap-up

eCommerce is a modern shopping method that lets people shop when, how and where they want.

If you’re considering getting into eCommerce, make sure you take into account all the above and do so with a business plan in place to give yourself the best chance at success.

Want to take your business further with Tyro? Get in touch!

1 The New York Times. (1994). Attention Shoppers: Internet is Open https://www.nytimes.com/1994/08/12/business/attention-shoppers-internet-is-open.html

2 Investopedia. (2022). Ecommerce Defined: Types, History, and Examples https://www.investopedia.com/terms/e/ecommerce.asp

3 UNCTAD. (2020). COVID-19 has changed online shopping forever, survey shows https://unctad.org/news/covid-19-has-changed-online-shopping-forever-survey-shows

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