Merchant Model - The Merchant Model Adapts To A Tougher Environment

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.