E-commerce software automates much of the transaction process.
Starting an e-commerce business can carry significantly lower costs when compared with opening a physical store, and these cost reductions equate to lower marginal transaction expenses. E-commerce shop owners can set up and operate their stores with fewer people, less equipment and no retail facilities, and the automated nature of e-commerce sites can considerably increase efficiency.
Administrative Costs
E-commerce websites typically use shopping cart applications combined with other software designed to automate the online shopping process. This electronic automation reduces the need for administrative personnel, according to the New Zealand consulting firm Remarkable Ideas. In addition to reducing headcount costs for cashiers and in-person customer service agents, e-commerce applications can also provide reports that reduce the need for manual analysis of sales trends and forecasting. E-commerce systems automatically generate transaction receipts and settlement documents, and some systems can automatically detect and compensate for errors. Because administrative costs represent a significant expense for retail business owners, reducing or eliminating these expenses can lower the marginal transaction costs that entrepreneurs incur during sales transactions.
Efficiency
The automation involved in electronic commerce can lead to significant increases in efficiency, and increased efficiency can help reduce transaction costs for these businesses. According to the Internet Resource Center, the computerized nature of e-commerce can automate inventory and notify the business owner when supplies, if kept on hand, become low. E-commerce sites can also automate ordering and relationship management with vendors and suppliers, according to the Internet Resource Center, and the sites create a consistent public interface for customers. E-commerce sites can help reduce accuracy by removing human input from the order process, and many online shopping cart applications automatically produce an array of reports that entrepreneurs can use for analysis.
Facilities
A physical retail business can carry a very high price tag, according to the entrepreneurial website Power Home Biz. Business owners who open a physical location can spend upwards of $20,000 as of January 2011, but prices for a fully stocked retail establishment can reach into the hundreds of thousands of dollars. According to Power Home Biz, typical physical store costs include building or leasing the property and designing the store layout, adding fixtures and displays, installing lighting suitable to a retail establishment and providing office furniture. Retail establishments must also pay for a host of electronics that provide security, inventory management and point of sale processing, and monthly utility fees represent an ongoing expense. In addition, small-business owners must stock stores with inventory for customers to browse. All of these expenses combine to raise marginal transaction costs for retail establishments, and e-commerce businesses can reduce or even eliminate these costs.
Considerations
Because customers who purchase from e-commerce websites do not physically present their credit cards for payment, according to the business website E-commerce Guide, online transactions often represent a higher risk of fraud than in-person purchases. To compensate for this risk, payment processors often charge higher per-transaction fees for e-commerce businesses than for physical shops. In addition, e-commerce merchants may have to pay other fees like Internet gateway charges, customer service fees and reserve costs.
Tags: marginal transaction, transaction costs, business carry, cart applications, customer service