Businessmodel Merchant

The merchant model is a very popular business model on the World Wide Web. Merchants can be defined as wholesalers and retailers of both goods and services. Merchants can sell directly to the public or to other businesses or to both. They purchase product directly from suppliers, maintain that inventory in a warehouse, then sell the product to customers with a built in mark up price. The bigger the mark up margin the more profit they make. As a general rule of thumb high volume turnover goods like books have smaller profit margins while low volume turnover goods like motor cars have higher profit margins. But the key here is that a merchant is taking a certain amount of business risk, they’re buying an inventory which they have to on sell (Rappa 2009).

Rappa (2009) describes four different merchant models. They are Virtual Merchant, Catalogue Merchant, Clicks and Bricks and Bit Vendor.

A Virtual Merchant is a business that operates solely over the internet. They are also known as electronic retailers or e-retailers. Amazon.com is an example. It started selling books in 1995 then added movies, music and many other items. Its turnover in 2011 was over $US 48 billion (Amazon.com 2012)

A Catalogue Merchant is a mail order business which has a web based catalog that has mail, telephone and online ordering. Land’s End is an example. It started in 1963 as a mail order company and added an online website in the 1990s. In 2002 Sears bought out the company (Landsend.com 2012). Chrisco is an Australian/New Zealand example in that the company specializes in Christmas hampers which can be ordered via their online catalogues. They send out 1.5 million orders every year (Chrisco.com.au 2012).

Clicks and Bricks (known as click and mortar in America) is a merchant which has a traditional walk in store but also maintains a website where it sells its wares. Barnes and Noble is an example. It opened its first bookstore in 1917 and launched its website in 1997.Its 2011 turnover was $US 7 billion (Barnesandnobleinc.com 2012). JB HiFi is an Australian example of the clicks and bricks model. According to their 2011 Annual Report they had 157 stores with over 800,000 visitors to their website every week. Their annual turnover was 2.9 billion dollars (JBHiFi.com.au 2012).

Of the four different types of merchant which operate over the internet only the clicks and bricks model offers a place which members of the public can physically walk into.

A Bit Vendor is a merchant which deals directly in digital products and services. It conducts sales and distribution over the web. Apple iTunes Music Store is an example. The parent Apple company was founded in 1976 and had a 2011 turnover of $US 108 billion. The iTunes store started in 2003 and had a 2011 turnover of $US 1.4 billion (Apple.com 2012). Clickbank is another bit vendor which sells 50,000 digital products over the internet (Clickbank.com 2012).

Business use of the Internet, Broadband and e-Commerce

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The purchase of inventory is an expensive undertaking and adds to the start up costs of a business. This is why merchants take a long time to make a profit, in Amazon’s case not until 2001 (Wikipedia 2012). Their overhead costs were much greater than other online businesses such as eBay. And when we look at Amazon relative to eBay, we can see how one business model (eBay’s brokerage) is really highly leveraged when implemented on the web (Rappa 2009). A Bit Vendor merchant has lower overhead costs than a Virtual Merchant because obviously it is cheaper to warehouse software than books.

All four types of merchants are heavily involved in the distribution process. They gather their inventory from different locations, warehouse their stock at one or more locations, then send out product to different locations as customer orders come in. Merchants utilize the internet not only as a communications network but also as a distribution network. The fundamental basis of commerce on the World Wide Web is the ability to reach customers anywhere in the world. The Web acts as a global distribution network

This global distribution network is the core strength of the internet. It allows the economic benefits of internet commerce to take place. These benefits include opening markets up i.e.going from a geographically defined market to an international one, reduction in the cost of information including production and distribution, reduced inventory stocks for some business models as they incorporate just in time production as and when orders arrive, better marketing methods – ability to target customers more effectively, and finally the tools to identify and target specific niche markets (Flew 2008). This last benefit is very important because it enables long tail retailing to take place.

When you think about it, most successful businesses on the Internet are about aggregating the Long Tail in one way or another. Google, for instance, makes most of its money off small advertisers (the long tail of advertising), and eBay is mostly tail as well - niche and one-off products. By overcoming the limitations of geography and scale, just as Rhapsody and Amazon have, Google and eBay have discovered new markets and expanded existing ones (Anderson 2009). Apple’s iTunes store is another example of long tail retailing. Their music catalog contains over 28 million songs and they had sold 16 billion tracks by 2011 (Wikipedia 2012). Additionally they have sold over 2 million movies and 200 million TV episodes. Software application (apps) purchases reached 25 billion in 2012 (Apple.com).

The fundamental bedrock foundation of the commercial side of the internet is it’s distribution aspect. It is a global network which connects consumers, producers, businesses, governments and everything in between. The internet conquers the tyranny of distance. It brings producers together with their consumers; it links markets up, it delivers one to many, one to one and many to many ; it exploits the long tail of retail. Merchants are a key part of this internet commerce.

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http://www.marketsize.com/blog/index.php/2012/04/11/e-commerce-writ-large/

Geographic reference: United States
Year: 2011, 4th quarter
Market size: Retail, $1.072 trillion, E-commerce: $51.38 billion (4.8% of total retail)
Source: Quarterly Retail E-Commerce Sales, 4th Quareter 2011, U.S. Census Bureau, available online here.http://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf

References:
Amazon.com (2012) <http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsAnnual>

Anderson, C. (2009). The Long Tail. Wired, 12(10). October <http://www.wired.com/wired/archive/12.10/tail.html>

Apple.com (2012) <http://investor.apple.com/financials.cfm><http://www.apple.com/itunes/whats-on/>

Barnesandnobleinc.com (2012) <http://www.barnesandnobleinc.com/for_investors/annual_reports/annual_reports.html>

Chrisco.com.au (2012) <http://www.chrisco.com.au/Content/About-Chrisco.aspx>

Clickbank.com (2012) <http://www.clickbank.com/about_us.html>

JBHiFi.com.au (2012) <http://www.jbhifi.com.au/corporate/reports/>

Kelly, K (2005) We are the web, Wired Magazine, Issue 13.08, <http://www.wired.com/wired/archive/13.08/tech.html?pg=2>

Landsend.com (2012) <http://www.landsend.com/aboutus/company_info/>

Rappa, M. (2009). Managing the Digital Enterprise: Business Models
<http://digitalenterprise.org/models/models.html>

Rappa, M. (2009). Managing the Digital Enterprise: Business Models
<http://digitalenterprise.org/transcripts/business_models_tr.html>

Wikipedia (2012) Viewed 14 July 2012
www.wikipedia.org

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