Home-based e-business - an option for the self-employed?

Chapter 4 – Essential components of e-business

In this chapter, the various components of a successful e-business will be examined with respect to the requirements of the different e-business opportunities in the previous chapter, and also to the situation in Hong Kong . The basic components described below apply to all types of e-businesses that require a functional web site. The basic elements of a successful e-business can be divided into:

•  Technical aspects - (a) web site design, (b) web hosting, (c) carting system, and  (d) payment processing

•  Strategic aspects – (a) promotion and (b) customer service management.

4.1. Technical Aspects

•  Web site design

 The design of the web site is very important in order to give a favorable first impression to prospective customers. If the potential customers get an unfavorable experience at the site, they are unlikely to make a purchase at your site. A virtual shop web site should be designed in the following manner in order to attract and retain more customers:

•  Easy to navigate - The web site should be user-friendly and easy to navigate, customers are able to access to any page and accomplish whatever they want within three clicks. There are no deeply buried pages. As a result, shoppers will find this site very easy to use. This site is also easy to maintain where products or prices can be changed quickly.

•  Quick download time – research indicates that 80% of web users cite download time as the number one problem (Terry Sullivan, 1999). Most customers nowadays are still connecting to the Internet via slow modems and recent studies indicate that slow-loading web sites cause online consumers to abandon up to 50% of online transactions (Keynote – http://www.keynote.com) . A web site should be clean, simple and direct, with no fancy element such as whistles, glitz, moving words and flash animation. There should be no excess graphic and the resolution of all necessary photos is reduced to a minimum so that the loading time of each page is only a couple of seconds.

•  Clean and accurate product information and presentation - Since customers cannot actually see, touch and feel products in person, the presentation must be clear and visually accurate. All products are described in simple English with clear specifications and photos. It is better include a FAQ section in its Web site so that most of the common questions were already answered in advance, it also save a lot of labor hours to answer repeated questions.

Although designing a web site could be daunting for the beginner, professional help is readily available in Hong Kong at a low cost, and shop-front solutions are now readily available (see TURNKEY approaches below)

•  Web hosting

  Once the web site is designed, it needs to be hosted with an Internet Service Provider. There are basically three options on web hosting. The first choice is to buy one's own server but it is very costly both in initial hardware, software and maintenance, and therefore not suitable for a small home business start-up. The second choice is to use a free web hoster. There are a lot of free web-hosting services on the Internet but in return, most of them require placing some form of advertisement on your site. These could be quite disturbing to the potential customer and affect the image of the web site. Besides, the performances of these free web-hosting services are often unstable, and can seriously affect the business should the hoster go down. The third choice is to rent space on a paid web hoster. All it requires is to pay a monthly fee and there are technicians to set up and maintain your server regularly. Many web-hosting companies have a 99.9% uptime guarantee and this could be critical for success.

The standard and charges of web hosting service providers varies greatly in the market. Generally speaking, those from the developed countries such as United States , United Kingdom and Hong Kong are very reliable. The charge range from a few US dollars to several hundred dollars per month, depending on the services you choose. Normally, for a new start up small business, the package with minimum services is good enough and additional services can be added on later. In selection of the service provider, make sure that it has adequate space, bandwidth, reliability, knowledge and capability to handle a fully functional e-commerce site. In general, the author would recommend a free-hosting company in the initial start-up phase, but switch quickly to a paid web hosting company once the business takes off. The following is a comparison on free and pay web hosting services:

(Exhibit 17)

Source: researched and analyzed by the Author

•  Carting system

  It is desirable for online shops to have some sort of carting system that allows prospective items to be added so that the total price including shipping is calculated. On completion of the order, the merchant will then be notified of it by e-mail. The orders can then be downloaded into the merchant's database. Besides calculating the total costs, some carts offer other features such as discount coupons, mailing list, and affiliate tracking. Although not essential for sites selling a small number of items, it is nonetheless highly desirable and is obligatory for sites for selling a larger number of items. There are two types of carting systems available; first party and third party carts.

•  First Party – The cart software resides in the same server as the web site. The cart software is either purposefully written for that particular web site or purchased from a third party. Examples of which include Miva Merchan, Actinic OS Commerce, and X-cart Many of these proprietary carts come with a shop-front (online catalogue) system that allows the webmaster's to display his products easily in a professional manner, thus making the design process of the web site much easier. Many of these shop-front packages are offered as a TURNKEY approach that includes web hosting, shop-front/cart.

•  Third Party - The cart itself is hosted at a remote third party hoster. Examples of third party carts include 1shoppingcart.com [40] and Mal's e-Commerce (mals-e.com) [27]. One has to sign up and pay a subscription fee for the service.

The vast majority of online shops opt for first party rather than third party carts. In general, first party carts are more difficult to set up (except for TURNKEY solutions) but there are usually no recurring charges once the cart had been set up. Third party carts are usually easier to set up and are more flexible. However, the merchant would be very dependent on that system; should the servers of the third party cart goes down, the cart would be inoperable. The author consulted several web hosting companies in Hong Kong and it appears that cart software tend to be purposefully written for a particular web site. This is probably the most inflexible and expensive approach and would make the merchant totally dependent on the web hosting company.

Comparison of (4) Different Carting System:

(Exhibit 18)

Source: researched and analyzed by the Author

4.1.4. Payment Processor

It is essential for an online business to have a means of accepting payment from its customers, especially credit card that accounts for over 90% of transactions carried through the Internet. It is in this area that e-businesses in Hong Kong is at the most disadvantage compared to North America and Europe . However, the situation has vastly improved in the last year with the availability of PayPal and also several payment gateways that will accept merchants based in Hong Kong . Previously, a merchant based in Hong Kong would have to open a merchant account with a local bank that could be very difficult and expensive. The merchant would then have to seek authorization from the bank by phone for each individual. This is a rather tedious process and adds significantly to the labor time. It is virtually impossible for a home-based business to open a merchant account with a local bank as a deposit of up to US$100,000 is required and even then, there are no guarantees that the application will be accepted. Listed below are the options available for e-businesses in Hong Kong to accept credit card payments.

(1). Escrow Agency

An escrow service receives money from the customer. It then authorizes the merchant to ship the order. The money is released to the merchant once the customer had indicated that he has received and is satisfied with the order. Examples of escrow services include escrow.com [14] and escrow.ca. The problem with escrow is that there is a substantial time lag before the merchant receives the money. Moreover, there is substantial work involved in setting up an escrow transaction. Moreover, the buyer himself must become a member and this may put prospective buyers off because of the extra time and hassle involved. In my experience, around one third of escrow transactions are abandoned by the buyer. However, there is no possibility of the merchant being defrauded by credit card fraud as escrow assumes full responsibility for the transaction. Escrow services are especially useful where large transactions are involved. The escrow charge of around 4% of the value of the transaction is quite reasonable. .

(2). PayPal

PayPal [29] has truly revolutionized e-commerce, particularly for the small merchant. For the first time, there is a means for private individuals to accept credit card payments with ease. It is now an attractive proposition for small merchants in Hong Kong especially since it allows withdrawal of money to a Hong Kong bank account, whereas up until last year, this was only available to residents of the U.S. and Canada . PayPal is now the major means of payment for online auctions and eBay [11] had now taken over PayPal. However, like escrow services, the buyer must sign up for PayPal before being allowed to pay, and likewise, this may put prospective buyers off.

(3). Payment Gateway

A payment gateway allows the customer to make a purchase by credit card and have it processed in real-time. The payment gateway sends a request for authorization directly to the computers of the credit card holder's bank. On authorization, the funds are captured. After a holding period of around 4 weeks, the funds are disbursed to the merchant. This leads to substantial savings in time for the merchant in that he need not seek authorization by phone from his bank. To date, no locally based payment gateway is available to merchants based in Hong Kong . Payment gateways are usually based in the U.S. or Europe and are available for merchants based in their respective countries only. Although this can be got round by opening a “Shell” company in the U.S. , this process is tedious and expensive. As from last year, several payment gateways have begun to take in customers based in Hong Kong at a reasonable cost. These include 2checkout.com [41] and Worldpay [37]. Some like 2checkout.com will take in new merchants without doing a background check but whereas others like Worldpay would require a company registration certificate and also a thorough background check. The quality of the service provided varies enormously, particularly in the case of fraud screening.

(4). The issue of credit card fraud

Credit card fraud is one of the most destabilizing factors in e-commerce. The banks and credit card companies regard e-commerce as a high-risk activity, and thus the merchant is liable for all the loss sustained through credit card fraud. To add insult to injury, the merchant also has to pay a charge-back fee of around US$20-30 for every fraudulent transaction as a reimbursement to the banks for the time spent in investigation. Typically, the buyer makes a purchase with a credit card issued by a bank in a particular country and asks the goods to be sent to another person in another country. There are also other means of checking the validity of the purchase e.g. by verifying that the invoice address given is correct and also that the customer has entered the correct 3 or 4 letter security code.

4.1.5. TURNKEY Approach

Setting up a web site and integrating it with a carting system and a payment gateway could be a very daunting and complicated task for the uninitiated. For this reason, a number of TURNKEY approaches are on the market offering a combination of the above elements in a single package. The most common combination is to offer web hosting with a shop-front/shopping cart system offered by hypermart.net and retineada.com. Another combination involves combining a shopping cart with the payment gateway such as 2checkout.com. Packages are becoming available whereby web hosting, shop-front, and payment gateway is combined into one package. A good example of this is the ‘click and build' [4] system offered by Worldpay [37].

4.2. Strategic Aspects

4.2.1. Promotion

With the exception of selling products through auction sites where a web site is not required, all online businesses with a web site requires a great deal of promotion in order for the business to succeed. No matter whether it is an online store, site selling services or sites that have joined affiliate programs, promotion should be regarded as the most important component of the business. However good you web site is, it will not generate a single sale if nobody can find it.

A lot of online retail businesses failed in the first place because they did not know how to utilize their advertising budget effectively. Many different promotion techniques are available, and it could be very daunting for the beginner. There are lots of advertising programs that sound impressive and charge a lot, but deliver little or nothing in terms of sales. It takes a lot of experience to sort through this minefield.

The table above shows the relative importance of various sources of web site promotion in relation to each other. In general, for small business sites, the most important means of referrals come from Search Engines and Directories, classified advertisements, and referrals from past customers. Banner advertising and pop-up ads are least effective but they allow a site to have the greatest amount of exposure throughout the Internet. One has to spend one's advertising budget very carefully. The different promotion techniques available are discussed further below.

•  Search Engines and Directories

This is usually the main means by which a particular Web site can be found. Therefore it is extremely important to be included in all-major search engines and directories such as Yahoo, Google, Inktomi, Alta Vista, MSN, Looksmart, DMOZ and Excite. However, being included in them is not enough, your site must be returned within the first 10 results for any particular search term in order for there to be a reasonable chance of the searcher visiting your site. Achieving a good ranking is not an accident but can be done through the design of the web page. It is an extremely complicated subject that is often very time-consuming and costly. The biggest problem with search engines and directories is that it will take weeks or months before a site is listed and even with expert help, top ranking cannot be guaranteed especially for common search terms. It may take a lot of experimentation in order to achieve top ranking but even then, a good ranking in one search engine doesn't mean it will rank well in others.

Some search engines such as Google Adwords, Overture, Findwhat and Kanoodle will list your site for particular search terms for a price. The actual ranking in the search result depend on the price you are willing to pay for an individual click to your site. The bidding usually starts at US$ 0.05 but can easily go up to several dollars for pole position. Pay per click engines are widely believed to be the most effective means of advertising but one must be very careful since some large shops may be willing to bid any price for top positions. The best strategy would probably be to concentrate on rarer search terms. Country or region specific pay per click engines will also be used.

•  Classified Sites, Message Board and Forums

Classified ad sites, message boards and forums can be surprisingly effective. The keyword here is targeting. One must target your ad to the target audience; therefore ads in sites with related categories in general would be the most effective. Advertisement in other sites such as web site design would be far less effective. It is essential to write eye-catching ads that stand out. It may be a good idea to couple the ad with a discount coupon. One added bonus of this approach is that the effectiveness of various campaigns can be monitored.

•  Unsolicited e-mail

A lot of companies seem to think that this approach is effective and spend a lot of time and money. In experience, the response rate is very poor (around one in a million) and none of our customers have returned for further purchases. Furthermore, your web site may be forced to shut down or the ISP will threaten to withdraw its services due to a lot of complaint. There is also a lot of potential damage to the image of your company.

•  Opt-in mailing lists

This could be a very effective means of promotion if you have your own opt-in mailing list from your site. However, this list will take some time to build. The key would be to give news on new editions and discounts from time to time. Response rates of as much as 15% have been reported. Another approach could be to pay an advertising agency to send e-mails to third party opt-in lists. However this is very expensive in comparison to other methods of advertising.

•  Banners and Pop-ups

Banners are the most widely used form of advertising but is also the poorest. The click-through rate is very poor and the industrial average is around 0.4%. Even after a click-through, their response rate is reported to be poor relative to other forms of promotion. Despite their poor response rates, banners remain the most popular of advertising because there is no form of advertising that can generate such a massive exposure. There are only a finite number of searches performed on a search engine on a given day but there are thousands of high traffic sites that can take banners. One can use banner advertising sparingly in the beginning until satisfied that the response rate justifies the cost of the campaigns.

Pop-ups generate a higher response rate but are generally annoying to web surfers and may damage the reputation of the company. Again one can only use pop-ups sparingly in the beginning until one is satisfied with the response rate. Despite the well-known poor response rate of Banners and Pop-ups, it is still necessary to use Banners and Pop-ups because this is the only way of generating huge exposure on the Internet. However, this has to be conducted extremely carefully.

•  Shopping and Auction Sites

Shopping such as Yahoo shopping and Amazon provide a highly effective means for third party online retailers to sell their products. However, these sites are not open to retailers based in Hong Kong . Auction sites such as eBay provide a useful means to sell products. However, prices realized on auction sites are generally very low and therefore auctions will normally be reserved for unsold stock.

•  Affiliate Programs

Affiliate programs are now recognized as one of the most efficient means of generating sales. A web site owner is paid for a fixed amount or percentage of every sale he generate. Affiliate programs are now thought to account for up to one-third of all Internet transactions. The downside of affiliate programs is that they can be very expensive and complicated to maintain, and are also subjected to a high level of credit card fraud.

•  Other online methods

Other online methods of promotion include hit-exchanges, banner-exchanges, FFA sites. However, the response rates of these programs are low and those that take part in them tend to be very small business promoting multi-level marketing, promotional techniques or even fraud. Therefore it is not advised to participate in these programs.

•  Off-line Advertising

Off-line advertising includes advertising in magazines, newspapers, billboards and even television. One may consider advertising in magazines devoted to a related field in different countries

4.2.2. Customer Service Management

The Internet has often been criticized for its lack of human contact and interaction. This is a major hurdle for the growth of e-commerce because many prospective customers are very wary of sending their credit card details over the Internet, particularly so to businesses based in another country. Therefore, many consumers would prefer to pay more by purchasing at a physical establishment locally rather than from another country through the Internet. Therefore it is very important to gain the trust of prospective customers, and there by retaining them and gaining their recommendation. The following are aspects of customer services that an online e-business should look at:

(1). Access to customer service – most online business, including provides access by e-mail only. Access can be enhanced by the provision of a telephone number, preferably one that is toll-free. However this is not practical for many businesses because of the time difference between different countries. Where e-mail is the only means of contact, it is essential that they be answered promptly, courteously, and in detail. It is also a good idea to provide a contact form on the web site so as to allow the customer to make inquiries more easily. More specialized third party customer service modules are available where a support ticket system is used. Another possibility is the use of the live chat system which is essential a variation of ICQ where the customer and merchant can communicate in real time.

(2). Timely and Quality Service – when delivering products or services, it is essential that it is done in timely manner. Products should be packed in a presentable manner and sent off promptly. Where services are involved such as web site design, it should be done in a professional manner with the input of the customer.

(3). Contact with customers – online businesses should make every opportunity to contact their customers. The customer should be notified once an order / service has been completed. They should be encouraged to give feedback and also join the mailing list of the company.

•  Requirement of essential elements for different e-businesses

Different types of e-business required different level and combination of essential elements:

(Exhibit 23)

Source: By the Author's research and analysis

4.3.1. Web Design – web sites that sell physical products require the products to be presented in an attractive manner with good images and descriptions. Nowadays, many shop-front programs are available thus making the task simpler. However, the software is often expensive and could be a deterrent for beginners. Sites that sell soft products are generally not as demanding in terms of presentation but would require a more complicated set-up in order only to allow those who have paid to access the product. Sites that sell services are even less demanding in terms of presentation but may require very complicated set-up as there may be a need to connect to other external database e.g. that of the travel agency. The demands of publishers in terms of web site design are variable. However, those that generate a high volume of visitor traffic tend to have their contents refreshed at regular intervals.

4.3.2. Web hosting – web sites that sell physical products do not require a lot of resources in terms of web space or bandwidth. However, sites that sell soft products require a lot of web space and bandwidth, and therefore much more expense. The requirements of sites that sell services are much more variable and depend very much on the service provided. Publisher sites that are successful generate a lot of traffic and are thus very demanding in terms of web space and bandwidth. It is because new content is added to these sites all the time, and these sites often provide services such as chat rooms, forums and free e-mail accounts that consume a lot of resources.

4.3.3. Carting System – a carting system is almost obligatory for web sites selling physical products, and optional for sites selling soft products and services. It is not required for publisher web sites.

4.3.4. Payment Processor – with the exception of publisher web sites, all other e-business web sites require a means of accepting online payments, preferably through a payment gateway. Sites that sell soft products would require a much high degree of fraud screening and protection than others.

4.3.5. Promotion - although promotion is required for all four different types of e-businesses, it is much harder for some than others. Those businesses with a lot of existing competitors will find it much more difficult to promote than other e-businesses. These businesses are generally the ones that are widely perceived to offer high rewards such as adult sites, or those that require little skill or investments such as reselling web hosting.

4.3.6. Customer Service Management – with the exception of businesses that derive their income from publishing, all online businesses including those that sell their products through auction sites require some degree of customer service. Obviously, the requirements would be greatest in those offering services.

Summary

Different e-business opportunities have different requirements in terms of technical and strategic aspects. It is now quite clear that Hong Kong has closed the gap considerably with N. America and Europe in terms of technical aspects, especially the processing of payments. Promotion is critical to the success of any e-business and there are many methods available. In the next chapter, the different types of home-based e-business opportunities will be compared in terms of risk, investment and reward. Conclusions will be reached as to whether and which type of e-business is most suitable for Hong Kong residents.