Current Issues
1. Gaining Consumer Trust for Online Store is Expensive
As a seller, you can create an e-commerce website with a smart design and sell quality products.
Yet even then potential customers will still be wary to shop with you, because you don’t have a long-standing reputation. Research shows that fear of a retailer’s business ethics is one of the major reasons people abandon shopping carts, along with the cost of shipping and long handling time. The increasing incidents of phishing scams and shoddy customer service makes consumers more wary of purchasing online than ever before. It’s extremely important for a seller to demonstrate their trustworthiness to their customers as soon as new shoppers arrive to the retailer’s site.
Today, many small and new brands buy a good reputation and trust. Sellers buy consumer’s trust by paying for ads. To achieve credibility, some sellers would have to first spend a lot of money on advertisement to attract their first batch of customers. They then hope these customers will leave some good reviews about the website for future customers to see. They
also buy social ads to increase their brand exposure, so new visitors can find a substantial list of seemingly trustworthy mentions of the shop when they research. This path always results in losing money and can take months or years before trust is established on the internet.
The second way to buy trust is to join a marketplace and pay their fees for endorsement.
For example, Amazon’s A-Z guarantee claims that Amazon will pay for the consumer’s lost when a
seller on Amazon commits a fraud. Customers knows Amazon as an established large company
and therefore trust its protection policies. Yet when a customer files a claim, it’s not Amazon but the sellers that pay for lost items. Besides that, sellers have to pay Amazon at least 15% of the sales amount just to be listed on Amazon.
2. Excessive Commission on Centralized Marketplace
The total cost for operating a storefront on a popular marketplace is very high. eBay usually takes 10% to 15% of the gross sales, while Amazon takes 15% to 25% of the gross sales. This is often unproportional to the service value being provided by the marketplace. Besides that, sellers often find it necessary to purchase advertisement services or even warehouse services from the marketplace in order to attract traffic and sales within the marketplace. The price of those services provided by the marketplace is often higher than the industry standard price. All
these prices are set by the marketplace and sellers usually have no power to negotiate the price.
3. Data Silos Lead to Unfair Competition
Customers should have the right to fully control their online shopping behavior data and
determine who can access their online shopping data.
Unfortunately, this right is not recognized or upheld. E-commerce platform companies have unrestricted access to all shopping activities that happen on their platform. They usually collect and analyze the shopping behavior data to gain insight into each customer’s profile and better promote products and drive more sales to.
Marketplace companies usually don’t allow the sellers on their platform to have access to the same amount of data that they have. Thus, sellers can’t have a clear understanding of how customers react to their listing and products. Sometimes marketplaces will use their unlimited access to data to their advantage, identify which products are popular and then sell those products at lower prices to compete with the existing sellers.
According to a 2015 Guardian article, Amazon has a list of customer email addresses and
browsing histories that its marketplace sellers don’t have access to. By withholding this list,
Amazon gains a competitive advantage and limits the seller’s’ ability to nurture close relationships with the customers. [5, 7]
The lost transparency of data usage and the manipulation of data negatively affects the benefits of both consumers and sellers. Sellers who make most of their sales from Amazon face a huge business risk. Most Amazon sellers are always on the look for new online channels and some of even build their own independent online stores. Unfortunately results of independent stores are not always successful. as e-commerce generally requires economic sale to be profitable.
4. Expensive Advertisement Spending and Huge Middleman Fee
Online advertisement is another big expense for online sellers. Social advertisement is popular and powerful. A YouTube or Instagram influencer post can generate millions of views in one day and bring a high volume of traffic and sales. This traffic data and order information is managed by individual sites and not open to publishers. Centralized companies are the current solution to measure affiliate marketing results. This type of companies gain access to both the sellers and publishers’ data and make a call on the payout.
It’s normal for companies and publishers to hire centralized advertising networks or affiliate
network companies to play the middleman that monitors and manages data. Unfortunately,
these companies then quickly turn into monopolies and charge small vendors fees, which results in the loss of 5% to even more than 10% of the price paid for a product.
For example, a gadget maker recruits a YouTube influencer to make a video review of their products and the video review brings in 100K in gross sales to the gadget maker. The gadget maker will pay 6K to the influencer and 4K to the middleman. The existence of the ad or affiliate agency, also known as the middleman, creates a 60% increase of the advertisement payment.
Eliminating the middleman will bring down the product price by at least 5% for almost every product online.
5. Bait-and-Switch Scheme of Centralized Platform
The key reason that a centralized e-commerce marketplace can charge high fees for its sellers and buyers is that they have a large number of consumers frequently visiting their platforms.
When more consumers shop on a platform, the platform grows in power and has a greater opportunity to later exploit the consumers who trusted them. This process is often beautified and disguised by e-commerce platform companies. When consumers realize the problem, it is too late to make a change in the market.
In the internet industry, we have seen a large number of cases employing this so called Bait-
and-Switch routine. It’s especially common in companies building a platform-like product. The routine is mainly composed of the following two steps.
Step 1, the Bait. The purpose is to attract a large number of people to join the platform by using huge discounts or free services. Once they join, they will set up accounts on the platform and generate transactions and data.
Step 2, the Switch. Once there are enough number of participants in the platform, the platform’s manager gradually removes the price discounts and increases various fees to make a profit. At this time most users have already developed path dependencies on this platform and will mostly likely stay with this platform even if there is no longer a price advantage.
Although many consumers now understand this business strategy, they don’t have many other choices as almost every traditional company is imitating this strategy. Instead, many consumers just choose to get as much advantage as possible during a company’s early promotion period.
This kind of behavior makes the Bait-and-Switch routine even more effective.
Decentralized Marketplace as Solution
Existing issues as we described in the previous chapter can all be traced to the core business
logic of traditional e-commerce companies. The traditional internet cannot support real time value transmission nor irrevocable contracts, which makes aintermediaries an unavoidable piece of the transition. The profit-seeking nature of intermediary companies makes achieving profits
the primary goal instead of providing a truly efficient and fair-trading environment. Using blockchain technology to realize the true decentralization of e-commerce marketplace is the
only way we can fundamentally solve these problems.
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