NCPA - National Center for Policy Analysis

The Limits Of E-Commerce

September 29, 2000

The potential of online commerce is large, but limited, according to a recent study. That is because the benefits of online shopping can be offset by the additional costs of establishing and maintaining e-retailing.

According to the study by University of California at Berkeley researchers:

  • E-retailing suffers from a high rate of product returns, estimated at more than 30 percent to 40 percent of sales.
  • Online retailers spend an average of $26 on marketing and advertising per purchase, more than ten times the cost to physical retailers.
  • Building a site can cost $1 to $1.5 million and maintaining it can be just as costly; Charles Schwab employs more than 250 technicians.

Because of these limitations, only products having certain characteristics are easily sold online. Good online products:

  • Do not require "touch and feel" to test their value.
  • Are standardized, price sensitive and cheaply shipped.
  • Require standardization or substantial product information.
  • Make good gift ideas, and attract high margins in physical stores.

Profitable online goods include books, computers, CDs and sporting goods. The study also states that online commerce is product focused -- which means goods purchased on impulse or by browsing have limited online potential. Similarly, product specific stores, such as book stores, face a greater danger from e-retailers than warehouse stores, like Walmart.

Source: "The Internet Does Not Change Everything," Economic Intuition, Summer 2000. Based on Kenneth T. Roen and Amanda L. Howard, "E-Retail: Gold Rush or Fool's Gold?" California Management Review, Spring 2000.


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