E-⁠commerce | ICSE Class 10 Commercial Studies Notes

This note covers the meaning of e-commerce and how it differs from traditional methods of transaction, the ideas of e-tailing, e-advertising, e-marketing and e-security, the meaning of ERP and its main modules, the advantages and limitations of doing business electronically, and the main types of e-commerce.

What is e-commerce and how does it differ from traditional methods of transaction?

E-commerce means the buying and selling of goods and services, and the transfer of money and information, over computer networks such as the internet. It covers a firm's interactions with its customers and suppliers over the internet.

Definition: E-commerce is the conduct of trade and commerce using computer networks, covering a firm's interactions with its customers and suppliers over the internet.

Traditional methods of transaction

Traditional methods of transaction are the older, physical ways of buying and selling: visiting a shop, meeting the seller face to face, paying in cash or by cheque, and carrying the goods home. E-commerce replaces much of this with a website, an online order and an electronic payment.

A traditional shop must exist at a physical place; an online seller needs no shop front. A traditional firm reaches customers through middlemen; an online firm often deals with them directly.

How the two modes differ

A traditional firm's internal messages pass down a chain of command; an online firm's messages can move directly between any two people. These differences are set out in the table below.

E-commerce is narrower than e-business

One point needs care. E-commerce is narrower than e-business. E-business includes e-commerce but also covers electronically conducted functions such as production, inventory management, product development, accounting and finance, and human resource management. E-commerce is therefore mainly the buying and selling part.

What is e-tailing and how does it work?

E-tailing, or electronic retailing, is the sale of goods and services to the final consumer through an online store. The customer browses a website, picks items into a shopping cart, pays electronically and receives delivery at home. It is the retail face of business-to-customer commerce.

Definition: E-tailing is retail selling carried out over the internet, where a consumer selects goods on a website, pays online and has them delivered.

The three stages of an online transaction

An online store works in three stages. First comes the pre-purchase stage, where the seller advertises and the buyer searches for information. Second comes the purchase stage, where price is negotiated, the deal is closed and payment is made.

Third comes the delivery stage, where the goods reach the buyer. Except for delivery, every stage is mainly a flow of information.

Registration and the shopping cart

Before shopping, a buyer must register with the online vendor by filling in a form. Registration means the buyer has an account with the vendor.

A password protects the account and the shopping cart, so that no one else can log in in the buyer's name and shop in the buyer's name.

The shopping cart is an online record of what the buyer has picked up while browsing the store; items can be put in and taken out just as in a physical store.

When the buyer is sure, the buyer checks out and chooses a payment option.

Methods of payment

Payment may be made in several ways. In cash on delivery, the buyer pays in cash when the goods are physically delivered.

By cheque, the vendor may arrange to pick up the cheque from the customer and deliver after it is realised.

By net-banking transfer, the buyer transfers the amount to the vendor's account using facilities such as Immediate Payment Service (IMPS), NEFT and RTGS. Through UPI (Unified Payments Interface), the buyer pays straight from a bank account with a mobile app, and UPI is now one of the most widely used ways of paying online in India. By credit or debit card, popularly called plastic money, the payment is made through the card.

Digital cash is a form of electronic currency that exists only in cyberspace; the buyer pays a bank an amount equal to the digital cash wanted, the bank sends software that allows the buyer to draw digital cash, and the funds are then used to buy over the web.

Advantages and weakness of e-tailing

E-tailing has clear advantages. It expands the marketplace to national and international markets, lowers the cost of operations, gives the buyer more choice and customised products, and allows quick delivery of digitised products such as music, films, software and e-books.

Its main weakness is the low personal touch: the buyer cannot handle the goods or talk to a salesperson in the same way as in a shop.

In India, online sellers must follow the Consumer Protection (E-Commerce) Rules, 2020, made under the Consumer Protection Act, 2019, which require them to show details of the seller, the total price and the return and refund policy, and to appoint an officer to handle complaints.

What is e-advertising and how does it differ from e-marketing?

E-advertising is the use of the internet to inform and persuade buyers about goods and services. It is one part of the wider marketing effort. Common forms are banners on websites, pop-up windows, online catalogues displaying images of goods, opinion polls and customer surveys, promotional e-mail and, today, advertisements on search engines, social media and video sites.

Definition: E-advertising is the promotion of goods and services over the internet through banners, pop-ups, online catalogues, opinion polls, customer surveys and e-mail.

E-marketing is the wider process

E-marketing is much broader. Marketing begins well before a product is offered for sale and continues after it has been sold.

E-marketing therefore covers identifying customers, researching what they want, promoting the product, selling it, taking payment and sometimes even delivering it online. Advertising is only one activity inside this larger process.

Definition: E-marketing is the whole process of identifying customer needs, promoting, selling and delivering goods and services over the internet, of which e-advertising is one part.

Why the distinction matters

The distinction matters. A firm that only puts up a banner is advertising. A firm that runs an online survey to find out who is buying what, adjusts its product to suit, promotes it, sells it and follows up with the buyer is marketing.

E-commerce permits these activities at much lower cost but at high speed.

Staying in touch with customers

E-marketing also allows a business to stay in touch with customers round the clock. Companies can conduct online surveys to find out who is buying what and what the level of customer satisfaction is.

Customers today are choosy and want individual attention: product features tailor-made to their needs, and delivery and payment at their convenience. E-commerce makes this possible.

What is e-security and why is it needed?

E-security means the protection of information, money and identity in electronic transactions from loss, misuse or theft. Online transactions, unlike face-to-face deals, carry a number of risks. Risk here means the probability of any mishap that can result in financial, reputational or psychological loss to the parties in a transaction.

Definition: E-security is the set of measures that protect data, payments and the identity of parties in electronic transactions from theft, misuse or loss.

The three groups of risk

The risks fall into three groups. Transaction risks arise when the seller denies that the customer ever placed the order, or the customer denies placing it (default on order taking or giving); when the intended delivery does not take place, goods go to a wrong address, or wrong goods are delivered (default on delivery); and when the seller does not get payment while the customer claims to have paid (default on payment).

Data storage and transmission risks arise because data stored in systems, or travelling between them, may be stolen or modified for selfish motives or simply for fun.

Risks to intellectual property and privacy arise because the internet is an open space: once information is available on it, it moves out of the private domain and is hard to protect from copying, and data given during transactions may be passed on to others who flood the buyer's mailbox with junk mail.

Safeguards used against these risks

Several safeguards are used. Identity and location can be verified at the time of registration, and authorisation obtained for order confirmation and payment.

Cookies are small files that a website stores on the buyer's computer so that it can recognise the buyer on a later visit, a little like caller ID on a telephone; they help the seller confirm who is dealing with it.

Buyers are advised to shop from well-established sites, which assure them of the seller's identity, location and service record; sites such as eBay even allow buyers and sellers to rate one another.

For card payments, encryption protects card details from misuse. The early standard was Secure Sockets Layer (SSL); its successor, Transport Layer Security (TLS), is used today, which is why a secure payment page begins with https and shows a padlock. In India, online card payments also need a one-time password (OTP) sent to the cardholder's mobile phone.

Cryptography is the art of protecting information by transforming it into an unreadable format called ciphertext; only those who possess a secret key can decipher it back into plaintext.

A virus is a program that replicates itself on other computer systems, and installing and timely updating anti-virus programs gives protection against it.

The law also helps. The Information Technology Act, 2000 punishes hacking and identity theft, and the Digital Personal Data Protection Act, 2023 requires firms that collect personal data to keep it safe and to use it only for the purpose the person agreed to.

What is ERP and what are its main modules?

Enterprise Resource Planning (ERP) is a single, integrated software system that links the different departments and functions of a business so that they share one common store of information. Instead of each department keeping its own records, the whole firm works from one database.

Definition: ERP is an integrated software system that connects the main functions of a business, such as purchasing, production, sales, finance and human resources, through a common database.

Why a firm uses ERP

The idea behind ERP is simple. In a firm without it, the sales department may promise a delivery date that the production department cannot meet, because the two keep separate records.

With ERP, a sales order entered in one module is at once visible to production, stores and accounts. This shortens the business cycle and reduces errors, because the same data are used everywhere.

The main modules

ERP is built from modules. A module is one self-contained part of the system that handles one area of work but shares its data with the rest. The main modules are:

1. Finance and accounting module: keeps the ledger, payables, receivables, budgeting and financial reporting.
2. Human resource module: keeps employee records, payroll, attendance, recruitment and training details.
3. Sales and distribution module: handles orders, invoicing, pricing, dispatch and customer records.
4. Purchase and inventory module: handles suppliers, purchase orders, stores and stock levels.
5. Production or manufacturing module: plans and tracks production, materials and work in progress.

What are the advantages and limitations of ERP for a business?

ERP is a large investment, so a firm should know what it gains and what it gives up before installing it.

Advantages of ERP

All departments work from one database, so the same data are used everywhere and errors fall. Managers get faster decisions, better coordination and speedier workflows, and the business cycle becomes shorter.

Stock levels, payables and receivables can be watched from one place, and reports for the whole firm can be drawn at any time.

Limitations of ERP

ERP is expensive to install and needs trained staff to run it. It also requires the firm to change the way it works, which people may resist.

A firm that keeps separate records in each department, by contrast, spends less at the start but risks promising a delivery date that production cannot meet.

Worked example 1. A trader keeps separate records. Last year 40 orders out of 500 were dispatched late because sales promised dates production could not meet, and each late order cost ₹1,500 in penalty and goodwill. An ERP system costs ₹1,50,000 a year and is expected to cut late orders to 10. Should the trader install it?

Answer: Present loss = 40 × ₹1,500 = ₹60,000. Loss with ERP = 10 × ₹1,500 = ₹15,000. Saving = ₹60,000 − ₹15,000 = ₹45,000, which is less than the ₹1,50,000 cost. The trader should not install ERP on this ground alone, and should look for other gains first.

What are the advantages of e-commerce?

E-commerce offers benefits to the business organisation and to consumers and society.

Advantages to the business organisation

For the business organisation, e-commerce expands the marketplace to national and international markets. It brings a gradual decline in the cost of operations.

It facilitates pull supply chain management, in which production responds to actual demand rather than pushing goods into the market.

It gives a competitive advantage over competitors, supports proper time management and business processes, and allows small firms to co-exist with big firms in a win-win situation.

Advantages to consumers and society

For consumers and society, e-commerce gives flexibility, competitive prices, discounts and waivers, more options and choices, and customised products. It gives quick and timely delivery, especially of digitised products. It creates employment potential, facilitates e-auctions and e-tenders, allows interaction with consumers, and gives a wider outreach.

Other advantages

Other advantages are worth noting. E-business is easy to form and needs lower investment: even a person with little capital but good contacts can do good business.

It offers convenience of 24 hours a day, 7 days a week, 365 days a year. It gives speed, because buying and selling largely involve exchange of information that the internet carries at the click of a mouse.

It gives global reach and access. It moves society towards paperlessness, reducing dependence on paperwork and red tape.

Note: The Information Technology Act, 2000 gives legal recognition to electronic records (Section 4) and digital, now called electronic, signatures (Section 5), allows their use in government offices (Section 6) and permits retention of records in electronic form (Section 7). This supports paperless dealings in business and government.

What are the limitations of e-commerce?

E-commerce is not all rosy. It suffers from certain limitations that a firm must weigh before switching over.

Low personal touch and slow delivery

Low personal touch. High-tech it may be, but e-business lacks the warmth of interpersonal interaction. It is therefore relatively less suitable for product categories that need a high personal touch, such as garments and toiletries.

Mismatch between order speed and delivery speed. Information can flow at the click of a mouse, but physical delivery of the product takes time. This gap may test the patience of customers. At times, for technical reasons, websites take unusually long to open, which frustrates the user further.

Technology capability and anonymity

Need for technology capability. Apart from the traditional three Rs of Reading, Writing and Arithmetic, e-business requires a fairly high degree of familiarity with computers. This requirement is responsible for the digital divide, the division of society on the basis of familiarity and non-familiarity with digital technology.

Increased risk from anonymity. Internet transactions occur between cyber personalities, so it is difficult to establish the identity of the parties, and one does not even know where they are operating from. There are additional hazards of impersonation, leakage of confidential information such as credit card details, viruses and hacking.

People resistance and ethical fallouts

People resistance. Adjusting to new technology and new ways of doing things causes stress and a sense of insecurity, so people may resist a firm's plans to enter e-business.

Ethical fallouts. Companies use an electronic eye to track the computer files an employee uses, the e-mail account and the websites visited. This raises questions of whether such monitoring is ethical.

Are these limitations permanent?

Most of these limitations are in the process of being overcome. Websites are becoming more interactive to reduce the problem of low touch, communication technology is continually evolving, and efforts are on to bridge the digital divide, for example through community telecentres in villages and rural areas set up with government agencies, NGOs and international institutions.

How do the main types of e-commerce differ?

E-commerce can be classified by the parties involved. The main types are B2B, B2C, C2C and intra-B commerce.

B2B and B2C commerce

In B2B commerce, both parties are business firms. A firm must interact with suppliers and vendors of inputs, and with the channel that distributes its products.

A network of computers is used for placing orders, monitoring production and delivery, and making payments. Historically, e-commerce originally meant B2B transactions using Electronic Data Interchange (EDI) technology to send and receive documents such as purchase orders and invoices.

In B2C commerce, a firm deals with its customers. Although online shopping comes to mind at once, selling is only the outcome of the marketing process, so B2C covers a wide range of marketing activities carried out online.

Its corollary, C2B commerce, gives consumers the freedom of shopping at will, and call centres allow them to make toll-free calls to query and complain round the clock.

C2C and intra-B commerce

In C2C commerce, the business originates from a consumer and ends with a consumer. It suits goods for which there is no established market, such as used books or clothes sold for cash or by barter.

Payment intermediaries make such deals safer. In an escrow arrangement, for example, the intermediary holds the buyer's money until the goods have been delivered and accepted, and only then passes it to the seller.

Intra-B commerce takes place within a firm. It uses an intranet, a private network, for communication among organisational units.

Just as an intercom helped voice communication within an office, an intranet allows multimedia and even 3-D graphic communication, permitting better coordination, faster decisions and speedier workflows.

It is largely because of intra-B commerce that firms can practise flexible manufacturing and mass customisation.

How should a small firm decide whether to go online?

A small firm weighing a move online should set the advantages above against the limitations for its own case. Four checks matter most.

1. Cost: compare the yearly cost of a website, delivery and payment charges with the rent, staff and electricity of a shop, and the sales each route is expected to bring.
2. Nature of the product: goods that buyers want to touch or try, such as garments, need a high personal touch and are harder to sell online.
3. Delivery: the firm must be able to deliver quickly and safely, since order speed and delivery speed do not match.
4. Skills and security: the owner and staff need familiarity with computers, and the firm must protect its customers' data and payments.

Worked example 2. A small firm sells gift items, which cost it 60 per cent of their selling price. Its shop costs ₹2,00,000 a year in rent, staff and electricity and brings sales of ₹8,00,000. A website would cost ₹1,20,000 a year to run, plus ₹60,000 for delivery, and is expected to bring sales of ₹9,00,000. Should the firm move online?

Answer: Shop: margin on goods = 40 per cent of ₹8,00,000 = ₹3,20,000; profit = ₹3,20,000 − ₹2,00,000 = ₹1,20,000. Online: margin on goods = 40 per cent of ₹9,00,000 = ₹3,60,000; profit = ₹3,60,000 − ₹1,20,000 − ₹60,000 = ₹1,80,000.

The online route earns ₹60,000 more, so the firm should choose the website, provided it can deliver reliably and show its gift items well enough online to make up for the low personal touch.

Glossary

• E-commerce: Buying and selling of goods and services, and transfer of money and information, over computer networks such as the internet.
• E-business: The wider conduct of industry, trade and commerce using computer networks, including production, finance and human resource functions.
• E-tailing: Retail selling over the internet, where a consumer selects goods on a website, pays online and receives delivery.
• E-advertising: Promotion of goods and services over the internet through banners, pop-ups, catalogues, polls and e-mail.
• E-marketing: The whole online process of identifying needs, promoting, selling and delivering, of which advertising is one part.
• E-security: Measures that protect data, payments and identity in electronic transactions from theft, misuse or loss.
• ERP: An integrated software system linking the main functions of a business through a common database.
• Module: One self-contained part of an ERP system that handles one area of work but shares data with the rest.
• Shopping cart: An online record of the items a buyer has picked up while browsing an online store.
• Digital divide: The division of society on the basis of familiarity and non-familiarity with digital technology.
• Cryptography: The art of protecting information by transforming it into an unreadable format called ciphertext.
• Cookies: Small files a website stores on a user's computer so that it can recognise the user on a later visit.
• Digital cash: Electronic currency that exists only in cyberspace and has no physical properties.
• Risk: The probability of a mishap that can cause financial, reputational or psychological loss to the parties.

Common errors and misconceptions

• Misconception: E-commerce and e-business mean the same thing. Correct: E-business is wider; it includes e-commerce plus functions such as production, inventory, accounting and human resource management.
• Misconception: E-marketing is another name for e-advertising. Correct: E-advertising is only one part of e-marketing, which begins before a sale and continues after it.
• Misconception: E-tailing means any online business activity. Correct: E-tailing is retail selling to the final consumer over the internet.
• Misconception: Online business needs no investment at all. Correct: It needs lower investment than a physical business, but still needs money, people, machines and a website.
• Misconception: E-commerce removes all risk. Correct: Transaction risk is actually higher online because of distance and anonymity of the parties.
• Misconception: ERP is only an accounting package. Correct: ERP links many functions, such as finance, human resources, sales, purchase and production, through one database.
• Misconception: A debit card and a credit card work in the same way. Correct: A debit card spends the money already in the account, while a credit card lets the holder buy on credit.

Exam-style questions with model answers

Q1. State any two differences between e-commerce and traditional business. [2 marks]

1. Physical presence is required in traditional business but not in e-commerce.
2. Traditional business reaches customers indirectly through intermediaries, while e-commerce usually deals with them directly.

Q2. Define e-tailing and e-security. [2 marks]

1. E-tailing is retail selling over the internet, where a consumer selects goods on a website, pays online and receives delivery at home.
2. E-security means the measures that protect data, payments and identity in electronic transactions from theft, misuse or loss.

Q3. Explain any three advantages of e-commerce to a business organisation. [3 marks]

1. It expands the marketplace to national and international markets, so the firm can reach far more buyers than a single shop.
2. It brings a gradual decline in the cost of operations, because the firm relies on a network of relationships rather than owning costly physical facilities.
3. It gives a competitive advantage over competitors and supports proper time management, since information moves at the click of a mouse.

Q4. Distinguish between e-advertising and e-marketing. [3 marks]

1. E-advertising is only the promotion of goods and services online, through banners, pop-ups, catalogues, polls and e-mail.
2. E-marketing is the whole process: identifying customer needs, promoting, selling, taking payment and sometimes delivering online.
3. Marketing begins before a product is offered for sale and continues after it is sold, so e-advertising is only one part of e-marketing.

Q5. What is ERP? Explain any three of its modules. [4 marks]

1. ERP is an integrated software system that links the different departments and functions of a business through one common database.
2. The finance and accounting module keeps the ledger, payables, receivables, budgeting and financial reporting.
3. The human resource module keeps employee records, payroll, attendance, recruitment and training details.
4. The sales and distribution module handles orders, invoicing, pricing, dispatch and customer records.

Q6. Explain any four limitations of e-commerce. [4 marks]

1. Low personal touch: it lacks the warmth of face-to-face interaction and is less suitable for goods such as garments and toiletries.
2. Mismatch between order speed and delivery speed: information moves at once but physical delivery takes time, which tests customer patience.
3. Need for technology capability: parties must be familiar with computers, and this creates a digital divide in society.
4. Increased risk from anonymity: identity and location are hard to establish, and there are hazards of impersonation, leakage of card details, viruses and hacking.

Q7. Explain the three stages of an online transaction and any two methods of payment used in it. [5 marks]

1. The pre-purchase stage includes advertising by the seller and information-seeking by the buyer.
2. The purchase stage includes price negotiation, closing the deal and making payment.
3. The delivery stage covers the physical or electronic delivery of the goods to the buyer.
4. In cash on delivery, the buyer pays in cash when the goods are physically delivered.
5. In net-banking transfer, the buyer transfers the amount to the vendor's account using facilities such as IMPS, NEFT and RTGS; UPI lets the buyer pay straight from a bank account with a mobile app.

Q8. Explain the main risks in online transactions and the safeguards used against them. [5 marks]

1. Transaction risks include default on order taking or giving, default on delivery and default on payment.
2. Data storage and transmission risks arise because data in systems, or travelling between them, may be stolen or modified.
3. Risks to intellectual property and privacy arise because information on the open internet is hard to protect from copying and may be passed on to others.
4. Identity and location can be verified at registration, and cookies help the seller recognise a returning customer.
5. Buyers should shop from well-established sites, and encryption such as SSL and its successor TLS, with a one-time password for card payments, protects card details from misuse.

Key takeaways

• E-commerce is the conduct of trade and commerce over computer networks, covering a firm's dealings with customers and suppliers.
• E-business is wider than e-commerce, as it also covers production, inventory, accounting and human resource functions done electronically.
• E-tailing is online retailing; e-advertising is online promotion; e-marketing is the whole online marketing process.
• E-security protects data, payments and identity from transaction risks, transmission risks and privacy risks.
• ERP links the main functions of a firm through one database, using modules for finance, human resources, sales, purchase and production.
• E-commerce expands markets, lowers costs and gives speed and convenience, but it lacks personal touch and carries higher transaction risk.
• Online transactions pass through pre-purchase, purchase and delivery stages, with payment by cash on delivery, cheque, net banking, UPI, card or digital cash.

Test yourself

What is a shopping cart?

It is an online record of the items a buyer has picked up while browsing an online store. Items can be added or removed, as in a physical store, before checkout.

What is the digital divide?

It is the division of society on the basis of familiarity and non-familiarity with digital technology, caused by the need for computer skills in e-business.

Name two payment intermediaries or safeguards used in online transactions.

A payment intermediary holding the money until the goods are accepted makes consumer-to-consumer deals safer, and SSL or TLS encryption protects card details from misuse.

Give one example each of B2B and C2C commerce.

An automobile factory ordering components from several vendors over a network is B2B. Consumers selling used books to other consumers on OLX or eBay is C2C.

What is a virus?

A virus is a program that replicates itself on other computer systems. Its effects range from on-screen annoyance to disruption, damage to data files and complete destruction of the system.

Why is e-commerce said to be less suitable for garments and toiletries?

Because these products need a high personal touch, and e-commerce lacks the warmth of interpersonal interaction that a buyer may want before purchase.

State two provisions of the Information Technology Act, 2000.

Section 4 gives legal recognition to electronic records, and Section 5 gives legal recognition to digital signatures, supporting paperless dealings.