Ecommerce in Tourism Industry
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Published: Tue, 06 Feb 2018
2.1. Introduction to e-Commerce
‘Electronic commerce (e-Commerce) is such a service offering people the opportunity to do their shopping via modern information and communication technologies at home’ (Schultz, 2007). It enables everyone to conduct business via the Internet. The only precondition is a computer and a connection to the Internet.
The term e-Commerce is becoming increasingly important in the dictionary of today’s tourism managers all around the world. This is reflected in the development of the overall online travel market turnover in Europe reaching a total of EUR 70 billion in the year 2008 (V-I-R, Verband Internet Reisevertrieb, 2009). The introduction of the internet represented both, major opportunities as well as threats, for the tourism industry.
The internet erased physical borders and enables everyone to participate in a global marketplace. The only requisite is a computer and an internet access. This section explores the current dynamics within the broader area of e-Commerce and provides definitions for the incorporating aspects of business transactions via the Internet.
The worldwide proliferation of the internet led to the birth of electronic transfer of transactional information. ‘E-Commerce flourished because of the openness, speed, anonymity, digitization, and global accessibility characteristics of the internet, which facilitated real-time business’ (Yu et al., 2002).
One can of course argue, whether the anonymity of the Internet is still valid today. Maya Gadzheva (2008) for example, suggests that the ‘achievement of unobservability and anonymity in the Internet is going to be much more difficult in the future, due to the possibility of unlimited collection of data’.
Through the aide of the internet tourism companies are able to market and sell their products to a far greater mass which represents substantial growth opportunities for them. According to Porter (2001), the ‘Internet technology provides better opportunities for companies to establish distinctive, strategic positioning than did previous generations of information technology’. However, those opportunities can also represent burdens for companies participating in transactions via the Internet.
Those companies are now more than ever forced to keep their web sites up-to-date and to provide reliable information. Since the Internet is a very fast changing medium, it requires their participants, in this case the e-merchants, to keep up with this pace. In case the companies cannot fulfil these requirements, they will probably face a shift of customers to the competition. Especially the area of tourism, being labelled as largely information driven (Morgan et al., 2001) requires constantly updated and reliable information. Customers need to find every information they require on the web. They need to know where to search and they need to be convinced of the trustworthiness and reliability of this information.
The ability to inform clients and to sell and market products in the virtual marketplace is a critical success factor for economic triumph of tourism companies nowadays and in the future. The website is thus a digital business card of tourism companies and one of their most effective sales persons at the same time.
‘Internet technology provides buyers with easier access to information about products and suppliers, thus bolstering buyer bargaining power’ (Porter, 2001). This will also decrease the costs of switching suppliers (or tourism companies). That is the downturn of the Internet. Competitors are only a few mouse clicks away (Porter, 2001) and the whole industry becomes more transparent. Just about every company participating in e-Commerce is obviously forced to list prices of their holiday components. This facilitates the comparability of tourism services.
Customers do now have access to all kinds of information that facilitate as well as influence their holiday choice. Since tourism companies can no longer differentiate themselves from the competition by pricing means, the corporate website, and the online booking process of a holiday becomes progressively more important. This involves the appearance of the website, including usability and content related features, but also everything concerning the actual booking process and transaction handling.
The tourism company (the seller) and the customer (the buyer) conducting business over the internet have usually never seen each other face-to-face, nor do they exchange currency or hard copies of documents hand-to-hand. When payments are to be made over a telecommunications network such as the internet, accuracy and security become critical (Yu et al., 2002).
In other words this would mean that customers need to transfer extremely private information like credit card details to a complete stranger.
Summarizing this section it can be said that Internet and e-Commerce present various advantages for tourism customers, since companies and offers are more transparent and easier to compare. Furthermore, improvements in IT technology will enhance the search for relevant information and facilitate the navigation in the World Wide Web.
However, there are also threatening factors for tourism companies. Competition will become stronger, since competitors are only a few mouse clicks away, switching costs for customers are much longer and due to their access to nearly unlimited information the customers’ bargaining power will increase. Nonetheless, tourism companies who can keep up with the fast pace of the Internet and who are able to convince customers of the reliability, trustworthiness and timeliness of their displayed offers and information will benefit from the Internet.
2.2. Online Trust or eTrust
What is (online) trust? A first step towards the answer of this question can be made by looking at various definitions of the term trust. Trust is defined as ‘the trait of believing in the honesty and reliability of others’ (Wordnet, Princeton University, 2006). According to this definition, buyers conducting transactions via the Internet will have to rely on a person or institution they may have never seen or even heard of.
This would certainly be not sufficient as an assurance for most of us. Another definition defines trust as ‘to hope or wish’ (Wordnet, Princeton University, 2006). Summarizing this would mean that we need to rely on the goodwill of the other party and hope or wish that it will act as it was promised. Those definitions might be a good starting point in explaining the meaning of trust, but they certainly do not seem to be convenient for most of us.
Böhle et al. (2000) argue that trust is a precondition for flourishing e-Commerce. Shankar et al. (2002) advance a different view, although they classify ‘(online) trust as being important in both business-to-business and business-to-consumer e-business’. Koufaris and Hampton-Sosa (2004) pursue a similar way of argumentation. They suggest that ‘lack of trust in online companies is a primary reason why many users do not shop online’. Another author, Peter Landrock (2002), founder and managing director of Cryptomathic UK Ltd., one of the world’s leading providers of security solutions to businesses, points out that ‘without such trust, neither businesses nor consumers will conduct transactions or sensitive communications across this medium (the Internet)’.
This argument is being supported by a recently conducted study by Ernst & Young and the Information Technology Association of America who concluded ‘that trust represents one of the most fundamental issues impacting the growth of e-Commerce’ (Talwatte, 2000). Strader and Shaw (Chadwick, 2001) point out that ‘consumers are more likely to buy from an online company they trust, when price differences are small’. Thos would in turn imply that whenever price differences are significant, customers are willing to accept a higher level of uncertainty and perceived risk in transactions with companies they do not know or trust.
According to those argumentations one can say that trust is the major precondition for both, businesses as well as consumers to conduct transactions via the Internet. ‘Trust is a key challenge to the customer acceptance of e-Commerce: the lack of trust is an important reason for the hesitant growth in e-Commerce and for the reluctance of consumers to engage in online buying transactions’ (Schultz, 2007).
A Forrester Survey from 2000 stated that ‘51% of companies would not do business with parties they do not trust over the web’ (Shankar et al., 2002). However, this would also mean that 49% of companies would do business with companies they do not trust. Trust needs to be strongly combined with uncertainty and ambiguity. The more information a buyer has about the seller, the better can he or she estimates whether the seller will act as it was promised. Thus, the better the information about a seller the better can he or she be trusted. Good examples for this assumption are online marketplaces like eBay or Amazon.
Those two providers offer nearly everyone the possibility to participate in e-Business. Since they recognized the increased need from customers for information about sellers, they introduced up-to-date ratings. Every seller can be rated after transactions whether buyers have been satisfied with the transaction process or not. The higher and better the rating, the more trustworthy is the seller (in a simplified way).
These ratings are good indications for (unexperienced) buyers, since they equip them with information about the seller’s past performance in transactions. Other ways in creating trustworthiness are so-called trust seals. ‘Those seals are issued by third parties to verify the commitment of an e-vendor’ (Cook and Luo, 2003; Hu et al., 2003; Kaplan and Nieschwitz, 2003; Koufaris and Hampton-Sosa, 2004; Loebbecke, 2003; Patton and Jøsang, 2004; Urban et al., 2000; Yang et al., 2006; in Schultz, 2007).
Trust seals are generally indicated via symbols on the web site of the seller. Those seals are a sign that the seller conducts business according to the standards of the third party, the trust seal provider, and/or that the seller conducts business as promised by the statements and policies on the web site (Schultz, 2007).
‘Further measures to increase trust are security features, the availability of alternative payment methods, privacy, security and return policies and feedback mechanisms and consumer communities’ (Schultz, 2007). ‘Security is the main concern of consumers before engaging in e-business with a seller’ (Schultz, 2007; Hinde 1998). ‘Sellers need to incorporate certain security features into the design of their web sites in order to ensure the safety of the whole transaction process’ (see Credit Card) (Schultz, 2007). Offering alternative methods of payment is another approach of the seller to signal the willingness to adapt to the customers’ needs. Being able to choose a method of payment equips the customer with the perceived power over a part of the transaction process.
It is essential to display the ‘rules of the game’. Privacy, security and return policies need to present on every seller’s web site in order to inform the customer properly. This will not only increase trust but will also facilitate processes in case of complaints or other problems. The provision of customer feedback mechanism (ratings, reply forms, forums, etc.) is another way for customers to increase knowledge and gather information about a seller.
The advantage is that customers can exchange with previous customers of the seller. This way they can obtain an objective evaluation of the seller. However, sellers can also manipulate those forums by uploading faked ratings or deleting negative ratings or feedbacks. Again, the customer needs to develop trust in these kinds of information.
Furthermore, customers do also need to develop trust in the IT infrastructure they are using, since this will be the mean of communicating the transactional data between the seller and the buyer. In other words, consumers not trusting the technology they are using for an intended transaction via the Internet will not participate in any e-Business transaction unless they feel confident with the security.
When considering security issues, a public key infrastructure (PKI) that can provide secure authentication on the Internet is an important step towards secure Internet transactions. It can help to build trust, reduce the potential for fraud, ensure privacy and provide merchants with non-repudiation (Böhle et al., 2000).
It is essential for the merchant that the customer can trust him, his connection and Website and the payment system used. Otherwise there will not be any transactions between the two parties.
Summarizing this section it can be said that information is the key to (nearly) everything. A higher level of information about the other transactional party will increase the level of trust, since uncertainty and ambiguity can be erased at least to a certain extent. Furthermore, it is essential to create awareness for technologies and tools needed for security improvements and the development of trust. These tools and technologies can involve ‘soft’ components like trust seals and customer feedback forums. The ‘harder’ components are embedded in the aspect of IT infrastructure. This includes improvements in the encryption and network and database security.
2.3. Electronic Payment Systems
Monetary transactions via the Internet do always involve risks and uncertainty. In most of the cases, there is no personal interaction involved.
That means that the customer has to put a considerable amount of trust in the seller’s promise to fulfil everything that has been agreed upon during the confirmation of the purchase (e.g. the delivery of the ordered products or services on time, in the right quality and that the agreed amount of money is charged) (Schultz, 2007; Chadwick, 2001).
According to Lammer (2006) ‘Electronic Payment Systems or e-Payment Systems may be defined as all payments that are initiated, processed and received electronically’.
The main concern with electronic payment systems is the level of security in each step of the transaction, because money and merchandise are transferred while there is no direct contact between the two sides involved in the transaction. If there is even the slightest possibility that the payment system may not be secure, trust and confidence in this system will begin to erode, destroying the infrastructure needed for electronic commerce (Yu et al., 2002).
The customer is concerned right from the point he is connected to the website of the seller. The risk of losing private information like contact details, credit card or bank account information is a primary concern of the customer. Therefore, it is necessary that both, the seller as well as the customer take care for the security of their own network as well as with the data exchanged during the transaction.
In Germany, there are currently up to ten different electronic payment methods used with varying frequency and success. The author will only refer to those payment systems which are applicable for intangible goods, such as holidays.
The definitions below are based on the work of Stroborn et al. (2004), who were arguing that one way to ‘classify different payment instruments is by the point of time when the liquidity effect sets in from the payer’s point of view that means the exact point in time when the customer’s account is charged with the payment’. ‘Following this premise, one can distinguish between “prepaid”, “pay-now” and “pay-later” systems’ (Stroborn et.al, 2004).
Other authors (Yu et al., 2002, Dannenberg & Ulrich, 2004) categorized payment systems with regard to the following variables. ‘The first variable is the ‘size or the amount of the payment’ (e.g. micro-payments). The second variable depends on the ‘type of transaction’, e.g. credit card, paying via e-mail (PayPal)’, etc. It can be argued which of these two different approaches in classifying e-payment systems is the most appropriate. However, the author decides to use the classification of Stroborn et al. (2004) for the reason that this type of classification can be best applied to the underlying topic of this work, due to the following facts.
The ability to differentiate e-Payment systems by the time, the liquidity effect sets in is important within the industry of tourism. Holiday components, especially cruises are oftentimes financed using prepayments of customers. Therefore, it is particularly important for cruise lines to know which of the offered payment systems allow them to use prepayments as financing means. On the other hand, customers do always want a certain level of security, especially when they purchase a holiday, which is certainly not an everyday expense with regard to the amount charged.
Therefore, equipping customers with the perceived power of determining the point of time when the actual payment will be processed will result in a beneficial feeling on the side of the customer. This equipment of perceived power is another way of demonstrating willingness to adapt to customer needs. Customers seem to have all under control, since they receive the product before they have to pay for it. So the seller has already delivered the agreed upon product or service.
2.3.1 Pre-Paid-payment systems
The different Pre-Paid-payment systems currently in use in Germany will not be further explained. Systems like GeldKarte, MicroMoney or WEB.Cent are being used to settle small-or micro-payments up to usually € 100. In this respect an application within the tourism industry is of no relevance. According to the DRV (Deutscher Reiseverband, 2008), the majority of holidays booked via the Internet was between € 500 -€ 1.500 (55, 1% of all holidays).
2.3.2 Pay-Now-payment systems
‘So called pay-now systems debit the account of the customer at the exact time the customer purchases something. Cash-on-Delivery (COD) and debit entry are well established examples today’ (Stroborn et al., 2004).
According to Monika E. Hartmann (Lammer, 2006) online transfer can be defined as follows:
These services are embedded in the online shopping process, e.g. via an automatic popup window connecting to the service provider and already containing all necessary transaction details. The customer is invited to choose a payment option and provide his account details. The completed transaction data set will be routed to the relevant payment service provider for authorization. After successful payment authorization the bank (or the payment service provider) confirms the payment to the merchant so that the purchase transaction can be completed (Lammer, 2006).
COD is usually used for the settlement of amounts for physical goods. Customers order their desired articles over the website of an online merchant. The goods are then delivered by a mail service. In addition to the price of the delivered goods, the customer pays also COD charges to the delivery service. The mail delivery service then mails a money order to the internet merchant.
Due to the simultaneous exchange of physical goods and money, COD is said to protect consumer and merchant at the same time. Nevertheless, it is considered not to be cost-effective and awkward for the consumer, who needs to be present for the delivery. Additionally, this payment method cannot be used for goods delivered electronically (Stroborn et al., 2004).
M-Payments (Mobile Payments)
M-Payment is such a service, where the mobile phone of the customer in combination with a PIN number deals as authentication device. Whenever the customer wants to purchase goods or transfer money, he or she is called by a third party, e.g. Paybox (www.paybox.net), on his or her mobile phone. He needs to confirm the transaction with a PIN. The sum of the transaction is then debited from the customer’s bank account (Stroborn et al., 2004).
According to a recent study conducted by the Verband Internet Reisevertrieb, v-i-r (2007), only two percent of all holiday purchases have been settled using mpayments. However, this payment method is expected to grow tremendously in the future. This is already indicated by the awareness level of m-payments. Although only two percent had used m-payments to settle their online purchases, more than 23% of all respondents are aware of the possibility of using mobile payments.
‘The process of a debit entry requires the receiver of the payment, the seller, to inform his banking institution to charge the account of the buyer with a certain amount. This amount is in turn booked on the account of the seller’ (www.wikipedia.org).
With over 150 million registered accounts worldwide (PayPal, 2009), PayPal is one of the most successful internet-based payment schemes.
Authentication is done via the personal e-mail address of the customer in addition to the entry of a password. The amount is then debited from the customer’s PayPal account. Customers using PayPal will benefit since they will no longer have to reveal their debit or credit card number. Furthermore, the whole transaction process is speeded up due to the fact that customers no longer need to enter their address details. PayPal also promotes its product as being more secure in comparison with other e-payment schemes.
2.3.3 Pay-Later-payment systems
‘In terms of pay-later-systems (e.g. credit cards), the customer actually receives the goods before being debited’ (Stroborn et al., 2004). However, this depends upon the point in time when the customers’ bank account is being debited. It is also possible, particularly within the area of tourism that the bank account is debited before the holiday is ‘consumed’. Within the tourism industry it is a common practice to book and purchase holidays long time in advance.
Especially in terms of family holidays, customers like to book in advance, since they do only have a small time frame (namely the school holidays) where they can go on holiday. So, holidays in these periods are strongly demanded. Thus there is an incentive for customers to book as early in advance as possible. In this case, the classification of Stroborn et al. (2004) is not valid anymore. The holiday is purchased long before it is consumed and thus the bank account will also be debited before the consumption.
‘Settling payments via the use of the credit card is the most commonly used payment method worldwide. Nearly 90 % of all items and goods purchased via the Internet are paid by credit card’ (Dannenberg & Ulrich, 2004). Stroborn et al. differentiate between three basic ways of credit card payments via the Internet:
- An unsecured transaction
- ‘A transaction via Secure Socket Layer (SSL), which is a sort of digital envelope. SSL is the de facto standard for secure online transactions, preventing eavesdroppers from learning customers’ account details’ (Ashrafi & Ng, 2009). The SSL technology establishes a secure communication channel between the participants of an online transaction.
- ‘a transaction employing Secure Electronic Transaction Protocol (SET), which is currently considered as the safest credit-card-based payment systems on the Internet’ (Stroborn et al., 2004).
Recapitulating this section again highlights the importance of awareness. According to Monika Hartmann (Lammer, 2006) ‘many payment solutions did not succeed in reaching a critical mass of users’. This can be seen in within the example of Mpayments. Payment methods may be very useful, however if they do not manage to reach a critical mass of users, they will not succeed in the market. So customers need to be enlightened about the different payment methods available and the advantages and disadvantages involved. In addition the aspect of trust reappears in this section. Customers need to trust the security of their Internet connection in the first place before they are conducting any business transactions.
3.1 Factors favouring the growth of e-Commerce in tourism
The introduction of the internet as well as the ability to pay for goods and services via electronic payment systems created potential advantages for customers as well as for tourism companies. ‘The marketing of an intangible product such as tourism largely depends upon visual presentation’ (Morgan et al., 2001). With the Internet, marketers finally found the perfect tool. The capability of combining the presentation of facts and figures, emotional pictures and the whole booking process is a huge asset for tourism companies. Buhalis (Morgan et al., 2001) stated that ‘organizations and destinations which need to compete will be forced to compute’. Thereby, he assigns companies participating in e-Commerce a significant competitive advantage.
According to a recent study of the VIR (Verband Internet Reisevertrieb, 2007) customers value the easy and fast way of booking trips via the internet. Furthermore, they appreciate the possibility to customize their trips, to see if their desired holiday is still available and the extensive range of offerings. The possibility to pay per credit card and the savings in terms of time they need to invest are also big advantages for German customers booking their trips and holidays via the Internet.
Cheyne et al. (2006) suggested that ‘the Internet is providing the means for suppliers and consumers to bypass the travel agent and interact directly’. Furthermore, many writers propose that ‘the Internet furnishes travel consumers with more information, quicker responses and often lower prices than they can achieve when making travel arrangements through a traditional travel agent’ (Cheyne et al., 2006).
Tania Lang, a senior consultant at Cap Gemini Ernst & Young, stated in her work in 2000 that ‘there are a variety of factors providing advantages and benefits for the users of the Internet’. Amongst those factors is the access for availability enquiries and bookings when consumers want to research and purchase travel. Customers are no longer restricted to the opening times of their local travel agency.
According to Buhalis (Lang, 2000), ‘the ability to access information which is detailed and up to date assists the travel consumer by making the product more tangible in their mind’. Another important advantage of e-Commerce in tourism is the bypass of travel agent fees and the access to online discounts. Lang (2000) stated that there is a ‘cost advantage in purchasing travel online as a result of the market becoming more competitive. These cost advantages can also be explained by decreasing distribution costs’.
Concluding this section it can be suggested that customers will benefit tremendously from e-Commerce in the tourism industry. They will be faced with lower prices, since no intermediaries are involved any more so that potential cost savings can be achieved. In addition to this, the authors cited above implied that the visual representation of holidays will improve due the recent and upcoming developments in technology. According to this, there should not be any disadvantages for customers and conducting bookings via the Internet are the best solution for the future.
However customers will also have to sacrifice in certain aspects as well as they will have to experience that bookings holidays via the Internet might not be that advantageous as the following section will point out.
3.2 Factors for the hesitant growth of e-Commerce in tourism
In 2009, Prashant Palvia argues that ‘the Internet is far from achieving its potential due to the reluctance of consumers to engage in its use’. Palvia (2009) stresses this assumption by a recent study, indicating that sales of online retailers were only 2, 2% of total goods sold in the U.S. in 2005. Moreover, analysts have predicted that even by 2011, e-Commerce sales would only account for only 7%. According to Tania Lang (2000), there are certain barriers or disadvantages of the Internet and the World Wide Web (WWW) for consumers.
Amongst those factors, the ‘lacks of a human interface and of confidence in the technology as well as security issues have a high relevance’. There are a lot of situations, where a customer has built a strong relationship to his travel agent. For some travellers, the actual booking process (whether via a travel agency or the Internet) is already part of the holiday itself. The booking process might even be some kind of ritual which is carried out in exactly the same manner every time the customer goes on holiday. Those loyalty or relational factors are hard to be erased or replaced by the Internet which is in fact a major threat to electronic commerce in the tourism industry.
A number of authors maintain that ‘travel agents provide better services, especially when more complex products are to be purchased’ (Cheyne et al., 2006). ‘Those complex travel arrangements are more information intensive and therefore needs consultation of travel agents compared to less complex holiday components such as flights or rail tickets’. Other authors, including Inkpen, Lyle and Paulson (Cheyne et al., 2006) argue that ‘travel agents can offer a more personalized service and provide unbiased advices that add value for the customer’. Concerning the latter assumption one can argue that this is true for inexperienced or first-time users.
Customers, who are familiar with the Internet and know where to find the information they are looking for, will not need the advice of the travel agent no more. First of all, the travel agent might provide them with information they already know or find by themselves. Secondly, travel agents are biased too, regarding the amount of commissions they receive for the sale of products. Another case where customers do not need the advice of the travel agent are repeated holidays, meaning customers who always travel to the same hotel. Those customers will not benefit from a travel agent’s consultancy. Summarizing this, one can say that ‘the service offered by travel agents is value adding for customers, who are inexperienced with the process of online booking and for customers who want to travel to a variety of different destinations’ (comparing Cheyne et al., 2006).
The lack of confidence in the technology as well as the mistrust in security are the two other major disadvantages of the Internet that Tania Lang has determined. She points out that the ‘main barrier stopping consumers from booking travel via the Internet is the perceived lack of a secure payment method’ (Lang, 2000). ‘The main concern with electronic payment is the level of security in each step of the transaction, because money and merchandise are transferred while there is no direct contact between the two sides involved in the transaction’ (Yu et al., 2002).
‘If there is even the slightest possibility that the payment system may not be secure, trust and confidence in this system will begin to erode, destroying the infrastructure needed for electronic commerce’ (Yu et al., 2002). Putting this in other words, tourism companies may have the perfect product in terms of price quality ratio. However, the company will not be able to sell its products to a greater mass if their payment system is lacking security. This will not only erode trust in the payment system itself, but may also affect the customers’ acceptance of the company, thus affecting the company’s reputation, image and profits.
In 1998, Haas surveyed that even though ‘many Internet users go online to find product information, most users prefer to log off and buy their goods through traditional sales channels’. Of course, this trend has increasingly changed over the last years; however, still today customers inform themselves over the Internet without performing t
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