Ecommerce Platforms In the UK

How does the landscape look like?

The e-commerce market is expected to grow considerably in the United Kingdom during the following years. While 21.8% of all retail transactions in the country were made online during 2019, the Coronavirus Pandemic galvanized the adoption of digital sale channels in such a way that by 2025 experts expect that 2 out of every 5 retail sales in the country will be carried out through the internet (fisher, 2021). For an economy that in 2021 had a 99% percent access to such communication mechanism (ecommerce, europe2021) and a GDP of £2.7 trillion (world, bank2021), those are figures that should in no way be disregarded. It is not unreasonable to say that in the UK, selling online is steadily becoming the regular way of doing business.

Perhaps, our first reaction at hearing the word "e-commerce" is to think about long-established players like Amazon or ebay. This is nothing to be surprised about as the former had a 30% market share over the UK online retail market during 2021 and the latter got the second position with a 10% participation (ecommercenews, 2022). Notwithstanding this impressive figures, the internet has still room for emergent participants who want to directly reach customers through their own brands, logistics and management procedures. And there is precisely where the Ecommerce Software Platform development companies enter the scene, offering extended autonomy to small competitors by providing a more decentralized online system.

Which are the options?

When it comes to selling online, companies face 3 options: they might build such capability in-house or through a contractor, trade their products through consumer facing marketplaces such as those from Amazon or Facebook, or make use of a standardized software solution to take over the technical details without intervening significantly on the sales management process. A custom solution provides the greatest flexibility at the expense of a higher cost, while using a third-party marketplace reduces the onboarding investment but also brand exposure and experience differentiation (e.g. 78% of Amazon searches are brandless (kaziukenas, 2019)). As a midpoint, an e-commerce software platform might require a greater effort to get started than using a generalist online retailer, in both time and money, but it facilitates the creation of a closer relationship between a business and its customers. These different ways of operating online are substitutive among each other, but not entirely, as together with brick and mortar shops they are mixed up in different proportions to meet a company's needs and strategy.

What is the demand behaviour?

According to the UK's Department for Business, Energy & Industrial Strategy, the country closed the year with 5.6 million private sector businesses of which 99.2% were small (i.e. had less than 50 employees) and which in the private sector contributed 36% of the yearly turnover (govuk, 2021)[^1]. For the firms developing e-commerce software, this segment of the UK businesses population is their main target, as those companies are the ones that might benefit the most from a prefabricated solution to efficiently step up their digital transformation.

[^1]: Large businesses (i.e. > 250 employees) where the main turnover contributors in the UK in 2021.

Contribution of UK Businesses by Size - 2021

For the majority of the small businesses, which in average generate a yearly turnover of £1,757,860, technology costs might be decisive when it comes to choose an external solution. If we consider that European businesses in general invest approximately 5% of their revenue in information technology (computer, 2019), that from that budget 40% is used in managed and cloud services (spiceworks, 2021), and that from that they allocate about 10% in web hosting (spiceworks, 2021b), we might build up an estimated curve of demand in which the y axis represents the price that small businesses would be willing to pay (WTP) for a monthly subscription to use an e-commerce platform software.

Using midpoint method (openstax, 2016) to compute the elasticity at every segment of our demand curve, we arrive to the results displayed in the table below. If our budget assumptions were correct, for the e-commerce software demand we would obtain an approximately unitary elasticity (As reported by (anderson, etal_1997) for most consumer goods). Again, this is based in publicly reported IT budget allocation metrics, and on the yearly revenue and number of small businesses that currently operate in the UK.

$$ Quantity Change = (Q2 - Q1) / ((Q2 + Q1) / 2) $$

$$ Price Change = (P2 - P1) / ((P2 + P1) / 2) $$

$$ Demand Elasticity = Quantity Change / Price Change $$

Q1	P1	Q2	P2	Quantity Change	Price Change	Demand Elasticity
73670	£907	210550	£303	96%	-100%	0.96
210550	£303	473410	£166	77%	-59%	1.31
473410	£166	1238365	£76	89%	-74%	1.21
1238365	£76	5547625	£13	127%	-143%	0.89

How does a supplier's cost structure look like?

Perhaps the most renowned firm in the e-commerce platform industry is Shopify. This Canadian company established in 2004 has experienced a substantial growth in recent years, especially after the Covid-19 pushed many retailers to the cloud. From the income statements of the company between 2006 and 2022, we might observe an average gross margin of 55%. Nevertheless, for its pure e-commerce platform business (i.e. subscription solutions) the company showcases a massive 79% average gross margin, which is almost identical to the reported 80% margin of most Software as a Service (SaaS) companies (saas, capital_2022). The costs here incurred are those related with the provisioning, maintenance and support over the hosting infrastructure provided by its service.

Shopify Revenue — Shopify's Revenue and Operating Income. 2016 - 2020

Shopify Gross — Shopify's Gross Margins. 2016 - 2020

In terms of operating expenses, the company doesn't report any kind of depreciations as it doesn't hold significant fixed assets (which is expected from a software company), and steadily invests an average of 39% of its revenue in SGA (especially in marketing) and 35% in Research & Development, to implement additional features on its platform and protect its merchants' retention and acquisition rates. Such financial metrics reveal that a typical firm competing in the ecommerce platform industry would benefit from the economies of scale associated with digital technologies (e.g. the infrastructure costs of serving one customer or a thousand of them might be identical), but will still spend a significant part of its budget in creating awareness about its products and developing improved functionality for its customers, especially considering that the environment keeps on evolving and increasing in complexity.

Shopify Expenses — Shopify's Operating Expenses. 2016 - 2020

How competitive is the market?

In the UK, 82% of the ecommerce platform market is shared by 5 companies: Woocommerce, Shopify, Wix, Ecwid and Squarespace. However, neither of them holds a complete dominant position and their percentage range of participation goes from 9% to 26% (statista, 2021).

If we compute the Herfindahl-Hirschman Index (HHI) (eurostat, 2021) over the previously reported levels of participation, we get a total score of 1536. This value, according to the U.S. Department of Justice (cfi, 2020b), indicates that the market presents moderate concentration. In fact there are literally more than a hundred different options that UK businesses can choose from when it comes to pick their desired e-commerce software (ep, 2021).

$$ HHI = s1^2 + s2^2 + s3^2 + …sn^2 $$

Notwithstanding the plethora of alternatives to chose from, every software solution in the market possesses distinctive characteristics that might make it more appealing to certain types of audiences. Shopify has been in business for almost 20 years and has grown to become an innovative and reliable multi-billion company aided by strong capital investitures. Woocommerce is an open source plugin that rests on the shoulders of Wordpress, the content management system with which an astonishing 43.3% of all the websites in the world have been created (w3techs, 2022). Ecwid is a UK based company that doesn't offer any themes or website customization facilities, like most competitors do, but instead relies in social assets marketplaces like Facebook or TikTok to drive its merchants' businesses. Hence, competing in this highly diverse ecosystem not only requires being able to scale in output, but also the capacity to adapt to the dynamic market needs.

What kind of market failures can be found?

Perhaps the most significant market failure that shows up in the e-commerce platform industry is the asymmetry of information that merchants face at choosing the solution they think is best for them. While suppliers might gather tons of behavioural data from their clients through several tracking mechanisms (e.g. browsing cookies, usage metrics, transactions statistics), service consumers know little about the quality of the solution (e.g. coding error rates), its reliability (e.g. scaling capability) and the way their information is being used (e.g. privacy enforcement controls). This is caused in part due to a supply side deficiency at communicating different service offerings, but also to the limited technical knowledge of those potential buyers (stantchev, 2012).

This asymmetry of information might generate disproportionate transaction costs on the merchants' side, by biasing them into paying for features they don't actually need or that in fact compromise their ability to stay in business and to efficiently serve their own customer bases (e.g. additional fees might be unwillingly imposed on their end users). What could then be done to tackle this issue? (hole, 2019) outlines five system actions to ease out the societal impact caused by what he calls Siren Servers, which seductively lure mariners into shipwreck through the monetization of vast amounts of information to achieve a winner-takes-all position. These actions are, namely: to ensure openness, avoid lock-in, pay for user information, provide multiple solutions with similar services, and to combine minds and machines. From all of them, being open with how collected data is being used is perhaps the most crucial property to succeed in the long run for the e-commerce platform industry, as it tries to differentiate from the marketplaces of behemoths like Facebook or Amazon, which try to make the most profit out of its massive data repositories disregarding the impact their actions might have upon their publishing partners.

Planning the strategy

How could a new entrant compete in this industry?

If a new firm were trying to join the Ecommerce Platform Industry, which actions should it perform to thrive in such a complex environment? Well, the first of them, of course, would be to design a sound business strategy. That means that we should consider the external forces that govern the market in which the firm will operate, and then analyze the internal capabilities it should develop to get itself a competitive advantage where to start to grow from. Citing the words of professor Timothy Galpin: "The best strategy is that which can be implemented". Thus, we will make use of well known frameworks to conduct our analysis, but will slightly adapt them to facilitate their communication (e.g. by making use of mnemonics) and to standardize their structure. To start with our external analysis we will make use of Porter's 5 Forces (porter, 2008), rearranging its constituents over the CAB acronym: Competitors (and new entrants), Alternatives (i.e. substitutes) and Bargaining Power (of customers and suppliers).

Market Pricing — Ecommerce Platforms Pricing - 2021

As previously stated in this document, the Ecommerce Platform competition landscape is a very dynamic and diverse one, both in terms of participants and offering range. However, from the pricing figure we can see that the main participants of the industry display similar subscription fees for each of their service tiers, the exception being Shopify which in its Business and Advanced plans diverts considerably from the pack. Looking at the features list promoted in each competitor's website, it is noticeable that despite the homogeneous pricing structure (which is always subscription based), each tier presents distinct features across its peers, especially as the price goes up. Shopify's Advanced plan offers a Duties and import taxes estimation feature for international commerce, while the Ecwid's one includes 12 hours of custom development. It shows that every competitor tries to specialize in a particular merchant type by balancing its array of generic and niche features.

To sell online, merchants have public marketplaces (e.g. Amazon, eBay) and social media channels (e.g. Facebook, TikTok) as practical entry level alternatives to hold their own websites. This confers them of great bargaining power to demand low prices for generic solutions which main benefit is exposing the merchants' own brands (i.e. lower tiers). In the other hand, the e-commerce firms own suppliers, like those providing payment gateway services or delivery solutions, increase their bargaining power the higher the subscription plan goes. The reason of this behaviour rests in the fact that as the complexity of the offered service increases, the Ecommerce platform provider has to resort to additional, and more limited, specialized providers. For its part, the bargaining power of the Ecommerce platform firm is proportional to the amount of information it can gather both from its customers (e.g. working capital needs) and its providers (e.g. which solutions are the most demanded by end consumers).

To broaden our view of the external environment and get a better picture of the opportunities and threats that might show up before the Ecommerce Platform Industry, we will use the PESTEL framework (aguilar, 1967) and Scenario Planning (ramirez, 2017). Due to the technical characteristics of the industry under study, we will focus specifically in the Technology-Economic-Legal (TEL) developments that could affect the industry in the years to come. Begining with the technology factors we could expect a higher use of automation through the use of artificial intelligence and robotics, as populations age in advanced economies and the demand for flexible working arrangements rises up (dempsey, 2021). Thus, the need for ecommerce platforms to adapt their input mechanisms to not only be used by humans, but also by machines might speed up considerably (i.e. Internet of Things - IoT). Fintech is another sector that will grow fast, especially in Europe, where the need for integrated payment systems across countries and currencies has increased by the hand of online commerce (venkat, 2022). More payment options means increased negotiation power for Ecommerce Platform firms, but also higher integration complexity.

The UK economy is expected to recover progressively as the government removes the limitations imposed during the Covid19 sanitary emergency. This supposes a back-to-physical way of doing business and with that a possible decline in ecommerce usage (still, some claim that online shopping has been permanently boosted) (bradshaw, 2021). Another interesting economic trend, perhaps exacerbated by the exposed fragility of global supply chains during the pandemic, is that of the Direct to Consumer (D2C) commerce which has been embraced especially by Millenials (wood, 2020). In D2C, producers sell directly to their customers, jumping over the intervention of intermediary retailers. Ecommerce platforms that appeal to this new merchant sector might gain an important advantage in the overall manufacturing landscape which in the UK employs 2.6million people and is expected to reborn in the years to come (mayger, 2018). Likewise, the legal arena is expected to evolve after the somewhat uncontrolled expansion of ecommerce caused by the quarantine mandates. Increased privacy protection mechanisms will be required by the regulators, so as the need to implement stronger merchant identification procedures to prevent online fraud and illegal content (govuk, 2022).

The final step of our analysis uses an Strategy Canvas (chan, 2005) to identify the strengths and weaknesses of the competition across several product features and service capabilities. Evaluation elements like the service price, its scalability or its functional scope (e.g. accounting or inventory management) are contrasted against the main participants of the Ecommerce Platform Industry to locate improvement opportunity spots. By aligning such areas with the overall external dynamics and trends, it is possible to fit an ideal curve for our entrant company. From the canvas we find out that none of the incumbents is specially strong in inventory, production and service management functions, which might be very attractive for companies in the manufacturing, consultancy and professional services sectors. They also misperform in their security, automation and reporting capabilities, which as we have discovered, medium-term will be increasingly important.

Incumbents could try to replicate the profile we have created for our entrant in the Strategy Canvas, especially if they have abundant resources like Shopify or Wix do. However, that could end up in alienating the value proposition they are currently sharing with their existing customer base, compromising the revenue stream that propelled them. Thus, making such a bold move just to impede the entrance of a new player could prove to carry over more disadvantages than benefits. The new entrant, for its part, would specialize in targeting a nascent sector, made up of merchants that not only want a platform for selling their products and services, but also an integrated system that supports them at making them.

What are the key resources for success?

Through the use of the VRIO framework (barney, 1995) (or VRO as in Very-Rare-Object) we define the core competencies or resources that the new entrant should build up to get itself a place in the industry and begin from there its journey for growth. To standout as the best ecommerce platform for "makers", the company should create a product that excel at managing operations, exerts enhanced security and provides extended analytical capabilities. This items would be the cornerstone of its strategy and, in general, they are valuable because they guarantee a differentiated position where to compete from, they are rare and inimitable because it is very expensive to implement such functionality at later development stages, and they are organizational as the team requires particular skills to produce them and the overall company's culture should resonate around them.

VRO — New Ecommerce Platform - Valuable, Rare and Organizational Resources

Which are the most challenging non-market attributes?

While antitrust laws might be one of the most pressing issues for the big players in the ecommerce landscape like Amazon or Facebook, perhaps the most pressing issue that SaaS ecommerce platforms have to tackle is that of protecting the data and ensuring the online safety of their users. Doing so is specially challenging due to the decentralized nature of the ecommerce platform industry and to the fact that its competing firms lack the resources to invest in complete monitoring departments and moderation technologies.

Ecommerce Platforms - Non-Market Strategy

Based on the IA3 (bach, 2010) framework, a Problem-Actors-Leverage (PAL) [^2] analysis can be carried out to identify which are the main stakeholders involved in determining how the issue at hand is treated in the UK. Establishing a good relationship with them can be a definitive factor in the success of both incumbents and new entrants. For instance, Shopify has had to endure a tedious process at handling serious accusations about the sale of fraudulent merchandise through tens of thousands of its sites (lee, 2020). Thus it is of utmost importance to have a clear strategy to manage these kind of situations and knowing who to approach when they materialize, especially as the market grows and becomes more complex.

As it can be seen in the Nonmarket figure, the main actors to be considered to approach the concerning issue are the UK Government, the assets and the internet regulation agencies like Ofcom (UK's communication regulator) and the European Ecommerce Directive (EED). Despite good public relationships should be maintained with all of the aforementioned parties, a higher emphasis should be given to the one held with the latter: the regulator authorities. These have the greatest leverage in the system as they are the ones in charge of determining the minimum level of due diligence that must be implemented by all the firms competing in the industry. Before Brexit, the EED held a rather soft view on the responsibility that digital platforms possessed over the data they collected from and shared with their users, maintaining that "…online intermediaries are not liable for illegal content found on their services unless they have specific knowledge of it". (ukparliament, 2019) This is understandable if we consider that such policy was enacted more than 20 year ago, when internet interactions were much simpler than what they are today.

But through Ofcom guidance, the UK government now plans on making the country a world leader in online safety technology, and that is why such regulator is landing additional policies to monitor and control content involving things like child abuse (including bullying), disinformation (e.g. anti-vaccine campaigns) or terrorist propaganda (govuk, 2020). The use of artificial intelligence, shared training datasets, and closer support to SMEs is being considered in the new legal framework to aid their enforcement without hindering innovation in the sector. Thus, it could be expected that those firms that manage to establish a direct communication channel with Ofcom and other regulatory bodies, will have a head start at positioning themselves as the blessed secure platforms on which to carry out ecommerce transactions in the UK.

Conclusion

The Ecommerce Platform Industry has a very influential role in the overall online selling environment, as it provides small businesses with a midpoint solution between building an expensive system to commercialize their products through the internet and opting for a generic marketplace from the big players where their brands get difuminated. In the UK, there currently exists a moderate concentration of the Ecommerce Platform market, but there still plenty of opportunity for new to entrants to thrive. To do that, however, they will have to examine closely the external environment trends, especially those related to technology developments, economic recovery and legal reform. They will then have to build a sound business strategy, by taking advantage over the weak spots of the competition and by building core capabilities that match their customers' dynamic requirements.