“Scalability”: the paradox of human resources in e‐commerce

This paper develops a framework exploring the question, “How does service affect the economics of e‐commerce?” Development of the framework requires an understanding of the different forms service takes in e‐commerce. These are described as “virtual” (either pure information or automated) and “physical” (requiring some degree of human intervention). The framework suggests that because the nature and quantity of physical service necessary to deliver value to customers influences the quantity of human intervention required, it also influences a firm’s ratio of variable to fixed costs, which alters its “scalability”. The paradox comes in that while reduced scalability is viewed negatively by many venture capitalists and proponents of e‐commerce, the cause of that reduction in scalability, human intervention, may help a firm to differentiate its offering to customers, thus providing a source of competitive advantage.