Chapter 5 Business Models for Ecommerce 1 Ecommerce

Chapter 5 Business Models for Ecommerce 1

E-commerce Business Models—Definitions v Business model § Set of planned activities designed to result in a profit in a marketplace v Business plan § Document that Describes a firm’s business model v E-commerce business model § Uses/leverages unique qualities of Internet and Web 2

Key Ingredients of a Business Model 3

Value Proposition v Defines how a company’s product or service fulfills the needs of customers v Questions to ask: § Why will customers choose to do business with your firm instead of another? § What will your firm provide that others do not or cannot? v Examples of successful value propositions: § Personalization/customization § Reduction of product search, price discovery costs § Facilitation of transactions by managing product delivery 4

Example of Value propositions • "You get fresh, hot pizza delivered to your door in 30 minutes or less -- or it's free. “ “You package absolutely, positively has to get there overnight” “The milk chocolate melts in your mouth, not in your hand” “It helps building strong bones 12 ways” 5

Revenue Model v Describes how the firm will earn revenue, generate profits, and produce a superior return on invested capital v Major types: § Advertising revenue model § Subscription revenue model § Transaction fee revenue model § Sales revenue model § Affiliate revenue model 6

Advertising Revenue Model v Web site that offers content, services and/or products also provides a forum for advertisements and receives fees from advertisers v Web sites that are able to attract the greatest viewership are able to charge higher advertising rates. v Example: Yahoo. com, 7

Subscription Revenue Model v Web site that offers users content or services charges a subscription fee for access to some or all of its offerings v Examples: v. Consumer Reports Online 8

Transaction Fee Revenue Model v Company that receives a fee for enabling or executing a transaction v Examples: § e. Bay. com § E-Trade. com 9

Sales Revenue Model v Company derives revenue by selling goods, information, or services to customers v Examples: v. Amazon. com v. LLBean. com v. Gap. com 10

Amazon Uses a Sales Revenue Model 11

Affiliate Revenue Model v Sites that steer business to an “affiliate” receive a referral fee or percentage of the revenue from any resulting sales v Example: § My. Points. com § Cobon. com § Foodonclick. com 12

Market Opportunity v Refers to a company’s intended marketspace and overall potential financial opportunities available to the firm in that marketspace v. Marketspace v. Area of actual or potential commercial value in which company intends to operate v. Realistic market opportunity v. Defined by revenue potential in each of market niches in which company hopes to compete 14

Marketspace and Market Opportunity in the Software Training Market 15

Competitive Environment v Refers to the other companies selling similar products and operating in the same marketspace v Influenced by: § § Number of active competitors Each competitor’s market share Competitors’ profitability Competitors’ pricing v Includes both direct competitors and indirect competitors 16

Competitive Environment (cont’d) v Direct competitors – companies that sell products or services that are very similar and into the same market segment § Example: Priceline. com and Travelocity. com v Indirect competitors – companies that may be in different industries but that still compete indirectly because their products can substitute for one another § Example: automobile manufacturers and airline company 17

Competitive Advantage v Achieved when a firm can produce a superior product and/or bring product to market at a lower price than most, or all, of competitors. v Firms achieve competitive advantage when they are able to obtain differential access to the factors of production that are denied to competitors v Asymmetry – when one participant in a market has more resources than others. Ex: i. Tunes 18

Competitive Advantage v Types of competitive advantage include: v. First mover advantage—results from a firm being first into a marketplace. Ex: Amazon v. Unfair competitive advantage—occurs when one firm develops an advantage based on a factor that other firms cannot purchase. Ex: brand name can not be purchased v. Leverage occurs when a company use its completive advantage to achieve more advantage in another market. Ex: Amazon move to online grocery business leverage the huge DB and years of e-commerce experience. 19

Market Strategy v Plan that details how a company intends to enter a new market and attract customers v Best business concepts will fail if not properly marketed to potential customers v Ex: Twitter, You. Tube have social network marketing strategy that encourages users to post their content on the sites for free. In this case the customer is the marketing staff! 20

Organizational Development v Plan that describes how the company will organize the work that needs to be accomplished § Work is typically divided into functional departments § Hiring moves from generalists to specialists as company grows § Ex: How e. Bay start. 21

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Management Team v Employees of the company responsible for making the business model work v Strong management team gives instant credibility to outside investors v Strong management team may not be able to salvage a weak business model, but should be able to change the model and redefine the business as it becomes necessary 23

Categorizing E-commerce Business Models: Some Difficulties v No one correct way v We categorize business models according to e-commerce sector (B 2 C, B 2 B, C 2 C) v Type of e-commerce technology used can also affect classification of a business model vi. e. , m-commerce v Some companies use multiple business models ve. Bay 24

B 2 C Business Models v Portal v E-tailer v Content Provider v Transaction Broker v Market Creator v Service Provider v Community Provider 25

B 2 C Business Models: Portal v Offers powerful search tools plus an integrated package of content and services v Typically utilizes a combined subscription/advertising revenues/transaction / referral fee model v Today, seen as “destination” site rather than gateway v May be general (horizontal) or specialized (vertical called vortals) v Ex: Yahoo, MSN, AOL offer powerful search tools as well as services such as news, email, instant messaging, calendars, shopping, music downloads, video streaming and more. 26

B 2 C Business Models: E-tailer v Online version of traditional retailer v Types include: v. Virtual merchants (online retail store only Ex: Amazon) v. Clicks and bricks (online distribution channel for a company that also has physical stores Ex: Wal-Mart) v. Catalog merchants (online version of direct mail catalog) v. Manufacturer-direct (manufacturer selling directly over the Web Ex: Dell) v Low barriers to entry v Becoming profitable and surviving is very difficult for e-tailers with no prior brand name or experience 27

B 2 C Business Models: Content Provider v Distribute digital content: information and entertainment, over the Web v Typical revenue models: v. Subscription v. Pay for download v. Advertising v Variations: v. Syndication: is a variation of standard content provider model v. Web aggregators v Ex: shopping. com collect information on the prices of thousands of goods online, analyze the information, then presntn users with tables showing price and 28 web location. It add value and resell this value to advertisers.

B 2 C Business Models: Transaction Broker v Processes online transactions for consumers v Primary value proposition—saving time and money v Typical revenue model—transaction fee v Largest industries using this model: § Financial services § Travel services § Job placement services 29

B 2 C Business Models: Market Creator v Uses Internet technology to create markets that bring buyers and sellers together v Examples: v. Priceline ve. Bay v Typically uses a transaction fee revenue model v e. Bay is one of the few websites that has been profitable virtually since beginning. Why? 30

B 2 C Business Models: Service Provider v Offers services online § e. g. Google: Google Maps, Google Docs, etc. v Value proposition § Valuable, convenient, time-saving, low-cost alternatives to traditional service providers v Revenue models § Subscription fees § One-time payment § Advertising § Collecting personal information that is useful in direct marketing Mixing service with products is powerful business strategy. 31

B 2 C Business Models: Community Provider v Creates online environment (social network) where people with similar interests can transact and communicate. v Typical revenue model: Hybrid § Including advertising fees, subscription fees, sales revenues, transaction fees, affiliate fees v Examples: § § My. Space Facebook i. Village Babystyle present links to Huggies. com and get commission on every sale 32

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B 2 B Business Models v E-distributor v E-procurement Companies v Exchanges v Industry Consortia v Private Industrial Networks 34

B 2 B Business Models: E-distributor v Supplies products and services directly to individual businesses. v Owned by one company seeking to serve many customers v Example: Grainger. com 35

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B 2 B Business Models: E-procurement v Creates and sells access to digital electronic markets § Includes B 2 B service providers, application service providers (ASPs) v Revenue models: § Transaction fees, usage fees, annual licensing fees v Example: Ariba § Software that helps firms organize procurement process v Scale economy 37

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B 2 B Business Models: Exchanges v Electronic digital marketplace where suppliers and commercial purchasers can conduct transactions v Usually owned by independent firms whose business is making a market v Revenue model: Transaction fees v Usually serve a single vertical industry v Number of exchanges has fallen dramatically v Example : Onvia 39

B 2 B Business Models: Industry Consortia v Industry-owned vertical marketplaces that serve specific industries (e. g. automobile, chemical, floral, logging) v. Supply smaller number of companies with product and services relevant to industry v. Sponsored by powerful industry players v. Strengthen traditional purchasing behavior v Exostar: Online trading exchange for aerospace and defense industry 40

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B 2 B Business Models: Private Industrial Networks v Digital networks designed to coordinate the flow of communications among firms engaged in business together v Single firm network: Most common form v. Wal-Mart v Industry-wide networks: Often evolve out of industry associations v. Agentrics 42

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Business Models in Emerging E-commerce Areas v Consumer-to-Consumer (C 2 C) § e. Bay, Half. com v Peer-to-Peer (P 2 P) § Kazaa, Cloudmark v M-commerce: § E-commerce models using wireless technologies § Pay. Pal Mobile Checkout, AOL Movie. Fone § Technology platform continues to evolve 44

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E-commerce Enablers: The Gold Rush Model v Internet infrastructure companies: Companies whose business model is focused on providing infrastructure necessary for e-commerce companies to exist, grow, and prosper v Internet infrastructure companies have profited the most, providing: § § Hardware, software, networking, security E-commerce software systems, payment systems, Databases Hosting services, etc. 46

How the Internet and the Web Change Business: Strategy, Structure, and Process v Important to understand how Internet and Web have changed business environment, including industry structures, business strategies, and industry and firm operations 47

Industry Structure v E-commerce changes the nature of players in an industry and their relative bargaining power by changing: vthe basis of competition among competitors vthe barriers to entry vthe threat of new substitute products vthe strength of suppliers vthe bargaining power of buyers 48

How the Internet Influences Industry Structure 49

Industry Value Chains v Set of activities performed in an industry by suppliers, manufacturers, transporters, distributors, and retailers that transform raw inputs into final products and services v Internet reduces cost of information and other transactional costs for manufacturers, distributors, customers v Leads to greater operational efficiencies, lowering prices, adding value for customers 50

E-commerce and Industry Value Chains 51

Firm Value Chains v Set of activities that a firm engages in to create final products from raw inputs v Internet effect: § Increases operational efficiency § Enables product differentiation 52

E-commerce and Firm Value Chains 53

Firm Value Webs v Networked business ecosystem that uses Internet technology to coordinate the value chains of business partners within an industry, or within a group of firms v Coordinates a firm’s suppliers with its own production needs using an Internet-based supply chain management system 54

Internet-Enabled Value Web 55

Business Strategy v Set of plans for achieving superior long-term returns on the capital invested in a business firm (i. e. , a plan for making a profit in a competitive environment) v Four generic strategies v. Differentiation v. Cost v. Scope v. Focus 56