Part 1: e-Commerce Digital Markets Digital Goods Dr. Anita Kealy

Learning objectives the unique features of e-commerce, digital markets, and digital goods E-commerce business models principal e-commerce business and revenue models How has e-commerce transformed marketing? Business-to-consumer, business-to-business How e-commerce changed business

Unique Feature of e-Commerce Digital Markets and Digital Goods E-commerce: Use of the Internet and Web to transact business. Began in 1995 and grew exponentially; still stable even in a recession. Companies that survived the dot-com bubble now thrive. The new e-commerce: social, mobile, local

Unique Feature of e-Commerce Digital Markets and Digital Goods Eight unique features of Internet and Web as commercial medium Ubiquity Global reach Universal standards Richness Interactivity Information density Personalization/customization Social technology

Unique Feature of e-Commerce Digital Markets and Digital Goods Ubiquity Internet/Web technology available everywhere: work, home, and so on, anytime Effect: Marketplace removed from temporal, geographic locations to become “marketspace” Enhanced customer convenience and reduced shopping costs Reduces transaction costs Costs of participating in market

Unique Feature of e-Commerce Digital Markets and Digital Goods Global reach The technology reaches across national boundaries, around Earth Effect: Commerce enabled across cultural and national boundaries seamlessly and without modification. Marketspace includes, potentially, billions of consumers and millions of businesses worldwide.

Unique Feature of e-Commerce Digital Markets and Digital Goods Universal standards One set of technology standards: Internet standards Effect: Disparate computer systems easily communicate with one another Lower market entry costs—costs merchants must pay to bring goods to market Lower consumers’ search costs—effort required to find suitable products

Unique Feature of e-Commerce Digital Markets and Digital Goods Richness Supports video, audio, and text messages Effect: Possible to deliver rich messages with text, audio, and video simultaneously to large numbers of people. Video, audio, and text marketing messages can be integrated into single marketing message and consumer experience.

Unique Feature of e-Commerce Digital Markets and Digital Goods Interactivity The technology works through interaction with the user. Effect: Consumers engaged in dialog that dynamically adjusts experience to the individual. Consumer becomes co-participant in process of delivering goods to market.

Unique Feature of e-Commerce Digital Markets and Digital Goods Information density Large increases in information density—the total amount and quality of information available to all market participants Effect: Greater price transparency Greater cost transparency Enables merchants to engage in price discrimination

Unique Feature of e-Commerce Digital Markets and Digital Goods Personalization/Customization Technology permits modification of messages, goods Effect: Personalized messages can be sent to individuals as well as groups. Products and services can be customized to individual preferences.

Unique Feature of e-Commerce Digital Markets and Digital Goods Social technology The technology promotes user content generation and social networking Effect: New Internet social and business models enable user content creation and distribution, support social networks Many-to-many model

Unique Feature of e-Commerce Digital Markets and Digital Goods Effect of the Internet on the marketplace: Reduces information asymmetry Offers greater flexibility and efficiency because of: Reduced search costs and transaction costs Lower menu costs Greater price discrimination Dynamic pricing May reduce or increase switching costs May delay gratification: effects dependent on product Increased market segmentation Stronger network effects More disintermediation

Benefits for the Consumer

Benefits for the Consumer Digital goods Goods that can be delivered over a digital network For example: music tracks, video, software, newspapers, books Cost of producing first unit is almost entire cost of product Costs of delivery over the Internet very low Marketing costs remain the same; pricing highly variable Industries with digital goods are undergoing revolutionary changes (publishers, record labels, etc.)

E-commerce Business Models Set of planned activities designed to result in a profit in a marketplace Business plan Describes a firm’s business model E-commerce business model Set of planned activities designed to result in a profit in a marketplace that uses/leverages unique qualities of Internet and Web

8 Key Elements of a Business Model Value proposition Revenue model Market opportunity Competitive environment Competitive advantage Market strategy Organizational development Management team

1. Value Proposition “Why should the customer buy from you?” Successful e-commerce value propositions: Personalization/customization Reduction of product search, price discovery costs Facilitation of transactions by managing product delivery

2. Revenue Model “How will you earn money?” Major types of revenue models: Advertising revenue model Subscription revenue model Freemium strategy Transaction fee revenue model Sales revenue model Affiliate revenue model

3. Market Opportunity “What marketspace do you intend to serve and what is its size?” Marketspace: Area of actual or potential commercial value in which company intends to operate Realistic market opportunity: Defined by revenue potential in each market niche in which company hopes to compete Market opportunity typically divided into smaller niches

4. Competitive Environment “Who else occupies your intended marketspace?” Other companies selling similar products in the same marketspace Includes both direct and indirect competitors Influenced by: Number and size of active competitors Each competitor’s market share Competitors’ profitability Competitors’ pricing

5. Competitive Advantage “What special advantages does your firm bring to the marketspace?” Is your product superior to or cheaper to produce than your competitors’? Important concepts: Asymmetries First-mover advantage, complementary resources Unfair competitive advantage Leverage Perfect markets

6. Market Strategy “How do you plan to promote your products or services to attract your target audience?” Details how a company intends to enter market and attract customers Best business concepts will fail if not properly marketed to potential customers

7. Organisational Development “What types of organisational structures within the firm are necessary to carry out the business plan?” Describes how firm will organise work Typically, divided into functional departments As company grows, hiring moves from generalists to specialists

8. Management Team “What kind of backgrounds should the company’s leaders have?” A strong management team: Can make the business model work Can give credibility to outside investors Has market-specific knowledge Has experience in implementing business plans

e-Commerce Business and Revenue Models Three major types of e-commerce Business-to-consumer (B2C) Example: Tesco.ie Business-to-business (B2B) Example: ChemConnect Consumer-to-consumer (C2C) Example: eBay E-commerce can be categorized by platform Mobile commerce (m-commerce)

B2C Business Models E-tailer Community provider (social network) Content provider Portal Transaction broker Market creator Service provider

B2C Models: E-tailer Online version of traditional retailer Revenue model: Sales Variations: Virtual merchant Bricks-and-clicks Catalog merchant Manufacturer-direct Low barriers to entry

B2C Models: Community Provider Provide online environment (social network) where people with similar interests can transact, share content, and communicate Examples: Facebook, LinkedIn, Twitter, Pinterest Revenue models: Typically hybrid, combining advertising, subscriptions, sales, transaction fees, and so on

B2C Models: Content Provider Digital content on the Web: News, music, video, text, artwork Revenue models: Use variety of models, including advertising, subscription; sales of digital goods Key to success is typically owning the content

B2C Business Models: Portal Search plus an integrated package of content and services Revenue models: Advertising, referral fees, transaction fees, subscriptions for premium services Variations: Horizontal/general Vertical/specialized (vortal) Search

B2C Models: Transaction Broker Process online transactions for consumers Primary value proposition—saving time and money Revenue model: Transaction fees Industries using this model: Financial services Travel services Job placement services

B2C Models: Market Creator Create digital environment where buyers and sellers can meet and transact Examples: Priceline, eBay Revenue model: Transaction fees, fees to merchants for access On-demand service companies (sharing economy): platforms that allow people to sell services Examples: Uber, Airbnb

B2C Models: Service Provider Online services Example: Google—Google Maps, Gmail, and so on Value proposition Valuable, convenient, time-saving, low-cost alternatives to traditional service providers Revenue models: Sales of services, subscription fees, advertising, sales of marketing data

Case Study: Two different approaches to capturing consumer interest are described in this case. How do the Placecast and AdLocal approaches differ? Do you think that targeted advertising is better than a blanket approach? What is the difference for the advertiser? For the consumer? The information from the comScore survey did not differentiate between age groups, only country. Do you think there are differences in behaviour among different age groups that would make location-based marketing better for one group than another? Think of businesses in your area that might benefit from joining the O2 scheme. What could they offer?

e-Commerce Business and Revenue Models E-commerce marketing Internet provides new ways to identify and communicate with customers. Long tail marketing: Ability to reach a large audience inexpensively Internet advertising formats Behavioral targeting: Tracking online behavior of individuals on thousands of Web sites and within apps Privacy concerns

e-Commerce Business and Revenue Models Web Site Personalisation

e-Commerce Business and Revenue Models How An Advertising Network Works: Advertising networks and their use of tracking programs have become controversial among privacy advocates because of their ability to track individual consumers across the Internet

e-Commerce Business and Revenue Models Social e-commerce: Based on digital social graph Features of social e-commerce driving its growth

e-Commerce Business and Revenue Models Social media: Fastest growing media for branding and marketing Social network marketing: Seeks to leverage individuals influence over others in social graph The target is a social network of people sharing interests and advice Facebook’s “Like button” Social networks have huge audiences Facebook: 137 million U.S. visitors monthly

How has E-commerce transformed marketing? Social shopping sites Wisdom of crowds Crowdsourcing Large numbers of people can make better decisions about topics and products than a single person. Prediction markets Peer-to-peer betting markets on specific outcomes (elections, sales figures, designs for new products)

E-commerce and Business-to-Business Transactions U.S. B2B trade in 2014 is $13.8 trillion U.S. B2B e-commerce in 2014 is $5.7 trillion Procurement requires significant overhead costs, which Internet and networking helps automate Variety of Internet-enabled technologies used in B2B Electronic data interchange (EDI) Private industrial networks (private exchanges) Net marketplaces Exchanges

E-commerce and Business-to-Business Transactions Electronic data interchange (EDI) Computer-to-computer exchange of standard transactions such as invoices, purchase orders. Major industries have EDI standards that define structure and information fields of electronic documents. More companies are increasingly moving toward private networks that allow them to link to a wider variety of firms than EDI allows and share a wider range of information in a single system.

E-commerce and Business-to-Business Transactions EDI Companies use EDI to automate transactions for B2B e-commerce and continuous inventory replenishment. Suppliers can automatically send data about shipments to purchasing firms. The purchasing firms can use EDI to provide production and inventory requirements and payment data to suppliers

E-commerce and Business-to-Business Transactions Private industrial network (private exchange) Large firm using extranet to link to its suppliers, distributors, and other key business partners Owned by buyer Permits sharing of: Product design and development Marketing Production scheduling and inventory management Unstructured communication (graphics and e-mail)

E-commerce and Business-to-Business Transactions Net marketplaces (e-hubs) Single market for many buyers and sellers Industry-owned or owned by independent intermediary Generate revenue from transaction fees, other services Use prices established through negotiation, auction, RFQs, or fixed prices May focus on direct or indirect goods May be vertical or horizontal marketplaces

E-commerce and Business-to-Business Transactions Net Market Place

E-commerce and Business-to-Business Transactions Exchanges Independently owned third-party Net marketplaces Connect thousands of suppliers and buyers for spot purchasing Typically provide vertical markets for direct goods for single industry (food, electronics) Proliferated during early years of e-commerce; many have failed Competitive bidding drove prices down and did not offer long- term relationships with buyers or services to make lowering prices worthwhile.

How e-commerce changes business E-commerce changes industry structure by changing: Rivalry among existing competitors Barriers to entry Threat of new substitute products Strength of suppliers Bargaining power of buyers

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

E-commerce and industry value chains

Firm Value Chain Activities that a firm engages in to create final products from raw inputs Each step adds value Effect of Internet: Increases operational efficiency Enables product differentiation Enables precise coordination of steps in chain

e-commerce and firm value chains

Firm Value Web Networked business ecosystem Uses Internet technology to coordinate the value chains of business partners Coordinates a firm’s suppliers with its own production needs using an Internet-based supply chain management system

Internet enabled value web