© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Part One: Chapter Five Web Business Models “A good business model begins with an insight into human motivations and ends in a rich stream of profits.” Joan Magretta, Why Business Models Matter

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Web Benefits to Firms The range of Web benefits –Business models can be based on improvements in product or service –Business models can be based directly on generating revenue

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Build brand ( Build category (Intel) Enhance quality (NPR) Reduce costs (CISCO Free trial (Encyclopedia Britannica) Improvement-Based Biz Models Use the Net to Improve Products & Services Enhancement Efficiency Support dealers (GM) Support suppliers (GE) Collect information (DoubleClick) Effectiveness

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Web Benefits to Businesses Cost reduction –In banking, the switch from teller windows to ATMs to online transactions Supply chain coordination –At Dell Computers, reduced inventory and faster response to changes in the market Also: improved customer knowledge, enhanced product quality and advanced branding

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Permission Sponsorship (pay for site of another organization) Alliances (e.g., Yahoo & Amazon) Banner advertising Prospect fees (click-through fees) Sales commissions (Amazon online affiliate program sites get a commission for generating sales) Revenue-Based Biz Models Use the Net to Make Money Provider Pays

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Revenue Benefits Online capabilities create new revenue opportunities Incremental benefits –Advertising last-minute tee times for a reduced price (lastminutegolfer.com) Entirely new streams of revenue –Selling music by the song at iTunes Enhanced products drive revenue –At Science, online content helps drive the magazine’s print sales

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Selecting a Payment Structure Which Company Bears the Risk? Sponsorship Fixed Payment Banner Ads Impressions Prospect Fees Click through Commissions Purchase Increasingly Performance Based and Higher Rise for Web Site Risk for AdvertiserRisk for Ad Network Sponsorship least risky: fixed payment Banner Ads: payment depends on impressions Prospect Fees & Sales Commissions: depend on success of site and advertiser Risk Increases for the Web Site Being Paid

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Bargaining Power Determines Who Bears Risk Powerful sites shift risk to advertisers and demand sponsorships Powerful advertisers demand accountability and negotiate for prospect fees of a share of transaction revenue

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Sponsorship Alliances Banner advertising Prospect fees Sales commissions Product sales Pay-per-use Subscriptions Bundle sales Revenue-Based Biz Models Use the Net to Make Money Provider PaysCustomer Pays

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Building Value Bundles via Alliances The Internet makes it easy to bring a wide range of resources together on a single site Fast, cheap way to build a product or service offering (whole product) A visit to any search engine illustrates

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Alliances A Marketing Challenge Screen real-estate: –how big will my logo be? –where will it appear? –exclusive deal? Revenue sharing The deal you can make depends on the bargaining position of each partner

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Q: Are these Biz Models mutually exclusive? No Companies try to generate revenues any way they can Multiple revenue models are combined on the same site

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation From Web Chains to Closed Loops There’s a strong connection between Web chains and closed-loop marketing A Web chain is closed loop if –the chain extends from the marketing offer to the desired marketing response –Each step is trackable The Internet can be used to close the loop on traditional media advertising if unique identifiers are included with the ad –Dell newspaper ads contain a unique code

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Closed Loop Marketing Marketing is closed loop when specific customer responses to specific marketing actions can be tracked –For example: if an online ad encourages Web site registration, the campaign is closed loop if users can be tracked from ad exposure to the decision to register Closed loop marketing leads to rapid learning –Marketers can experiment with prices, ad copy, and product features on selected samples of consumers

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Closed Loop Marketing Tracking customers from ad click to page views to purchase or exit Learning from and responding to customer interaction at each level Expanded accountability Accelerated learning curve on pricing, product quality and other variables

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Closed Loop Marketing Marketing Reaction Resource Allocation Customer Value Calculation Customer Database Segmentation Customer Database Creation Customer Action

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation The Impact of Closed Loop Marketing Marketers want two results from user responses –They want consumers to make a choice that leads to information improved customer satisfaction a transaction –Marketers want to learn about visitors to their site On the Internet Nobody Knows You’re A Dog

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Web Chains A Web chain is a click sequence –Can be as short as a single click –Can be as long as all possible choices on a Web site Decision points = event nodes Ending point = result node Common Web chain starting points –Company homepage –Search engine or portal –Banner ads

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Evaluating Web Chains Enables marketers to evaluate a wide range of Web strategies and tactics Calculate –expected value of an impression –expected value of a prospect –expected value of a new customer –expected value of a repeat buyer

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Web Chain Benefits and Probabilities Five Main Benefits Occur in the Chain Online contribution: the incremental profit from an online sale Offline contribution: incremental profit from the sale of products through the standard channel Ad-brand impact: value to a visitor, who sees the ad but doesn’t click through Web site brand impact: value of a visit to the Web site that results in benefits, but not a sale Lifetime customer value: future value of profits from a new customer

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Customer Lifetime Value The ability to track, store and analyze individual behavior online allows firms to calculate the present value of the future cash flow attributed to the relationship with any one customer

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Customer Lifetime Value The ability to track, store and analyze individual behavior online allows firms to calculate the present value of the future cash flow attributed to the relationship with any one customer Not every customer is created equal; high support costs can drive some customer relationship below zero value

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Web Benefits to Business Online strategies can bring direct and indirect benefits to firms Not every online tactic is profitable No formula for successful online business model Scale matters

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Evaluating Web Chains

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Cost and Performance One of the best uses of Web chain analysis is to compare alternative methods of acquiring customers

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Study 1 Each of the following is an example of an indirect benefit of enhanced online customer contact EXCEPT: A.Efficiency B.Energy C.Effectiveness D.Enhancement

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Study 2 Which of the following is an example of a quicker learning curve due to closed-loop marketing? A.A price drop B.A revised ad campaign C.A new product feature D.All of the above

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Study 3 Web chain analyses allow marketers to calculate the benefit of what? A.Product purchases B.Technology adoptions C.Customer contacts D.Price reductions

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Study 4 Retention spending by a business can influence a customer’s __________. A.purchasing power B.lifetime value C.ad notice rate D.price sensitivity

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Study 5 Which of the following is a potential direct benefit of successful online marketing? A.Improved efficiency B.Increased sales C.Higher customer loyalty D.Better branding