E-Business Models MBAA 609 R. Nakatsu

Electronic Business E-Business are all business activities that use Internet technologies. Three most common categories are: B2C (business-to-customer): consumer shopping on the Web. B2B (business-to-business): transactions conducted between businesses on the Web. Business processes in which companies and organizations use the Internet to support selling, purchasing, and other business activities. Other categories include C2C (consumer-to-consumer) and B2G (business to government).

What is an E-Business Model? “They are, at heart, stories—stories that explain how enterprises work.” Who is the customer? What does the customer value? How do we make money in this business? What is the underlying economic logic of this business? Assessing the viability of the Business Model: Does it meet the narrative test? Does it pass the P&L test?

Pure Play or Hybrid? Pure Play: an Internet company devoted primarily to its online business. Click-and-Mortar: a company that not only has a Web presence, but also has a physical storefront. What are the advantages of each approach?

Combining Marketing Channels Marketing Channel: a way to reach customers (e.g. retail store, web site, mailed catalogs) A problem with having multiple marketing channels is channel conflict and cannibalization. How do companies manage channel conflict? Some companies combine marketing channels to their benefit. What are some examples? (Home Depot and Talbots)

Seven Revenue Models Commission Advertising Markup Manufacturer Referral Subscription Fee for Service Source: Afuah and Tucci (2002) and Rappa (2010)

1. Commission (Brokerage Model) A commission is a fee that is levied on a transaction by a third party. Brokers are market makers: they bring together buyers and sellers Examples: Ebay (auction broker model) E*Trade (financial brokerage model) Travelocity (marketplace for travel)

2. Advertising Some Web companies earn revenue primarily by selling advertising. Two general strategies: General interest strategy: Advertisers pay low rates to reach large numbers of undifferentiated visitors. Targeted strategy: Advertisers pay high rates to reach small numbers of visitors with specific interests either (a) related to the theme of the site or (b) related to specific pages or searches. What are some examples of each approach?

Advertising (Continued) How does Google advertising work? What are the advantages and disadvantages of Web advertising (compared to traditional media like radio and television)?

3. Markup (Merchant Model) Markup refers to the amount added to the cost of producing a product or service in order to create a profit. This model is traditionally used by wholesalers and retailers Examples: Amazon.com (pure play) Barnes & Noble (click and mortar) Overstock.com Target.com Question: What is the downside to this model?

4. Manufacturer (Direct Seller Model) Manufacturers and producers try to reach customers directly through the Internet. Benefits: efficiency, lower cost, better understanding of customer preferences. Examples: Dell and other PC manufacturers Levi’s jeans Car manufacturers (What are the problems with this model?)

Direct Seller Model: Disintermediation Manufacturers or producers can sell their products and services directly to customers, bypassing intermediaries such as distributors or retail outlets. A distribution channel can have several intermediary layers. Manufacturer->Distributor->Retailer->Cust. Manufacturer->Retailier->Cust. Manufacturer->Cust.

5. Referral (Affiliate Model) A web site receives a fee for steering visitors to another web site. Variations of this model include banner exchange, pay-per-click, and revenue sharing (i.e, a web site receives a percentage of sales). Examples: Amazon Associates program Google’s AdSense program The disadvantages of this model are similar to the advertising model. What are they?

6. Subscription Users are charged a periodic—daily, monthly or annual—fee to subscribe to a service (unlimited usage for a period of time). Examples: Wall Street Journal, NY Times Netflix Online dating services LexisNexis Question for discussion: What are some problems with this model?

7. Fee for Service Two Models: Utility Model: Activities are metered and users pay for their actual usage (“pay as you go” approach). One-time usage fee for a service Examples: Users pay for metered Internet service Users “rent” a video and pay a one-time fee What are some other examples of this model? The disadvantages of this model are similar to the subscription model.

C2C Business Models Business models in the twenty-first century have to take into account the capabilities of Web 2.0, such as collective intelligence, network effects, user generated content, and the possibility of self-improving systems.1 A good example is Waze. How does it work? Source: Chen, T. F. 2009. Building a platform of Business Model 2.0 to creating real business value with Web 2.0 for web information services industry. International Journal of Electronic Business Management 7 (3) 168-180.

Community Model This model involves building community with users. Revenue can based on the sale of products and services, voluntary contributions, advertising, or subscriptions for premium services. Examples: Open source (software developed collaboratively by a global community of programmers—e.g., Linux) Open content (content developed by a global community of contributors—e.g. Wikipedia) Social networking (sites that provide individuals with the ability to connect with other individuals—e.g., Facebook, LinkedIn, Vine)

Pricing Model How do you price your product or service? Fixed pricing (e.g., Amazon) Dynamic pricing (e.g., Uber) Auction (e.g., Ebay) Reverse auction (see next slide) Free (Question: How can we make the free model a viable business model? What do we mean by “Free for many, fee for few”?)

Online Auctions Example: Ebay.com People can make online bids for items such as computer equipment, antiques, jewelry. The system evaluates the bids and notifies the highest bidder. How does a reverse auction differ? Can you think of an example?