Lecture 02 Introduction to E-Business Models Jaeki Song

Outlines Components of an e-Business Model Components of an e-Business Model Price-based e-Business Model Price-based e-Business Model –Price competition –Different types of e-business models »Storefront model »Auction model »Portal model »Dynamic-pacing model Bricks & Clicks Bricks & Clicks

Components of e-Business Models Business Model -Customer value - Scope - Price - Resources - Capabilities - Implementations Business Model -Customer value - Scope - Price - Resources - Capabilities - Implementations Environment Internet Performance

Price Competition Price for books and CDs sold on the Internet less than conventional channel Price for books and CDs sold on the Internet less than conventional channel –Average 9-16% Price increments Price increments –Price change on the Internet is smaller than conventional channel Price dispersion Price dispersion –Substantial differences in price across retailers on the Internet –Heterogeneity in consumer awareness –Heterogeneity in retailer branding and trust

Driving Factors Lower buyer search costs Lower buyer search costs –Promote price competition Low entry costs or low operational costs Low entry costs or low operational costs Other factors Other factors –Tax –Shipping and handling fees

Storefront Model Basic direct interaction model Basic direct interaction model –B2C Combines transaction processing, security, online payment, and information storage Combines transaction processing, security, online payment, and information storage Needs online catalogs and takes order through websites Needs online catalogs and takes order through websites Incorporates web-based technologies Incorporates web-based technologies –Shopping-cart technology

Amazon.com Client/server application Client/server application –Database Personalization Personalization –Electronic wallet –1-click system Security Security

History of Internet Auctions Web-based commercial auction began in 1995 Web-based commercial auction began in 1995 –Onsale and eBay Various types of goods sold Various types of goods sold

Primary Business Model Merchant Sites Merchant Sites –Merchandise offers products/services –Acts as retailer –E.g. Onsale Listing-agent Sites Listing-agent Sites –Acts as an agent for other sellers allowing them to register their items and running the auctions on their behalf –E.g. eBay

Important Parameters Minimum acceptable bid amount Minimum acceptable bid amount Reserve price Reserve price Profitable strategy Profitable strategy –Minimum price plus a reserve price Advanced technologies Advanced technologies –Multi-unit pricing display

Auction Formats English Auctions English Auctions Dutch Auctions Dutch Auctions Sealed-Bid Auctions Sealed-Bid Auctions Double Auctions Double Auctions

English Auctions The bidders announce their bids until no higher bid is forthcoming The bidders announce their bids until no higher bid is forthcoming –‘going... going... gone!’ –Ascending-price auctions –Typically set a closing time in advance Minimum bid plus a reserve price Minimum bid plus a reserve price Early buyout price Early buyout price

Dutch Auctions Bidding starts at a high price and drops until a bidder accepts the price Bidding starts at a high price and drops until a bidder accepts the price –Descending price auctions

Sealed-Bid Auctions Bidders submit their bids independently and are usually prohibited from sharing information with each other Bidders submit their bids independently and are usually prohibited from sharing information with each other First-price sealed-bid auction First-price sealed-bid auction –The winner pays his amount Second-price sealed-bid auction Second-price sealed-bid auction –The winner pays one increment over the second-highest bid received

Double Auctions Buyers and sellers submit bids to an auctioneer Buyers and sellers submit bids to an auctioneer The auctioneer matches the seller’s offers to the buyer’s offer The auctioneer matches the seller’s offers to the buyer’s offer –E.g. New York Stock Exchange

FRAUD How does the buyer know she can trust the seller? How does the buyer know she can trust the seller? –Auction sites cooperate with prosecutors –Auction sites use a feedback and rating system that encourage buyers and sellers to rate each other at the close of a transaction –Auction sites encourage users to use third-party service when they fear the possibility off fraud

Competition Auction SiteAuctions closing per dayRevenues per month ($) eBay340,000190,000,000 Yahoo!88,00019,000,000 Amazon10,0002,000,000 Source: Lucking-Reiley, 2000 (JIE)

Web Portal Model Give visitors the change to find almost everything they are looking for in one place Give visitors the change to find almost everything they are looking for in one place Portals linking consumers to online merchants Portals linking consumers to online merchants Helps users collect information on an item and allows users to browse independently owned storefronts Helps users collect information on an item and allows users to browse independently owned storefronts Yahoo.com, Hotbot.com, About.com, Altavista.com, etc. Yahoo.com, Hotbot.com, About.com, Altavista.com, etc.

Yahoo.com

Dynamic Pricing Models Name-Your-Price Model Name-Your-Price Model Comparison-Pricing Model Comparison-Pricing Model Demand-Sensitive Pricing Model Demand-Sensitive Pricing Model

Name-Your-Price Model Allows customers to state the price they are willing to pay Allows customers to state the price they are willing to pay Priceline.com Priceline.com –Demand collect systems »Use shopping bot that takes customer’s bid to the Priceline partners to see whether they will accept the prices for the requested products/services –Intelligent agents

Comparison-Pricing Model Allows customers to poll a variety of merchants and find a desired product/service at the lowest price Allows customers to poll a variety of merchants and find a desired product/service at the lowest price Mysimon.com Mysimon.com –Uses intelligent-agent technology –Offers discussion groups, customer ratings, and comparison shopping

Demand-Sensitive Pricing Model Group purchasing Group purchasing –Individual buyers to shop in large groups to obtain group discount »The more people who buy a product in a single purchase, the lower the cost per person becomes –Mercata.com, mobshop.com, demandline.com How it works How it works –Buyers create requests for quotes (RFQs) –Purchasing manager monitors all aggregated RFQs –Manager negotiates through suppliers.

Demand-Sensitive Pricing Model Price Discrimination Price Discrimination Output Price D1 R1 Q1 P1 D2 R2 Q2Q P2 Marginal cost

Demand-Sensitive Pricing Model Benefits to Buyers Benefits to Buyers –Reduce product costs –Reduce transaction costs Benefits to Suppliers Benefits to Suppliers –Enhance revenue with a high-volume sales –Reduce sales costs –Improve manufacturing efficiency

Bricks & Clicks Should we integrate our Internet business with our traditional business or should we keep the two separate? Should we integrate our Internet business with our traditional business or should we keep the two separate?

Seamless Model: Office Depot Two reasons Two reasons –Existing catalog-sales support an Internet store –Existing information systems made it easy to coordinate online stores and physical stores Customers’ Benefit Customers’ Benefit –Make shopping simple and convenient Company’s Benefit Company’s Benefit –Cheaper to reach customers

Seamless Model: Office Depot Added Value Added Value –Each customer has its own specialized view of the OfficeDepot.com site »authorization –Provide additional discount for larger customers if they place order on online Actually increased the traffic at its physical outlet Actually increased the traffic at its physical outlet

Joint Venture Model: KB Toy Reasons Reasons –Don’t have much experience with catalog retailing –Tend to focus exclusively on their physical stores KB Toy and Kbkids.com KB Toy and Kbkids.com –KB Toy joined with BrainPlay.com to create Kbkids.com »$80 million

Joint Venture Model: KB Toy Operation Operation –Separation »Kbkids headquarter: Denver »KB Toy headquarter: MA –Integration »Share brand: promotion »Customer service »Purchasing function

Virtual Partnership Rite Aid and Drugstore.com Rite Aid and Drugstore.com Customer benefit Customer benefit –Customers can pick up their Drugstore.com prescriptions at their local Rite Aid

A Spectrum of Choices ModelBrandManagementOperation SeamlessFully integrated Joint Venture Mostly integrated Slightly integrated Moderately integrated PartnershipSeparate Slightly integrated Moderately integrated

Decision Process Brand SeparationIntegration Does the brand extend naturally to the Internet? Will we need to price differently? Management Do we have the skills and experience? Will there be major channel conflict? Does the Internet threaten the current business model?

Decision Process Operations SeparationIntegration Do our distribution systems translate well to the Internet? Do our information systems provide a foundation on which to build? Does either systems constitute a significant competitive advantage?