E-Commerce Business Models

Topic Objectives At the end of this topic, you should be able to do the following: List and describe the key components of e-commerce business models Describe the major B-2-C business models Describe the major B-2-B business models Describe the key business concepts and strategies applicable to e-commerce

Business Models Business Model Business plan A set of planned activities (business processes) designed to result in a profit in a marketplace Business plan A document that describes a firm’s business model An e-commerce business model aims to use and leverage the unique qualities of the Internet and WWW into a firm’s business model (Timmers, 1998)

Business Models To develop a successful business model, we must address the 8 key ingredients below: Value proposition Revenue model Market opportunity Competitive environment Competitive advantage Market strategy Organizational development Management team

Business Models Key Ingredients Value Proposition Defines how a firm’s product or service fulfills the needs of customers Answer the following questions Why will customers buy our product instead from our competitors? What will we provide that others will not? E-commerce can offer Personalization and customization Reduction in product search cost Reduction in price discovery cost Facilitation of transaction by managing product delivery

Business Models Key Ingredients Revenue Model Describes how the firm will earn revenue, produce profits, and produce a superior return on invested capital Examples of e-commerce revenue models Advertising model Subscription model Transaction model Sales model Affiliate model

Business Models Key Ingredients Revenue Model Description Examples Advertising Fees from advertisers in exchange for advertisements Yahoo.com Subscription Fees from subscribers in exchange for access to content or service WSJ.com Transaction fee Fees (commissions) for enabling or executing a transaction eBay.com Sales Sales of goods, information, or services Amazon.com Affiliate Fees for business referrals, customers redeem loyalty points MyPoints.com

Business Models Key Ingredients Market Opportunity Refers to the firm’s intended marketspace and the overall potential financial opportunities available to the firm in that marketplace Usually divided into smaller market segment, and within each market segment, there are market niche Example Motor industry Market segment: Commercial vehicles and consumer vehicles Market niche for consumer vehicles: luxury cars, MPV, four-wheel drives, saloons

Business Models Key Ingredients Competitive environment Refers to the other firms operating in the same marketspace selling similar products Factors influencing the environment How many competitors are active How large their operations are What the market share of each competitor is How profitable these firms are How they price their products

Business Models Key Ingredients Competitive environment Direct competition Firms that sell products and services that are very similar and into the same market segment Indirect competition Firms that may be in different industries but still compete indirectly The existence of large number of competitors in any one segment may be a sign that the market is saturated it may be difficult to be profitable

Business Models Key Ingredients Competitive Advantage Achieved by a firm when it can produce a superior product and/or bring the product to market at a lower price than most, or all, of its competitors Achieved competitive advantage from Obtain differential access to factors of production denied to competitors Has more experience, knowledge others cannot imitate Has patent on products competitors cannot imitate Loyal customers that competitors do not have Brand name and popular image others cannot duplicate

Business Models Key Ingredients Competitive Advantage Unique forms of competitive advantage First mover advantage being first in the market Unfair competitive advantage Develop an advantage others cannot purchase (example brand name, patent to invention)

Business Models Key Ingredients Competitive Advantage Firms can leverage (use) their competitive advantage to perform better than their rivals, thus make more profits

Business Models Key Ingredients Market Strategy The plan put together that details exactly how a firm intends to enter a new market and attract new customers Example Smart partnership with other firms to joint promote products Distribute free samples, free gifts Advertising blitz (heavily)

Business Models Key Ingredients Organizational Development Describes how the company will organize the work that needs to be accomplished Organizations need changes to organizational structures and cultural values to support e-commerce Work rules, procedures Reporting structure Information flow between departments

Business Models Key Ingredients Management Team Employees of the company responsible for making the business model work The skills and knowledge of management can make or break the business model Finding the right management team What kinds of experience and skill sets required for the business model Technical skills Experience in a given field

Categorizing E-Commerce Models Business-to-Consumer Portal E-Tailer Content Provider Transaction Broker Market Creator Service Provider Community Provider

Business-to-Consumer Business Models Description Revenue Model Examples Portal Offers an integrated package of services and content such as search, news, e-mail, chat, music downloads, video streaming, and calendars Advertising, subscription fees, transaction fees Yahoo.com, AOL.com, MSN.com, Excite@home.com E-tailer Online version of retail store, where customers can shop at any hour of the day or night without leaving home or office Sales of goods, transaction fees Amazon.com Walmart.com Dell.com Pasarborong.com

Business-to-Consumer Business Models Description Revenue Model Examples Content Provider Information and entertainment providers such as newspapers, sports sites, and sites offering news, special interest, how-to-guide Advertising, subscription fees, affiliate referral fees WSJ.com, Sportsline.com, CNN.com Transaction Broker Processors of online sales transactions helping customers get things done faster and more cheaply Transaction fees E-Trade.com, Expedia.com, Monster.com

Business-to-Consumer Business Models Description Revenue Model Examples Market Creator Web-based businesses that use Internet technology to create markets that bring buyers and sellers together Transaction fees eBay.com, Priceline.com Service Provider Companies that make money by selling users a service, rather than a product Sales of service xDrive.com, myCFO.com

Business-to-Consumer Business Models Description Revenue Model Examples Community Provider Sites where individuals with particular interests, hobbies, and common experiences can come together and compare notes Advertising, subscription fees, affiliate referral fees About.com, iVillage.com, BlackPlanet.com

Categorizing E-Commerce Models Business-to-Business Marketplace/exchanges (B2B hubs) E-Distributor B2B Service Provider Matchmaker Informediary

Business-to-Business Business Models Description Revenue Model Examples Marketplace/ Exchange (B2B Hubs) Helps bring buyers and sellers together to reduce procurement costs for a specific industry Transaction fees DirectAg.com, e-steel.com, TradeOut.com E-Distributor Connecting businesses directly with other businesses, reducing sales cycles and mark-up Sales of goods Grainger.com

Business-to-Business Business Models Description Revenue Model Examples B2B Service Provider Supports companies through online business services Sales of services, Rental fees Employeematters.com Salesforce.com Corio.com Matchmaker Helps businesses find what they want and need on the Web Transaction fees iShip.com

Business-to-Business Business Models Description Revenue Model Examples Informediary Gathers information about consumers and uses it to help advertisers find the most appropriate audience Gathers customer data, and uses it to direct vendors to customers Sales of information Referral fees DoubleClick.com AutoByTel.com

Business Models in Emerging E-Commerce Areas Consumer-to-consumer Market creator Peer-to-peer Content provider M-Commerce Various