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Chapter 5Business Models for E-commerce1E-commerce Business ModelsDefinitionsBusiness modelSet of planned activities designed to result in a profit in a marketplaceBusiness planDocument that Describes a firms business modelE-commerce business modelUses/leverages unique qualities of Internet and Web2Key Ingredients of a Business Model

33Value PropositionDefines how a companys product or service fulfills the needs of customersQuestions to ask:Why will customers choose to do business with your firm instead of another?What will your firm provide that others do not or cannot?Examples of successful value propositions:Personalization/customizationReduction of product search, price discovery costsFacilitation of transactions by managing product delivery4Example of Value propositions

"You get fresh, hot pizza delivered to your door in 30 minutes or less -- or it's free.

You package absolutely, positively has to get there overnight

The milk chocolate melts in your mouth, not in your hand

It helps building strong bones 12 ways

55Revenue ModelDescribes how the firm will earn revenue, generate profits, and produce a superior return on invested capitalMajor types:Advertising revenue modelSubscription revenue modelTransaction fee revenue modelSales revenue modelAffiliate revenue model6Advertising Revenue ModelWeb site that offers content, services and/or products also provides a forum for advertisements and receives fees from advertisers

Example: Yahoo.com7Subscription Revenue ModelWeb site that offers users content or services charges a subscription fee for access to some or all of its offeringsExamples: Consumer Reports Online

8Transaction Fee Revenue ModelCompany that receives a fee for enabling or executing a transactionExamples:eBay.comE-Trade.com9Sales Revenue ModelCompany derives revenue by selling goods, information, or services to customers

Examples:Amazon.comLLBean.comGap.com10Amazon Uses a Sales Revenue Model

1111Affiliate Revenue ModelSites that steer business to an affiliate receive a referral fee or percentage of the revenue from any resulting sales

Example:MyPoints.com12

Market OpportunityRefers to a companys intended marketspace and overall potential financial opportunities available to the firm in that marketspace

MarketspaceArea of actual or potential commercial value in which company intends to operate

Realistic market opportunity Defined by revenue potential in each of market niches in which company hopes to compete14Fortune 500 List of the largest 500 US manufacturing corporations, ranked by revenue. It is published annually in the Fortune magazine with data on the firm's assets, net earnings, earnings per share, number of employees, etc

14Marketspace and Market Opportunity in the Software Training Market

1515Competitive EnvironmentRefers to the other companies selling similar products and operating in the same marketspaceInfluenced by:Number of active competitorsEach competitors market shareCompetitors profitabilityCompetitors pricingIncludes both direct competitors and indirect competitors16Competitive Environment (contd) Direct competitors companies that sell products or services that are very similar and into the same market segmentExample: Priceline.com and Travelocity.comIndirect competitors companies that may be in different industries but that still compete indirectly because their products can substitute for one anotherExample: CNN.com and ESPN.com1717Competitive AdvantageAchieved when a firm can produce a superior product and/or bring product to market at a lower price than most, or all, of competitors.Firms achieve competitive advantage when they are able to obtain differential access to the factors of production that are denied to competitorsAsymmetry when one participant in a market has more resources than others18Competitive AdvantageTypes of competitive advantage include:First mover advantageresults from a firm being first into a marketplaceUnfair competitive advantageoccurs when one firm develops an advantage based on a factor that other firms cannot purchase

Leverage occurs when a company use its completive advantage to achieve more advantage in another market19Market StrategyPlan that details how a company intends to enter a new market and attract customers

Best business concepts will fail if not properly marketed to potential customers20Organizational DevelopmentPlan that describes how the company will organize the work that needs to be accomplishedWork is typically divided into functional departmentsHiring moves from generalists to specialists as company grows21

22Management TeamEmployees of the company responsible for making the business model workStrong management team gives instant credibility to outside investorsStrong management team may not be able to salvage a weak business model, but should be able to change the model and redefine the business as it becomes necessary

23Categorizing E-commerce Business Models: Some DifficultiesNo one correct wayWe categorize business models according to e-commerce sector (B2C, B2B, C2C)Type of e-commerce technology used can also affect classification of a business modeli.e., m-commerceSome companies use multiple business modelseBay24B2C Business ModelsPortalE-tailerContent ProviderTransaction BrokerMarket CreatorService ProviderCommunity Provider

25B2C Business Models: PortalOffers powerful search tools plus an integrated package of content and servicesTypically utilizes a combined subscription/advertising revenues/transaction / referral fee modelToday, seen as destination site rather than gatewayMay be general (horizontal) or specialized (vertical)26B2C Business Models: E-tailerOnline version of traditional retailerTypes include:Virtual merchants (online retail store only)Clicks and bricks (online distribution channel for a company that also has physical stores)Catalog merchants (online version of direct mail catalog)Manufacturer-direct (manufacturer selling directly over the Web)Low barriers to entry27B2C Business Models: Content ProviderDistribute digital content: information and entertainment, over the WebTypical revenue models:SubscriptionPay for downloadAdvertisingVariations:Syndication: is a variation of standard content provider modelWeb aggregators28B2C Business Models: Transaction BrokerProcesses online transactions for consumersPrimary value propositionsaving time and moneyTypical revenue modeltransaction fee Largest industries using this model:Financial servicesTravel servicesJob placement services

29B2C Business Models: Market CreatorUses Internet technology to create markets that bring buyers and sellers together Examples:PricelineeBayTypically uses a transaction fee revenue model30B2C Business Models: Service ProviderOffers services onlinee.g. Google: Google Maps, Google Docs, etc.Value proposition Valuable, convenient, time-saving, low-cost alternatives to traditional service providersRevenue modelsSubscription feesOne-time payment

31B2C Business Models: Community ProviderCreates online environment (social network) where people with similar interests can transact and communicate. Typical revenue model: HybridIncluding advertising fees, subscription fees, sales revenues, transaction fees, affiliate fees Examples:MySpaceFacebookiVillage32

33B2B Business ModelsE-distributorE-procurement CompaniesExchangesIndustry ConsortiaPrivate Industrial Networks

34B2B Business Models: E-distributorSupplies products and services directly to individual businesses.Owned by one company seeking to serve many customersExample: Grainger.com35

36B2B Business Models: E-procurementCreates and sells access to digital electronic marketsIncludes B2B service providers, application service providers (ASPs)Revenue models:Transaction fees, usage fees, annual licensing feesExample: AribaSoftware that helps firms organize procurement processScale economy 37

38B2B Business Models: ExchangesElectronic digital marketplace where suppliers and commercial purchasers can conduct transactionsUsually owned by independent firms whose business is making a marketRevenue model: Transaction feesUsually serve a single vertical industryNumber of exchanges has fallen dramaticallyExample : Onvia39B2B Business Models: Industry ConsortiaIndustry-owned vertical marketplaces that serve specific industries (e.g. automobile, chemical, floral, logging)Supply smaller number of companies with product and services relevant to industrySponsored by powerful industry playersStrengthen traditional purchasing behaviorExostar: Online trading exchange for aerospace and defense industry40

41B2B Business Models: Private Industrial NetworksDigital networks designed to coordinate the flow of communications among firms engaged in business togetherSingle firm network: Most common form Wal-MartIndustry-wide networks: Often evolve out of industry associations Agentrics

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Business Models in Emerging E-commerce AreasConsumer-to-Consumer (C2C)eBay, Half.comPeer-to-Peer (P2P)Kazaa, CloudmarkM-commerce: E-commerce models using wireless technologies PayPal Mobile Checkout, AOL MovieFoneTechnology platform continues to evolve

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E-commerce Enablers: The Gold Rush Model Internet infrastructure companies: Companies whose business model is focused on providing infrastructure necessary for e-commerce companies to exist, grow, and prosperInternet infrastructure companies have profited the most, providing:Hardware, software, networking, securityE-commerce software systems, payment systems,DatabasesHosting services, etc.

46How the Internet and the Web Change Business: Strategy, Structure, and ProcessImportant to understand how Internet and Web have changed business environment, including industry structures, business strategies, and industry and firm operations

47Industry StructureE-commerce changes the nature of players in an industry and their relative bargaining power by changing:the basis of competition among competitorsthe barriers to entrythe threat of new substitute productsthe strength of suppliersthe bargaining power of buyers

48How the Internet Influences Industry Structure

4949Industry Value ChainsSet of activities performed in an industry 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 for manufacturers, distributors, customersLeads to greater operational efficiencies, lowering prices, adding value for customers

50E-commerce and Industry Value Chains

5151Firm Value ChainsSet of activities that a firm engages in to create final products from raw inputs

Internet effect:Increases operational efficiencyEnables product differentiation52E-commerce and Firm Value Chains

5353Firm Value WebsNetworked business ecosystem that uses Internet technology to coordinate the value chains of business partners within an industry, or within a group of firms

Coordinates a firms suppliers with its own production needs using an Internet-based supply chain management system54Internet-Enabled Value Web

5555Business StrategySet of plans for achieving superior long-term returns on the capital invested in a business firm (i.e., a plan for making a profit in a competitive environment)Four generic strategiesDifferentiationCostScopeFocus56