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MGT 3225: E-Business

Lecture 2: E-Commerce Business Models and ConceptsMd. Mahbubul Alam, PhDE-commerce Business ModelsDefinitionsBusiness modelA set of planned activities (i.e. business processes) designed to result in a profit in a marketplace.The business model is at the center of the business plan.

Business planA document that describes a firms business model.It always takes into account the competitive environment.

E-commerce business modelUses/leverages unique qualities of the Internet, the web and the mobile platform.

Key Elements of a Business Model

Key Ingredients of a Business Model

4Value PropositionHeart of a companys business model. It refers to how a companys product or service fulfills the needs of customers.

How do you analyze a firms value proposition?Why will customers choose to do business with your firm instead of another?What will your firm provide that others do not or cannot?

Successful e-commerce value propositions include:Personalization and customization of product offerings,Reduction of product search cost, Reduction of price discovery costsFacilitation of transactions by managing product delivery.Example: Amazon.com. At past, people need to visit offline store or have to wait for a week or two for the book. But now customers can find and buy book instantly. Amazon kindle fire makes e-book instantly available with no shipping wait. Amazon value propositions are unparalleled selection and convenience. 5Revenue ModelDescribes how the firm will earn revenue, generate profits, and produce a superior return on invested capital.Revenue model and financial model are used interchangeably. Function of business organizationGenerate profitsProduce returns on invested capital. Returns must be greater than alternative investment.

Major Types of Revenue ModelsAdvertising revenue model (Yahoo): Offers content, services/products. Receives fee from advertisers. Subscription revenue model (consumerreport.com, Match.com, eHarmony): Charges a subscription fees. Provides detailed ratings, reviews, recommendation of customer reports. Transaction fee revenue model (e Bay, E*Trade): Receives a transaction fee for each successful transaction.Sales revenue model (Amazon, Gap.com)Selling goods, content or services to customers. Affiliate revenue model (MyPoints, Epinions)Earns money by connecting companies with potential customers by offerings special deals to its members. Fees for business referrals. 1. Epinions-> community feedback company. 7Market OpportunityRefers to the companys intended marketplace (i.e., an area of actual or potential commercial value), and the overall potential financial opportunities available to the firm in that marketplace. Realistic market opportunity is defined by the revenue potential in each of market niches in which company hopes to compete.

Fig. Marketspace and Market Opportunity in the Software Training Market Marketspaces are composed of many market segments. Your realistic market opportunity will typically focus on one or a few market segment.1. Two major segments: Instructor-led training and Computer based training. Which further divided into smaller market niche. For computer based training, big firms (Fortune) has the largest marketplace so as a small start-up firm the size of the realistic market oppotunity is 6 billion. 8Competitive EnvironmentRefers to the those companies who already exist into market selling similar products and services. It also includesPresence of substitute productsPotential new entrants to the marketPower of customers and suppliers over the business

Influenced by:how many competitors are activehow large their operations arethe market share for each competitorhow profitable these firms are how they price their products

Competitor: Direct competitor Vs. Indirect competitorDirect competitor: Square Vs. Liver Brothers, Ltd. Indirect competitor: Bangladesh Railway Vs. Bangladesh Biman, Different industry but offer customers alternative means of transportation. 9Competitive AdvantageUnique skill which is used by firm to produce good and services (superior products, lower price) into market as compare to other competitors.Technology, unique idea, or other skillTypes of Competitive AdvantageAsymmetryOne participation in a market has more resources than others.First-mover advantageAdvantage that results for being the first in the marketplace. Complementary resourcesResources & assets that directly not involved in the production of products but required for success, such as, marketing, management, financial assets, & reputations. Unfair competitive adv. When one firm develops an advantage based on factor that other firms cannot purchase. Perfect marketA market in which there are no competitive advantages & asymmetries. All firms have equal access. LeverageWhen a firm uses its competitive advantages to achieve more advantages in surrounding markets. Asymemetry: Applle iTune. At the beginning, better-than-average odds of success. First-mover: Amazon.comUnfair adv. : Any Brand name. Brand is developed based on trust, loyalty, reliability and quality. Leverage: Amazon moves into the online grocery business leverages the companys huge customer database & years of experience of e-commerce.

10Market StrategyMarketingPromoting companys products/services to potential customers.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 customers.Market strategy and execution, therefore, have the immense importance for business success. e.g., YouTube, Twitter, or PinterestUses social network marketing strategies that encourages users to post contents, build a community. Here, customers becomes part of the marketing staffs. Organizational DevelopmentDescribes how the company will organize the work that needs to be accomplished.

Work is typically divided into functional departments.Production, shipping, marketing, customer support & finance.

Hiring moves from generalists to specialists as company grows.Management TeamEmployees of the company responsible for making the business model work.Strong management team gives instant credibility to outside investors, immediate market specific knowledge, and experiences in implementing business plans.Strong 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.

Classification of E-Business ModelsCategorizing E-commerce Business Models: DifficultiesNo one correct wayWe categorize business models according to e-commerce sector (B2C, B2B, C2C)Type of e-commerce technology used and market focus can also affect classification of a business model.e-Tailers sales to individual customers (i.e., B2C)e-Distributor sales to another business (i.e., B2B)

Some companies use multiple business models, e.g., Amazon e-retailer, content provider, market creator, infrastructure provider.eBay market creator in the B2C & C2C e-commerce, infrastructure providerSnapshot of B2C Models

B2C Model: e-tailerOnline version of traditional retailer (i.e., online retail store)Customer can shop at any hour of the day or night without leaving their home or office.Similar to bricks-and-mortar store, except customers only have to connect to the Internet or use their smartphones to place an order.

TypesVirtual merchants, e.g., Amazon, Blue Nile, Drugstore (No physical store)Bricks-and-clicks, e.g., JCPenney, Walmart, Barnes & NobleCatalog merchants, e.g., LLBean.comManufacturer-direct online sales, e.g., Dell.com

RevenueSales of goodsB2C Model: Community ProviderSites that create a digital online environment where people with similar interests can transact (buy & sell), communicate, and receive interest-related information, and even play out fantasies by adopting online personalities called avatars.

Revenue:Hybrid revenue model, Advertising, subscription, affiliate referral fees.

Example:iVillageBabycenter.com (http://www.babycenter.com/) Rightstart.com (http://www.rightstart.com/)1. iVillage 34 million monthly visitors, 18B2C Model: Content ProviderInformation and entertainment companies that provide digital content over the Web.Digital content: digital video, music, photos, text, & artwork.

RevenueSubscription fee, pay for download, or advertisements.

ExampleWSJ.com (Wall Street Journal online newspaper)CNN.comCBSSports.comESPN.comB2C Model: PortalOffers powerful search tools plus an integrated package of content and social network services.Do NOT sell anything directly. ServicesNews, e-mail, chat, music, video streaming, etc. e.g., Google, Yahoo, MSN, Facebook

RevenueAdvertising, subscription fees, affiliate referral fees

May be general or specialized (Vortal)Horizontal portal: Yahoo, MSN target all users of the Internet.Vertical portal (Vortal): Sailnet.com target specialized customersB2C Model: Transaction BrokerCompanies that process transactions for consumers normally handled in person, by phone or by mail are transaction brokers.Primary value propositionsaving time and moneyTypical revenue modeltransaction fee

Industries using this model include:Financial servicesTravel servicesJob placement services

ExampleE*TradeExpediaTripadvisor (http://www.tripadvisor.com/Tourism-g294217-Hong_Kong-Vacations.html)

B2C Model: Market CreatorUses Internet technology to create markets that bring buyers and sellers together.

Examples:Amazon.commeBay.com

Revenue model:Transaction feesB2C Model: Service ProviderCompanies that make money by selling users a service, rather than a product.

Value propositionValuable, convenient, time-saving, low-cost alternatives to traditional service providersRevenueSales of services, subscription fees or one-time paymentExampleVisaNow.comRocketLawyer

Snapshot of B2B Model

B2B Model: E-distributorSupplies products and services directly to individual businesses. Owned by one company seeking to serve many customers. The more products and services a company makes available on its site, the more attractive that site is to potential customers.

RevenueSales of goods

Example Grainger.com (distributor of maintenance, repair & operations)Partstore.com

B2B Model: E-procurementSingle firm creating digital markets where sellers and buyers transact for indirect inputs.

RevenueFees for market-making services, supply change managementApplication service providersA company that sells access to Internet-based software applications to other companies.Finding new customers for software, increasing market size and achieving scale economics. Scale economics Efficiencies that arise from increasing the size of a business. ExampleAriba (http://www.ariba.com/) Create software where large firms organize their procurement processCreates custom-integrated online catalogs (suppliers list their offerings) for purchasing firms. PerfectCommerceB2B Model: ExchangesElectronic digital marketplace where suppliers and commercial purchasers can conduct transactions.Usually owned by independent firms whose business is making a market.Usually serve a single vertical industry.

RevenueCommission fees and transaction fees.

B2B Model: Industry ConsortiaIndustry-owned vertical marketplaces that serve specific industries, such as the automobile, aerospace, chemical, floral, or logging industries. Horizontal marketplaces, in contrast, sell specific products and services to a wide range of industries, such as marketing-related, financial and computing services.

ExampleExostar, online trading exchange for the aerospace & defense industry.

B2B Business Models: Private Industrial NetworksDigital networks designed to coordinate the flow of communications among firms engaged in business together.The network is owned by a single large purchasing firm.Participation is by invitation only to trusted long-term suppliers of direct inputs.

e.g, WalmartSuppliers of Walmart can monitor their products sales by using Walmarts private network.

Business Models in Emerging E-commerce AreasConsumer-to-Consumer (C2C)Provides a way for consumers to sell to each other, with the help of an online market maker.

Peer-to-Peer (P2P)Links users, enabling them to share files and common resources without a common server.

M-commerceE-commerce business models that use wireless technologies.To date, m-commerce a disappointment in the United States; however, technology platform continues to evolve.

E-commerce Enablers: The Gold Rush ModelInternet infrastructure companiesProvide hardware, software, networking, security, e-commerce software systems, payment systems, databases, hosting services, etc.Business model is focused on providing the infrastructure necessary for e-commerce companies to exist, grow and prosper.

ExampleAkamai (https://www.youtube.com/watch?v=IHEFubEQbMo) Amazon web server

How the Internet & Web Change Business (Industry Structure)E-commerce changes the nature of players in an industry and their relative bargaining power by changing:the basis of competition among rivalsthe barriers to entrythe threat of new substitute productsthe strength of suppliersthe bargaining power of buyers

How the Internet & Web Change Business (Industry Value Chains)Set of activities performed in an industry by suppliers, manufacturers, transporters, distributors, and retailers that transform raw inputs into final products and services. Reduces the cost of information and other transactional costs.

How the Internet & Web Change Business (Firm Value Chains)Set of activities that a firm engages in to create final products from raw inputsIncreases operational efficiency.

How the Internet & Web Change Business (Firm Value Webs)Networked 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 system.

Business StrategyA set 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).Profit, the difference between the price of a firm is able to charge for its products and the cost of producing & distributing goods. Generic strategiesDifferentiation, the ways producers can make their products or services unique & different to distinguish them from those of competitors. e.g., Warby Parker (eyeglasses company)Commoditization, no difference among products or services, and the only basis of choosing is price. Cost competition, offering products or services at a lower cost than competitors. e.g., Walmart.Scope strategy, compete in all markets rather than just local, regional or national markets. e.g., Apple iDevices. Focus/market niche strategy, compete within a narrow market or product segment. e.g., Bonobos.comCustomer intimacy, develop strong ties with customers in order to increase switching cost. e.g., Amazon, Netflix. Question Please?