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IT 361: E-Commerce Systems

Chapter 2

E-commerce Business Models and Concepts

Readings: Chapter 2 - E-commerce Business Models and Concepts

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Tweet Tweet: Twitter’s Business ModelClass Discussion

• What characteristics or benchmarks can be used to assess the business value of a company such as Twitter?

• Have you used Twitter to communicate with friends or family? What are your thoughts on this service?

• What are Twitter’s most important assets?• Which of the various methods described for

monetizing Twitter’s assets do you feel might be most successful?

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E-commerce Business Models—Definitions• Business model: set of planned activities

designed to result in a profit in a marketplace• Business plan: document that describes a

firm’s business model• E-commerce business model: aims to use and

leverage the unique qualities of Internet and Web

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Key Ingredients of a Business Model

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Value Proposition• Defines how a company’s product or service fulfills the needs of

customers“Buy this product, and you will get this specific benefit”

• Questions 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/customization Reduction of product search costs Reduction of price discover costs Facilitation of transactions by managing product delivery

Example 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”

Approach to creating a compelling customer value proposition

• Know your targeted customers and both their obvious and less apparent needs and desires.

• Talk to current customers and understand the product's value from their perspective.

• Know the competition. What product performance does our offering provide that competition does not. Review existing competitive value propositions to develop an understanding of their relative strengths. Do they send a stronger message to potential customers than the proposition you are considering?

• Research classic customer value propositions to learn from the success and failure of other marketplace offerings.

• Brainstorm with both others in the company and potential customers to develop a value proposition that states your product benefits clearly and accurately and brings sustaining brand recognition to your product.

Reference: Manzi, A. M. (2010). How to Write a Strong Value Proposition. Retrieved 4 22, 2010, from Helium: http://www.helium.com/items/1161368-increase-sales-how-to-increase-brand-recognition-writing-a-strong-value-proposition

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Revenue Model

• Describes how the firm will earn revenue, generate profits, and produce a superior return on invested capital

• Major types: Advertising revenue model Subscription revenue model Transaction fee revenue model Sales revenue model Affiliate revenue model

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Market Opportunity

• Refers to a company’s intended marketspace and the overall potential financial opportunities available to the firm in that marketspace

• Marketspace: the area of actual or potential commercial value in which a company intends to operate

• Realistic market opportunity is defined by revenue potential in each of market niches in which company hopes to compete

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Competitive Environment• Refers to the other companies selling similar

products and operating in the same marketspace• In addition; presence of substitute, potential of new

entrants, power of customer, power of supplier (Firm’s environment).

• Influenced by: how many competitors are active how large their operations are what is the market share for each competitor how profitable these firms are how they price their products

• Includes both direct competitors and indirect competitors

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Competitive Advantage

• Achieved 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 competitors (ex. Terms from suppliers, more experience & knowledge, loyal employee, patent, network, ..)

• Types of competitive advantage include: First mover advantage—results from a firm being

first into a marketplace Unfair competitive advantage—occurs when one

firm develops an advantage based on a factor that other firms cannot purchase

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Competitive Advantage

• Perfect market: A market in which there are no competitive advantage o asymmetries because all firms have equal access to all factors of production

• Leverage a competitive advantage: is when a company uses its competitive advantage to achieve more advantage in surrounding market. (brand leverage).

Methods for creating a sustainable competitive advantage

1. Cost leadership - Cost advantage occurs when a firm delivers the same services as its competitors but at a lower cost;

2. Differentiation - Differentiation advantage occurs when a firm delivers greater services for the same price of its competitors.

3. Focus (economics) - A focused approach requires the firm to concentrate on a narrow market niche, hoping to achieve a local rather than industry wide competitive advantage.

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Market Strategy

• A plan 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

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Organizational Development

• Describes how the company will organize the work that needs to be accomplished (implement the business plan)

• Work is typically divided into functional departments

• Move from generalists to specialists as the company grows

• e.g. ebay

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Management Team

• Employees of the company responsible for making the business model work

• Strong management team gives instant credibility to outside investors, market-specific knowledge, and experience in implementation.

• A 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

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How to Identify Management Team?

• What kind of experience do you need to manage your startup business?

• What technical background is desired?• What kind of supervisory experience?• How many years of experience?• What job functions to be fulfilled?• Any contacts and experience in raising

finance?

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Raising Capital

• Seed Fund• Incubator• Angel investors• Capital investors• Venture Capital• Crowdfunding

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Insight on Business: Crowdfunding Takes OffClass Discussion

• What types of projects and companies might be able to most successfully use crowdfunding?

• Are there any negative aspects to crowdfunding?

• What obstacles are presented in the use of crowdfunding as a method to fund start-ups?

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Categorizing E-commerce Business Models: Some Difficulties

• No one correct way• We categorize business models according to e-

commerce sector (B2C, B2B, C2C)• Type of e-commerce technology used can also

affect classification of a business model• Some companies use multiple business

models

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• B2C Business Models– Portal– E-tailer– Content Provider– Transaction Broker– Market Creator– Service Provider– Community Provider

• B2B Business Models– E-distributor– E-procurement– Exchanges – Industry Consortia– Private Industrial

Networks

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B2C Business Models: Portal

• Offers powerful search tools plus an integrated package of content and services

• Typically utilizes a combines subscription/advertising revenues/transaction fee model

• May be general or specialized (vortal)

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B2C Business Models: E-tailer

• Online version of traditional retailer• Types include:

Virtual merchants Bricks-and-cricks Catalog merchantsManufacturer-direct

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B2C Business Models: Content Provider

• Information and entertainment companies that provide digital content over the Web

• Typically utilizes a subscription, pay for download, or advertising revenue model

• Syndication a variation of standard content provider model

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B2C Business Models: Transaction Broker

• Processes online transactions for consumers• Primary value proposition—saving of time and

money• Typical revenue model—transaction fee • Industries using this model include:

Financial services Travel services Job placement services

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B2C Business Models: Market Creator

• Uses Internet technology to create markets that bring buyers and sellers together

• Examples: Priceline.com eBay.com

• Typically uses a transaction fee revenue model

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B2C Business Models: Service Provider

• Offers services online• Value proposition: valuable, convenient, time-

saving, low-cost alternatives to traditional service providers

• Revenue models: subscription fees or one-time payment

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B2C Business Models: Community Provider

• Sites that create a digital online environment where people with similar interests can transact, communicate, and receive interest-related information.

• Typically rely on a hybrid revenue model• Examples:

iVillage.com Friendster.com About.com

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Insight on Technology: Battle of the Titans: Music in the Cloud

Class Discussion• Have you purchased music online or subscribed to

a music service? What was your experience?• What revenue models do cloud music services use?• Do cloud music services provide a clear advantage

over download and subscription services? • Of the cloud services from Google, Amazon, and

Apple, which would you prefer to use, and why?

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B2B Business Models: E-distributor

• Company that supplies products and services directly to individual businesses

• Owned by one company seeking to serve many customers

• Example: Grainger.com

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B2B Business Models: E-procurement Companies

• Create and sell access to digital electronic markets

• B2B service provider is one type: offer purchasing firms sophisticated set of sourcing and supply chain management tools

• Application service providers: a subset of B2B service providers

• Example: Ariba

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B2B Business Models: Exchanges

• An electronic digital marketplace where suppliers and commercial purchasers can conduct transactions

• Usually owned by independent firms whose business is making a market

• Generate revenue by charging transaction fees• Usually serve a single vertical industry• Number of exchanges has fallen to around 200

in 2005

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B2B Business Models: Industry Consortia

• Industry-owned vertical marketplaces that serve specific industries

• Horizontal marketplaces, in contrast, sell specific products and services to a wide range of industries

• Example: Exostar

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B2B Business Models: Private Industrial Networks

• Digital networks (usually, but not always Internet-based) designed to coordinate the flow of communications among firms engaged in business together

• Single firm network: the most common form (Example: Walmart)

• Industry-wide networks: often evolve out of industry associations (Example: Agentrics)

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Business Models in Emerging E-commerce Areas

• Consumer to Consumer (C2C): Provides a way for consumers to sell to each other, with the help of an online marketmaker such as eBay.com

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

• M-commerce: Takes traditional e-commerce business models and leverages emerging new wireless technologies

• To date, a disappointment in the United States; however, technology 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 prosper

• Provide hardware, software, networking, security, e-commerce software systems, payment systems, databases, hosting services, etc.

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How the Internet and the Web Change Business: Strategy, Structure, and Process

• Important to understand how Internet and Web have changed business environment, including industry structures, business strategies, and industry and firm operations

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Industry Structure

• E-commerce changes the nature of players in an industry and their relative bargaining power by changing:

the basis of competition among rivals the barriers to entry the threat of new substitute products the strength of suppliers the bargaining power of buyers

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Industry Structure

• Industry Structural Analysis is performed to check a business model and its potential long-term profitability.

• E-commerce can affect the structure of an industry +ve (automobile) and -ve (music, travel)– Increased price competition– Created new strategies for differentiation of

products and services

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Industry Value Chains

• A set of activities performed in an industry by suppliers, manufacturers, transporters, distributors, and retailers that transform raw inputs into final products and services

• Internet may change business operation at the industry level

• Reduces the cost of information and other transactional costs

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E-commerce and Industry Value ChainsFigure 2.6, Page 93

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Firm Value Chains

• Analysis of the efficiency of a single firm’s operation

• A set of activities that a firm engages in to create final products from raw inputs

• Internet helped firms increases operational efficiency– Outsource activities via the internet– Precisely coordinate steps in the value chain and

reduce cost– Differentiate product and services

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E-commerce and Firm Value Chains

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Firm Value Webs

• A 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 firm’s suppliers with its own production needs using an Internet-based supply chain management system

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Internet-Enabled Value Web

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Business Strategy

• A 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)

• Why would anyone pay for a product than it costs to produce?

• Four generic strategies Differentiation (vs. commoditization) Cost Scope Focus

Teaching Objectives

• Identify the key components of e-commerce business models.

• Describe the major B2C business models.• Describe the major B2B business models.• Recognize business models in other emerging

areas of e-commerce.• Understand key business concepts and

strategies applicable to e-commerce

Key Terms•business model•business plan•e-commerce business model•value proposition•revenue model•advertising revenue model•subscription revenue model•transaction fee revenue model•sales revenue model•affiliate revenue model•market opportunity•marketspace•competitive environment•competitive advantage•asymmetry•first-mover advantage•complimentary resources•unfair competitive advantage•perfect market•leverage•market strategy•organizational development•management team•portal•e-tailer

•barriers to entry•intellectual property•content provider•transaction broker•market creator•service provider•community provider•e-distributor•e-procurement firm•B2B service provider•application service provider (ASP)•scale economies•exchange•industry consortia•private industrial networks•industry structure•industry structural analysis•value chain•firm value chain•value web•business strategy•profit•differentiation•commoditization