E-Business Models

Learning 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.

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.

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

Business Model

Customer value

Scope

Price

Resources

Capabilities

Implementations

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

Price for books and CDs sold on the Internet less than conventional channel

Average 9-16%

Price increments

Price change on the Internet is smaller than conventional channel

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 Promote price competition Low entry costs or low operational costs Other factors Tax Shipping and handling fees

Lower buyer search costs

Promote price competition

Low entry costs or low operational costs

Other factors

Tax

Shipping and handling fees

E-Commerce Business Models Business model a set of planned activities designed to result in a profit in a marketplace E-commerce business model a business model that aims to use and leverage the unique qualities of the Internet and the World Wide Web.

Business model

a set of planned activities designed to result in a profit in a marketplace

E-commerce business model

a business model that aims to use and leverage the unique qualities of the Internet and the World Wide Web.

Eight Key Ingredients of a Business Model Key Questions Business Model Components Value Proposition Why should the customer buy from you? Revenue model How will you earn money? Market opportunity What marketspace do you intent to serve, and what is its size? Competitive environment Who else occupies your intended marketspace? Competitive advantage What special advantages does your firm bring to the marketspace? Market strategy How do you plan to promote your products to attract customer? Organizational development What types of organizational structures within the firm are necessary to carry out the business plan? Management team What kinds of experiences and background are important for the company’s leaders to have?

Value Position Defines how a company’s product or service fulfills the needs of customers. Questions Why will customers choose to do business with your firm instead of another company? What will your firm provide that other firms do not and cannot?

Defines how a company’s product or service fulfills the needs of customers.

Questions

Why will customers choose to do business with your firm instead of another company?

What will your firm provide that other firms do not and cannot?

Revenue Model Describes how the firm will earn revenue, produce profits, and produce a superior return on invested capital. E-commerce revenue models include: advertising model subscription model transaction fee model sales model affiliate model

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

E-commerce revenue models include:

advertising model

subscription model

transaction fee model

sales model

affiliate model

Revenue Model Advertising revenue model a company provides a forum for advertisements and receives fees from advertisers ( Yahoo ) Subscription revenue model a company offers it users content or services and charges a subscription fee for access to some or all of it offerings ( Consumer Reports or Wall Street Journal )

Advertising revenue model

a company provides a forum for advertisements and receives fees from advertisers ( Yahoo )

Subscription revenue model

a company offers it users content or services and charges a subscription fee for access to some or all of it offerings ( Consumer Reports or Wall Street Journal )

Revenue Model Transaction fee revenue model a company receives a fee for enabling or executing a transaction ( eBay or E-Trade ) Sales revenue model a company derives revenue by selling goods, information, or services ( Amazon or DoubleClick ) Affiliate revenue model a company steers business to an affiliate and receives a referral fee or percentage of the revenue from any resulting sales ( MyPoints )

Transaction fee revenue model

a company receives a fee for enabling or executing a transaction ( eBay or E-Trade )

Sales revenue model

a company derives revenue by selling goods, information, or services ( Amazon or DoubleClick )

Affiliate revenue model

a company steers business to an affiliate and receives a referral fee or percentage of the revenue from any resulting sales ( MyPoints )

Market Opportunity Market opportunity refers to the company’s intended marketspace and the overall potential financial opportunities available to the firm in that market space defined by the revenue potential in each of the market niches where you hope to compete Marketspace the area of actual or potential commercial value in which a company intends to operate

Market opportunity

refers to the company’s intended marketspace and the overall potential financial opportunities available to the firm in that market space

defined by the revenue potential in each of the market niches where you hope to compete

Marketspace

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

Competitive Environment Refers to the other companies operating in the same marketplace selling similar products Influenced by: how many competitors are active how large are their operations the market share of each competitor how profitable these firms are how they price their products

Refers to the other companies operating in the same marketplace selling similar products

Influenced by:

how many competitors are active

how large are their operations

the market share of each competitor

how profitable these firms are

how they price their products

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 because a firm has been able to obtain differential access to the factors of production that are denied their competitors -- at least in the short term

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 because a firm has been able to obtain differential access to the factors of production that are denied their competitors -- at least in the short term

Competitive Advantage Asymmetry exists whenever one participant in a market has more resources than other participants First mover advantage a competitive market advantage for a firm that results from being the first into a marketplace with a serviceable product or service

Asymmetry

exists whenever one participant in a market has more resources than other participants

First mover advantage

a competitive market advantage for a firm that results from being the first into a marketplace with a serviceable product or service

Competitive Advantage Unfair competitive advantage occurs when one firm develops an advantage based on a factor that other firms cannot purchase Perfect Market a market in which there are no competitive advantages or asymmetries because all firms have equal access to all the factors of production when a company uses its competitive advantage to achieve more advantage in surrounding markets

Unfair competitive advantage

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

Perfect Market

a market in which there are no competitive advantages or asymmetries because all firms have equal access to all the factors of production

when a company uses its competitive advantage to achieve more advantage in surrounding markets

Market Strategy The plan you put together that details exactly how you intend to enter a new market and attract new customers Best business concepts will fail if not properly marketed to potential customers

The plan you put together that details exactly how you intend to enter a new market and attract new customers

Best business concepts will fail if not properly marketed to potential customers

Organizational Development Describes how the company will organize the work that needs to be accomplished Work is typically divided into functional departments Move from generalists to specialists as the company grows

Describes how the company will organize the work that needs to be accomplished

Work is typically divided into functional departments

Move from generalists to specialists as the company grows

Management Team Employees of the company responsible for making the business model work Strong management team gives instant credibility to outside investors A strong management team may not be able to salvage a weak business model Should be able to change the model and redefine the business as it becomes necessary

Employees of the company responsible for making the business model work

Strong management team gives instant credibility to outside investors

A strong management team may not be able to salvage a weak business model

Should be able to change the model and redefine the business as it becomes necessary

Major Business-to-Consumer (B2C) Business Models

Major Business-to-Consumer (B2C) Business Models

Major Business-to-Consumer (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 specialize (vortal)

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 specialize (vortal)

Major Business-to-Consumer (B2C) Business Models E-tailer online version of traditional retailer includes virtual merchants (online retail store only) clicks and mortar e-tailers (online distribution channel for a company that also has physical stores) catalog merchants (online version of direct mail catalog) online malls (online version of mall) Manufacturers selling directly over the Web

E-tailer

online version of traditional retailer

includes

virtual merchants (online retail store only)

clicks and mortar e-tailers (online distribution channel for a company that also has physical stores)

catalog merchants (online version of direct mail catalog)

online malls (online version of mall)

Manufacturers selling directly over the Web

Major Business-to-Consumer (B2C) Business Models Content Provider information and entertainment companies that provide digital content over the Web typically utilizes an advertising, subscription, or affiliate referral fee revenue model Transaction Broker processes online sales transactions typically utilizes a transactions feel revenue model

Content Provider

information and entertainment companies that provide digital content over the Web

typically utilizes an advertising, subscription, or affiliate referral fee revenue model

Transaction Broker

processes online sales transactions

typically utilizes a transactions feel revenue model

Major Business-to-Consumer (B2C) Business Models Market Creator uses Internet technology to create markets that bring buyers and sellers together typically utilizes a transaction fee revenue model E.g. Auction English auction Dutch auction Sealed-bid auction Double auction

Market Creator

uses Internet technology to create markets that bring buyers and sellers together

typically utilizes a transaction fee revenue model

E.g. Auction

English auction

Dutch auction

Sealed-bid auction

Double auction

English Auctions 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 Early buyout price

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

Early buyout price

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

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 First-price sealed-bid auction The winner pays his amount Second-price sealed-bid auction The winner pays one increment over the second-highest bid received

Bidders submit their bids independently and are usually prohibited from sharing information with each other

First-price sealed-bid auction

The winner pays his amount

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 The auctioneer matches the seller’s offers to the buyer’s offer E.g. New York Stock Exchange

Buyers and sellers submit bids to an auctioneer

The auctioneer matches the seller’s offers to the buyer’s offer

E.g. New York Stock Exchange

Major Business-to-Consumer (B2C) Business Models Service Provider offers services online Community Provider provides an online community of like-minded individuals for networking and information sharing revenue is generated by referral fee, advertising, and subscription

Service Provider

offers services online

Community Provider

provides an online community of like-minded individuals for networking and information sharing

revenue is generated by referral fee, advertising, and subscription

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

Dynamic Pricing Models

Name-Your-Price Model

Comparison-Pricing Model

Demand-Sensitive Pricing Model

Name-Your-Price Model Allows customers to state the price they are willing to pay 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

Allows customers to state the price they are willing to pay

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 Mysimon.com Uses intelligent-agent technology Offers discussion groups, customer ratings, and comparison shopping

Allows customers to poll a variety of merchants and find a desired product/service at the lowest price

Mysimon.com

Uses intelligent-agent technology

Offers discussion groups, customer ratings, and comparison shopping

Demand-Sensitive Pricing Model 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 Buyers create requests for quotes (RFQs) Purchasing manager monitors all aggregated RFQs Manager negotiates through suppliers.

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

Buyers create requests for quotes (RFQs)

Purchasing manager monitors all aggregated RFQs

Manager negotiates through suppliers.

Demand-Sensitive Pricing Model Price Discrimination Output Price D1 R1 Q1 P1 D2 R2 Q2 Q P2 Marginal cost

Price Discrimination

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

Benefits to Buyers

Reduce product costs

Reduce transaction costs

Benefits to Suppliers

Enhance revenue with a high-volume sales

Reduce sales costs

Improve manufacturing efficiency

Major Business-to-Business (B2B) Business Models

Major Business-to-Business (B2B) Business Models B2B Hub also known as marketplace/exchange electronic marketplace where suppliers and commercial purchasers can conduct transactions may be a general (horizontal marketplace) or specialized (vertical marketplace) E-distributor supplies products directly to individual businesses

B2B Hub

also known as marketplace/exchange

electronic marketplace where suppliers and commercial purchasers can conduct transactions

may be a general (horizontal marketplace) or specialized (vertical marketplace)

E-distributor

supplies products directly to individual businesses

Major Business-to-Business (B2B) Business Models B2B Service Provider sells business services to other firms Matchmaker links businesses together charges transaction or usage fees Infomediary gather information and sells it to businesses

B2B Service Provider

sells business services to other firms

Matchmaker

links businesses together

charges transaction or usage fees

Infomediary

gather information and sells it to businesses

Seven Unique Feature of E-Commerce Technology

Seven Unique Feature of E-Commerce Technology Ubiquity Alters industry structure by creating new marketing channels and expanding size of overall market Creates new efficiencies in industry operations and lowers cost of firms’ sales operations Enables new differentiation strategies Global Reach Changes industry structure by lowering barriers to entry, but greatly expands market at the same time Lowers cost of industry and firm operations through production and sales efficiencies Enables competition on global scale

Ubiquity

Alters industry structure by creating new marketing channels and expanding size of overall market

Creates new efficiencies in industry operations and lowers cost of firms’ sales operations

Enables new differentiation strategies

Global Reach

Changes industry structure by lowering barriers to entry, but greatly expands market at the same time

Lowers cost of industry and firm operations through production and sales efficiencies

Enables competition on global scale

Seven Unique Features of E-Commerce Technology Universal Standards Changes industry structure by lowering barriers to entry and intensifying competition within an industry Lowers costs of industry and firm operations by lowering computing and communications costs Enables broad-scope strategies Richness Alters industry structure by reducing strength of powerful distribution channels Change industry and firm operations costs by lessening reliance on sales force Enhances post-sale support strategies

Universal Standards

Changes industry structure by lowering barriers to entry and intensifying competition within an industry

Lowers costs of industry and firm operations by lowering computing and communications costs

Enables broad-scope strategies

Richness

Alters industry structure by reducing strength of powerful distribution channels

Change industry and firm operations costs by lessening reliance on sales force

Enhances post-sale support strategies

Seven Unique Features of E-Commerce Technology Interactivity Alters industry structure by reducing threat of substitutes through enhanced customization Reduces industry and firm costs by lessening reliance on sales force Enable differentiation strategies Personalization/Customization Alters industry structure by reducing threats of substitutes, raising barriers to entry Reduces value chain costs in industry and firm by lessening reliance on sales forces

Interactivity

Alters industry structure by reducing threat of substitutes through enhanced customization

Reduces industry and firm costs by lessening reliance on sales force

Enable differentiation strategies

Personalization/Customization

Alters industry structure by reducing threats of substitutes, raising barriers to entry

Reduces value chain costs in industry and firm by lessening reliance on sales forces

Seven Unique Features of E-Commerce Technology Information Density Changes industry structure by weakening powerful sales channels, shifting bargaining power to consumer Reduces industry and firm operations costs by lowering costs of obtaining, processing, and distributing information about suppliers and consumers

Information Density

Changes industry structure by weakening powerful sales channels, shifting bargaining power to consumer

Reduces industry and firm operations costs by lowering costs of obtaining, processing, and distributing information about suppliers and consumers

Case Studies 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 Existing catalog-sales support an Internet store Existing information systems made it easy to coordinate online stores and physical stores Customers’ Benefit Make shopping simple and convenient Company’s Benefit Cheaper to reach customers

Two reasons

Existing catalog-sales support an Internet store

Existing information systems made it easy to coordinate online stores and physical stores

Customers’ Benefit

Make shopping simple and convenient

Company’s Benefit

Cheaper to reach customers

Seamless Model: Office Depot 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

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

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

Reasons

Don’t have much experience with catalog retailing

Tend to focus exclusively on their physical stores

KB Toy and Kbkids.com

KB Toy joined with BrainPlay.com to create Kbkids.com

$80 million

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

Operation

Separation

Kbkids headquarter: Denver

KB Toy headquarter: MA

Integration

Share brand: promotion

Customer service

Purchasing function

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

Rite Aid and Drugstore.com

Customer benefit

Customers can pick up their Drugstore.com prescriptions at their local Rite Aid

A Spectrum of Choices Joint Venture Mostly integrated Slightly integrated Moderately integrated Partnership Separate Slightly integrated Moderately integrated Model Brand Management Operation Seamless Fully integrated Fully integrated Fully integrated

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

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