Online Business Models

Business Models Internet Marketing Dr. Mary Wolfinbarger

Business Models
A plan for how to use the Internet to make money or increase organizational efficiency
For awhile, there were more VC $ than investment-worthy businesses (stopped in 2001)
The availability of VC money coupled with the high cost of customer acquisition resulted in too much money being spent and many losses
Some of these old plans are being re-reviewed for their potential now
Why?

Business Models
Example: Reel.com (is this a business model??)
Sold copies of Titanic for $9.99 (they cost them $15)
Spent millions advertising the promo
Burned through $600K/wk – total of 7.5M of VC funds
But, it was early in the game: they were purchased by a video rental chain (Hollywood Entertainment) for $100M

Business Models
Example: Reel.com
“ This lack of business model has been in evidence across a wide swath of the Web. The underlying idea – that as long as a company is the Web and perhaps attracting like of traffic, it will eventually, ultimately, somehow turn into a real business – has been replicated across many Web Species .”
--Evan Schwartz, Digital Darwinism, writing in 1999

Business Models
Two steps required to make money:
Driving traffic to your site
“Monetizing” that traffic

Business Models
“… offering the lowest prices and becoming the most efficient supplier…is not nearly enough. The only way to differentiate your Web venture is by creating new value-added applications, assembling bundles of information and inventing interactive services that transform mere transactions into unique, personalized experiences that competitors would have a tough time replicating.” -- Digital Darwinism
Note: Does this quote make you think of the Virtual Value Chain?

Business Models
Content Sponsorship
Solution Branding
Dynamic Pricing
Affiliate Programs
Bundling
Mass Customization
Value-Added Transactions
Integrated Digital Commerce

Content Sponsorship
Create websites
Attract a lot of traffic
Sell advertising
Can be used in combination with other models
Example:
Variation 1: software service or agent (e.g. Alexa) which tracks your behavior and sells ad space and/or information
Variation 2: use content to sell products, e.g. Reel.com and imdb.com
Variation 3: user generated content – Myspace.com, Blogger.com, Youtube.com

Solution Branding
Identify a specific set of issues that customers face and develop a set of interactive services that addresses those problems
Example: TheKnot

Solution Branding
These brands save time and simplify life
“ It is indeed telling that no new soft drinks or beans, soaps, detergents, no new cereals or frozen entrees, no new makes of cars and trucks have been established solely on web…none is really aimed at intricate multi-step problem domains as are many of the emerging brands on the web.” ---Digital Darwinism

Solution Branding
Example: Homeportfolio.com
“ Cybermediates” home improvement (a “dark ages industry”)
Pulls together everything from high end consumers – contractor names, estimates, product specs
Search site according to room being renovated
Contractors are screened
Sell sponsorships in portfolio areas

Solution Branding
Also called a “Metamediary” strategy
Some sites receive commissions for referrals
Some sites aggregate sellers/manufacturers in a special niche – e.g. www.myknobs.com
Yahoo! provides one-stop website businesses for smaller sellers
Shopping agents are a related type of “solution” for comparison shopping
www.mysimon.com , www.shopping.com

Dynamic Pricing
Allowing prices to fluctuate freely with supply and demand
The web is used to “collect demand”
Example: Band-X matches telecommunications sellers & buyers; takes 1% commission on sales (a B2B example)
Like a stock exchange for telecommunications capacity

Dynamic Pricing
Example: Priceline.com – excess demand is matched with travelers (a “reverse auction”)
Auctions – eBay, Sharper Image

Dynamic Pricing
Companies are often selling excess inventory, or products about to be retired
Example: HP Printers

Dynamic Pricing
Offering consumers different prices at your website is resisted by consumers.
But, is there a different way to offer individualized prices? (THINK.)

Affiliate Partners
Pay commissions to website owners for referrals
Amazon pioneered the Amazon Associates Program
How did Amazon got started in the first affiliate program?

Affiliate Partners
Amazon’s goals for the program: Word of Mouse!
Acquire new, loyal customers through referral
Enable others to participate in bookselling
Extend Amazon’s editorial influence into unique spheres
Affiliate partners can be businesses as well

Affiliate Partners
Drawbacks:
It cuts into profits if the customers are not “new” customers
Putting an affiliate button on your site sends customers off your site
Difficult to control quality of your partners
It probably displaces some advertising

Affiliate Partners
Product classes w/ depth, variety probably tend to benefit most (books, CDs)

Affiliate Partners/Viral marketing
“ Viral marketing” – your biggest fans post your logo, icons and characters on their websites
Not really an affiliate rel’p, but it could be
They aren’t paid
Why do some companies try to control/prevent this?
Some TV fan sites have substantial fan fiction – e.g. Xena

Bundling
Offer unique bundles of information and interactive services
Charge for access (as opposed to the business model of free content, revenue from advertising)

Bundling
Example: Wall Street Journal
Free content proliferates on net
How to sell WSJ Interactive ?

Bundling
Answer:
6 mo free trial – had to create perception of value in the marketplace

Bundling
Answer:
Created new interactive services regularly to prevent subscriber defection
Tech Center w/high tech coverage
Personal Journal (collects stories w/keywords selected by user)
Email notification for topics in which subscriber has indicated an interest
Career center

Bundling
Revenue is 50% advertising, 40% subscription, 10% premium services
Downside: articles don’t come up in search engines
New York Times model is slightly different
Free content day of news
Pay for back articles
Revenues from advertising, classified (they are dabbling in “behavioral” advertising)
Email topic alert service -- $29.99 (have access to articles for 90 days)
www.nytimes.com

Bundling
Example: Tickle.com
An information bundle – IQ tests, personality tests, includes some major well-known academic tests
$14.95/mo -- now profitable
Dating services $19.95/mo
Also sell advertising

Bundling
Research on selling info. bundles suggests that it’s a good strategy – low MC (marginal cost) of info goods is what makes it possible
The bundle will earn higher profits than selling singly
Consumers have high value for some goods but not others

Bundling
Charging for access can cause people to return
Keep evolving the value bundle
Invent ultra-high value services and keep them outside the bundle to offer as a premium product

Bundling
Example: ESPN – mixes free, advertising supported services with some pay services
for a fee can buy exclusive member content, expansive stat library, sports almanacs, fantasy leagues, ESPN Motion
Sports sites tend to be younger and male
In January 2003, half of all male internet users between 25-34 visited a sports site
Paid online sports content, $2 billion in 2003, growth expected to be 20% per year for next 4-5 years

Mass Customization Sell the custom product, than make it
Use information rather than inventory
Example: Dell
Dell has “negative cash conversion” of 5 days
Suppliers told Dell’s requirements daily—top 15 suppliers (90% of their supplies) have online procurement
Products are produced “on the network virtually” before actually produced

Mass Customization
Transparency:
Customers can watch their system being built in real time

Mass Customization
Mass customization has not worked well in the past
Reason?
High costs of managing unique customer rel’ps
“ In some sense we are resurrecting the blacksmith, reverting back to the strict definition of the 16 th century of the word ‘manufacture,’ which derives from the Latin manu factus , or made by hand .”
--Schwartz, Digital Darwinism

Mass Customization
Potential Drawbacks:
Returns of custom products
Expense of manufacturing
“ Choiceboard” strategy constrains the number of options needed to manufacture
Creating “channel strife”
Example: Nike is now offering some customized products

Mass Customization
Lands’ End sells custom chinos and jeans
www.landsend.com
40% of their online sales are now custom pants
Costs increase, but ROI can be higher
Lower inventory
Items don’t go on sale
Reduced returns
www.reflect.com (owned by P&G – now out of business)

Add new value to transactions between sellers and buyers
Example: Instill’s e •store (B2B food buying)
Model: Charge a fee of $2.50 to buyers for each order processed
Sign up distributors online –
their incentive is to reduce catalog costs, paperwork, cost of mishandled orders
“ eProcurement”
Food buying is an $150B industry in U. S. alone and 20,000 distributors relied on catalogs, phone calls and faxes

“ Like Instill, if you really want to change the industry, you’ll have to dive into the middle and figure out ways to add tremendous value for buyer and seller .”—Schwartz
Instill not only organizes buying, buyers can do what-if scenarios, generate reports, figure out how to lessen inefficiencies
Demand forecasting and collaboration tools have been added to support “supply chain management” (More on this later in course.)

Also possible in B2C:
Example: E*Trade
Bill Porter knew industry profits were shockingly fat and business was terribly inefficient
Early Slogan: “Someday we will all trade this way”

“Price is what hooks them…but this is about more than cheap trade. It’s the customization, the research tools, the portfolio mgmt. services, the comfort factor and the quality of info. that makes them stick around.”
-- Kathy Levinson, E*Trade

“ Finance is a pure info processing game…A lot of people in the business are doing things that should be done by computers…Our industry will shrink and shrink .” – David E. Shaw, CEO of D. E. Shaw (a super high-tech hedge fund.)

Integrate Digital Commerce in Absolutely Everything
All events, all employees, all sales components should tie in with web commerce
Bricks and Mortar operation should be fully integrated with online operation
Example: REI has installed banks of computer kiosks in store displaying online catalog at all locations

Example: REI
Results?
Can order merchandise not in stock
Deep data can be accessed by customers
Can print out full color maps of almost any destination on earth in the store
Typical store visit is 2 hours
Customers get home and are trained to visit your website
Local events promoted on web site

Example: REI
Three channels: catalogs, stores, website
“… [REI’s] focus on the customer is what drove REI to become one of the first companies to accomplish meaningful real-time integration among all channels of distribution.” Digital Darwinism

Example: REI
“ [Many businesses] see the Web as competing with their other lines of businesses. But we take Web orders from the Seattle customers who drive by our stores every day. Many customers are multichannel customers. We can’t choose how are customers want to shop. So we offer our product, any time, any place and answer any question.” – Matt Hyde, Director of REI sales

Too many companies run Web as stand-alone enterprise
Example: Barnes and Noble (couldn’t return books ordered on the web in their store)

Need to integrate :
PCs
Smart cards (for payment)
Digital telephones
Personal Digital Assistants
Real World Stores
Cell phones (lots of work to do here!)

Other Business Models that haven’t done that well
Virtual Malls (host multiple online merchants)
Buyer cooperatives (Mercata.com)
Struggling: ASPs (application service providers)

Other models
Netflix? What’s the model here?
www.netflix.com
A “Long Tail” business?
Woot!
How does this maximize the capability of the web?
User generated content/products (e.g. Threadless.com)

A final thought
“ In the future, there will be even weirder business models…we won’t just be doing obvious things like taking mail order and taking it on the net .”
-- Tim Berners-Lee (the CERN physicist who conceived the WWW)

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Online Business Models

by Marco Derksen on Feb 24, 2007

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