Online Business Models

Slide 1: Business Models Internet Marketing Dr. Mary Wolfinbarger

Slide 3: 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? 

Slide 4: 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

Slide 5: 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

Slide 6: Business Models Two steps required to make money: Driving traffic to your site  “Monetizing” that traffic 

Slide 7: 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?

Slide 8: Business Models Content Sponsorship  Solution Branding  Dynamic Pricing  Affiliate Programs  Bundling  Mass Customization  Value-Added Transactions  Integrated Digital Commerce 

Slide 9: 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

Slide 10: Solution Branding Identify a specific set of issues that  customers face and develop a set of interactive services that addresses those problems Example:TheKnot 

Slide 11: 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

Slide 12: 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

Slide 13: 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

Slide 14: 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

Slide 15: Dynamic Pricing Example: Priceline.com – excess demand is  matched with travelers (a “reverse auction”) Auctions – eBay, Sharper Image 

Slide 16: Dynamic Pricing Companies are often selling excess  inventory, or products about to be retired Example: HP Printers 

Slide 17: Dynamic Pricing Offering consumers different prices at your  website is resisted by consumers. But, is there a different way to offer  individualized prices? (THINK.)

Slide 18: 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?

Slide 19: 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

Slide 20: 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

Slide 21: Affiliate Partners Product classes w/ depth, variety probably  tend to benefit most (books, CDs)

Slide 22: 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

Slide 23: Bundling Offer unique bundles of information and  interactive services Charge for access (as opposed to the  business model of free content, revenue from advertising)

Slide 24: Bundling Example: Wall Street Journal  Free content proliferates on net  How to sell WSJ Interactive?

Slide 25: Bundling Example: Wall Street Journal Answer:  6 mo free trial – had to create perception of value in the marketplace

Slide 26: Bundling Example: Wall Street Journal 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

Slide 27: Bundling Example: Wall Street Journal  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 

Slide 28: 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

Slide 29: 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

Slide 30: 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

Slide 31: 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

Slide 32: 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

Slide 33: Mass Customization Transparency:  Customers can watch their system being built in real time

Slide 34: 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 16th century of the word ‘manufacture,’ which derives from the Latin manu factus, or made by hand.” --Schwartz, Digital Darwinism

Slide 35: How dynamic trade differs Traditional E arly Web Dynamic Trade Speed Days Weeks M inutes Product attributes Seller-selected Seller-selected B uyer-selected Prices M arket L ist L ist Production Pre-sale Pre-sale Post-sale Customer relationships Standard Targeted Customized V isibilit Customer Strategic asset L ocation database y

Slide 36: 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

Slide 37: 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)

Slide 38: Value-Added Transactions 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

Slide 39: Value-Added Transactions “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.)

Slide 40: Value-Added Transactions 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”

Slide 41: Value-Added Transactions “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

Slide 42: Value-Added Transactions “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.)

Slide 43: 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

Slide 44: Integrate Digital Commerce in Absolutely Everything 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 

Slide 45: Integrate Digital Commerce in Absolutely Everything 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

Slide 46: Integrate Digital Commerce in Absolutely Everything 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

Slide 47: Integrate Digital Commerce in Absolutely Everything Too many companies run Web as stand-alone  enterprise Example: Barnes and Noble (couldn’t return books ordered on the web in their store)

Slide 48: Integrate Digital Commerce in Absolutely Everything Need to integrate :  PCs  Smart cards (for payment)  Digital telephones  Personal Digital Assistants  Real World Stores  Cell phones (lots of work to do here!)

Slide 49: Other Business Models that haven’t done that well Virtual Malls (host multiple online merchants)  Buyer cooperatives (Mercata.com)  Struggling: ASPs (application service  providers)

Slide 50: 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)

Slide 51: 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)