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Chapter Two
Business Models for E-Commerce
By:Marya Sholevar
Department of Banking and Finance
Fall 2014
E-Commerce Business Models
• A business model is a set of planned activities
designed to result in a profit in a marketplace.
• An e-commerce business model aims to use and
leverage the unique qualities of the Internet, the
Web, and the mobile platform.
• There are eight key elements of a business
model.
Key Elements of a Business Model
Components Key Questions
Value proposition Why should the customer buy from you?
Revenue model How will you earn money?
Market opportunity What marketspace do you intend 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 or services to attract
your target audience?
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?
1-Value Proposition

Defines how a company’s product or service
fulfills the needs of customers.

Questions to ask:
− Why should the customer buy from you?
− What will your firm provide that others do not or
cannot?

Successful e-commerce value propositions:
− Personalization/customization
− Reduction of product search, price discovery costs
− Facilitation of transactions by managing product
delivery
2- Revenue Models
• Describes how the firm will earn revenue, generate profits,
and produce a superior return on invested capital
• Most companies rely on one, or some combination, of the
following major revenue models:
• Advertising (Yahoo)
• Subscription (WSJ)
• Transaction fee (eBay)
• Sales (Amazon)
• Affiliate (MyPoints)
• Why may a company want more than one revenue
model?
2- Revenue Model
2-1 Advertising revenue model:

A company provides a forum for advertisements and
receives fees from advertisers.
2-2 Affiliate revenue model:

A company steers business to an affiliate and receives
a referral fee or percentage of the revenue from any
resulting sales.

For example,MyPoints.com makes money by
connecting companies with potential customers by
offering special deals to its members. When they take
advantage of an offer and make a purchase, members
earn “points” they can redeem for freebies, and
MyPoints.com receives a fee.
3- Market Opportunity

Refers to the company’s intended marketspace
and the overall potential financial opportunities
available to the firm in that marketspace.

Marketspace:
− Area of actual or potential commercial value in
which company intends to operate.

Realistic market opportunity:
− Defined by revenue potential in each market niche
in which company hopes to compete.

Market opportunity typically divided into
smaller niches
4-Competitive Environment
• Refers to the other companies operating in the same
marketspace selling similar products.
• Who else occupies your intended marketspace?”
− Other companies selling similar products in the same
marketspace.
− Includes both direct and indirect competitors.
• Influenced by:
− Number and size of active competitors
− Each competitor’s market share
− Competitors’ profitability
5- Competitive advantage

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.

“What special advantages does your firm bring
to the marketspace?”
− Is your product superior to or cheaper to produce
than your competitors’?
5- Competitive advantage

Important concepts:
− 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.
− Complimentary resources: resources and assets
not directly involved in the production of the product
but required for success such as marketing,
management, financial assets, and reputation.
− Unfair competitive advantage occurs when one
firm develops an advantage based on a factor that
other firms cannot purchase.
5- Competitive advantage

Important concepts:
– 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.
– Leverage: when a company uses its
competitive advantages to achieve more
advantage in surrounding markets.
6- Market Strategy

The plan you put together that details exactly
how you intend to enter a new market and
attract new customers.

Details how a company intends to enter market
and attract customers Best business concepts
will fail if not properly marketed to potential
customers.

Examples:
− YouTube having social network marketing strategy
which lets users to post content on the site for free;
− AOL distributing out free trial CDs through
magazines and newspapers
7- Organizational development
plan

Development plan describes how the company
will organize the work that needs to be
accomplished.

Work typically divided into functional
departments, e.g, production, shipping,
marketing, customer support, and finance

As company grows, hiring moves from
generalists to specialists , e.g., eBay starting
out from one- person firm into multi-
departmental large enterprise
8- Management team

Management team: employees of the company
responsible for making the business model
work.

A strong management team:
− Can make the business model work
− Can give credibility to outside investors
− Has market-specific knowledge
− Has experience in implementing business plans
Categorizing E-commerce
Business Models

There are many e-commerce business models,
and more are being invented every day.

In this course we categorize business models
according to:
– E-commerce sector (e.g. B2B, B2C, C2C)
– Type of e-commerce technology (e.g. P2P, m-
commerce)

Similar business models appear in more than
one sector, e.g., e-tailer and e-distributors.

Some companies use multiple business
models (e.g. eBay being B2C market maker,
B2C Business Mode: Portal
model

Business-to-consumer (B2C) e-commerce, in
which online businesses seek to reach
individual consumers, is the most well-known
and familiar type of e-commerce. No sale
directly.

Portal offers users powerful Web search tools
as well as an integrated package of content
and services all in one place.

Revenue models:
– Advertising, referral fees, transaction fees,
subscriptions

Variations:
B2C Models: E-tailer

Online version of traditional retailer

Revenue model:
– Sales

Variations:
– Virtual merchant– Amazon, BlueNile, Drugstore
– Bricks-and-clicks – Wal-Mart, Staples, JCPenny
– Catalog merchants – LLBean, CDW
– Manufacturer-direct – Sony, Dell, IBM

Low barriers to entry

Keys to success in e-tailing
B2C Models: Transaction Broker

Transaction broker: site that processes
transactions for consumers that are normally
handled in person, by phone, or mail.

Primary value proposition

saving time and money

Revenue model:
– Transaction fees

Industries using this model:
– Financial services–
– E*Trade, Ameritrade, Schwab
B2B Business
Models

Net marketplaces
– E-distributor
– E-procurement
– Exchange
– Industry consortium

Private industrial network
– Single-firm networks
– Industry-wide networks
B2B Models: E-
distributor

Supplies products and services directly to
individual businesses.

Owned by one company seeking to serve many
customers

Revenue model:
– Sales of goods

Examples: Grainger.com (largest distributor of
maintenance, repair, and operations (MRO)
supplies
B2B Models: E-
procurement

Creates and sells access to digital E-markets
Includes:
– B2B service providers (sells business services
to other firms), application service providers
(ASPs sell access to Internet-based software to
other companies)

Creating custom integrated online catalogs,
(where supplier firms can list their offerings) for
purchasing firms

Revenue model:
– Transaction fees, service fees, supply-chain
management, fulfillment services
B2B Models: Exchanges

Electronic digital marketplace where hundreds
of suppliers meet a smaller number of very
large commercial buyers

Independently owned vertical digital
marketplace, e.g., steel, aluminum, polymers,
for direct inputs to production and short-term
contracts

Revenue model:

Transaction fees (based on transaction size),
commission fees

Create powerful competition between
Private Industrial Networks

Digital network used to coordinate
communication among firms engaged in
business together

Network owned by a single large buying firm

Typically evolve out of company’s internal
enterprise system,ERP system

Examples Walmart’s network for suppliers
Other E-commerce Business
Models

Consumer-to-consumer (C2C)

eBay, Craigslist

Peer-to-peer (P2P)

The Pirate Bay, Cloudmark (P2P anti-spam
solution to protect e-mailboxes)

M-commerce:

Extends existing e-commerce business models to
service mobile workforce, consumers

Unique features include mobility, cameras to scan
product codes, GPS
E-Commerce Business Models Chapter

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E-Commerce Business Models Chapter

  • 1. Chapter Two Business Models for E-Commerce By:Marya Sholevar Department of Banking and Finance Fall 2014
  • 2. E-Commerce Business Models • A business model is a set of planned activities designed to result in a profit in a marketplace. • An e-commerce business model aims to use and leverage the unique qualities of the Internet, the Web, and the mobile platform. • There are eight key elements of a business model.
  • 3. Key Elements of a Business Model Components Key Questions Value proposition Why should the customer buy from you? Revenue model How will you earn money? Market opportunity What marketspace do you intend 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 or services to attract your target audience? 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?
  • 4. 1-Value Proposition  Defines how a company’s product or service fulfills the needs of customers.  Questions to ask: − Why should the customer buy from you? − What will your firm provide that others do not or cannot?  Successful e-commerce value propositions: − Personalization/customization − Reduction of product search, price discovery costs − Facilitation of transactions by managing product delivery
  • 5. 2- Revenue Models • Describes how the firm will earn revenue, generate profits, and produce a superior return on invested capital • Most companies rely on one, or some combination, of the following major revenue models: • Advertising (Yahoo) • Subscription (WSJ) • Transaction fee (eBay) • Sales (Amazon) • Affiliate (MyPoints) • Why may a company want more than one revenue model?
  • 6.
  • 7. 2- Revenue Model 2-1 Advertising revenue model:  A company provides a forum for advertisements and receives fees from advertisers. 2-2 Affiliate revenue model:  A company steers business to an affiliate and receives a referral fee or percentage of the revenue from any resulting sales.  For example,MyPoints.com makes money by connecting companies with potential customers by offering special deals to its members. When they take advantage of an offer and make a purchase, members earn “points” they can redeem for freebies, and MyPoints.com receives a fee.
  • 8. 3- Market Opportunity  Refers to the company’s intended marketspace and the overall potential financial opportunities available to the firm in that marketspace.  Marketspace: − Area of actual or potential commercial value in which company intends to operate.  Realistic market opportunity: − Defined by revenue potential in each market niche in which company hopes to compete.  Market opportunity typically divided into smaller niches
  • 9.
  • 10. 4-Competitive Environment • Refers to the other companies operating in the same marketspace selling similar products. • Who else occupies your intended marketspace?” − Other companies selling similar products in the same marketspace. − Includes both direct and indirect competitors. • Influenced by: − Number and size of active competitors − Each competitor’s market share − Competitors’ profitability
  • 11. 5- Competitive advantage  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.  “What special advantages does your firm bring to the marketspace?” − Is your product superior to or cheaper to produce than your competitors’?
  • 12. 5- Competitive advantage  Important concepts: − 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. − Complimentary resources: resources and assets not directly involved in the production of the product but required for success such as marketing, management, financial assets, and reputation. − Unfair competitive advantage occurs when one firm develops an advantage based on a factor that other firms cannot purchase.
  • 13. 5- Competitive advantage  Important concepts: – 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. – Leverage: when a company uses its competitive advantages to achieve more advantage in surrounding markets.
  • 14. 6- Market Strategy  The plan you put together that details exactly how you intend to enter a new market and attract new customers.  Details how a company intends to enter market and attract customers Best business concepts will fail if not properly marketed to potential customers.  Examples: − YouTube having social network marketing strategy which lets users to post content on the site for free; − AOL distributing out free trial CDs through magazines and newspapers
  • 15. 7- Organizational development plan  Development plan describes how the company will organize the work that needs to be accomplished.  Work typically divided into functional departments, e.g, production, shipping, marketing, customer support, and finance  As company grows, hiring moves from generalists to specialists , e.g., eBay starting out from one- person firm into multi- departmental large enterprise
  • 16. 8- Management team  Management team: employees of the company responsible for making the business model work.  A strong management team: − Can make the business model work − Can give credibility to outside investors − Has market-specific knowledge − Has experience in implementing business plans
  • 17. Categorizing E-commerce Business Models  There are many e-commerce business models, and more are being invented every day.  In this course we categorize business models according to: – E-commerce sector (e.g. B2B, B2C, C2C) – Type of e-commerce technology (e.g. P2P, m- commerce)  Similar business models appear in more than one sector, e.g., e-tailer and e-distributors.  Some companies use multiple business models (e.g. eBay being B2C market maker,
  • 18.
  • 19. B2C Business Mode: Portal model  Business-to-consumer (B2C) e-commerce, in which online businesses seek to reach individual consumers, is the most well-known and familiar type of e-commerce. No sale directly.  Portal offers users powerful Web search tools as well as an integrated package of content and services all in one place.  Revenue models: – Advertising, referral fees, transaction fees, subscriptions  Variations:
  • 20. B2C Models: E-tailer  Online version of traditional retailer  Revenue model: – Sales  Variations: – Virtual merchant– Amazon, BlueNile, Drugstore – Bricks-and-clicks – Wal-Mart, Staples, JCPenny – Catalog merchants – LLBean, CDW – Manufacturer-direct – Sony, Dell, IBM  Low barriers to entry  Keys to success in e-tailing
  • 21. B2C Models: Transaction Broker  Transaction broker: site that processes transactions for consumers that are normally handled in person, by phone, or mail.  Primary value proposition  saving time and money  Revenue model: – Transaction fees  Industries using this model: – Financial services– – E*Trade, Ameritrade, Schwab
  • 22. B2B Business Models  Net marketplaces – E-distributor – E-procurement – Exchange – Industry consortium  Private industrial network – Single-firm networks – Industry-wide networks
  • 23. B2B Models: E- distributor  Supplies products and services directly to individual businesses.  Owned by one company seeking to serve many customers  Revenue model: – Sales of goods  Examples: Grainger.com (largest distributor of maintenance, repair, and operations (MRO) supplies
  • 24. B2B Models: E- procurement  Creates and sells access to digital E-markets Includes: – B2B service providers (sells business services to other firms), application service providers (ASPs sell access to Internet-based software to other companies)  Creating custom integrated online catalogs, (where supplier firms can list their offerings) for purchasing firms  Revenue model: – Transaction fees, service fees, supply-chain management, fulfillment services
  • 25. B2B Models: Exchanges  Electronic digital marketplace where hundreds of suppliers meet a smaller number of very large commercial buyers  Independently owned vertical digital marketplace, e.g., steel, aluminum, polymers, for direct inputs to production and short-term contracts  Revenue model:  Transaction fees (based on transaction size), commission fees  Create powerful competition between
  • 26. Private Industrial Networks  Digital network used to coordinate communication among firms engaged in business together  Network owned by a single large buying firm  Typically evolve out of company’s internal enterprise system,ERP system  Examples Walmart’s network for suppliers
  • 27.
  • 28. Other E-commerce Business Models  Consumer-to-consumer (C2C)  eBay, Craigslist  Peer-to-peer (P2P)  The Pirate Bay, Cloudmark (P2P anti-spam solution to protect e-mailboxes)  M-commerce:  Extends existing e-commerce business models to service mobile workforce, consumers  Unique features include mobility, cameras to scan product codes, GPS