eCommerce-Selling New Value

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eCommerce-Selling New Value. Creating Business Cases in an Uncertain Environment. Session Objectives. Review the key components of an eCommerce business case Discuss steps needed to build a persuasive analysis - PowerPoint PPT Presentation

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  • eCommerce-Selling New ValueCreating Business Cases in an Uncertain Environment

  • Session ObjectivesReview the key components of an eCommerce business caseDiscuss steps needed to build a persuasive analysisExamine a case that demonstrates the complexities of eCommerce business case development

    1999 Andersen Consulting

  • A business case generally consists of three components.Business ModelFinancial ModelData and AssumptionsA business strategy specifying the primary approach and rationale for pursuing an eCommerce opportunityThe financial analysis of a proposed business model consisting of baseline projections, revenue and expense estimates and valuationsThe data, analysis and assumptions which support the financial model

    1999 Andersen Consulting

  • Several common eCommerce business models exist and new ones emerge continually.PortalContentProviderShopping/CommerceISP/Web HostAuctionSiteCommunitySoftwareProviderSecurityServicesConsultingAdvertising

    1999 Andersen Consulting

  • eCommerce financial models rely upon the same components as traditional businesses.Baseline ProjectionsExpense EstimatesRevenue EstimatesValuationsBusinessModel and Logic

    1999 Andersen Consulting

  • The data and assumptions that drive eCommerce financial models are the crux of the business case.Online PopulationHouseholds Making Online PurchasesPercentage of Online Purchasers Visiting MakeMeRich.com

    Percentage Purchasing from MakeMeRich.comAverage Purchase AmountOther Revenues

    Development CostsGeneral and Advertising ExpensesOperating CostsBaselineRevenueExpenseValuation

    Income StatementBalance SheetCash PositionNet Present ValueInternal Rate of ReturnEarnings MultipleRevenue MultiplePayback Period

    1999 Andersen Consulting

  • Session ObjectivesReview the key components of an eCommerce business caseDiscuss steps needed to build a persuasive analysisExamine a case that demonstrates the complexities of eCommerce business case development

    1999 Andersen Consulting

  • Sample Business Case Approaches :2. Stand-alone Web Venture1. Quick & Dirty4. ePremium - assessing market valuation impact3. eCommerce initiative for existing businesses

    1999 Andersen Consulting

  • The quick and dirty approach can be used to qualify multiple opportunities or model competitors.Approach 1: Quick & Dirty

    1999 Andersen Consulting

  • For a stand-alone web venture, we develop a model of all sources of revenue and expense.RewardsTransactionServicesCommerceMedia Placement Services(e.g. Double Click)Branded Advertiser/ SponsorTransactive ContentSponsorship/ AdvertisingBountyInterchangeRevenue Sharing

    BountyBanner RatesClick ThroughsLeads

    PurchasesAdvertising SpendingReturn/Cash FlowUserAccess FeeHelp Line FeeCustomer CareApproach 2: Web Venture

    1999 Andersen Consulting

  • eCommerce initiatives for existing businesses focus on cost reduction and revenue enhancement. Approach 3: Existing BusinessEnhance RevenueReduce CostsReduce Non-Care Related CostsReduce Care Related CostsPotential eCommerce BenefitsAttract/Retain More MembersExpand Share of Each Customer($ x)Value Potential($ y)$ p$ q($ A)$ BIs there compelling value? $ B-AHealth Services: CareFirst Example

    1999 Andersen Consulting

  • The impact of eCommerce initiatives on shareholder value can be a driving factor.Approach 4: Valuing the ePremium Market Capitalisation (US$ Bn)AOL$ 132Time-Warner$ 76Amazon.comBarnes & Noble$ 24$ 2eSchwab$ 43Merill Lynch$ 29eBaySothebys$ 23$ 2$ 16$ 9@HomeCablevision$ 34$ 33YahooCBS= Internet based companies

    Sources:Mary Meeker (AC), Andersen Consulting analysis.Yahoos NPAT for FY98 was US$32m. Estimate for FY99 is $104 m.Amazon.com posted a net loss of US$(74.4)m for 1998. AOL recorded a net loss of US$(0.5)Bn in 1997 and net income of only US$160 m in 1998.= Traditional Bricks and mortar

    1999 Andersen Consulting

  • The business case is a living deliverable that evolves with the stage of development.Broad ranges, reliable to +/- 40%Reliable to +/- 25%Reliable to +/- 10 or lessFuturePlanningAnalysisDesignBuild and TestDeployReasonable assumptionsDirectionally correctComparable opportunitiesConceptual design completeBusiness / tech requirements definedDevelopment options narrowedDetailed design completeDevelopment options selectedPricing finalizedOperational requirements knownRelease schedule knownIssues / risks mitigated

    1999 Andersen Consulting

  • Business case development is an iterative process with four basic steps.DevelopBusinessLogicCollectDataBuildSpreadsheetPerformSensitivityAnalysisClientCheckpointsStructure the analysis

    Confirm logic fits client strategy

    Define key metricsConduct research

    Normalize data

    Document assumptionsDesign workbook

    Enter data and documentation

    Check data and formulas Identify key sensitivities

    Alter variables within reasonable range

    Establish best/worst and most likely cases

    1999 Andersen Consulting

  • Investment reports, research firms and publications are the best sources of eCommerce data.How fast is the Internet growing in Belgium?What are the demographics of users?How much eCommerce is being conducted?Research Firms:ForresterGartner GroupIDCJupiterInvestment Banks:Alex BrownBankBoston Robertson StephensCSFBMerrill LynchPublications:Business 2.0International Journal of eCommerceInternet WorldRed Herring

    1999 Andersen Consulting

  • Estimates and projections differ by source, implying the need for additional analysis.On-Line Banking Projections (US)MillionsofUsers

    1999 Andersen Consulting

  • eCommerce revenue estimates are generated by analyzing four primary sources of income.Sources of RevenueTransactionsFees (Annual/Periodic)SponsorshipsOtherAdvertising Slotting feesPreferred provider certificationValue-added content subscriptionsEquity researchPortfolio managementServicesAdviceCustomer profilingAlertsValue-added network (ISP)Other premium servicesCommissions on sale of own/others productsBountiesPercentage of transaction (bp)Referral feesTransaction processing feesWallet-related revenueSale of aggregated user information that does not compromise customer privacy

    1999 Andersen Consulting

  • Estimating eCommerce advertising revenue is a complex task.Advertising and Sponsorship Revenue AssumptionsUniversal Advertising AssumptionsAverage page views/user per monthTotal banner ads per page

    Non-targeted AdvertisingPercent of total ad spaceCPMInventory sold

    Highly-targeted AdvertisingPercent of total ad spaceCPMInventory sold

    Sponsorship AssumptionsSponsorship spaces per pageCPMInventory sold

    352

    80%$3020%

    20%$4530%

    1$2550%

    1999 Andersen Consulting

  • eCommerce expense estimates are highly dependent upon the clients business model.Sources of ExpensesMarketingand SalesProduct/Service DevelopmentCustomer CareTechnology InfrastructureSubscriber/merchant acquisitionPromotional brandingRelationship managementContent, tools,applicationNormal contentExpert/celebrityAggregationWeb scrapingSite scrapingTechnical supportCustomer supportBillingHardware SoftwareHostingIntegrationG&ASalariesOccupancyEquipment Other

    1999 Andersen Consulting

  • Rough estimates of eCommerce site development costs can be useful for high-level business cases.Future Cost of an eCommerce Site (Circa 2000)Source: Gartner Group, Electronic Commerce and Extanet Applications, May 7, 1999$300,000 to $1 million$1 million to $5 million$5 million to $20+million

    1999 Andersen Consulting

  • Sensitivity analysis helps the team refine the business case and communicate key assumptions.BestWorstLikely

    Traffic Volume700500600

    % Purchasing15%5%10%

    Avg. Purchase$75$25$50

    Revenue$7,875$625$3,000Key Steps

    Identify key assumptions

    Establish reasonable ranges

    Vary each item independently

    Refine estimates if warranted

    Communicate critical items

    1999 Andersen Consulting

  • Business case data is presented using common financial statements and client-specific metrics.Projected Statement of IncomeRevenuesAdvertising & SponsorshipsTransactionsExpensesMarketing and SalesCustomer CareTechnologyGeneral and Admin. MarginInvestment RequirementsNPV (12% discount rate)2000$3.8($25.6)$31.5$3.2$6.2$22.0$2.1$10.5$1.02001$15.2($6.8)$15.1$15.0$8.4$10.5$3.22002$33.3($2.6)$31.1$31.5$18.3$10.5$6.72003$54.1$32.2$11.4$24.0$29.7$9.3$11.12004$71.6$55.4$54.1$22.5$39.4$9.3$14.7($mm)

    1999 Andersen Consulting

  • Several lessons are worth sharing.Project Team:Begin data gathering as early as possibleExpect to dedicate a strong resource for the durationGuide spreadsheet organization and designEnsure sufficient self-checksDocument excessivelyStaff the right skillsSpread model ownership

    Client:Leverage sponsor early to get internal contacts and dataGet buy-in on model from a senior finance representativeDo not show numbers without a detailed internal reviewDo not try to walk executives through the modelTrain client to assume ownership of model

    1999 Andersen Consulting

  • Session ObjectivesReview the key components of an eCommerce business caseDiscuss steps needed to build a persuasive analysisExamine a case that demonstrates the complexities of eCommerce business case development

    1999 Andersen Consulting

  • A major European bank wanted to explore banking and commerce opportunities via the mobile phone.Applications of Interest:Banking balance inquiryBanking transactionsSecurities alertsSecurities transactionsMobile eCommerceWeb content deliveryChip Card:

    SecurityPaymentsRel