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Business Models for Electronic MarketsPaul Timmers aa European Commission, Directorate-General III, April 1998,

Online Publication Date: 01 January 1998

To cite this Article Timmers, Paul(1998)'Business Models for Electronic Markets',Electronic Markets,8:2,3 8To link to this Article: DOI: 10.1080/10196789800000016URL: http://dx.doi.org/10.1080/10196789800000016

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BUSINESSMODELSFOR ELECTRONICMARKETS

ABSTRACTElectronic commerce over the Internet maybe either complementary to traditionalbusiness or represent a whole new line ofbusiness. In either case, in view of th e newfeatures of the In ternet, critical questionsto be answered include:+ what are the em erging business models;

and related to this,+ which strategic marketing approaches

are applied, or emerging.This article addresses the first questionabove by providing a framework for theclassification of Interne t electronic com-merce business models. This frameworkhas been developed on the basis of cur-rent commercial Internet business andexperim ental work in European RtD pro-grammes.

Electronic commerce.i.Electronic com-merce; can be defined loosely as 'doingbusiness electronically" (European Com-mission 1997). Electronic commerce in-cludes electronic trading of physical goodsand of intangibles such as information.This encompasses all the trading steps suchas online marketing, qrdering, payment,and support for delivery. Electronic com-merce includes the electronic provision ofs e ~ c e s ,such as after-sales support oronlin e legal advice. Finally it also includeselectronic support for collaboration be-tween companies, such as collaborativedesign.Some f o m of elemonic commerce existsalready for over 2 0 years, e.g. electronicdata interchange (EDI),in sectors such asretail and automotive, and CALS (Compu-ter Assisted Lifecycle Support) in sectorssuch as defence and heavy m anufacturing.These forms of electronic commerce havebeen limited in their diffusion and take-up. Recently, however, we see an explo-

sive development in electronic commerce.The reasons for that are, of course, theInternet an d the W orld Wide Web, whichare making electronic commerce muchmore accessible. They offer easily usableand low cost forms of electronic com-merce. Electronic commerce on th e basisof the Internet is set to become a veryimportant way of doing business.

*Mr Paul T imm m([email protected]) is currently

head of secto r in the EuropeanCommission, Directorate-General III-

Industry, in the Infonna tion Technolo-gies Directorate. H e is charged withelectronic commerce in the context

of the Europ ean co mponent ofthe G 7 Pil ot "A Global Mark etplace for

SMEs" and in the IT research anddevelop ment program me ESPRIT.

Previous positions in the EuropeanCommission include Ass istan t to

the Dire ctor of Telema tics Applica tionsProgramme and project manager intechnology for disabled and elderly

people. Before joining the CommissionMr. Timmm held various positions in

product marketing and softwaredevelopment in the IT industry. He hasco-founded a software company.

Mr. Timmers holds in PhD in theoreticalphysics and a certijicate in business

administration.

Forrester (1997) forecasts th at b usiness-to-business (B-to-B) electronic commercewill grow to $327 billion in the year2002 - that is the value of goods and serv-ices traded via the Internet. This excludesthe value of the hardware, software ands e ~ c e sthat are needed to perform elec-tronic comm erce, whos e value is estimatedat several hundred billions of dollars like-wise. Between 1996 and 1997 electroniccommerce has been growing at over 1000percent per year. While such high growthrates will not be sustained, it is clear thatelectronic com merce will become perva-sive: Datam onitor (1997)expects in 5 yearstime 630,000 US companies and 245,000European companies to be invo lved in full-fledged integrated B-to-B electronic com-merce. The Report o n E lectronic Commerce(1998) expects that t he business-to-busi-ness penetration rate will grow from 1090in 1997 to 90% in 2001.Although the number of consumers on theNet by the year 2000 could be several 100millions it is expected that business-to-business will constitute the larger part ofelectronic commerce.With the new medium - the Internet -also new ways of doing business are de-veloping. Most of those that capture thepublic attention are consumer-oriented(suchasAmazon.com, Tesco). Less public-ity is given to the way the Interne t can beused for business-to-business electroniccommerce, although such commerce is areality today (e.g. Cisco, GeneraI Electronicprocurem ent, etc). New forms of electroniccommerce are being piloted in m any sec-tors of industry, for business-to-business,business-to-consumer and business-pub-Iic administration srelationships. A dvancedpilot experiments in new business modelsarebeing supported by the European Com-mission in the ESPRIT and ACTS Euro-pean research, technology developmentand demonst~ationprogrammes. Thisworkis part of a more general framework ofpolicy-making and programmes for globalelectronic commerce, which also addressesthe legal and regulatory framework andother factors in the business environment.


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CLASSIFICATION OF BUSINESS MO DEL SThe literature about Internet electroniccommerce is not consistent in the usageof the term 'business model', and, more-over, often authors do not even give adefinition of the term.Therefore, before embarking up on an ap-proach to co nstruct business models, firsta definition is giving of what is mean t bya business model.Definition of a business modelt An architecture for the product, serv-

ice and information flows, including adescription of the various business ac-tors and their roles; and

t A description of th e potential benefitsfor the various business actors; and

t A description of the sources of rev-enues.

A business model in itself does not yetprovide understan ding of how it will con-tribute to realise the business mission ofany of the companies who is an actorwithin the model. We need to know themarketing strategy of the com pany i n or-der to assess the comm ercial viability an dto answer questions like: how is com peti-tive advantage being built, what is thepositioning, what is the marketing mix,which prod uct-market strategy is followed.Therefore it is useful to identify beyondbusiness m odels also 'marketing models".Definition of a marketing model

A business model; andt The marketing strategy of the business

actor under consideration.The classification developed below is forbusiness models only.

VALUE CHAINSAND BUSINESS MODELS

A systematic approach to identifyingarchitectures for business models can bebased on value chain de-construction andre-construction, that is identifying valuechain elements, and identifying possibleways of integrating information alon g thechain. It also takes into account the pos-

sible creation of electronic m arkets. Thesecan be fully open, that is, with an arbi-trary number of buyers and sellers, or'semi-open' that is with one buyer andmultiple sellers (as in public procurement)or vice-versa. The schem e is a s follows:(i) Value chain de-construction means

identifying the elements of the valuechain, for exam ple as in Porter (1985)who distinguishes nine value chain el-ements. Namely, as primary elementsinbound logistics, operations, out-bound logistics, marketing Et sales,senrice; an d as support activities tech-nology development, procurement,human resource management, corpo-rate infrastructure;

(ii) Interaction patterns, which can be 1-to-1, 1-to-many, many-to-1, many-to-many. In this context '1-to- 1' is tobe understood in as enumerating thenumber of parties involved rather thanin the 'one-to-one marketing' sense.It is also understood that 'many'means that information from severalactors is being combined.

(iii) Value chain re-con struction, tha t is in-tegration of information processingacross a number of steps of the valuechain. The combinations are of thevalue chain elements involved in suchintegration. Two sets of value chainelements would be mentioned if weconsider the interaction patterns men-tioned i n point (ii) above.

Possible architectures for business mod-els arethen constructed by combining in-teraction pa tterns with value chain inte-gration. For example, an electronic shopis 'single actor'-to-'single actor' market-in g 8 sales. A basic electronic mall con-sists of N times an e-shop. An electronicmall having a common brand offersmany-to- 1 marketing 8 sales (brand in-formation is common across 'many' sup-pliers in the m all).An electronic auction'The inventory of European electronic commercerelated projects (www.ispo.cec.belccommcrcelcromproj.htm) was a particularly useful too l to iden -tify business models and classify p rojects accordingly.

where multiple buyers are bidding for thesales offer of one supplier brings toge thersales of one supplier at a time with theprocurement of multiple buyers, whilecombining the bid information from themultiple buyers.The a priori feasibility of technical im-plementation of the architecture of anybusiness model depends very much uponthe state-of-the-art of the technology.This holds for the integ ration dimension,for the realisation of the single functions,and for the support for interaction pat-terns. The commercially viability of anybusiness model is a different m atter alto-gether which is the do main of a market-ing model analysis.We observe, from actual business on theInternet a nd pilot projects, that:t inf om atii n and communication tech-

nology enables a wide range of busi-ness models;

+ the capability of the state-of-the-arttechnology is just on e criterion inmodel selection;

+ technolog y in itself provides n o guide-lines for selecting a model in com mer-cial terms;

t guidance to technology developmentcan come from the definition of newmodels;

4 many of the conceivable models havenot y et been experimented with com-mercially.

While the systematic approach above leadsto a huge number of potential businessmodels, we observe in practice only a sm allnumber of these being implemented. Inthe next section eleven such businessmodels o r generalisations of specific busi-ness models are included. Examples of allof these can be found o n the Internet to-day. Some of these are still experimentalwhile others are in fully commercial op-eration. The selection of eleven has beenmade on the basis of background and casestud y research1. The more general ap-proach presented above rema ins useful inorder to identify and experiment with newbusiness models.


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BUSINESSMODELSEleven business models tha t are currentlyin use or being experimented with arelisted below.E-SHOPThis is Web marketing of a co mpany or ashop. In first instance this is done to pro-mote the company and its goods or serv-ices. Increasingly added is the possibilityto order and possibly to pay, often com-bined with traditional m arketing channels.Benefits sought fo r the company are in-creased demand, a low-cost route to glo-bal presence, and cost-reduction of pro-motion and sales. Benefits for thecustomers can be lower prices comparedto the traditional offer, wider choice, bet-ter information, and convenience of se-lecting, buying and delivery, including24-hour availability. Where repeat visitsto the e-shop are done, one-to-one mar-keting can increase those benefits for bothseller and buyer. Seller revenues ar e fromreduced cost, increased sales, and possi-bly advertising.. Most commercial Websites are business-to-consumer electronicshops, selling for example flowers byFleurop (http:llwww.fleurop.com) or airtickets by Travelocity (http://www.trave1ocity.com).E-PROCUREMENTThis is electronic tendering a nd procure-ment of goods and services. Large com-panies or public authorities implementsome form of e-procurement on th e Web(an example is Japan Airlines at Fehler!Textmarke nicht definiert.). Benefits sough tare to have a wider choice of supplierswhich is expected to lead to lower cost.better quality, improved delivery, reducedcost of procurement (e.g. tendering specsare downloaded by suppliers rather thanmailed by post). Electronic negotiation andcontracting and possibly collaborativework in specification can further enhancetime- and cost saving and convenience.For suppliers the benefits are in m ore ten-dering opportunities, possibly o n a globalscale, lower cost of submitting a tender,and possibly tendering in parts which m aybe better suited for smaller enterprises, or

collaborative tend ering (if the e-procure-ment site supports forms of collaboration).The main s o m e of income is reductionof cost (automated tender processing, morecost-effective offers).E-AUCTIONElectronic auctions (o n the In ternet) offeran electronic implementation of the bid-ding mechanism also known from tradi-tional auctions. This can be accompaniedby multimedia presentation of the goods.Usually they are not restricted to this sin-gle function. They may also offer integra-tion of the bidding process with contract-ing, payments and delivery. The sourcesof income for the auction provider are inselling the techno logy platform, in trans-

Business Models (dz)

(collection of e-shops), aggregators,industly sector marketplace3rd party marketplacecommon marketing frontend and transactionsupport to multiple businessI

Figure I Internet business models - I

action fees, and in advertising. Benefitsfor suppliers and buyers are increased ef-ficiency and time-savings, no need forphysical transport until th e deal has beenestablished, global sourcing. Because ofthe lower cost it becomes feasible to alsooffer for sale small quantities of low value,e.g. surplus goods. Sources of income forsuppliers are in reduced surplus stock,better utilisation of production capacity,lower sales overheads. S ources of incomefor buyers are in reduced purchasing over-head cost and reduced cost of goods orservices purchased . Examples of electronic

auctions are the ESPRIT project Infomar(for ESPRlT and ACTS projects see www.ispo.cec.belecommerce/ecomproj.htm) andFastParts (www.fastparts.com 1.E-MALLAn electronic mall, in its basic form, con-sists of a collection of e-shops, usuallyenhanced by a comm on umbrella, for ex-ample of a well-known brand. It might beenriched by a common - guaranteed -payment method.An example is ElectronicMall Bodensee (www.emb.ch), giving en-try to individual e-shops. When they spe-cialise on a certain market segment suchmalls become more of an industry mar-ketplace, like Industry.Net (www.industry.net), which can add value by virtual com-munity features (FAQ, discussion forums,closed user groups, ...). The e-mall opera-tor may not have an interest in an indi-vidual business that is being hosted. In-stead the operator may seek benefits inenhanced sales of the supporting technolo-gies (e.g. IBM with W orld Avenue). Alter-natively benefits are sought in services(e.g. Barclays with Barclaysquare), or inadvertising space and/or brand rein-forcement or in collective benefits for thee-shops that are hosted su ch as increasedtraffic, with the expectation tha t visitingone shop on the e-mall will lead to visitsto 'neighbouring' shops.Benefits for the customer (real or hopedfor) are the benefits for each individual e-shop (see above) with additional conven-ience of easy access to othe r e-shops andease of use through a comm on user inter-face. When a brand nam e is used to hostthe e-mall, this should lead to more trust,and therefore increased readiness to buy.Benefits for the e-mall members (the e-shops) are lower cost and complexity tobe on the Web, with sophisticated host-ing facilities such as electronic payments,and additional traffic generated fromother e-shops on the mall, or from theattraction of the hosting brand. Revenuesare from membership fee (which can in-clude a contribution to software/hardwareand set-up cost as well as a service fee),


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advertising, and possibly a fee o n trans-actions (if the mall provider processespayments).

The commercial viability of the e-mallmodel has been questioned in its currentimplementation and in the current state-of-the-market. IBM World Avenue, forexample, has folded. One of the reasonsmay be that the 'neighbour' concept doesnot translate into physical distance incyberspace, where each location is onlyone click away. Therefore, not much ad-ditional convenience in finding shops isdelivered. Furthermore, the sophisticateduser (i.e. th e majority of those o n the Webtoday!) is able to handle a variety of selle r-buyer user interfaces and therefore maybe less attached to a uniform user inter-face. On the other hand, the re are also in-dications that an increasing number ofcompanies wish to outsource their Web-operations, which may increase the op-portunity for e-malls or 3rd party mar-ketplaces (s ee below). Possibly this reflectsthe shift from early adopters to mass-mar-ket use of the Internet am ongst businesses.

THIRDPARTY MARKETPLACEThis is an emerging model that is suitablein case companies wish to leave the Webmarketing to a 3rd party (possibly as anadd-on to their othe r channels). They allhave in common that they offer at least auser interface to the suppliers' productcatalogues. Several additional features likebranding , paymen t, logistics, ordering, andultimately the full scale of secure trans-actions are added to 3rd party market-places. An example for business-to-con-sumers is to provide a common marketingaround a special one-off w en t profiled bywell-known brand names, such as the re-cent e-Christmas expe rim ent ISPs may beinterested in this model for business-to-business, using their Web builder exper-tise. However, it may equally appeal tobanks or other value chain service pro-viders. Revenues can be generated on thebasis of one-off membership fee, servicefees, transaction fee, or percentage ontransaction value. Examples of 3rd partymarketplace providers are Citius (as de-

scribed by Jellasi and Lai 1996),Tradezone(http://tradezone. ony xnet ), and to someextent FedEx Virtualorder (wwwfedex.com).VIRTUALCOMMUNITIESThe ultimate value of virtual communi-ties is coming from the members (custom-e n or partners), who add their informa-tion onto a basic environment providedby the virtual community company. Themembership fees as well as advertisinggenerate revenues. A virtual communitycan also be an importa nt add-on to othermarketing operations in order to build cus-tomer loyalty and receive customer feed-back, (see Hagel and Armstrong 1997).

Business h d e k (212)

focus on added value of communication

support part of value chain, e.g. logistics,

added-value by integrating multiple steps

cg . collaborative design

trust providers. business information andconsultancy

Figure 2 Internet business m o d e b - r

Virtualcommunities are already abunda ntwithin specific market sectors for exam-ple in books such as Amazon.com.apparellgarments (http://apparelex.com/bbs/index.htm), steel industry (www.indconnect.com/steelweb), nanotech-nology (www.nanothinc.com), and manyothers. Firefly provides an interesting ca seof virtual community building, addingvalue to the community by building cus-tomer profiles (www.firefly.net). Virtualcommunities are also becoming an addi-tional function to enhance the attractive-ness and oppomnities for new servicesof several of the other business models

listed here (e.g. e-malls, co llaborative plat-forms, or 3rd party marketplaces).VALUE CHAIN SERVICE PROVIDERThese specialise on a specific function forthe value chain, such as electronic pay-ments or logistics, with the intention tomake that into their distinct competitiveadvantage. Banks for example have beenpositioning themselves as such since long,but may find new opportunities using net-works. New approaches are also emergingin productionlstock management wherethe specialised expertise needed to ana-lyse and fine-tune production is offeredby new intermediaries. A fee- or percent-age based scheme is the basis for revenues.Examples of value chain service provid-e n are the FedEx or UPS (www.ups.com )Web-based package shipping support.VALUE CHAIN INTEGRATORSThese focus on integrating multiple stepsof the value chain, with the potential toexploit the information flow betweenthose steps as further added value. Rev-enues are coming from consultancy feesor possibly transaction fees. An examplevalue chain integrator is the ESPRiTproject TRANS2000 in the area of multi-modal transport. Marshall offers its cus-tomers added-value from transaction in-formation, which is provided throughExtranet solutions like PartnerNet andMarshallNet (see Young et a1 1996,Mou gayar 1997, and G7-10 WG 1997).Some of the 3rd party marketplace pro-viders are moving into the direction ofvalue cha in integration.COLLABORATION PLATFORMSThese provide a set of tools a nd a n infor-mation environment for collaboration be-tween enterprises. This can focus on spe-cific functions, such as collaborativedesign and engineering, or in providingproject support with a virtual te am of con-sultants. Business opportunities are inmanaging the platform (membershiplus-age fees), and in selling the specialist tools(e.g. f or design, workflow, doc ument m an-agement). Examples are in the productsand projects spun off from the Global


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Figure 3Classillcationof Internetbusiness modeb

MultipleFunctions/Integrated

. .- .I Collaboration Platform ] . - --- ,% c ~ :-' < I

SingleFunction

lower Degree of Innovation h i g h

Engineering Network concept (Rethfeldt1994)such as Deutsche Telekom/Globana'sICS and the ESPRIT GENIAL project andin experimental projects for 3D collabo-rative design and simulation2.~NFO RMATIO NBROKERAGE, TRUSTAND OTHER SERVICES

A whole range of new info rmation servicesan? emerging, to add value to the hugeamo unts of data available on the open net-works or coming from integrated businessoperations, such a s inform ation search, e.g.Yahoo (www.yahoo.com), customer profi-ling, business opportunities brokerage,inves tment advice, etc. Usually informat ionand consultancy have to be directly paidfor eitherthrou gh subscription or on a pay-per-use basis, although advertisingschemesarealso conceivable. A spe cial category istrust services, as provided by cerlificationauthoritiesand eledm nic notaries and othertrusted third parties. Subscription fees com-bined with one-off service fees as w d assoftware sales and consultancy are thesources of revenue.An example of a trust service provider isBelsign (www.belsign.be). Many consul-tancy and m arket research companies arenow offering commercial business infor-mation services via the Internet Searchengines are a special category of infor-

Datamonitor, "Business-to-BusinessElectronic Commerce: Erploiting Market

Oppo rfunities in t he ErCranet Age",199 7.

European Commission,*European Initiative in Electronic

Commerce", COM(97) 157, April 19 97 ,chapter I. Also available at http://

www.cordis.lu/esprit/src/ecomcom.htm.See also related publications atwww.ispo.cec. be/ecommerce/.

ForresterResearch report,"Sizing Intercompany Commerce",

28 July 1997. See alsowwwJorrester.com.

G7-10 WG,uElectronicCommerce BetterPractice, case study book of the G7Global Marketpla ce for SMEs PilotProject",fint edition April 1997.

A Web version can be found atunuw.ispo.cec.be/ecommerce/bonn. html.Jelassi, T.;Lai H.-S.,

"CitiusNe t: The Emergence ofa Global Electronic Market", Society for

Information Management, 1 996 ,www.simnet.org. See also w ww.citius.fi.

See inparticular the ESPRITHPCN p m j m addms-ing the automotive. aerospace and space sectors.

mation services, with th e public Internetfacility (rather then intranet ve nions) usu-ally based on advertising as a source ofrevenue. Advanced informati on brokerageto support ne gotiation between businessesis being developed by th e ESPRIT CASBAand MEMO projects.

CLASSIFICATION OF BUSINESS MODELSWe conclude with a qualitative mappingof the eleven business models along twodimensions. The first dime nsion gives thedegree of innovation. This ranges fromessentially an electronic version of a tra-ditional way of doing business to moreinnovative ways, for example by exter-nalising via the Internet functions thatpreviously were performed w ithin a com-pany or by offering functions that did notexist before. The secon d dimension is theextent of integration of functions, rang-ing from single function business models(e.g. e-shops that only provide the mar-keting function over the Internet), to fullyintegr ated functionality, e.g. v alue chainintegration. Figure 3 shows the mapping.In the lower left-hand comer are basic e-shops, which ar e electronic version of tra-ditiona l ways of selling only. On the oth erextreme, at the upper right hand com er isvalue chain integration, which cannot bedone at all in a traditional form, is criti-cally dependent upon inform ation tech-


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Fjgure 4 MultipleExamples Functions/of business models Integratedmentionedin the text

FunctionalIntegration

SingleFunction

Third Party Marketplace

Marshall on Internet

Lower Degree of I n n d o n ~ i & e r

nology for letting information flow acrossnetworks, and creates added value fromintegrating these information flows. Inbetween are business models that oftenfind some degree of analogy in non-elec-tronic business. For example, trust serv-ices have been provided since years bypublic notaries or by indu stry bodies. Theirfunctionality is being re-implemented byelectronic trust services. However, at thesame time new trust functionality is be-ing added, that intrinsically requires lTsupport, such as encryption and public andprivate key managem ent. The same holdsfor value chain service provision, such aselectronic payments support: partially thisis a matter of offering by electronic meansthe same as what is already being offerednon-electronically such as account man-agement. At the same time new function-ality is being provided such as Internetsma rt card support, e.g. for purchas e cardsin B-to-B trading.

Mougayar, W "Opening Digital Markets,Advanced S trateg iesfo r Internet-driven

Commerce", CybermamgementPublications. 1997, pp. 201 -211.

Porte r M.E. and M illar VE.,-How Info nnation Gives You Competi-

tive Advantage", Haward BusinessReview, July-August 1985, p. 151.

Rethfeld, U., "Manufacturing and theInfonnation Highway", ESPRIT-UME,

10th Annual Con fmc e,5-7 October 94, Copenhagen.

The Report on Electronic Commerce,VoL5, N0.4, 2 4 Feb ruary , 1998 .

Young, K.M.; Malho tra , A.;El Sawy 0.; an d Gosain S. "The Relent-

less Pu rsui t of "Free. Perfect. Now ":IT-Enabled Value Innovation a t Marsha ll

Industries"; Societyfor InfonnationManagement, 1996,

www.simnet.org/pub~ic/pmgram/capital/97paper/paperl. html.

' The recent evolution of Indushy.Net is a countcr-example to the trend towards more integration. Thenew owners of Indusny.Net, MS. have decided to takeit back to its roots as an industry mall. They therebydo not pursue the re-positioning of 1ndushy.Net as athird party marketplace. which was initiated by theprevious owner Pe nt (who was implementing a tightinregration between tran sactions and marketing).

APPLYINGTHE CLASSIFICATIONFigure 4 summarises the classification ofa number of the examples mentionedabove. There seems to be a trend to gradu-ally move towards increased integrationof inform ation flowd.

SUMMARYA classification was provided of elevenbusiness models that are currently foundin Internet e lectronic commerce (business-to-business as well as business-to-con-sumer). Som e of these models are essen-tially an electronic re-impleme ntation oftraditional forms of doing business, suchas e-shops. Many others go far beyondtraditional business such as value chainintegration and seek innovative ways toadd value through information manage-ment and a rich functionality. Creatingthese new business models is feasible o nlybecause of the open ness and connectivityof the Internet

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