MGT 3225: E-Business

Lecture 2: E-Commerce Business Models

and Concepts

Md. Mahbubul Alam, PhD

E-commerce Business Models—Definitions

• Business model– A set of planned activities (i.e. business processes) designed

to result in a profit in a marketplace.– The business model is at the center of the business plan.

• Business plan– A document that describes a firm’s business model.– It always takes into account the competitive environment.

• E-commerce business model– Uses/leverages unique qualities of the Internet, the web and the

mobile platform.

Key Elements of a Business Model

Key Ingredients of a Business Model

Value Proposition

• Heart of a company’s business model. • It refers to how a company’s product or service fulfills the

needs of customers.

• How do you analyze a firm’s value proposition?– Why will customers choose to do business with your firm

instead of another?– What will your firm provide that others do not or cannot?

• Successful e-commerce value propositions include:– Personalization and customization of product offerings,– Reduction of product search cost, – Reduction of price discovery costs– Facilitation of transactions by managing product delivery.

Revenue Model

• Describes how the firm will earn revenue, generate profits, and produce a superior return on invested capital.

• Revenue model and financial model are used interchangeably.

• Function of business organization– Generate profits– Produce returns on invested capital. Returns must be greater

than alternative investment.

Major Types of Revenue Models

• Advertising revenue model (Yahoo): Offers content, services/products. Receives fee from advertisers.

• Subscription revenue model (consumerreport.com, Match.com, eHarmony): • Charges a subscription fees. Provides detailed ratings, reviews,

recommendation of customer reports.

• Transaction fee revenue model (e Bay, E*Trade): • Receives a transaction fee for each successful transaction.

• Sales revenue model (Amazon, Gap.com)• Selling goods, content or services to customers.

• Affiliate revenue model (MyPoints, Epinions)• Earns money by connecting companies with potential customers by

offerings special deals to its members. Fees for business referrals.

Market Opportunity

• Refers to the company’s intended marketplace (i.e., an area of actual or potential commercial value), and the overall potential financial opportunities available to the firm in that marketplace. – Realistic market opportunity is defined by the revenue

potential in each of market niches in which company hopes to compete.

Fig. Marketspace and Market Opportunity in the Software Training Market

• Marketspaces are composed of

many market segments.

• Your realistic

market opportunity will

typically focus on one or a few

market segment.

Competitive Environment

• Refers to the those companies who already exist into market selling similar products and services. It also includes– Presence of substitute products– Potential new entrants to the market– Power of customers and suppliers over the business

• Influenced by:– how many competitors are active– how large their operations are– the market share for each competitor– how profitable these firms are – how they price their products

• Competitor: Direct competitor Vs. Indirect competitor

Competitive Advantage

• Unique skill which is used by firm to produce good and services (superior products, lower price) into market as compare to other competitors.– Technology, unique idea, or other skillTypes of Competitive Advantage

Asymmetry One participation in a market has more resources than others.

First-mover advantage

Advantage that results for being the first in the marketplace.

Complementary resources

Resources & assets that directly not involved in the production of products but required for success, such as, marketing, management, financial assets, & reputations.

Unfair competitive adv.

When one firm develops an advantage based on factor that other firms cannot purchase.

Perfect market A market in which there are no competitive advantages & asymmetries. All firms have equal access.

Leverage When a firm uses its competitive advantages to achieve more advantages in surrounding markets.

Market Strategy

• Marketing– Promoting company’s products/services to potential customers.

• Strategy– Plan that details how a company intends to enter a new market

and attract customers.

• Best business concepts will fail if not properly marketed to potential customers.

• Market strategy and execution, therefore, have the immense importance for business success.

• e.g., YouTube, Twitter, or Pinterest– Uses social network marketing strategies that encourages users to

post contents, build a community. Here, customers becomes part of the marketing staffs.

Organizational Development

• Describes how the company will organize the work that needs to be accomplished.

• Work is typically divided into functional departments.– Production, shipping, marketing, customer support & finance.

• Hiring moves from generalists to specialists as company grows.

Management Team

• Employees of the company responsible for making the business model work.

• Strong management team gives instant credibility to outside investors, immediate market specific knowledge, and experiences in implementing business plans.

• Strong management team may not be able to salvage a weak business model, but should be able to change the model and redefine the business as it becomes necessary.

Classification of E-Business Models

Categorizing E-commerce Business Models: Difficulties

• No one correct way• We categorize business models according to e-commerce

sector (B2C, B2B, C2C)• Type of e-commerce technology used and market focus

can also affect classification of a business model.o e-Tailers sales to individual customers (i.e., B2C)o e-Distributor sales to another business (i.e., B2B)

• Some companies use multiple business models, e.g., o Amazon e-retailer, content provider, market creator, infrastructure

provider.o eBay market creator in the B2C & C2C e-commerce, infrastructure

provider

Snapshot of B2C Models

B2C Model: e-tailer

• Online version of traditional retailer (i.e., online retail store)• Customer can shop at any hour of the day or night without

leaving their home or office.• Similar to ‘bricks-and-mortar’ store, except customers only

have to connect to the Internet or use their smartphones to place an order.

• Typeso Virtual merchants, e.g., Amazon, Blue Nile, Drugstore (No physical store)o Bricks-and-clicks, e.g., JCPenney, Walmart, Barnes & Nobleo Catalog merchants, e.g., LLBean.como Manufacturer-direct online sales, e.g., Dell.com

• Revenueo Sales of goods

B2C Model: Community Provider

• Sites that create a digital online environment where people with similar interests can transact (buy & sell), communicate, and receive interest-related information, and even play out fantasies by adopting online personalities called avatars.

• Revenue:o Hybrid revenue model, o Advertising, subscription, affiliate referral fees.

• Example:o iVillageo Babycenter.com (http://www.babycenter.com/) o Rightstart.com (http://www.rightstart.com/)

B2C Model: Content Provider

• Information and entertainment companies that provide digital content over the Web.o Digital content: digital video, music, photos, text, & artwork.

• Revenueo Subscription fee, pay for download, or advertisements.

• Exampleo WSJ.com (Wall Street Journal online newspaper)o CNN.como CBSSports.como ESPN.com

B2C Model: Portal

• Offers powerful search tools plus an integrated package of content and social network services.

• Do NOT sell anything directly. • Services

o News, e-mail, chat, music, video streaming, etc. o e.g., Google, Yahoo, MSN, Facebook

• Revenueo Advertising, subscription fees, affiliate referral fees

• May be general or specialized (Vortal)o Horizontal portal: Yahoo, MSN target all users of the Internet.o Vertical portal (Vortal): Sailnet.com target specialized customers

B2C Model: Transaction Broker

• Companies that process transactions for consumers normally handled in person, by phone or by mail are transaction brokers.o Primary value proposition—saving time and moneyo Typical revenue model—transaction fee

• Industries using this model include:o Financial serviceso Travel serviceso Job placement services

• Exampleo E*Tradeo Expediao Tripadvisor (http://

www.tripadvisor.com/Tourism-g294217-Hong_Kong-Vacations.html)

B2C Model: Market Creator

• Uses Internet technology to create markets that bring buyers and sellers together.

• Examples:o Amazon.como eBay.com

• Revenue model:o Transaction fees

B2C Model: Service Provider

• Companies that make money by selling users a service, rather than a product.

• Value propositiono Valuable, convenient, time-saving, low-cost alternatives to traditional

service providers

• Revenueo Sales of services, subscription fees or one-time payment

• Exampleo VisaNow.como RocketLawyer

Snapshot of B2B Model

•

B2B Model: E-distributor

• Supplies products and services directly to individual businesses.

• Owned by one company seeking to serve many customers. • The more products and services a company makes available

on its site, the more attractive that site is to potential customers.

• Revenueo Sales of goods

• Example o Grainger.com (distributor of maintenance, repair & operations)o Partstore.com

B2B Model: E-procurement

• Single firm creating digital markets where sellers and buyers transact for indirect inputs.

• Revenue– Fees for market-making services, supply change management

• Application service providerso A company that sells access to Internet-based software applications to

other companies.o Finding new customers for software, increasing market size and achieving

scale economics. o Scale economics Efficiencies that arise from increasing the size of a

business.

• Exampleo Ariba (http://www.ariba.com/)

o Create software where large firms organize their procurement processo Creates custom-integrated online catalogs (suppliers list their offerings) for

purchasing firms. o PerfectCommerce

B2B Model: Exchanges

• Electronic digital marketplace where suppliers and commercial purchasers can conduct transactions.

• Usually owned by independent firms whose business is making a market.

• Usually serve a single vertical industry.

• Revenue• Commission fees and transaction fees.

B2B Model: Industry Consortia

• Industry-owned vertical marketplaces that serve specific industries, such as the automobile, aerospace, chemical, floral, or logging industries.

• Horizontal marketplaces, in contrast, sell specific products and services to a wide range of industries, such as marketing-related, financial and computing services.

• Exampleo Exostar, online trading exchange for the aerospace & defense industry.

B2B Business Models: Private Industrial Networks

• Digital networks designed to coordinate the flow of communications among firms engaged in business together.

• The network is owned by a single large purchasing firm.• Participation is by invitation only to trusted long-term suppliers

of direct inputs.

• e.g, Walmarto Suppliers of Walmart can monitor their products sales by using Walmart’s

private network.

Business Models in Emerging E-commerce Areas

• Consumer-to-Consumer (C2C)o Provides a way for consumers to sell to each other, with the help of an

online market maker.

• Peer-to-Peer (P2P)o Links users, enabling them to share files and common resources

without a common server.

• M-commerceo E-commerce business models that use wireless technologies.o To date, m-commerce a disappointment in the United States; however,

technology platform continues to evolve.

E-commerce Enablers: The Gold Rush Model

• Internet infrastructure companieso Provide hardware, software, networking, security, e-commerce software

systems, payment systems, databases, hosting services, etc.o Business model is focused on providing the infrastructure necessary for e-

commerce companies to exist, grow and prosper.

• Exampleo Akamai (https://www.youtube.com/watch?v=IHEFubEQbMo) o Amazon web server

How the Internet & Web Change Business (Industry Structure)

• E-commerce changes the nature of players in an industry and their relative bargaining power by changing:o the basis of competition

among rivalso the barriers to entryo the threat of new substitute

productso the strength of supplierso the bargaining power of

buyers

How the Internet & Web Change Business (Industry Value Chains)

• Set of activities performed in an industry by suppliers, manufacturers, transporters, distributors, and retailers that transform raw inputs into final products and services.

• Reduces the cost of information and other transactional costs.

How the Internet & Web Change Business (Firm Value Chains)

• Set of activities that a firm engages in to create final products from raw inputs

• Increases operational efficiency.

How the Internet & Web Change Business (Firm Value Webs)

• Networked business ecosystem that uses Internet technology to coordinate the value chains of business partners within an industry, or within a group of firms.

• Coordinates a firm’s suppliers with its own production needs using an Internet-based supply chain management system.

Business Strategy

• A set of plans for achieving superior long-term returns on the capital invested in a business firm (i.e., a plan for making a profit in a competitive environment). Profit, the difference between the price of a firm is able to charge for its

products and the cost of producing & distributing goods.

• Generic strategieso Differentiation, the ways producers can make their products or services

unique & different to distinguish them from those of competitors. e.g., Warby Parker (eyeglasses company)

Commoditization, no difference among products or services, and the only basis of choosing is price.

o Cost competition, offering products or services at a lower cost than competitors. e.g., Walmart.

o Scope strategy, compete in all markets rather than just local, regional or national markets. e.g., Apple iDevices.

o Focus/market niche strategy, compete within a narrow market or product segment. e.g., Bonobos.com

o Customer intimacy, develop strong ties with customers in order to increase switching cost. e.g., Amazon, Netflix.

Question Please

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