E business models

E-Business ModelsE-Business Models

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Learning ObjectivesLearning Objectives
 Identify the key components of e-commerceIdentify the key components of e-commerce
business models.business models.
 Describe the major B2C business models.Describe the major B2C business models.
 Describe the major B2B business models.Describe the major B2B business models.
 Recognize business models in otherRecognize business models in other
emerging areas of e-commerce.emerging areas of e-commerce.
 Understand key business concepts andUnderstand key business concepts and
strategies applicable to e-commerce.strategies applicable to e-commerce.

Components of e-BusinessComponents of e-Business
ModelsModels
Business Model
-Customer value
- Scope
- Price
- Resources
- Capabilities
- Implementations
Business Model
-Customer value
- Scope
- Price
- Resources
- Capabilities
- Implementations
EnvironmentEnvironment
InternetInternet PerformancePerformance

Price CompetitionPrice Competition
 Price for books and CDs sold on the Internet lessPrice for books and CDs sold on the Internet less
than conventional channelthan conventional channel
– Average 9-16%Average 9-16%
 Price incrementsPrice increments
– Price change on the Internet is smaller thanPrice change on the Internet is smaller than
conventional channelconventional channel
 Price dispersionPrice dispersion
– Substantial differences in price across retailers on theSubstantial differences in price across retailers on the
InternetInternet
– Heterogeneity in consumer awarenessHeterogeneity in consumer awareness
– Heterogeneity in retailer branding and trustHeterogeneity in retailer branding and trust

Driving FactorsDriving Factors
 Lower buyer search costsLower buyer search costs
– Promote price competitionPromote price competition
 Low entry costs or low operational costsLow entry costs or low operational costs
 Other factorsOther factors
– TaxTax
– Shipping and handling feesShipping and handling fees

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E-Commerce Business ModelsE-Commerce Business Models
 Business modelBusiness model
– a set of planned activities designed toa set of planned activities designed to
result in a profit in a marketplaceresult in a profit in a marketplace
 E-commerce business modelE-commerce business model
– a business model that aims to use anda business model that aims to use and
leverage the unique qualities of theleverage the unique qualities of the
Internet and the World Wide Web.Internet and the World Wide Web.

Eight Key Ingredients of a Business ModelEight Key Ingredients of a Business Model
Key Questions
Business Model
Components
Value Proposition Why should the customer buy from you?
Revenue model How will you earn money?
Market opportunity What marketspace do you intent 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 to attract customer?
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?

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Value PositionValue Position
 Defines how a company’s product orDefines how a company’s product or
service fulfills the needs of customers.service fulfills the needs of customers.
 QuestionsQuestions
 Why will customers choose to do business withWhy will customers choose to do business with
your firm instead of another company?your firm instead of another company?
 What will your firm provide that other firms doWhat will your firm provide that other firms do
not and cannot?not and cannot?

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Revenue ModelRevenue Model
 Describes how the firm will earn revenue,Describes how the firm will earn revenue,
produce profits, and produce a superiorproduce profits, and produce a superior
return on invested capital.return on invested capital.
 E-commerce revenue models include:E-commerce revenue models include:
 advertising modeladvertising model
 subscription modelsubscription model
 transaction fee modeltransaction fee model
 sales modelsales model
 affiliate modelaffiliate model

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 Advertising revenue modelAdvertising revenue model
 a company provides a forum for advertisementsa company provides a forum for advertisements
and receives fees from advertisers (and receives fees from advertisers (YahooYahoo))
 Subscription revenue modelSubscription revenue model
 a company offers it users content or servicesa company offers it users content or services
and charges a subscription fee for access toand charges a subscription fee for access to
some or all of it offerings (some or all of it offerings (Consumer ReportsConsumer Reports
oror Wall Street JournalWall Street Journal))

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 Transaction fee revenue modelTransaction fee revenue model
 a company receives a fee for enabling ora company receives a fee for enabling or
executing a transaction (executing a transaction (eBayeBay oror E-TradeE-Trade))
 Sales revenue modelSales revenue model
 a company derives revenue by selling goods,a company derives revenue by selling goods,
information, or services (information, or services (AmazonAmazon oror
DoubleClickDoubleClick))
 Affiliate revenue modelAffiliate revenue model
 a company steers business to an affiliate anda company steers business to an affiliate and
receives a referral fee or percentage of thereceives a referral fee or percentage of the
revenue from any resulting sales (revenue from any resulting sales (MyPointsMyPoints))

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Market OpportunityMarket Opportunity
 Market opportunityMarket opportunity
 refers to the company’s intended marketspacerefers to the company’s intended marketspace
and the overall potential financial opportunitiesand the overall potential financial opportunities
available to the firm in that market spaceavailable to the firm in that market space
 defined by the revenue potential in each of thedefined by the revenue potential in each of the
market niches where you hope to competemarket niches where you hope to compete
 MarketspaceMarketspace
 the area of actual or potential commercial valuethe area of actual or potential commercial value
in which a company intends to operatein which a company intends to operate

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Competitive EnvironmentCompetitive Environment
 Refers to the other companies operating inRefers to the other companies operating in
the same marketplace selling similarthe same marketplace selling similar
productsproducts
 Influenced by:Influenced by:
 how many competitors are activehow many competitors are active
 how large are their operationshow large are their operations
 the market share of each competitorthe market share of each competitor
 how profitable these firms arehow profitable these firms are
 how they price their productshow they price their products

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Competitive AdvantageCompetitive Advantage
 Achieved by a firm when it can produce aAchieved by a firm when it can produce a
superior product and/or bring the product tosuperior product and/or bring the product to
market at a lower price than most, or all, ofmarket at a lower price than most, or all, of
its competitorsits competitors
 Achieved because a firm has been able toAchieved because a firm has been able to
obtain differential access to the factors ofobtain differential access to the factors of
production that are denied their competitorsproduction that are denied their competitors
-- at least in the short term-- at least in the short term

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 AsymmetryAsymmetry
 exists whenever one participant in a market hasexists whenever one participant in a market has
more resources than other participantsmore resources than other participants
 First mover advantageFirst mover advantage
 a competitive market advantage for a firm thata competitive market advantage for a firm that
results from being the first into a marketplaceresults from being the first into a marketplace
with a serviceable product or servicewith a serviceable product or service

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 Unfair competitive advantageUnfair competitive advantage
 occurs when one firm develops an advantageoccurs when one firm develops an advantage
based on a factor that other firms cannotbased on a factor that other firms cannot
purchasepurchase
 Perfect MarketPerfect Market
 a market in which there are no competitivea market in which there are no competitive
advantages or asymmetries because all firmsadvantages or asymmetries because all firms
have equal access to all the factors ofhave equal access to all the factors of
productionproduction
 when a company uses its competitive advantagewhen a company uses its competitive advantage
to achieve more advantage in surroundingto achieve more advantage in surrounding
marketsmarkets

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Market StrategyMarket Strategy
 The plan you put together that detailsThe plan you put together that details
exactly how you intend to enter a newexactly how you intend to enter a new
market and attract new customersmarket and attract new customers
 Best business concepts will fail if notBest business concepts will fail if not
properly marketed to potential customersproperly marketed to potential customers

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Organizational DevelopmentOrganizational Development
 Describes how the company will organizeDescribes how the company will organize
the work that needs to be accomplishedthe work that needs to be accomplished
 Work is typically divided into functionalWork is typically divided into functional
departmentsdepartments
 Move from generalists to specialists as theMove from generalists to specialists as the
company growscompany grows

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Management TeamManagement Team
 Employees of the company responsible forEmployees of the company responsible for
making the business model workmaking the business model work
 Strong management team gives instantStrong management team gives instant
credibility to outside investorscredibility to outside investors
 A strong management team may not be ableA strong management team may not be able
to salvage a weak business modelto salvage a weak business model
 Should be able to change the model andShould be able to change the model and
redefine the business as it becomesredefine the business as it becomes
necessarynecessary

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Major Business-to-ConsumerMajor Business-to-Consumer
(B2C) Business Models(B2C) Business Models

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 PortalPortal
 offers powerful search tools plus an integratedoffers powerful search tools plus an integrated
package of content and servicespackage of content and services
 typically utilizes a combinestypically utilizes a combines
subscription/advertising revenues/transactionsubscription/advertising revenues/transaction
fee modelfee model
 may be general or specialize (vortal)may be general or specialize (vortal)

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 E-tailerE-tailer
 online version of traditional retaileronline version of traditional retailer
 includesincludes
 virtual merchants (online retail store only)virtual merchants (online retail store only)
 clicks and mortar e-tailers (online distributionclicks and mortar e-tailers (online distribution
channel for a company that also has physical stores)channel for a company that also has physical stores)
 catalog merchants (online version of direct mailcatalog merchants (online version of direct mail
catalog)catalog)
 online malls (online version of mall)online malls (online version of mall)
 Manufacturers selling directly over the WebManufacturers selling directly over the Web

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 Content ProviderContent Provider
 information and entertainment companies thatinformation and entertainment companies that
provide digital content over the Webprovide digital content over the Web
 typically utilizes an advertising, subscription, ortypically utilizes an advertising, subscription, or
affiliate referral fee revenue modelaffiliate referral fee revenue model
 Transaction BrokerTransaction Broker
 processes online sales transactionsprocesses online sales transactions
 typically utilizes a transactions feel revenuetypically utilizes a transactions feel revenue
modelmodel

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 Market CreatorMarket Creator
 uses Internet technology to create markets thatuses Internet technology to create markets that
bring buyers and sellers togetherbring buyers and sellers together
 typically utilizes a transaction fee revenuetypically utilizes a transaction fee revenue
modelmodel
 E.g. AuctionE.g. Auction
 English auctionEnglish auction
 Dutch auctionDutch auction
 Sealed-bid auctionSealed-bid auction
 Double auctionDouble auction

English AuctionsEnglish Auctions
 The bidders announce their bids until noThe bidders announce their bids until no
higher bid is forthcominghigher bid is forthcoming
– ‘‘going . . . going . . . gone!’going . . . going . . . gone!’
– Ascending-price auctionsAscending-price auctions
– Typically set a closing time in advanceTypically set a closing time in advance
 Minimum bid plus a reserve priceMinimum bid plus a reserve price
 Early buyout priceEarly buyout price

Dutch AuctionsDutch Auctions
 Bidding starts at a high price and drops untilBidding starts at a high price and drops until
a bidder accepts the pricea bidder accepts the price
– Descending price auctionsDescending price auctions

Sealed-Bid AuctionsSealed-Bid Auctions
 Bidders submit their bids independently andBidders submit their bids independently and
are usually prohibited from sharingare usually prohibited from sharing
information with each otherinformation with each other
 First-price sealed-bid auctionFirst-price sealed-bid auction
– The winner pays his amountThe winner pays his amount
 Second-price sealed-bid auctionSecond-price sealed-bid auction
– The winner pays one increment over theThe winner pays one increment over the
second-highest bid receivedsecond-highest bid received

Double AuctionsDouble Auctions
 Buyers and sellers submit bids to anBuyers and sellers submit bids to an
auctioneerauctioneer
 The auctioneer matches the seller’s offers toThe auctioneer matches the seller’s offers to
the buyer’s offerthe buyer’s offer
– E.g. New York Stock ExchangeE.g. New York Stock Exchange

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 Service ProviderService Provider
 offers services onlineoffers services online
 Community ProviderCommunity Provider
 provides an online community of like-mindedprovides an online community of like-minded
individuals for networking and informationindividuals for networking and information
sharingsharing
 revenue is generated by referral fee,revenue is generated by referral fee,
advertising, and subscriptionadvertising, and subscription

e-Business Modelse-Business Models
 Dynamic Pricing ModelsDynamic Pricing Models
– Name-Your-Price ModelName-Your-Price Model
– Comparison-Pricing ModelComparison-Pricing Model
– Demand-Sensitive Pricing ModelDemand-Sensitive Pricing Model

Name-Your-Price ModelName-Your-Price Model
 Allows customers to state the price they areAllows customers to state the price they are
willing to paywilling to pay
 Priceline.comPriceline.com
– Demand collect systemsDemand collect systems
» Use shopping bot that takes customer’s bid to theUse shopping bot that takes customer’s bid to the
Priceline partners to see whether they will accept thePriceline partners to see whether they will accept the
prices for the requested products/servicesprices for the requested products/services
– Intelligent agentsIntelligent agents

Comparison-Pricing ModelComparison-Pricing Model
 Allows customers to poll a variety ofAllows customers to poll a variety of
merchants and find a desiredmerchants and find a desired
product/service at the lowest priceproduct/service at the lowest price
 Mysimon.comMysimon.com
– Uses intelligent-agent technologyUses intelligent-agent technology
– Offers discussion groups, customer ratings, andOffers discussion groups, customer ratings, and
comparison shoppingcomparison shopping

Demand-Sensitive Pricing ModelDemand-Sensitive Pricing Model
 Group purchasingGroup purchasing
– Individual buyers to shop in large groups to obtainIndividual buyers to shop in large groups to obtain
group discountgroup discount
» The more people who buy a product in a single purchase, theThe more people who buy a product in a single purchase, the
lower the cost per person becomeslower the cost per person becomes
– Mercata.com, mobshop.com, demandline.comMercata.com, mobshop.com, demandline.com
 How it worksHow it works
– Buyers create requests for quotes (RFQs)Buyers create requests for quotes (RFQs)
– Purchasing manager monitors all aggregated RFQsPurchasing manager monitors all aggregated RFQs
– Manager negotiates through suppliers.Manager negotiates through suppliers.

 Price DiscriminationPrice Discrimination
Output
Price
D1
R1
Q1
P1
D2
R2
Q2 Q
P2
Marginal
cost

 Benefits to BuyersBenefits to Buyers
– Reduce product costsReduce product costs
– Reduce transaction costsReduce transaction costs
 Benefits to SuppliersBenefits to Suppliers
– Enhance revenue with a high-volume salesEnhance revenue with a high-volume sales
– Reduce sales costsReduce sales costs
– Improve manufacturing efficiencyImprove manufacturing efficiency

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Major Business-to-BusinessMajor Business-to-Business
(B2B) Business Models(B2B) Business Models

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 B2B HubB2B Hub
 also known asalso known as marketplace/exchangemarketplace/exchange
 electronic marketplace where suppliers andelectronic marketplace where suppliers and
commercial purchasers can conductcommercial purchasers can conduct
transactionstransactions
 may be a general (horizontal marketplace) ormay be a general (horizontal marketplace) or
specialized (vertical marketplace)specialized (vertical marketplace)
 E-distributorE-distributor
 supplies products directly to individualsupplies products directly to individual
businessesbusinesses

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 B2B Service ProviderB2B Service Provider
 sells business services to other firmssells business services to other firms
 MatchmakerMatchmaker
 links businesses togetherlinks businesses together
 charges transaction or usage feescharges transaction or usage fees
 InfomediaryInfomediary
 gather information and sells it to businessesgather information and sells it to businesses

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Seven Unique Feature of E-Seven Unique Feature of E-
Commerce TechnologyCommerce Technology

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Seven Unique Feature of E-Seven Unique Feature of E-
 UbiquityUbiquity
 Alters industry structure by creating new marketingAlters industry structure by creating new marketing
channels and expanding size of overall marketchannels and expanding size of overall market
 Creates new efficiencies in industry operations andCreates new efficiencies in industry operations and
lowers cost of firms’ sales operationslowers cost of firms’ sales operations
 Enables new differentiation strategiesEnables new differentiation strategies
 Global ReachGlobal Reach
 Changes industry structure by lowering barriers toChanges industry structure by lowering barriers to
entry, but greatly expands market at the same timeentry, but greatly expands market at the same time
 Lowers cost of industry and firm operations throughLowers cost of industry and firm operations through
production and sales efficienciesproduction and sales efficiencies
 Enables competition on global scaleEnables competition on global scale

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Seven Unique Features of E-Seven Unique Features of E-
 Universal StandardsUniversal Standards
 Changes industry structure by lowering barriers to entryChanges industry structure by lowering barriers to entry
and intensifying competition within an industryand intensifying competition within an industry
 Lowers costs of industry and firm operations byLowers costs of industry and firm operations by
lowering computing and communications costslowering computing and communications costs
 Enables broad-scope strategiesEnables broad-scope strategies
 RichnessRichness
 Alters industry structure by reducing strength ofAlters industry structure by reducing strength of
powerful distribution channelspowerful distribution channels
 Change industry and firm operations costs by lesseningChange industry and firm operations costs by lessening
reliance on sales forcereliance on sales force
 Enhances post-sale support strategiesEnhances post-sale support strategies

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 InteractivityInteractivity
 Alters industry structure by reducing threat ofAlters industry structure by reducing threat of
substitutes through enhanced customizationsubstitutes through enhanced customization
 Reduces industry and firm costs by lessening relianceReduces industry and firm costs by lessening reliance
on sales forceon sales force
 Enable differentiation strategiesEnable differentiation strategies
 Personalization/CustomizationPersonalization/Customization
 Alters industry structure by reducing threats ofAlters industry structure by reducing threats of
substitutes, raising barriers to entrysubstitutes, raising barriers to entry
 Reduces value chain costs in industry and firm byReduces value chain costs in industry and firm by
lessening reliance on sales forceslessening reliance on sales forces

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 Information DensityInformation Density
 Changes industry structure by weakeningChanges industry structure by weakening
powerful sales channels, shifting bargainingpowerful sales channels, shifting bargaining
power to consumerpower to consumer
 Reduces industry and firm operations costs byReduces industry and firm operations costs by
lowering costs of obtaining, processing, andlowering costs of obtaining, processing, and
distributing information about suppliers anddistributing information about suppliers and
consumersconsumers

Case StudiesCase Studies
 Should we integrate our Internet businessShould we integrate our Internet business
with our traditional business or should wewith our traditional business or should we
keep the two separate?keep the two separate?

Seamless Model: Office DepotSeamless Model: Office Depot
 Two reasonsTwo reasons
– Existing catalog-sales support an Internet storeExisting catalog-sales support an Internet store
– Existing information systems made it easy toExisting information systems made it easy to
coordinate online stores and physical storescoordinate online stores and physical stores
 Customers’ BenefitCustomers’ Benefit
– Make shopping simple and convenientMake shopping simple and convenient
 Company’s BenefitCompany’s Benefit
– Cheaper to reach customersCheaper to reach customers

Seamless Model: Office DepotSeamless Model: Office Depot
 Added ValueAdded Value
– Each customer has its own specialized view ofEach customer has its own specialized view of
the OfficeDepot.com sitethe OfficeDepot.com site
» authorizationauthorization
– Provide additional discount for largerProvide additional discount for larger
customers if they place order on onlinecustomers if they place order on online
 Actually increased the traffic at its physicalActually increased the traffic at its physical
outletoutlet

Joint Venture Model: KB ToyJoint Venture Model: KB Toy
 ReasonsReasons
– Don’t have much experience with catalogDon’t have much experience with catalog
retailingretailing
– Tend to focus exclusively on their physicalTend to focus exclusively on their physical
storesstores
 KB Toy and Kbkids.comKB Toy and Kbkids.com
– KB Toy joined with BrainPlay.com to createKB Toy joined with BrainPlay.com to create
Kbkids.comKbkids.com
» $80 million$80 million

Joint Venture Model: KB ToyJoint Venture Model: KB Toy
 OperationOperation
– SeparationSeparation
» Kbkids headquarter: DenverKbkids headquarter: Denver
» KB Toy headquarter: MAKB Toy headquarter: MA
– IntegrationIntegration
» Share brand: promotionShare brand: promotion
» Customer serviceCustomer service
» Purchasing functionPurchasing function

Virtual PartnershipVirtual Partnership
 Rite Aid and Drugstore.comRite Aid and Drugstore.com
 Customer benefitCustomer benefit
– Customers can pick up their Drugstore.comCustomers can pick up their Drugstore.com
prescriptions at their local Rite Aidprescriptions at their local Rite Aid

A Spectrum of ChoicesA Spectrum of Choices
Model Brand Management Operation
Seamless Fully integrated Fully integrated Fully integrated
Joint Venture
Mostly
integrated
Slightly
integrated
Moderately
integrated
Partnership Separate
Slightly
integrated
Moderately
integrated

Decision ProcessDecision Process
Brand
Separation Integration
Does the brand extend naturally
to the Internet?
Will we need to price differently?
Management
Do we have the skills and experience?
Will there be major channel conflict?
Does the Internet threaten the current
business model?

Decision ProcessDecision Process
Operations
Separation Integration
Do our distribution systems
translate well to the Internet?
Do our information systems provide
a foundation on which to build?
Does either systems constitute a
significant competitive advantage?

E business models

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