Class 4, 5 and 6

ASSESSMENT
Friday, 05 February 2016Ajith Sundaram 1

Friday, 05 February 2016 Ajith Sundaram 2
# Type Weightage
1 End Term 40 Marks
2 Assignment - 1 5 Marks
3 Assignment - 2 5 Marks
4 Mini Project 20 Marks
5 Presentation 10 Marks
6 Case Analysis -1 5 Marks
7 Case Analysis -2 5 Marks
8 Attendance 10 Marks
Total 100 Marks

Business Model and
Marketplace analysis for
e-commerce

Business Model
• Timmers (1999) defines a ‘business model’ as:
• An architecture for product, service and information flows, including a
description of the various business actors and their roles; and a
description of the potential benefits for the various business actors; and
a description of the sources of revenue.

Storefront Model
• The storefront combines transaction processing, security, online
payment and information storage to enable merchants to sell their
products on the Web.
• This is a basic form of e-commerce where the buyer and the seller
interact directly.
• To conduct storefront e-commerce, merchants need to organize an
online catalogue of products, take orders through their Web sites,
accept payments in a secure environment, send merchandise to
customers and manage customer data

Auction Model
• Auction sites act as forums through which Internet users can log-on
and assume the role of either bidder or seller.
• As a seller, you are able to post an item you wish to sell, the minimum
price you require to sell your item and a deadline to close the auction.
• Some sites allow you to add features, such as a photograph or a
description of the item’s condition.

Auction Model
• As a bidder, you may search the site for availability of the item you are
seeking, view the current bidding activity and place a bid (bids are
usually in designated increments).
• Some sites allow you to submit a maximum bidding price and will
continue bidding for you.

Portal Model
• Portal sites give visitors the chance to find almost everything they are
looking for in one place.
• They often offer news, sports and weather, as well as the ability to
search the Web.
• Search engines are horizontal portals, or portals that aggregate
information on a broad range of topics.
• Other portals are more specific, offering a great deal of information
pertaining to a single area of interest these are called vertical portals.

Dynamic Pricing Model
• The web has changed the way business is done and the way products
are priced.
• In the past, bargain hunters had to search out deals by visiting
numerous local retailers and wholesalers. Today it just few click away.

Name Your Price Model
• The name your price model empowers customers by allowing them to
choose their price for products and services.
• Many of the businesses that offer this services have formed
partnerships with leaders of industries such as travel, lending and
retail.
• These industry leaders receive the customer’s desired price from the
intermediary and decide whether or not to sell the product or service.
• If the customer price is not reasonable then that customer can ask for
another price.

Comparison Pricing Model
• It allows the customer to poll a variety of merchants and find a desired
product or service at the lowest price.
• These sites gets their revenue from the partnerships with particular
merchants.

Demand Sensitive Pricing Model
• The more people who buy a product in a single purchase, the lower
the cost-per-person becomes.
• Selling products individually can be expensive because the vendor
must price a product so that it covers selling and overhead cost while
still generating a profit.
• When customers buy in bulk, the cost is shared and the profit margin is
increased.

Bartering Model
• Offering one item in exchange for another.
• The seller makes an initial offer with the intention of bartering to reach a
final agreement with the buyer.

Offering Free Products and Service
• They offer their products for free on the web.
• Many of these sites also form partnership with companies to exchange
products and services for advertisement space and vice versa.

Revenue Models
• In business, revenue typically consists of the total amount of money
received by the company for goods sold or services provided during a
certain time period.
• Therefore, revenue models are a part of the business model.

Revenue Models
• Many online companies generate revenues from multiple income
streams such as
• advertising,
• subscription,
• affiliate marketing etc.
• Online models not only sell goods or services
• also contacts (e.g. banner)
• information (e.g. user-data)

Advertising Revenue Model
• Fees are generated from advertisers in exchange for advertisements,
which is ultimately the classic principal among the revenue models
besides sales

Affiliate Revenue Model
• In exchange for bringing business to your affiliates, you receive a
commission, or a percentage of the sales they make on that business.

Licensing Revenue Model
• Assume you have created a product. Companies would pay you a
licensing fee for the right to market, copy, or use the product.
• Licensing is the granting of permission to use intellectual property, such
as music, photos, software programs, and inventions

Subscription Revenue Model
• Users are charged a periodic (daily, monthly or annual) fee to subscribe
to a service.
• Many sites combine free content with premium membership

Transaction Fee Revenue Model
• A company receives commissions based on volume for enabling or
executing transactions
• The revenue is generated through transaction fees by the customer
paying a fee for a transaction to the operator of a platform.
• The company is a market place operator providing the customer with a
platform to place his transactions.
• During this process the customer may be presented as a buyer as well
as a seller.

Sales Revenue Model
• Wholesalers and retailers of goods and services sell their products
online.
• The main benefits for the customer are the convenience, time savings,
fast information etc.
• The prices are often more competitive.
• In terms of online sales there are different models such as market
places as common entry points for various products from multiple
vendors

Analysis of
E-Commerce Industry in India
Friday, 05 February 2016 23

Overview of the industry
Domain wise
Market Penetration
Market Trends Market Potential
Competitive
Analysis
Value Chain
Analysis
The e-commerce sector in India
has grown by 34% since 2009 to
touch 16.4 billion USD in 2014.
The sector has 22 billion USD in
2015
$ 22 Bn
2015
$ 3.8 Bn
2009
Asia-Pacific emerged as the strongest business-to-consumer (B2C)
e-commerce region in the world in 2013
• Sales of around 567.3 billion USD, a growth of 45% over 2012
• Ranked ahead of Europe (482.3 billion USD) and North America
(452.4 billion USD).
India’s internet penetration with total
e-households at 46 million against China’s 207 million is one of
the reasons behind India’s poor B2C sales growth.
• The US, UK and China together account for 57% of the world’s
total B2C e-commerce sales in 2013 with China having total
sales of 328.4 billion USD.
• As against this, India had sales of only 10.7 billion USD.

0%
10%
20%
30%
40%
50%
60%
70%
80%
2012 2013 2014 2015(Est.) 2016(Est.) 2017(Est.)
Online travel sales volume in India from 2012 to 2017
Source: eMarketer
Series 1 Column1 Column2
Domain wise
Market Penetration
Competitive
Analysis
Value Chain
Analysis
• Currently, e-Travel comprises 70% of the total e-
commerce market.
• It has been observed that online travel sales are
maturing in most of the major economies. Same
trend is observed in India as well.

Domain wise
Market Penetration
Competitive
Analysis
Value Chain
Analysis
By 2020, eTail in India is
expected to account for
3% of total retail.
orders per million are
expected to more than
double from five million
in 2013 to 12 million by
2016
it is still miniscule
compared to the figure
in China, where the
share is 8-10%.

Domain wise
Market Penetration
Competitive
Analysis
Value Chain
Analysis
• Different e-commerce companies
follow different models for
functioning.
• Amazon India follows Online
Marketplace model.
• Amazon India has two fulfilment
centers in Mumbai and Bangalore.
• And it plans to start five new
fulfilment centres across the country.
Sources: ASSOCHAM India, PwC

Domain wise
Market Penetration
Competitive
Analysis
Value Chain
Analysis
M-Commerce
There is a traffic to
revenue gap on
mobile e-commerce
in India
Sources: Accel estimates,
Accel portfolio
companies, CNNIC and
other industry sources

Domain wise
Market Penetration
Competitive
Analysis
Value Chain
Analysis
Women Shoppers – A Growing Force
• Working women segment grew 43% in 2013 and
constitutes nearly 10% of Active internet users in
India according to i-Cube & IAMAI
• Categories like baby care, home décor, jewellery
etc have traditionally been influenced by women
decision makers. As more choice become
available more women are shopping online.
Sources: Accel estimates, Accel portfolio companies & comScore

Domain wise
Market Penetration
Competitive
Analysis
Value Chain
Analysis
• A significantly low (19%) but fast-growing internet population of 243 million
in 2014 is an indicator of the sector’s huge growth potential in India.
• It is evident that in absolute terms India’s internet users are short by only 36
million as compared with 279 million in the US.
High Scope For Internet Penetration
• In coming years, as internet presence increases in rural areas, rural
India will yield more e-commerce business.

Domain wise
Market Penetration
Competitive
Analysis
Value Chain
Analysis
E-commerce Friendly States
Top 3 e-commerce states
• Delhi-NCR
• Karnataka
• Maharashtra
Large states with very
little ecommerce presence:
• Bihar
• Uttrakhand
• Chhattisgarh
Top 10 cities:
1. Delhi
2. Bangalore
3. Mumbai
4. Pune
5. Hyderabad
6. Chennai
7. Kolkata
8. Ahmedabad
9. Jaipur
10. Panaji
Central & North-Eastern India appears to have low adoption
of e-commerce
Sources: Accel estimates, Accel portfolio companies, Google

Domain wise
Market Penetration
Competitive
Analysis
Value Chain
Analysis
Sources: Accel estimates, NSSO, Facebook
Young India Will Become Dominant Presence In E-Commerce
Young Indians (19-24yrs) are more comfortable with online services e.g. FB and thus could
potentially add up to 40M new shoppers in next 3 years – if we just take the Facebook users

Domain wise
Market Penetration
Competitive
Analysis
Value Chain
Analysis
Major difference between various companies is the way they maintain their inventory, Whilst Flipkart follows the inventory led
model, Amazon India and Snapdeal, the other two major players follow marketplace model.
Flipkart (inventory-led model)
• It started with a consignment model where goods were
procured on demand
• And turned into inventory e-retailer supported by
registered suppliers
• This provides better control on the logistics chain.
• Manages a fine balance between inventory and cost of
delivering goods.
Amazon India (marketplace
model)
• Amazon started practicing the market place model by
launching its site in early 2013 in India.
• It started registering electronics goods sellers and ended
FY 2013 offering nearly 15 million products.
• Known for its strong last-mile delivery network
• Amazon India has set up a logistics arm named Amazon
Logistics and started offering same day delivery.
Sources: ASSOCHAM India, PwC | Forbes India, Jun 24, 2014

Domain wise
Market Penetration
Competitive
Analysis
Value Chain
Analysis
Company Name Alexa Popularity
Rank in India
Flipkart.com 6
Amazon.in 8
Snapdeal.com 13
Quikr.com 17
Amazon.com 18
Jabong.com 21
Ebay.in 28
Paytm.com 30
Olx.in 37
Naukri.com 43
Alibaba.com 46
Shopclues.com 50
Myntra.com 52
Popularity Comparison of Various E-
Commerce Websites in India
Source : Alexa.com accessed on 28 Mar 2015
Top 10 Parameters The E-Commerce Companies
In India Should Be Evaluated Upon
Customer Experience
Tax And Regulatory
Environment
Technological
Advancements
Operational Framework
Convergence Of Online
And Off Line Channels
Customer Acquisition
Delivery Experience Digital Infrastructure
Payments And
Transactions
Addressable Markets

Domain wise
Market Penetration
Competitive
Analysis
Value Chain
Analysis
E-products/Services
Software
Platform/Tech tools
Payment
integration
Logistics &
Fulfillments
Customer Service
and CRM
Source: Emerald Insight
Every e-commerce company has to evaluate itself on various
parameters. These parameters are as diversified as of the
conventional Value chain analysis on one hand. On the other
hand it would also has to take care of some specialized
instruments as depicted in the above diagram.
Indian e-commerce industry is still in the inception to growth
stage, so most of the companies make negative margins on
each product that they sell.
All companies are innovating on all the primary and support
activities for their firm, to reduce their losses, but due to fierce
competition, all major firms are still loss making.

What Is the Internet?
• It is a worldwide telecommunications system that provides connectivity
to other smaller networks
• Can be referred to as a network of networks
• It allows users to communicate across distances and computer
platforms
• It never closes and anyone can access it any time from anywhere
Friday, 05 February 2016 38Ajith Sundaram

How internet works : TCP/IP
• The Internet uses TCP/IP (developed by Vicent Cerf and Robert Kahn)
to handle network communications between network nodes.
• Transmission control protocol (TCP)- manages the movement of data
between applications
– Controls disassembly of message into packets at the origin
– Reassembles at the destination
• Internet Protocol (IP) -handles the movement of data between host
computers
– Specifies the addressing details for each packet
• Each packet is labeled with its origin and destination

ISO OSI & TCP/IP
Application
Presentation
Session
Transport
Network
Data Link
Physical
Application
Transport
Internet
Network Interface

Information exchange between a web browser and a web
server

Internet Standards
• Email related standards
– IMAP, POP, X.400, SMTP, CMC, MIME, binhex, uuencode
• Web related standards
– http, CGI, html/xml/vrml/sgml
• Internet directory standards
– X.500, LDAP
• Application standards
– http, FTP, telnet, gopher, wais
• Videoconferencing standards
– H.320, H.323, Mpeg-1, Mpeg-2

A five-layer model of e-business infrastructure

Key management issues of e-business infrastructure

Physical and network infrastructure components of the
Internet

Fragmented applications infrastructure, Integrated
applications infrastructure

Differing use of applications at levels of management
within companies

Elements of e-business infrastructure that require
management

Impact of Internet

Major Industry trends
• Consumer trends
• Service/process trends
• Organizational trends
• Enterprise technology trends

Consumer Trends
• Speed of service
• Self-service
• Integrated solutions, not piecemeal products

Service/Process Trends
• Convergence of sales & service: customization and integration
• Ease of use: make service consistent and reliable
• Flexible fulfilment and convenient service delivery: streamline your
supply chain

Organizational Trends
• Contract manufacturing: becoming brand intensive, not capital
intensive
• Retain the core, outsource the rest: Business process outsourcing
• Increasing process transparency and visibility
• Continuous innovation and employee retention

Enterprise Technology Trends
• Enterprise applications: Connect the corporation
• Infrastructure convergence: Increasing melding of voice, data and
video
• Multichannel integration: computer telephony integration and voice
recognition
• Wireless applications enter the mainstream
• Leveraging legacy investment: The rise of middleware for systems
integration

Indian Scenario

63
Online Travel
• India’s travel industry was pegged at over USD 2.8
Bn (Rs. 140 bn) by end of March 2010, comprising of
Tour Operators, Railways, Hotels and other such
entities.
• The online travel industry size currently is about 25%
amounting to USD 700 mn by year 2010.
• Top 5 players: MakeMyTrip, Cleartrip, Yatra,
Travelguru,IRCTC
• The current growth rate of India’s online travel
industry is 45%. The operating margins of most
online travel operators are about 8-12%.
Makemytrip had a successful IPO in July2010
• The current growth rate of India’s online travel
industry is 45%. The operating margins of most
online travel operators are about 8-12%
• Growth is driven by Indian professionals traveling
within India and abroad,
Company Revenues
Make My
Trip
US 83.56 mn
Travel Guru US 4 mn
ClearTrip US 9.6 mn
Yatra US 15.6 mn
IRCTC US 34mn

64
Online Matrimony
Online matrimony segment is driven by 2 main factors:
1) Arranged Marriages is still a norm in India
2) Online matrimony provides a much larger database of
grooms/brides unlike local match makers.
Dominated by 4 key players:
63 million by 2010-11( Empower research 2010)
Shaadi.com – is the leader with maximum visitor
traffic in FY 2010.Revenues (USD 18 mn)
Jeevansathi.com – is second in terms of unique
visitor traffic in the same year however, it is the
leader in terms of page-views (133 million) as
compared to Shaadi (75 million). (USD 14 mn)
Bharatmatrimony.com – is number 3 in terms of
unique visitors but it is also experiencing a decline
in traffic like Shaadi.com (USD 10 mn)
Indiamatrimony.com with over 1 million profiles
is a significant player. (USD 4 mn)
Simplymarry.com, LifepartnerIndia.com,
Indiabestmatch.com, vivahabandhan.com,
shubhlagan.in are some of the other upcoming sites.
Company Revenues
Shaadi.com 18 mn
JeevanSathi
.com
14mn
Bharatmatri
mony.com
10 mn
Indiamatri
mony.com
4mn

65
Online Jobs
USD 0.5 bn (1000 cr market) Dominated by a
few big players such as:
Naukri.com – leader with over 10 million
unique visitors during FY 2008.
Monster.com – 2nd website in terms of
visitor traffic with around 6.5 million unique
visitors in fiscal 2010.
Timesjobs.com – fastest growing recorded
a 40% jump in visitor traffic during FY 2010.
Clickjobs.com- Fourth largest with 2 mn
unique visitors
Driven by: Strong growth in India’s Services
sector, IT/ITES/ boom. (Naukri is part of
infoedge, monster is not listed in India ,
Times jobs is part of Times of India group.
Individual revenue numbers are not available
directly)

66
Online Real Estate
Indiaproperty.com– maximum number of
unique visitors in FY 2010 (65 mn ) unique
visitors,150 mn page views
99acres.com – is number two in terms of
visitor traffic but leads in terms of page-
views.
58 mn unique visitors, 180 mn page views
Magicbricks.com – 45 mn unique
visitors,120 mn page views
Makaan.com – 35 mn unique visitors,102
mn page views
Driven by: Strong growth in India’s Services
sector, IT/ITES/ boom, real estate boom in
boom towns. (99acres is part of infoedge. )

67
B2B biz Networks/Directories
Free and cost-effective online applications
are available for all typical business
processes of
SMEs. Revenue Model: Bulk Purchase
orders and Product search listing. Registered
with more than 40,000 product listings and
10,000 vendors
Top 3 leading b2b networks are:
• IndiaMART.com: Biggest B2B Market
place. Comprehensive directory of all
major B2B players with the contact
details.
• Tradeindia.com: Second largest B2B
Market place. Registered with more than
25,000 product listings and 8,000 vendors
• BizXchange.in: Third largest B2B Market
place. Registered with more than 20,000
product listings and 6,000 vendors

68
Online Retail Portals
Mark
Driven by India’s increasing internet and credit
card penetration. Provide a wider reach and even
cover tier2 and tier 3 cities. Primarily cater to
professional working class and youth.
Top 5 players are:
IndiaPlaza: Revenues of US$ 12mn in 2010 ( to
be confirmed). Claims to have the largest
collection of books and gift items
Infibeam: Launched India’s first ereader. Major
source of revenue from books though they started
out a shopping site across all categories
Rediff Shopping: Overall rediff revenues in March
2010 USD 18.84 mn. Claim that 25% revenues
come from shopping (to be verified)
eGully India: Online retailer across all categories
(launched in 2008). Revenues of 4 crores.
Naaptol India: Online retailer across all
categories (launched in 2007). Expected Revenues
of 3.5 crores in 2010

69
Online books
Mark
Sachin Bansal,CEO FlipKart India:
Market size of whole of book industry in India is
estimated at 6000 crores and is growing at a very quick
pace. Market size for online book shopping in India is
expected to be between Rs. 70 crore for 2010 and growing
at a healthy rate 50-60% Year on Year ( to be verified). It
is driven by growing middle class, better internet access
and
higher comfort of Indians with online shopping
Top 5 players (Based on Alexa rankings) are:
FlipKart: Aims to be Amazon of India. Posted revenue of
Rs 5 crore in 2008-09 and its site attracts 5 million visitors
a month. In 2009, they grew to 8 crores with 8.5-9 mn
visitors.
Bookshopindia: Claim to be second largerst book store.
In 2009, they claim to post revenues of 3 crores with 4.5
mn visitors.
IndiaPlaza: Largest shopping portal of India. Claim to
have the biggest collection of books (8 lakh titles )
Indiatimes shopping: Largest information portal of
India. Claim to get over 30% of total revenues by books
(to be verified)

70
Online Gifts
Driven by India’s increasing internet and credit
card penetration. India’s corporate gifts market is
over US$
1.2 billion with online gifting constituting 1% of
overall share (Source: Business India news, Jan
2010)
Top 5 players (Based on Alexa rankings) are:
India Gifts Portal:
Claim to have the largest market share (20%) of
Corporate gifting market. Expected Revenues of
over 20 crores in 2010 (to be confirmed)
GiftsIndia.com:
Expected revenues of 6-7 crores in 2010. claim to
be the second largest player
IndiaPlaza:
Indiatimes shopping:
Rediff Shopping:

71
Online Shoes
India’s online footmarket is estimated to be
800 cr+ (Business world April 2009). Online
shoe selling constitutes only 1% of the total
market. Driven by increasing internet and
credit card penetration
BigShoeBazaar: Claim to be Largest online
authorized shoe store in South Asia. Claim
Revenues of 8.5 crores in 2009 (to be
confirmed)
IndiFootwear: Claim Revenues of 4.5
crores in 2009 and seem to have highest
number of unique visitors in their category
(requires confirmation)
Playgroundonline: Cater to sports and
outdoor apparel market. Likely to do 1.3
crores this year

72
Online Kids shopping
India’s online baby care is estimated to be
1000 cr+ (Business India Dec 2009). Online
segment constitutes less than 3% of the
total market. Driven by increasing internet
and credit card penetration
BabyIndia: Claim to be fastest growing
online babycare store in India. Expected
revenues 4 crores 2010 (to be confirmed).
Shopmania: Claim to derive largest share of
revenues from baby care segment (40% ).
Revenues for 2010: 2.8-3 crores
KidStudtio: Expected revenues of 1.5 crores
in 2010

73
Payment Gateways
Problem area: Low credit card penetration, also
online payment is unreliable making ecommerce
difficult. online fraud and account
breaches are the biggest barriers to eCommerce.
Online shoppers are apprehensive and unwilling to
provide their credit card and bank details (Business
world survey June 2008)
Payment gateways provide a solution. Leading
Payment gateways:
CCAvenue: Biggest payment gateway provider in
India. Revenues: 280 crores (March 2009).Tie-ups
with all leading banks, 30,000 merchants. Part of
Avenues group with multiple online business
interests( Events, Online travel services
EBS-Payments:online payments system offers
payment options; credit cards, prepaid cards and
online bank transfer.
neonePay: Offer
Pay Seal (from ICICI Bank)
Axis Payment Gateway:

74
Customer Online Billing solutions
Problem area: Enable individuals/customers to
pay bills online.Top two players:
1) BillDesk: Direct relationship model. One time.
Authentication of credit card/debit card. Small
Fee for every transaction. Investors: SIDBI
ventures
2) Bill Junction (Tech Process Solutions
Ltd):Use Electronic Clearing Services where the
customer specifies the amount to be debited in
his account for every bill generated. Flat
Subscription fee for users. Even allow
Enterprise and Corporate Bill payment.
Investors : ICICI Ventures, GreyLock Ventures
3) Timesofmoney.com: Allow bill payment
through credit card/debit card services. Service
product: “DirectPay”. Subscription based model
for users.
4) Easy2Pay: electronic bill presentation and
payment (EBPP) service. It enables the user to
view, store and pay the bills. It is India’s first real-
time EBPP service provider that offers multiple bill
payment modes. It only charges a one-time fee
and no annual charges. It has some big Corporate
firms as
its clientele.

75
mPayments
Problem area: PC and Internet on PC penetration in India is low
but mobile penetration is high. For mCommerce to succeed,
mobile payments platform should be successful.
Recent regulation by RBI :
Leading Mobile payment providers:
1) mChek: Signed up with all leading telcos, banks, ticket
providers, insurance companies. Enable bill payments, ticket
purchases. One time credit card authentications setup.
Investors: DFJ
2) Paymate: Like mChek, allows users to link mobile phone with
a credit card, bank account. Tie ups with mobile phone
operators, banks but smaller coverage
3) Obopay India: Part of Obopay group,California. Partnered
with Nokia for mobile payment platform. Revenues less than
$1mn.
4) ATOM Tech: Part of Financial Technologies India group.
Providing a mobile app which includes a credit card on mobile.
Any payment requires a password authentication.

76
Challenges with order fulfillments: Logistics
Problem area: Order Fulfillment is an important
part of ecommerce Value chain. Most ecommerce
providers use a combination of their own logistics
teams and also tie-ups with leading local logistics.
Based on Interviews, the following leading names
in logistics names were revealed:
1. DTDC logistics (part of DHL ,all India
presence)
2. Gati (Maharashtra, Karnataka)
3. BlueDart (part of DHL ,all India presence)
4. VRL Logistics (Karnataka)
5. Aramex logistics (Maharashtra, Karnataka)
6. Vichare courier( Maharashtra)
Most of these provide tracking services for
customers and people are willing to pay a
premium for proper delivery.

77
Ecommerce Software/Solution Providers
Many front-end ecommerce portals use
ecommerce solution/platform providers for their
services. Advantage is that these eCommerce
solution providers have proven expertise and the
front-end companies do not have to re-invent the
wheel in all areas.
Company Expertise
Verchaska Travel platform. Clients:
cleartrip,eezego,eToursOnline
Binary
semantics
Maruti Udyog Ltd,
automartindia.com
ProSolutions
Software
India Plaza, rediff-shopping,
indiatimes
eStoreGroup Merchant integration

Project

P a n d o r a
and the Freemium Business Model

P a n d o r a
• Pandora is the Internet’s most successful subscription radio service. As
of June 2013, it had over 200 million registered users (140 million of
which access the service via a mobile device) and over 70 million
active listeners. Pandora now accounts for more than 70% of all
Internet radio listening hours and a 7% share of total U.S. radio
listening (both traditional and Internet).

P a n d o r a
At Pandora, users select a genre of music based on a favorite musician, and a
computer algorithm puts together a personal radio station that plays not only
the music of the selected artist but also closely related music by different
artists.
A team of professional musicians listens to new songs each day and classifies
the music according to more than 400 musical criteria including male or female
vocal, electric vs. acoustical guitar, distortion of instruments, presence of
background vocals, strings, and various other instruments.
These criteria are used in a computer algorithm to classify new songs into five
genres: Pop/Rock, Hip-Hop/Electronica, Jazz, World Music, and Classical.
Within each of these genres are hundreds of sub-genres. Like Taylor Swift?

P a n d o r a
• Create a radio station on Pandora with Taylor Swift as the artist and you can
listen all day not only to some Taylor Swift tracks but also to musically related
artists such as Carrie Underwood, Rascal Flatts, Anna Nalick, and others.
• Pandora’s founders, Will Glaser and Tim Westergren, launched Pandora in
2005. Their biggest challenge was how to make a business out of a totally
new kind of online radio station when competing online stations were making
music available for free, many without advertising, and online subscription
services were streaming music for a monthly fee and finding some
advertising support as well.
• Online music illegally downloaded from P2P networks for free was also a
significant factor, as was iTunes, which by 2005 was a roaring success,
charging 99 cents a song with no ad support, and 20 million users at that
time. The idea of a “personal” radio station playing your kind of music was
very new.

P a n d o r a
• Facing stiff odds, Pandora’s first business model was to give away 10
hours of free access, and then ask subscribers to pay $36 a month for
a year after they used up their free 10 hours. The result: 100,000
people listened to their 10 hours for free and then refused to use their
credit cards to pay for the annual service. People loved Pandora but
were unwilling to pay for it, or so it seemed in the early years.

P a n d o r a
• Facing financial collapse, in November 2005 Pandora introduced an ad-
supported option. Subscribers could listen to a maximum of 40 hours of
music in a calendar month for free. After the 40 hours were used up,
subscribers had three choices: (a) pay 99 cents for the rest of the month, (b)
sign up for a premium service offering unlimited usage, or (c) do nothing. If
they chose (c), the music would stop, but users could sign up again the next
month.
• The ad-supported business model was a risky move because Pandora had
no ad server or accounting system, but it attracted so many users that in a
few weeks they had a sufficient number of advertisers (including Apple) to
pay for their infrastructure. In 2006, Pandora added a “Buy” button to each
song being played and struck deals with Amazon, iTunes, and other online
retail sites. Pandora now gets an affiliate fee for directing listeners to Amazon
where users can buy the music.

P a n d o r a
• In 2008, Pandora added an iPhone app to allow users to sign up from
their smartphones and listen all day if they wanted. This added 35,000
new users a day. By 2009, this “free” ad-supported model had attracted
20 million users.
• All of Pandora’s plans come with restrictions required by the music
companies that own the music, including the inability to hear a song on
demand, no replay, and a skip limit of six skips per hour per station.
• Also, the music cannot be used commercially or outside the United
States. After struggling for years showing nothing but losses,
threatened by the music companies who wanted to raise their Internet
radio rates, Pandora finally had some breathing room.

P a n d o r a
• Still not giving up on its premium service, in late 2009, the company
launched Pandora One, a premium service that offered no advertising,
higher quality streaming music, a desktop app, and fewer usage limits. The
service cost $36 a year. By July 2010, Pandora had 600,000 subscribers to
its premium service, about 1% of its then 60 million users.
• Pandora reported $55 million in annual revenue for 2009 and $137 million for
2010. Pandora’s “new” business model proved so successful that it went
public in June 2011. Revenues again doubled in 2011, to $274 million, and in
2012, to $427 million with about 88% ($375 million) coming from advertising
and the remainder from subscriptions and other sources. However, Pandora
has not yet shown a profit, and does face competition from services such as
Spotify, which also is using the freemium strategy.

P a n d o r a
• Pandora is an example of the “freemium” business revenue model. The
model is based on giving away some services for free to 99% of the
customers, and relying on the other 1% of the customers to pay for premium
versions of the same service.
• As Chris Anderson, author of Free: The Future of a Radical Price, has
pointed out, since the marginal cost of digital products is typically close to
zero, providing free product does not cost much, and potentially enables you
to reach many more people, and if the market is very large, even getting just
1% of that market to purchase could be very lucrative.
• There are many other examples of successful freemium model companies.
For many traditional print media like newspapers and magazines, the
freemium model may be their path to survival. But it won’t work for every
online business.

P a n d o r a
• While it clearly has worked for Pandora, there is ongoing debate among e-
commerce CEOs and venture capitalists about the effectiveness of the
freemium model. The crux of the issue is that while freemium can be an
efficient way to gather a large group of potential customers, companies have
found that it’s a challenge to convert eyeballs into those willing to pay. Absent
subscriber revenue, firms need to rely on advertising revenues. MailChimp’s
story is both a success and a cautionary tale. The company lets anyone
send e-mail newsletters to customers, manage subscriber lists, and track the
performance of an e-mail marketing campaign. Despite the powerful tools it
gives marketers, and its open applications programming interface, after 10
years in business, the company had only 85,000 paid subscribers.

P a n d o r a
• In 2009, CEO Ben Chestnut decided that it was time to implement new
strategies to attract additional customers. MailChimp began giving
away its basic tools and charging subscription fees for special features.
• The concept was that as those customers’ e-mail lists grew, they would
continue using MailChimp and be willing to pay for enhanced services.
• These services included more than just the ability to send e-mails to a
greater number of people. Clients would pay to use sophisticated
analytics to help them target their e-marketing campaigns more
efficiently and effectively.

P a n d o r a
• In just over a year, MailChimp went from 85,000 to 450,000 users. E-mail
volume went from 200 million a month to around 700 million. Most
importantly, the number of paying customers increased more than 150%,
while profit increased more than 650%! Sounds great, but there was also a
price to pay.
• Although the company also saw a significant increase in abuse of its system,
they developed an algorithm that has helped them to find and eliminate
spammers using their service.
• For MailChimp, freemium has been worth the price. It currently supports
more than 3 million subscribers worldwide, sending 35 billion e-mails a year.
However, Ning, a company that enables users to create their own social
networks, tried freemium and came to a different conclusion. They
abandoned it in July 2010.

P a n d o r a
• Marc Andreessen, co-author of Mosaic, the first Web browser, and
founder of Netscape, launched Ning in 2004. With his assistance, the
company has raised $119 million in funding. Despite being the market’s
leading social network infrastructure platform, Ning was having a
common problem—converting eyeballs into paying customers.
• While 13% of customers were paying for some premium services, the
revenue was not enough. The more free users Ning acquired, the more
it cost the company.

P a n d o r a
• In May 2010, Ning announced the impending end of the freemium model.
The company shed staff, going from 167 to 98, and began using 100% of its
resources to capture premium users. Since shifting to a three-tier paid
subscription model, Ning has experienced explosive growth, increasing the
number of paying customers from 17,000 to more than 100,000 and growing
revenue by more than 500%.
• By September 2011, Ning had more than 100 million registered user social
profiles and its social networks reached more than 60 million monthly unique
users. In December 2011, Ning was acquired by Glam Media, a leading
social media company, for $200 million. In March 2013, Glam relaunched
Ning as a personal blogging platform for brands and individuals to bring all of
their social media followers together in one place. This version of Ning will
attempt to intertwine content publishing with community. Glam intends to
charge users a fee, rather than returning to a free or freemium strategy.

P a n d o r a
• So when does it make sense to include freemium in a business plan? It
makes sense when the product is easy to use and has a very large
potential audience, preferably in the millions. A solid customer value
proposition is critical. It’s helpful if a large user network increases the
perceived value of the product (i.e., a dating service).
• Freemium may work when a company has good long-term customer
retention rates and the product produces more value over time. An
extremely important part of the equation is that the variable costs of
providing the product or service to additional customers for free must
be low.

P a n d o r a
• For example, Evernote, a personal note-taking service, added freemium to
its business model and has since grown its user base to over 65 million,
adding about 100,000 users a day. The company has over 1.4 million paying
users. Evernote reportedly has a conversion rate of about 3.7%, which is
considered to be quite high in the freemium business world. Evernote has
also discovered that the longer a subscriber remains an active user, the
more likely he or she is to convert to a premium subscription.
• For instance, 12% of those who continue to use Evernote for at least two
years become premium subscribers. Evernote currently is taking in about
$75–$80 million in revenues and has raised over $250 million in funding, the
most recent round of which has valued the company at $1 billion, clear proof
that the freemium model can add tremendous value.

P a n d o r a
• Companies also face challenges in terms of what products and/or
services to offer for free versus what to charge for (this may change
over time), the cost of supporting free customers, and how to price
premium services.
• Further, it is difficult to predict attrition rates, which are highly variable at
companies using freemium. So, while freemium can be a great way to
get early users and to provide a company with a built-in pool for
upgrades, it’s tough to determine how many users will be willing to pay
and willing to stay.

P a n d o r a
• A freemium strategy makes sense for companies such as Pandora,
where there is a very low marginal cost, approaching zero, to support
free users. It also makes sense for a company where the value to its
potential customers depends on a large network, like Facebook.
• Freemium also works when a business can be supported by the
percentage of customers who are willing to pay, like Evernote and
Pandora, especially when there are other revenues like affiliate and
advertising fees that can make up for shortfalls in subscriber revenues.
Freemium has also become the standard model for most apps, with
over 75% of the top 100 apps in Apple's app store using a freemium
strategy.

P a n d o r a
1. Compare Pandora’s original business model with its current business
model.
2. What’s the difference between “free” and “freemium” revenue models?
3. What is the customer value proposition that Pandora offers?
4. Why did Mail Chimp ultimately succeed with a freemium model but
Ning did not?
5. What’s the most important consideration when considering a freemium
revenue model?

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