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1. Electronic Commerce Eighth Edition Chapter 3 Selling on the Web: Revenue Models and Building a Web Presence

2. Learning Objectives In this chapter, you will learn about: • Revenue models • How some companies move from one revenue model to another to achieve success • Revenue strategy issues that companies face when selling on the Web • Creating an effective business presence on the Web • Web site usability • Communicating effectively with customers on the Web Electronic Commerce, Eighth Edition 2

3. Revenue Models • Web business revenue generating models – Web catalog – Digital content – Advertising-supported – Advertising-subscription mixed – Fee-based • Can work for both sale types – Business-to-consumer (B2C) – Business-to-business (B2B) • Can work with one Web site, separate sites, or separate pages Electronic Commerce, Eighth Edition 3

4. Web Catalog Revenue Models • Adapted from traditional catalog-based model – Seller established brand image – Sold through printed information • Mailed to prospective buyers • Web sites expand traditional model – Replace or supplement print catalogs – Offer flexibility • Order through Web site or telephone • Payment though Web site, telephone, or mail • Creates additional sales outlet Electronic Commerce, Eighth Edition 4

5. Web Catalog Revenue Models (cont’d.) • Computers and consumer electronics – Apple, Dell, Gateway, Hewlett-Packard, IBM, Sun Microsystems • Sell full range of products – Dell • Allows product configuration; creates value – Crutchfield and The Sharper Image • Successful mail order expansion includes Web sites – Best Buy, Circuit City, J&R Music World, Radio Shack • Successful retail store presence expansion • Sell same products Electronic Commerce, Eighth Edition 5

6. Electronic Commerce, Eighth Edition 6

7. Web Catalog Revenue Models (cont’d.) • Books, music, and videos – Most visible electronic commerce examples – Amazon.com Web-only retailer • Originally sold only books – Barnes & Noble, Blackwell’s, Books-A-Million, Powell’s Books • Well-established physical book stores – CDnow Web-only online music store – Tower Records, Sam Goody retail stores • Created Web sites to compete with CDnow – CD Universe copied CDnow approach Electronic Commerce, Eighth Edition 7

9. Web Catalog Revenue Models (cont’d.) • Luxury goods – Clientele reluctant to buy through Web – Vera Wang and Versace • Web sites provide information • Shopper purchases at physical store • Heavy use of graphics and animation – Evian • Uses flash animation – Tiffany & Co • Graphics and animation require broadband connection Electronic Commerce, Eighth Edition 9

10. Web Catalog Revenue Models (cont’d.) • Clothing retailers – Adapt catalog sales model to Web – Display clothing photos • Prices, sizes, colors, tailoring details – Customers examine clothing online • Place orders through Web site – Lands’ End online Web shopping assistance • Lands’ End Live (1999) – Text chat and call-back features – Lands’ End personal shopper agent (more recent) • Learns preferences and makes suggestions Electronic Commerce, Eighth Edition 10

11. Web Catalog Revenue Models (cont’d.) • Clothing retailers (cont’d.) – My Virtual Model (customers try clothes) • Graphic image built from customer measurements – Lands’ End • Two shoppers using different computers • Simultaneously browse Web site together – Online overstocks stores • Reaches more people than physical store – Problem with varying computer monitor color settings • Send fabric swatch on request • Offer generous return policies Electronic Commerce, Eighth Edition 11

12. Web Catalog Revenue Models (cont’d.) • Flowers and gifts (gift retailers) – 1-800-Flowers • Online extension to successful telephone business • Competes with online-only florists – Godiva • Offers business gift plans – Hickory Farms and Mrs. Fields Cookies • Offer familiar name brands on Web – Harry and David • Original Web site for informational purposes • Promoted catalog business • Added online ordering feature Electronic Commerce, Eighth Edition 12

13. Web Catalog Revenue Models (cont’d.) • General discounters (completely new businesses) – Buy.Com • Borrowed Wal-Mart and discount club sales model – Many sites sold advertising (originally) • Subsidized extremely low prices • Most sites now out of business – Rely on volume purchasing strategy (now) • Keeps prices low – Fiercely competitive (thin margins: little profits) – Traditional discount retailers • Costco, Kmart, Target, Wal-Mart • Slow to introduce electronic commerce Web sites Electronic Commerce, Eighth Edition 13

14. Digital Content Revenue Models • Highly efficient distribution mechanism – Firms own written information or information rights • LexisNexis: variety of information services • Lexis.com: traditional research product • ProQuest: sells published documents’ digital copies • Dow Jones newspaper publisher subscriptions – Digitized newspaper, magazine, and journal content • Association for Computer Machinery: digital library • Sellers of adult digital content – Pioneered online credit card payment processing Electronic Commerce, Eighth Edition 14

15. Advertising-Supported Revenue Models • United States network television – Provides free programming and advertising messages • Supports network operations sufficiently • Site visitor views problem (measuring and charging) – Stickiness • Keeping visitors at site and attracting repeat visitors • Exposed to more advertising in sticky site • Obtaining large advertiser problem – Demographic information • Characteristics set used to group visitors Electronic Commerce, Eighth Edition 15

16. Advertising-Supported Revenue Models (cont’d.) • Successful sites attract specific groups – About.com, HowStuffWorks, Drudge Report • Web portals – Yahoo! • First Web directory • Search engine results presented on separate page • Search term triggered advertising – Main portal sites (AOL, Excite, Google, MSN) – Smaller general-interest sites (refdesk.com) • More difficulty attracting advertisers • C-NET (offers items to a specialized group) Electronic Commerce, Eighth Edition 16

17. Advertising-Supported Revenue Models (cont’d.) • Newspaper publishers – Publish print content on Web – Internet Public Library Online Newspapers page • Links to worldwide newspaper sites – Newspaper’s Web presence • Provides greater exposure and advertising audience • Print edition sales loss (difficult to measure) • Operating costs not covered by advertising revenue Electronic Commerce, Eighth Edition 17

18. Advertising-Supported Revenue Models (cont’d.) • Targeted classified advertising sites – More successful at generating adverting revenue – Web site profit potential • Specialize in classified advertising – Web employment advertising (CareerBuilder.com) • Web directory and search engine advertising approach • Topics of interest; short articles (increases stickiness) • Monster.com Electronic Commerce, Eighth Edition 18

20. Advertising-Supported Revenue Models (cont’d.) • Targeted classified advertising sites (cont’d.) – Used vehicle sites • AutoTrader.com, CycleTrader.com, BoatTrader.com • Accepts paid advertising and charge listing fee • Seller ad options: Web site only, print version inclusion – Dedicated following product sites (VetteFinders) • Caters to small audiences – Product sites useful to buyer after use • Musicians Buy-Line, ComicLink.com, The Golf Classifieds Electronic Commerce, Eighth Edition 20

21. Advertising-Subscription Mixed Revenue Models • Subscribers – Pay fee and accept advertising – Typically less advertising • Compared to advertising-supported sites • Web sites offer different degrees of success – The New York Times (today) • Bulk of revenue derived from advertising – The Wall Street Journal (mixed model) • Subscription revenue weighted more heavily – Print edition and online editions • Different model versions Electronic Commerce, Eighth Edition 21

22. Advertising-Subscription Mixed Revenue Models (cont’d.) • The Washington Post , Los Angeles Times – Mixed revenue model variation • No subscription fee charges • Current stories free • Pay for archived articles • Business Week – Mixed revenue model variation • Free content at online site • Requires paid subscription to print magazine • Archived article additional charge (over five years old) Electronic Commerce, Eighth Edition 22

23. Advertising-Subscription Mixed Revenue Models (cont’d.) • ESPN – Leverages brand name from cable television business – Sells advertising, offers free information – Collects Insider subscriber revenue • Consumers Union (ConsumerReports.org) – Subscriptions and charitable donations – Not-for-profit organization • No advertising – Free information • Attracts subscribers and fulfills mission Electronic Commerce, Eighth Edition 23

24. Fee-for-Transaction Revenue Models • Service fee based on transaction number or size • Web site offers visitor personal service – Formerly, human agents provided service • Value chain – Disintermediation • Intermediary (human agent) removed – Reintermediation • New intermediary (fee-for-transaction Web site) introduced Electronic Commerce, Eighth Edition 24

25. Fee-for-Transaction Revenue Models (cont’d.) • Travel agents – Receive fee for initiating transaction – Replaced by computers • Online travel agents – Saber system (Travelocity) – Expedia, Hotels.com, Hotel Discount Reservations • All profitable – Orbitz • Five major U.S. airlines consortium • Generates advertising revenue Electronic Commerce, Eighth Edition 25

27. Fee-for-Transaction Revenue Models (cont’d.) • Travel agents (cont’d.) – Traditional travel agents being squeezed out • Reduced or eliminated fees – Smaller travel agents specializing (cruises, hotels) – Reintermediation strategy • Travel agents focus on groups – Cruise Web sites • VacationsToGo.com, Cruise Specialists – Group travel Web sites • WaveHunters.com, WannaSurf Electronic Commerce, Eighth Edition 27

28. Fee-for-Transaction Revenue Models (cont’d.) • Automobile sales – Web site removes salesperson negotiation • Reduces costs • Provides buyers information service – CarsDirect.com model • Customers select specific car, site determines price and finds local dealer – Autoweb.com and Autobytel model • Site locates local dealers, car sells at small premium over dealer’s nominal cost – Car salesperson disintermediated – Web site: new intermediary (reintermediation) Electronic Commerce, Eighth Edition 28

29. Fee-for-Transaction Revenue Models (cont’d.) • Stockbrokers – Charge customers trade execution commission – Web-based brokerage firms (E*TRADE and Datek) • Offer investment advice, fast trade execution • Creates competition – Discount brokers and full-line brokers • Web sites opened for stock trading and information • Transaction cost reductions (like online auto buying) • Stockbrokers disintermediated Electronic Commerce, Eighth Edition 29

30. Fee-for-Transaction Revenue Models (cont’d.) • Insurance brokers – Quotesmith • Internet policy price quotes direct to public (1996) • Independent insurance agents disintermediated – Insurance policy information, comparisons, sales sites • InsWeb, Answer Financial, Insurance.com, YouDecide.com – Progressive Web site • Provides quotes for competitors’ products too – Major insurance company Web sites • Offer information or policies for sale Electronic Commerce, Eighth Edition 30

32. Fee-for-Transaction Revenue Models (cont’d.) • Event tickets – Event promoters use Web • Ticketmaster, Tickets.com, TicketWeb • Sell original tickets • Customers reside anywhere worldwide – Secondary market tickets • StubHub, TicketsNow • Operate as brokers • Connect ticket owners with buyers • Reduce transaction costs Electronic Commerce, Eighth Edition 32

33. Fee-for-Transaction Revenue Models (cont’d.) • Real estate and mortgage loan brokers – Web sites provide all traditional broker services • Coldwell Banker, Prudential – National Association of Realtors Web site • Realtor.com – IndyMac Bank Home Lending • Offers online credit review, decision in minutes, printing approval letter – Successful Web mortgage brokers • Ditech and E-LOAN Electronic Commerce, Eighth Edition 33

35. Fee-for-Transaction Revenue Models (cont’d.) • Online banking and financial services – No physical product • Easy to offer on Web – Web financial transactions concerns • Trust and reliability of financial institution – Solutions • Use existing bank’s identification and reputation (Citibank Online) • Start online bank not affiliated with existing bank (First Internet Bank of Indiana) • Use different name (Bank One used Wingspan) Electronic Commerce, Eighth Edition 35

36. Fee-for-Transaction Revenue Models (cont’d.) • Online music – Amazon MP3, Apple’s iTunes, eMusic, Microsoft’s MSN Music, Napster, Rhapsody, Yahoo!, Walmart.com Music Downloads – Sell single songs (tracks) and albums – Sales revenue source • Fee-for-transaction model • Some sites offer subscription plans Electronic Commerce, Eighth Edition 36

37. Fee-for-Transaction Revenue Models (cont’d.) • Online music (cont’d.) – Problems • Digital products easily copied • Stores promote own music file format • Buyers required to download and install software • Software limits number of audio file copies • Software does not prevent illegal copying – Solution • Adopting one standard file format • No copying restrictions • DRM-free MP3 format (Amazon) Electronic Commerce, Eighth Edition 37

38. Online Video • Copying control – Use DRM software • Three issues hampering sales – Large file size • Reduced by higher Internet connection speeds – Fear of online sales impairing other sales types • Potential serial release pattern impact – Inability to play on variety of devices • DRM not platform compatible Electronic Commerce, Eighth Edition 38

39. Fee-for-Service Revenue Models • Companies offer Web service – Fee based on service value • Not broker service • Not based on transactions-processed number or size • Online games – Sales revenue source • Advertising (older concept) • Pay-to-play premium games • Subscriptions – Frequent player demographics • 40% over age 35 Electronic Commerce, Eighth Edition 39

40. Fee-for-Service Revenue Models (cont’d.) • Professional services – Limited Web use • State laws prohibit extension of practice • Patients may set appointments – Major concern • Patient privacy – Significant barrier • Patient diagnosis difficult without physical examination Electronic Commerce, Eighth Edition 40

41. Revenue Models in Transition • Need to change revenue model – When Web users’ needs change • Conditions after 2000 – Funding became scarce • Unprofitable growth phase – Change model or go out of business Electronic Commerce, Eighth Edition 41

42. Subscription to Advertising-Supported Model • Slate magazine (e-zine) – Upscale news and current events • Success expectations were high – Experienced writers and editors – Acclaim for incisive reporting and excellent writing • Initial revenue source – Annual subscription • Did not cover operating costs • Now an advertising-supported site – Part of MSN portal • Increases stickiness Electronic Commerce, Eighth Edition 42

43. Advertising-Supported to Advertising- Subscription Mixed Model • Salon.com – Acclaim for innovative content • Initial revenue source – Advertising-supported site – Needed additional money to continue operations • Investors did not provide • Now offers optional subscription version – Annual fee for Salon premium • Free of advertising • Downloadable content • Additional content Electronic Commerce, Eighth Edition 43

44. Advertising-Supported to Fee-for- Services Model • Xdrive Technologies – Free disk storage • Initial revenue source (1999) – Advertising-supported • Pages contained advertising • Targeted e-mail advertising • Did not cover operating costs • Now subscription-supported service – Monthly fee dropping • Other similar companies (IBackup and Kela) Electronic Commerce, Eighth Edition 44

45. Advertising-Supported to Subscription Model • Northern Light – Search engine (includes own database) • Results include Web site links and abstracts • Initial revenue source – Combination (advertising-supported and fee-based) • Individual article payment • Search results page advertising – Did not cover operating costs • Now subscription model – Annual, large clients Electronic Commerce, Eighth Edition 45

46. Multiple Transitions • Encyclopedia Britannica – Initial Web offerings • Britannica Internet Guide • Encyclopedia Britannica Online • Initial revenue source – Paid subscription site • Low subscription sales – Converted to free advertiser-supported site • Sold educational and scientific products • Returned to mixed model – Subscription plan and free content Electronic Commerce, Eighth Edition 46

48. Revenue Strategy Issues • Implementations issues – Channel conflict and cannibalization – Strategic alliances and channel distribution management – Mobile commerce Electronic Commerce, Eighth Edition 48

49. Channel Conflict and Cannibalization • Channel conflict (cannibalization) – Company Web site sales activities interfere with existing sales outlets • Retail distribution partner issues – Levis: stopped selling products on company Web site • Site now provides product information – Maytag: incorporated online partners into Web site • Site now provides product information – Eddie Bauer • Online purchases returnable at retail stores • Required compensation and bonus plans adjustments to support Web site Electronic Commerce, Eighth Edition 49

50. Strategic Alliances and Channel Distribution Management • Strategic alliance – Two or more companies join forces • Undertake activity over long time period – Joining Web sites with channel distribution management firms • Yodlee – Relationship with portal site clients • Amazon.com – Joined with Target, Borders, CDnow, ToyRUs • Handleman Company – Manages music inventories (Walmart, KMart) Electronic Commerce, Eighth Edition 50

51. Mobile Commerce • Few companies successful generating significant revenues – NTT’s DoCoMo I-Mode service (Japan cell phone) • Send short messages, play games, obtain weather forecasts – AvantGo (United States) • Offers channels of information as PDA downloads • Mobile commerce: $400 billion by 2012 – Requires larger memory, easier-to-use interfaces, higher screen resolutions • E-mail, telephone, Web access, entertainment services convergence Electronic Commerce, Eighth Edition 51

52. Creating an Effective Web Presence • Organization’s presence – Public image conveyed to stakeholders – Usually not important • Until growth reaches significant size – Stakeholders • Customers, suppliers, employees, stockholders, neighbors, general public • Effective Web presence – Critical • Even for smallest and newest Web operating firms Electronic Commerce, Eighth Edition 52

53. Identifying Web Presence Goals • Business physical space – Focus on very specific objectives • Not image driven • Must satisfy many business needs • Fails to convey good presence • Web business site intentionally creates distinctive presence • Good Web site design – Provides effective image-creation features – Provides effective image-enhancing features • Serves as sales brochure, product showroom, financial report, employment ad, customer contact point Electronic Commerce, Eighth Edition 53

54. Identifying Web Presence Goals (cont’d.) • Making Web presence consistent with brand image – Different firms establish different Web presence goals – Coca Cola pages • Usually include trusted corporate image (Coke bottle) • Traditional position as a trusted classic – Pepsi pages • Usually filled with hyperlinks to activities and product- related promotions • Upstart product favored by younger generation Electronic Commerce, Eighth Edition 54

55. Achieving Web Presence Goals • Effective site creates attractive presence – Meets business or organization objectives • Objectives – Attract visitors to the Web site – Make site interesting – Convince visitors to follow site’s links – Create impression consistent with organization’s desired image – Build trusting relationship with visitors – Reinforce positive image – Encourage visitors to return Electronic Commerce, Eighth Edition 55

56. Achieving Web Presence Goals (cont’d.) • Profit-driven organizations – Toyota • Good example of effective Web presence • Presence consistent with corporate goal – Quaker Oats older Web site • Offered little sense of corporate presence – Quaker Oats current Web site • Much better Electronic Commerce, Eighth Edition 56

60. Achieving Web Presence Goals (cont’d.) • Not-for-profit organizations – Web presence effort goals • Image-enhancement capability • Provide information dissemination – Successful site key elements • Integrate information dissemination with fund-raising • Provide two-way contact channel – American Civil Liberties Union (ACLU) • Serves many different constituencies – Political party Web sites Electronic Commerce, Eighth Edition 60

62. Web Site Usability • Current Web presences – Few businesses accomplish all goals – Most fail to provide visitors sufficient interactive contact opportunities – Improve Web presence • Make site accessible to more people • Make site easier to use • Make site encourage visitors’ trust • Develop feelings of loyalty toward organization Electronic Commerce, Eighth Edition 62

63. How the Web Is Different • Simple mid-1990s Web sites – Conveyed basic businesses information – No market research conducted • Web objectives achievement failure – Not understanding Web presence-building media • Web objective achievement success – Sites create organization’s presence – Sites contain standard information set • History, objectives, mission, product information, financial information, two-way meaningful communication Electronic Commerce, Eighth Edition 63

64. Meeting the Needs of Web Site Visitors • Successful Web businesses: – Realize every visitor is a potential customer (partner) • Crafting Web presence is an important concern – Know visitor characteristic variations • Visitor at site for a reason Electronic Commerce, Eighth Edition 64

65. Meeting the Needs of Web Site Visitors (cont’d.) • Web site visitor motivations – Learning about company products or services – Buying products or services – Obtaining warranty, service, repair policy information – Obtaining general company information – Obtaining financial information – Identifying people – Obtaining contact information • Visitors have: – Various needs, experience, expectations, technology Electronic Commerce, Eighth Edition 65

66. Meeting the Needs of Web Site Visitors (cont’d.) • Making Web sites accessible – Build interface flexibility • Optional to use frames • Offer text-only version • Option to select smaller graphic images • Option to specify streaming media connection type • Option to choose among information attributes – Controversial Web site design • Animated graphics software use • Some tasks lend themselves to animated Web pages Electronic Commerce, Eighth Edition 66

68. Meeting the Needs of Web Site Visitors (cont’d.) • Making Web sites accessible (cont’d.) – Offer multiple information formats – Web site constructions goals • Offer easily accessible organization facts • Allow different visitor experiences • Provide meaningful, two-way communication link • Sustain visitor attention and encourage return visits • Offer easily accessible information about products, services, and their use Electronic Commerce, Eighth Edition 68

69. Trust and Loyalty • Creates relationship value • Good service leads to seller trust – Delivery, order handling, help selecting product, after- sale support • Satisfactory service builds customer loyalty • Customer service in electronic commerce sites – Problem • Lack integration between call centers and Web sites • Poor e-mail responsiveness – Unlikely to recover money spent to attract customers Electronic Commerce, Eighth Edition 69

70. Rating Electronic Commerce Web Sites • Review electronic commerce Web sites – Usability, customer service, other factors – Gomez.com • No longer publishes most scorecards – BizRate.com • Comparison shopping service • Links to low price and good service ratings sites Electronic Commerce, Eighth Edition 70

71. Rating Electronic Commerce Web Site (cont’d.) • Usability testing – Helps meet Web site goals – Avoids Web site frustration • Customers leave site without buying anything – Simple site usability changes • Include telephone contact information • Staff a call center – Learn about visitor needs by conducting focus groups – Usability testing cost • Low compared to Web site design costs Electronic Commerce, Eighth Edition 71

72. Rating Electronic Commerce Web Site (cont’d.) • Customer-centric Web site design – Important part of successful electronic business operation – Focus on meeting all site visitors’ needs – Putting customer at center of all site designs • Follow guidelines and recommendations • Make visitors’ Web experiences more efficient, effective, memorable – Usability • Important element of creating effective Web presence Electronic Commerce, Eighth Edition 72

73. Connecting with Customers • Important element of a corporate Web presence • Identify and reach out to customers Electronic Commerce, Eighth Edition 73

74. Connecting with Customers (cont’d.) • Nature of Web communication – Personal contact (prospecting) • Employees individually search for, qualify, contact potential customers – Mass media • Deliver messages by broadcasting – Addressable media • Advertising efforts directed to known addressee – Internet medium • Occupies central space in medium choice continuum Electronic Commerce, Eighth Edition 74

76. Summary • Six main approaches to generate Web revenue – Models work differently – Different business types use different models – Learn more about customers, business environment • Change models • Channel conflict and cannibalization challenges – Form strategic alliances with other companies – Contract with channel distribution managers • B2C mobile commerce not widely successful • Create effective Web presence to deliver value • Must understand Web communication Electronic Commerce, Eighth Edition 76

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