05 Business Models for E-commerce slides

e-commerce
business. technology. society.

eighth edition

Kenneth C. Laudon
Carol Guercio Traver

Copyright © 2012 Pearson Education, Inc.

Chapter 5
Business Models for E-commerce

1

Tweet Tweet: What’s Your Business Model?
Class Discussion

What characteristics or benchmarks can be used to
assess the business value of a company such as
Twitter?

Have you used Twitter to communicate with friends
or family? What are your thoughts on this service?
What are Twitter’s most important assets?

Which of the various methods described for
monetizing Twitter’s assets do you feel might be
most successful?
Copyright © 2012 Pearson Education Slide 5-3

Class Discussion


2

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

E-commerce Business Models – Definitions
Business model
Set of planned activities designed to result in a
profit in a marketplace
Business plan
Describes a firm’s business model
E-commerce business model
Uses/leverages unique qualities of Internet and
Web


3

8 Key Elements of a Business Model

Slide 2-7

1. Value Proposition
Defines how a company’s product or service
fulfills the needs of customers
Questions to ask:
“Why should the customer buy from you?”
What will your firm provide that others do not or
cannot?
Successful e-commerce value propositions:
Personalization/customization
Reduction of product search, price discovery costs
Facilitation of transactions by managing product
delivery

4

2. Revenue Model
“How will the firm earn revenue,
generate profits, and produce a superior
return on invested capital?”
Major types:
Advertising revenue model, e.g., Google
Subscription revenue model, e.g., WSJ
Transaction fee revenue model, e.g., eBay
Sales revenue model, e.g., Amazon.com,
Gap.com
Affiliate revenue model, e.g., MyPoints, Epinions


5

3. Market Opportunity
“What marketspace do you intend to
serve and what is its size?”
Marketspace: Area of actual or potential commercial
value in which company intends to operate
Realistic market opportunity: Defined by revenue
potential in each market niche in which company hopes
to compete
Market opportunity typically divided
into smaller niches


Marketspace and Market Opportunity in the
Software Training Market


6

4. Competitive Environment
“Who else occupies your intended
marketspace?”
Other companies selling similar products in the same
marketspace
Includes both direct (Travelocity vs Expedia) and
indirect (auto makers vs airlines) competitors
Influenced by:
Number and size of active competitors
Each competitor’s market share
Competitors’ profitability
Competitors’ pricing

5. Competitive Advantage
“What special advantages does your firm bring
to the marketspace?”
Is your product superior to or cheaper to produce than your
competitors’?
Important concepts:
Asymmetries
First-mover advantage, complementary resources, e.g.,
Amazon
Unfair competitive advantage, e.g., Sony, Apple
Leverage: When a company uses its competitive advantage
to achieve more advantage in surrounding markets, E.g.,
Amazon’s moving into online grocery business leverages its
huge customer database and years of e-commerce
experience
Perfect markets

7

6. Market Strategy
“How do you plan to promote your
products or services to attract your target
audience?”
Details how a company intends to enter market and
attract customers
Best business concepts will fail if not properly
marketed to potential customers
Examples include:
YouTube having social network marketing strategy
which lets users to post content on the site for free;
AOL distributing out free trial CDs through
magazines and newspapers


7. Organizational Development
“What types of organizational structures
within the firm are necessary to carry out
the business plan?”
Describes how firm will organize work
Work typically divided into functional departments,
e.g, production, shipping, marketing, customer
support, and finance

As company grows, hiring moves from generalists
to specialists , e.g., eBay starting out from one-
person firm into multi-departmental large
enterprise

8

8. Management Team
“What kind of backgrounds should the
company’s leaders have?”
A strong management team:
Can make the business model work
Can give credibility to outside investors
Has market-specific knowledge
Has experience in implementing business plans


Categorizing E-commerce Business Models
No one correct way
We categorize business models according to:
E-commerce sector (e.g. B2B, B2C, C2C)
Type of e-commerce technology (e.g. P2P, m-
commerce)
Similar business models appear in more than
one sector, e.g., e-tailer and e-distributors
Some companies use multiple business models
(e.g. eBay being B2C market maker, C2C
business model, and B2C m-commerce model)


9

B2C Business Models: Portal
Search plus an integrated package of
content and services
Revenue models:
Advertising, referral fees, transaction fees,
subscriptions
Variations:
Horizontal/General : Marketspace includes all
Internet users, e.g., Yahoo, AOL, MSN
Vertical/Specialized (Vortal) : Focus around
specific subject matter or market segment, e.g.,
Sailnet
Search

B2C Models: E-tailer
Online version of traditional retailer
Revenue model: Sales
Variations:
Virtual merchant– Amazon, BlueNile, Drugstore
Bricks-and-clicks – Wal-Mart, Staples, JCPenny
Catalog merchants – LLBean, CDW
Manufacturer-direct – Sony, Dell, IBM
Low barriers to entry
Keys to success in e-tailing
Keeping expenses low,
Selection broad, and
Inventory controlled

10

B2C Models: Content Provider
Digital content on the Web
News, music, video, photos, text, and artwork
Revenue models:
Subscription, e.g., Real.com’s Rhapsody Unlimited service;
Pay per download (micropayment) , e.g., WSJ.com, Harvard
Business Review;
Advertising, e.g., CNN.com, CBSSports.com;
Affiliate referral fees
Variations:
Content owners: book publishers, newspapers, music publishers,
movie studios
Syndication: content providers do not own content, but syndicate
(aggregate) and then distribute contents produced by others
Web aggregators: collect info from sources and add value to info
thru post-aggregation services. E.g., shopping.com

B2C Models: Transaction Broker
Process online transactions for
consumers
Primary value proposition—saving time and money
Revenue model:
Transaction fees
Industries using this model:
Financial services– E*Trade, Ameritrade, Schwab
Travel services – Travelocity.com
Job placement services – Monster.com

11

B2C Models: Market Creator
Create digital environment where buyers
and sellers can meet and transact
Differs from transaction brokers who carry
out transactions for their customers, or act
as agents in larger markets
Examples:
Priceline
eBay
Revenue model: Transaction fees

B2C Models: Service Provider
Online services
e.g., Google—Google Maps, Gmail, Google Docs,
etc.
Value proposition
Valuable, convenient, time-saving, low-cost
alternatives to traditional service providers
Revenue models:
Sales of services, subscription fees, advertising,
sales of marketing data

12

B2C Models: Community Provider
Provide online environment (social
network) where people with similar
interests can transact, share content,
and communicate
e.g., Facebook, LinkedIn, Twitter
Revenue models:
Typically hybrid, combining advertising,
subscriptions, sales, transaction fees, affiliate
fees


13


B2B Business Models
Net marketplaces
E-distributor
E-procurement
Exchange
Industry consortium
Private industrial network


14

B2B Models: E-distributor
Supplies products and services directly
to individual businesses
Owned by one company seeking to
serve many customers
Revenue model: Sales of goods
e.g., Grainger.com (largest distributor of
maintenance, repair, and operations
(MRO) supplies

B2B Models: E-procurement
Creates and sells access to digital markets
Includes B2B service providers (sells business services
to other firms), application service providers (ASPs sell
access to Internet-based software to other companies)
Creating custom integrated online catalogs,
(where supplier firms can list their offerings)
for purchasing firms
Revenue model:
Transaction fees, service fees, supply-chain
management, fulfillment services
e.g., Ariba, Software that helps firms organize procurement
process by creating custom integrated online catalogs
where supplier firms can list their offerings for purchasing
firms

15

B2B Models: Exchanges
Electronic digital marketplace where hundreds of
suppliers meet a smaller number of very large
commercial buyers
Independently owned vertical digital marketplace,
e.g., steel, aluminum, polymers, for direct inputs to
production and short-term contracts
Revenue model: Transaction fees (based on
transaction size), commission fees
Create powerful competition between suppliers
Tend to force suppliers into powerful price
competition; number of exchanges has dropped
dramatically

B2B Models: Industry Consortia
Industry-owned vertical digital marketplace
that serve specific industries (e.g., automobile,
aerospace, chemical, floral, logging)
More successful than exchanges
Sponsored by powerful industry players
Strengthen traditional purchasing behavior
Revenue model: Transaction, commission fees
e.g., Exostar – online trading exchange for
aerospace and defense industry, founded by
Boeing, Lockheed Martin, Rolls-Royce,
Raytheon

16

Private Industrial Networks
Digital network used to coordinate
communication among firms engaged in
business together
Network owned by a single large buying
firm
Typically evolve out of company’s
internal enterprise system, e.g., ERP
system
e.g., Walmart’s network for suppliers


17

Other E-commerce Business Models
Consumer-to-consumer (C2C)
eBay, Craigslist
Peer-to-peer (P2P)
The Pirate Bay, Cloudmark (P2P anti-spam
solution to protect e-mailboxes)
M-commerce:
Extends existing e-commerce business models
to service mobile workforce, consumers
Unique features include mobility, cameras to
scan product codes, GPS


18

E-commerce Enablers:
The Gold Rush Model
E-commerce infrastructure companies
have profited the most:
Hardware, software, networking, security
E-commerce software systems, payment systems
Media solutions, performance enhancement
CRM software
Databases
Hosting services, etc.


19



20

How the Internet and the Web
Change Business
E-commerce changes industry structure
by changing:
Basis of competition among rivals
Barriers to entry
Threat of new substitute products
Strength of suppliers
Bargaining power of buyers



21

Industry Value Chains
Set of activities performed by suppliers,
manufacturers, transporters, distributors, and
retailers that transform raw inputs into final products
and services
Value chain: each of these activities adds economic
value to the final products
Internet reduces cost of information and other
transactional costs
Leads to greater operational efficiencies, lowering
cost, prices, adding value for customers
Example: Dell bypassing distributors and retailers and
also providing efficient CRM

E-commerce and Industry Value
Figure 5.4, Page 364 Chains


22

Firm Value Chains
Activities that a firm engages in to create final
products from raw inputs
A firm value chain: Set of activities that a firm
engages in to create final products from raw inputs
Each step adds value
Effect of Internet:
Increases operational efficiency
Enables product differentiation
Enables precise coordination of steps in chain
Example: Amazon providing large selection of books
at lower prices, and professional and consumer
book reviews

E-commerce and Firm Value Chains
Figure 5.5, Page 365


23

Firm Value Webs
Firms also rely on value chain of their partners (suppliers,
distributors, delivery firms)
A value Web: Networked business ecosystem that uses
Internet technology to coordinate the value chains of
business partners within an industry, or within a group of
firms
Uses Internet technology to coordinate the value chains
of business partners
Coordinates a firm’s suppliers with its own production
needs using an Internet-based supply chain management
system
Example: Amazon relies on UPS tracking system for online
package tracking, and on USPS for package insertion into
mail stream

Internet-enabled Value Web
Figure 5.6, Page 366


24

Business Strategy
Plan for achieving superior long-term returns on the
capital invested in a business firm (i.e., a plan for
making a profit in a competitive environment)
Four generic strategies
1. Differentiation, by creating expectations, adding
features, and enhancing product abilities to solve
related problems
2. Cost, lowered by finding new, more efficient business
processes, by finding a unique resource, or lower-cost
supplier
3. Scope: to compete in all markets around the globe,
rather than only in local, regional, or national markets
4. Focus: to compete within a narrow market or product
segment, e.g., LLBean focusing on outdoor sports
apparel


25

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