Chapter Two

Business Models for E-Commerce

By:Marya Sholevar

Department of Banking and Finance

Fall 2014

E-Commerce Business Models

• A business model is a set of planned activities designed to result in a profit in a marketplace.

• An e-commerce business model aims to use and leverage the unique qualities of the Internet, the Web, and the mobile platform.

• There are eight key elements of a business model.

Key Elements of a Business Model

Components Key Questions

Value proposition Why should the customer buy from you?

Revenue model How will you earn money?

Market opportunity What marketspace do you intend 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 or services to attract your target audience?

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?

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

2- Revenue Models

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

• Most companies rely on one, or some combination, of the following major revenue models:• Advertising (Yahoo)• Subscription (WSJ)• Transaction fee (eBay)• Sales (Amazon)• Affiliate (MyPoints)

• Why may a company want more than one revenue model?

2- Revenue Model

2-1 Advertising revenue model:A company provides a forum for advertisements and receives fees from advertisers.2-2 Affiliate revenue model:A company steers business to an affiliate and receives a referral fee or percentage of the revenue from any resulting sales. For example,MyPoints.com makes money by connecting companies with potential customers by offering special deals to its members. When they take advantage of an offer and make a purchase, members earn “points” they can redeem for freebies, and MyPoints.com receives a fee.

3- Market Opportunity

Refers to the company’s intended marketspace and the overall potential financial opportunities available to the firm in that marketspace.

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

4-Competitive Environment

• Refers to the other companies operating in the same marketspace selling similar products.• Who else occupies your intended marketspace?”

− Other companies selling similar products in the same marketspace.

− Includes both direct and indirect competitors.

• Influenced by: − Number and size of active competitors − Each competitor’s market share − Competitors’ profitability

5- Competitive advantage

Competitive advantage:− Achieved by a firm when it can produce a superior

product and/or bring the product to market at a lower price than most, or all, of its competitors.

“What special advantages does your firm bring to the marketspace?” − Is your product superior to or cheaper to produce

than your competitors’?

5- Competitive advantage

Important concepts:− Asymmetry exists whenever one participant in a

market has more resources than other participants− First mover advantage a competitive market

advantage for a firm that results from being the first into a marketplace with a serviceable product or service.

− Complimentary resources: resources and assets not directly involved in the production of the product but required for success such as marketing, management, financial assets, and reputation.

− Unfair competitive advantage occurs when one firm develops an advantage based on a factor that other firms cannot purchase.

5- Competitive advantage

Important concepts:– Perfect market: a market in which there are

no competitive advantages or asymmetries because all firms have equal access to all the factors of production.

– Leverage: when a company uses its competitive advantages to achieve more advantage in surrounding markets.

6- Market Strategy

The plan you put together that details exactly how you intend to enter a new market and attract new customers.

Details how a company intends to enter market and attract customers Best business concepts will fail if not properly marketed to potential customers.

Examples: − 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 plan

Development plan describes how the company will organize the work that needs to be accomplished.

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- Management team

Management team: employees of the company responsible for making the business model work.

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

There are many e-commerce business models, and more are being invented every day.

In this course 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)

B2C Business Mode: Portal model

Business-to-consumer (B2C) e-commerce, in which online businesses seek to reach individual consumers, is the most well-known and familiar type of e-commerce. No sale directly.

Portal offers users powerful Web search tools as well as an integrated package of content and services all in one place.

Revenue models: – Advertising, referral fees, transaction fees,

subscriptions Variations:

– Horizontal portal/General : Marketspace includes all Internet users, Yahoo, AOL, MSN

– Vertical portal/Specialized (Vortal) : Focus around specific subject matter or market segment, Sailnet

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

B2C Models: Transaction Broker

Transaction broker: site that processes transactions for consumers that are normally handled in person, by phone, or mail.

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

B2B Business Models

Net marketplaces – E-distributor – E-procurement – Exchange – Industry consortium

Private industrial network– Single-firm networks– Industry-wide networks

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

Examples: Grainger.com (largest distributor of maintenance, repair, and operations (MRO) supplies

B2B Models: E-procurement

Creates and sells access to digital E-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 Examples:Ariba, Software that helps firms

organize procurement process by creating custom integrated online catalogs where supplier firms can list their offerings for purchasing firms

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

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,ERP system Examples Walmart’s network for suppliers

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