Lecture 02

E-Business Models

Jaeki Song
 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.
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 Components of e-Business
Models
BusinessModel
Business Model
--Customer
Customervalue
value
--Scope
Scope
--Price
Price
--Resources
Resources
--Capabilities
Capabilities
--Implementations
Implementations

Internet
Internet Performance
Performance

Environment
Environment
 Price Competition
 Price for books and CDs sold on the Internet less
than conventional channel
– Average 9-16%
 Price increments
– Price change on the Internet is smaller than
conventional channel
 Price dispersion
– Substantial differences in price across retailers on the
Internet
– Heterogeneity in consumer awareness
– Heterogeneity in retailer branding and trust
 Driving Factors
 Lower buyer search costs
– Promote price competition
 Low entry costs or low operational costs
 Other factors
– Tax
– Shipping and handling fees
 E-Commerce Business Models
 Business model
– a set of planned activities designed to

result in a profit in a marketplace

 E-commerce business model
– a business model that aims to use and

leverage the unique qualities of the

Internet and the World Wide Web.

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Eight Key Ingredients of a Business Model

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 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 What types of organizational structures within the firm are
development necessary to carry out the business plan?

What kinds of experiences and background are important for

Management team
the company’s leaders to have?
 Value Position
 Defines how a company’s product or
service fulfills the needs of customers.
 Questions
 Why will customers choose to do business with
your firm instead of another company?
 What will your firm provide that other firms do
not and cannot?

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 Revenue Model
 Describes how the firm will earn revenue,
produce profits, and produce a superior
return on invested capital.
 E-commerce revenue models include:
 advertising model
 subscription model
 transaction fee model
 sales model
 affiliate model
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 Revenue Model
 Advertising revenue model
 a company provides a forum for advertisements
and receives fees from advertisers (Yahoo)
 Subscription revenue model
 a company offers it users content or services
and charges a subscription fee for access to
some or all of it offerings (Consumer Reports
or Wall Street Journal)

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 Revenue Model
 Transaction fee revenue model
 a company receives a fee for enabling or
executing a transaction (eBay or E-Trade)
 Sales revenue model
 a company derives revenue by selling goods,
information, or services (Amazon or
DoubleClick)
 Affiliate revenue model
 a company steers business to an affiliate and
receives a referral fee or percentage of the
revenue from any resulting sales (MyPoints) 11
 Market Opportunity
 Market opportunity
 refers to the company’s intended marketspace
and the overall potential financial opportunities
available to the firm in that market space
 defined by the revenue potential in each of the
market niches where you hope to compete
 Marketspace
 the area of actual or potential commercial value
in which a company intends to operate
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 Competitive Environment
 Refers to the other companies operating in
the same marketplace selling similar
products
 Influenced by:
 how many competitors are active
 how large are their operations
 the market share of each competitor
 how profitable these firms are
 how they price their products
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 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
 Achieved because a firm has been able to
obtain differential access to the factors of
production that are denied their competitors
-- at least in the short term

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 Competitive Advantage
 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

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 Competitive Advantage
 Unfair competitive advantage
 occurs when one firm develops an advantage
based on a factor that other firms cannot
purchase
 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
 when a company uses its competitive advantage
to achieve more advantage in surrounding
markets
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 Market Strategy
 The plan you put together that details
exactly how you intend to enter a new
market and attract new customers
 Best business concepts will fail if not
properly marketed to potential customers

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 Organizational Development
 Describes how the company will organize
the work that needs to be accomplished
 Work is typically divided into functional
departments
 Move from generalists to specialists as the
company grows

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 Management Team
 Employees of the company responsible for
making the business model work
 Strong management team gives instant
credibility to outside investors
 A strong management team may not be able
to salvage a weak business model
 Should be able to change the model and
redefine the business as it becomes
necessary
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Major Business-to-Consumer
(B2C) Business Models

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Major Business-to-Consumer
(B2C) Business Models

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 Major Business-to-Consumer
(B2C) Business Models
 Portal
 offers powerful search tools plus an integrated
package of content and services
 typically utilizes a combines
subscription/advertising revenues/transaction
fee model
 may be general or specialize (vortal)

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 Major Business-to-Consumer
(B2C) Business Models
 E-tailer
 online version of traditional retailer
 includes
 virtual merchants (online retail store only)
 clicks and mortar e-tailers (online distribution
channel for a company that also has physical stores)
 catalog merchants (online version of direct mail
catalog)
 online malls (online version of mall)
 Manufacturers selling directly over the Web
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 Major Business-to-Consumer
(B2C) Business Models
 Content Provider
 information and entertainment companies that
provide digital content over the Web
 typically utilizes an advertising, subscription, or
affiliate referral fee revenue model
 Transaction Broker
 processes online sales transactions
 typically utilizes a transactions feel revenue
model
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 Major Business-to-Consumer
(B2C) Business Models
 Market Creator
 uses Internet technology to create markets that
bring buyers and sellers together
 typically utilizes a transaction fee revenue
model
 E.g. Auction
 English auction
 Dutch auction
 Sealed-bid auction
 Double auction

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 English Auctions
 The bidders announce their bids until no
higher bid is forthcoming
– ‘going . . . going . . . gone!’
– Ascending-price auctions
– Typically set a closing time in advance
 Minimum bid plus a reserve price
 Early buyout price
 Dutch Auctions
 Bidding starts at a high price and drops until
a bidder accepts the price
– Descending price auctions
 Sealed-Bid Auctions
 Bidders submit their bids independently and
are usually prohibited from sharing
information with each other
 First-price sealed-bid auction
– The winner pays his amount
 Second-price sealed-bid auction
– The winner pays one increment over the
second-highest bid received
 Double Auctions
 Buyers and sellers submit bids to an
auctioneer
 The auctioneer matches the seller’s offers to
the buyer’s offer
– E.g. New York Stock Exchange
 Major Business-to-Consumer
(B2C) Business Models
 Service Provider
 offers services online
 Community Provider
 provides an online community of like-minded
individuals for networking and information
sharing
 revenue is generated by referral fee,
advertising, and subscription

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 e-Business Models

 Dynamic Pricing Models

– Name-Your-Price Model
– Comparison-Pricing Model
– Demand-Sensitive Pricing Model
 Name-Your-Price Model
 Allows customers to state the price they are
willing to pay
 Priceline.com
– Demand collect systems
» Use shopping bot that takes customer’s bid to the
Priceline partners to see whether they will accept the
prices for the requested products/services
– Intelligent agents
 Comparison-Pricing Model
 Allows customers to poll a variety of
merchants and find a desired
product/service at the lowest price
 Mysimon.com
– Uses intelligent-agent technology
– Offers discussion groups, customer ratings, and
comparison shopping
Demand-Sensitive Pricing Model
 Group purchasing
– Individual buyers to shop in large groups to obtain
group discount
» The more people who buy a product in a single purchase, the
lower the cost per person becomes
– Mercata.com, mobshop.com, demandline.com
 How it works
– Buyers create requests for quotes (RFQs)
– Purchasing manager monitors all aggregated RFQs
– Manager negotiates through suppliers.
 Demand-Sensitive Pricing Model
 Price Discrimination
Price D2
R2
Marginal
D1 cost
R1
P2
P1

Q1 Q2 Q Output
Demand-Sensitive Pricing Model
 Benefits to Buyers
– Reduce product costs
– Reduce transaction costs
 Benefits to Suppliers
– Enhance revenue with a high-volume sales
– Reduce sales costs
– Improve manufacturing efficiency
Major Business-to-Business
(B2B) Business Models

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 Major Business-to-Business
(B2B) Business Models
 B2B Hub
 also known as marketplace/exchange
 electronic marketplace where suppliers and
commercial purchasers can conduct
transactions
 may be a general (horizontal marketplace) or
specialized (vertical marketplace)
 E-distributor
 supplies products directly to individual
businesses
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 Major Business-to-Business
(B2B) Business Models
 B2B Service Provider
 sells business services to other firms
 Matchmaker
 links businesses together
 charges transaction or usage fees
 Infomediary
 gather information and sells it to businesses

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Seven Unique Feature of E-
Commerce Technology

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 Seven Unique Feature of E-
Commerce Technology
 Ubiquity
 Alters industry structure by creating new marketing
channels and expanding size of overall market
 Creates new efficiencies in industry operations and
lowers cost of firms’ sales operations
 Enables new differentiation strategies
 Global Reach
 Changes industry structure by lowering barriers to
entry, but greatly expands market at the same time
 Lowers cost of industry and firm operations through
production and sales efficiencies
 Enables competition on global scale
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 Seven Unique Features of E-
Commerce Technology
 Universal Standards
 Changes industry structure by lowering barriers to entry
and intensifying competition within an industry
 Lowers costs of industry and firm operations by
lowering computing and communications costs
 Enables broad-scope strategies
 Richness
 Alters industry structure by reducing strength of
powerful distribution channels
 Change industry and firm operations costs by lessening
reliance on sales force
 Enhances post-sale support strategies
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 Seven Unique Features of E-
Commerce Technology
 Interactivity
 Alters industry structure by reducing threat of
substitutes through enhanced customization
 Reduces industry and firm costs by lessening reliance
on sales force
 Enable differentiation strategies
 Personalization/Customization
 Alters industry structure by reducing threats of
substitutes, raising barriers to entry
 Reduces value chain costs in industry and firm by
lessening reliance on sales forces 43
 Seven Unique Features of E-
Commerce Technology
 Information Density
 Changes industry structure by weakening
powerful sales channels, shifting bargaining
power to consumer
 Reduces industry and firm operations costs by
lowering costs of obtaining, processing, and
distributing information about suppliers and
consumers

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 Case Studies
 Should we integrate our Internet business
with our traditional business or should we
keep the two separate?
 Seamless Model: Office Depot
 Two reasons
– Existing catalog-sales support an Internet store
– Existing information systems made it easy to
coordinate online stores and physical stores
 Customers’ Benefit
– Make shopping simple and convenient
 Company’s Benefit
– Cheaper to reach customers
 Seamless Model: Office Depot
 Added Value
– Each customer has its own specialized view of
the OfficeDepot.com site
» authorization
– Provide additional discount for larger
customers if they place order on online
 Actually increased the traffic at its physical
outlet
 Joint Venture Model: KB Toy
 Reasons
– Don’t have much experience with catalog
retailing
– Tend to focus exclusively on their physical
stores
 KB Toy and Kbkids.com
– KB Toy joined with BrainPlay.com to create
Kbkids.com
» $80 million
 Joint Venture Model: KB Toy
 Operation
– Separation
» Kbkids headquarter: Denver
» KB Toy headquarter: MA
– Integration
» Share brand: promotion
» Customer service
» Purchasing function
 Virtual Partnership
 Rite Aid and Drugstore.com
 Customer benefit
– Customers can pick up their Drugstore.com
prescriptions at their local Rite Aid
 A Spectrum of Choices

Model Brand Management Operation

Seamless Fully integrated Fully integrated Fully integrated

Mostly Slightly Moderately

Joint Venture
integrated integrated integrated

Slightly Moderately
Partnership Separate
integrated integrated
 Decision 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 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?