e-commerce

business. technology. society.

eighth edition

Kenneth C. Laudon
Carol Guercio Traver

Copyright © 2012 Pearson Education, Inc.

Chapter 2
E-commerce Business Models
and Concepts
Tweet Tweet: What’s Your Business Model?
Class Discussion

n What characteristics or benchmarks can be used to

assess the business value of a company such as
Twitter?
n Have you used Twitter to communicate with friends
or family? What are your thoughts on this service?
n What are Twitter’s most important assets?
n Which of the various methods described for
monetizing Twitter’s assets do you feel might be
most successful?

Copyright © 2012 Pearson Education, Inc. Slide 2-3

 E-commerce Business Models
n Business model
v Set of planned activities designed to result in a
profit in a marketplace
n Business plan
v Describes a firm’s business model

n E-commerce business model

v Uses/leverages unique qualities of Internet and
Web

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 8 Key Elements of a Business Model
1. Value proposition
2. Revenue model
3. Market opportunity
4. Competitive environment
5. Competitive advantage
6. Market strategy
7. Organizational development
8. Management team
Copyright © 2012 Pearson Education, Inc. Slide 2-5
 1. Value Proposition
n “Why should the customer buy from
you?”
n Successful e-commerce value
propositions:
v Personalization/customization
v Reduction of product search, price discovery
costs
v Facilitation of transactions by managing
product delivery
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 2. Revenue Model
n “How will the firm earn revenue,
generate profits, and produce a superior
return on invested capital?”
n Major types:
v Advertising revenue model
v Subscription revenue model
v Transaction fee revenue model
v Sales revenue model
v Affiliate revenue model
Copyright © 2012 Pearson Education, Inc. Slide 2-7
 3. Market Opportunity
n “What marketspace do you intend to
serve and what is its size?”
v Marketspace: Area of actual or potential commercial
value in which company intends to operate
v Realistic market opportunity: Defined by revenue
potential in each market niche in which company hopes
to compete

n Market opportunity typically divided

into smaller niches

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 4. Competitive Environment
n “Who else occupies your intended
marketspace?”
v Other companies selling similar products in the same
marketspace
v Includes both direct and indirect competitors

n Influenced by:
v Number and size of active competitors
v Each competitor’s market share
v Competitors’ profitability
v Competitors’ pricing
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 5. Competitive Advantage
n “What special advantages does your firm
bring to the marketspace?”
v Is your product superior to or cheaper to produce than
your competitors’?
n Important concepts:
v Asymmetries
v First-mover advantage, complementary resources
v Unfair competitive advantage
v Leverage
v Perfect markets

Copyright © 2012 Pearson Education, Inc. Slide 2-10

 6. Market Strategy
n “How do you plan to promote your
products or services to attract your
target audience?”
v Details how a company intends to enter
market and attract customers
v Best business concepts will fail if not
properly marketed to potential customers

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 7. Organizational Development
n “What types of organizational
structures within the firm are necessary
to carry out the business plan?”
n Describes how firm will organize work
v Typically, divided into functional departments

v As company grows, hiring moves from

generalists to specialists

Copyright © 2012 Pearson Education, Inc. Slide 2-12

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

Copyright © 2012 Pearson Education, Inc. Slide 2-13

 Insight on Business: Class Discussion

Is Groupon’s Business Model Sustainable?

n What is the value of Groupon to merchants?
What types of merchants benefit the most?
n What is the value of Groupon to investors?
Is Groupon overvalued ?
n What obstacles does Groupon face?
n Does Google Offers present a threat to
Groupon’s business model?

Copyright © 2012 Pearson Education, Inc. Slide 2-14

Categorizing E-commerce Business Models
n No one correct way
n We categorize according to:
v E-commerce sector (e.g. B2B)
v E-commerce technology (e.g. m-commerce)

n Similar business models appear in more

than one sector
n Some companies use multiple business
models (e.g. eBay)
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 B2C Business Models: Portal
n Search plus an integrated package of
content and services
n Revenue models:
v Advertising, referral fees, transaction fees,
subscriptions
n Variations:
v Horizontal/General
v Vertical/Specialized (Vortal)
v Search
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 B2C Models: E-tailer
n Online version of traditional retailer
n Revenue model: Sales
n Variations:
v Virtual merchant
v Bricks-and-clicks
v Catalog merchant
v Manufacturer-direct

n Low barriers to entry

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 B2C Models: Content Provider
n Digital content on the Web
v News, music, video

n Revenue models:
v Subscription; pay per download (micropayment);
advertising; affiliate referral fees

n Variations:
v Content owners
v Syndication
v Web aggregators

Copyright © 2012 Pearson Education, Inc. Slide 2-18

 B2C Models: Transaction Broker
n Process online transactions for
consumers
v Primary value proposition—saving time and money

n Revenue model:
v Transaction fees

n Industries using this model:

v Financial services
v Travel services
v Job placement services

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 Insight on Technology: Class Discussion

Battle of the Titans: Music in the Cloud

n Have you purchased music online or subscribed
to a music service? What was your experience?
n What revenue models do cloud music services
use?
n Do cloud music services provide a clear
advantage over download and subscription
services?
n Of the cloud services from Google, Amazon, and
Apple, which would you prefer to use and why?
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 B2C Models: Market Creator
n Create digital environment where
buyers and sellers can meet and
transact
n Examples:
v Priceline

v eBay

n Revenue model: Transaction fees

Copyright © 2012 Pearson Education, Inc. Slide 2-21

 B2C Models: Service Provider
n Online services
v e.g., Google—Google Maps, Gmail, etc.

n Value proposition
v Valuable, convenient, time-saving, low-cost
alternatives to traditional service providers
n Revenue models:
v Sales of services, subscription fees, advertising,
sales of marketing data

Copyright © 2012 Pearson Education, Inc. Slide 2-22

 B2C Models: Community Provider
n Provide online environment (social
network) where people with similar
interests can transact, share content,
and communicate
v e.g., Facebook, LinkedIn, Twitter

n Revenue models:
v Typically hybrid, combining advertising,
subscriptions, sales, transaction fees, affiliate
fees
Copyright © 2012 Pearson Education, Inc. Slide 2-23
 B2B Business Models
n Net marketplaces
v E-distributor
v E-procurement
v Exchange
v Industry consortium

n Private industrial network

Copyright © 2012 Pearson Education, Inc. Slide 2-24

 B2B Models: E-distributor
n Version of retail and wholesale store,
MRO goods and indirect goods
n Owned by one company seeking to
serve many customers
n Revenue model: Sales of goods

n e.g., Grainger.com

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 B2B Models: E-procurement
n Creates digital markets where
participants transact for indirect goods
v B2B service providers, application service
providers (ASPs)
n Revenue model:
v Service fees, supply-chain management,
fulfillment services
n e.g., Ariba

Copyright © 2012 Pearson Education, Inc. Slide 2-26

 B2B Models: Exchanges
n Independently owned vertical digital
marketplace for direct inputs
n Revenue model: Transaction, commission
fees
n Create powerful competition between
suppliers
n Tend to force suppliers into powerful price
competition; number of exchanges has
dropped dramatically
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 B2B Models: Industry Consortia
n Industry-owned vertical digital
marketplace open to select suppliers
n More successful than exchanges
v Sponsored by powerful industry players
v Strengthen traditional purchasing behavior

n Revenue model: Transaction,

commission fees
n e.g., Exostar
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 Private Industrial Networks
n Digital network
n Used to coordinate communication
among firms engaged in business
together
n Typically evolve out of company’s
internal enterprise system
n e.g., Walmart’s network for suppliers

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 Other E-commerce Business Models
n Consumer-to-consumer (C2C)
v eBay, Craigslist

n Peer-to-peer (P2P)
v The Pirate Bay, Cloudmark

n M-commerce:
v Extends existing e-commerce business models
to service mobile workforce, consumers
v Unique features include mobility, cameras to
scan product codes, GPS
Copyright © 2012 Pearson Education, Inc. Slide 2-30
 Insight on Society: Class Discussion

Foursquare: Check In/Check Out

n Why should you care if companies track your
location via cell phone?
n Are privacy concerns the only shortcoming of
location-based mobile services?
n Should business firms be allowed to call cell
phones with advertising messages based on
location?

Copyright © 2012 Pearson Education, Inc. Slide 2-31

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

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

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 Industry Value Chains
n Set of activities performed by suppliers,
manufacturers, transporters, distributors,
and retailers that transform raw inputs into
final products and services
n Internet reduces cost of information and
other transactional costs
n Leads to greater operational efficiencies,
lowering cost, prices, adding value for
customers
Copyright © 2012 Pearson Education, Inc. Slide 2-34
 E-commerce and Industry Value
Figure 2.4, Page 100 Chains

Copyright © 2012 Pearson Education, Inc. Slide 2-35

 Firm Value Chains
n Activities that a firm engages in to
create final products from raw inputs
n Each step adds value

n Effect of Internet:
v Increases operational efficiency

v Enables product differentiation

v Enables precise coordination of steps in chain

Copyright © 2012 Pearson Education, Inc. Slide 2-36

 E-commerce and Firm Value Chains
Figure 2.5, Page 101

Copyright © 2012 Pearson Education, Inc. Slide 2-37

 Firm Value Webs
n Networked business ecosystem
n Uses Internet technology to coordinate
the value chains of business partners
n Coordinates a firm’s suppliers with its
own production needs using an
Internet-based supply chain
management system

Copyright © 2012 Pearson Education, Inc. Slide 2-38

 Internet-enabled Value Web
Figure 2.6, Page 102

Copyright © 2012 Pearson Education, Inc. Slide 2-39

 Business Strategy
n Plan for achieving superior long-term
returns on the capital invested in a
business firm
n Four generic strategies
v Differentiation
v Cost
v Scope
v Focus

Copyright © 2012 Pearson Education, Inc. Slide 2-40