Chapter 02

Chapter 02
E-Commerce
Business Models
M. FATHIMA RASHIDA
SENIOR LECTURER IN MIT
DMIT, FMC
Learning Objectives
❑Identify the key components of e-commerce business models.

❑Describe the major B2C business models.
❑Describe the major B2B business models.
❑Explain the key business concepts and strategies applicable to e-commerce.
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E-commerce business model
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E-commerce Business Model
❑A plan for the successful operation of a business, identifying sources of revenue, the
intended customer base, products, and details of financing.
❑A business model is a set of planned activities designed to result in a profit in a
marketplace.
❑E-commerce business model aims to use and leverage the unique qualities of the Internet
and the WWW.
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Eight key elements of a business model
❑If you hope to develop a successful business model in any arena you must make sure that
the model effectively addresses the eight elements listed below
o Value Proposition
o Revenue Model
o Market Opportunity
o Competitive Environment
o Competitive Advantage
o Market Strategy
o Organizational Development
o Management Team
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Eight key elements of a business model…
Value Proposition
❑A value proposition defines how a company’s product or service fulfills the needs of
customers.
❑We need to answer why customers will choose to do business with us instead of another
company and what the firm will offer that others can not or do not.
❑Successful value proposition will include
o Personalization and customization of product offering
o Reduction of search costs
o Reduction of price discovery costs
o Facilitating transaction by managing product delivery
Amazon makes it possible for book lovers to shop for virtually any book in print from the comfort of their
home or office, 24 hours day, and know immediately whether a book is in stock
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Revenue Model
❑Describes how a firm will earn revenue, generate profits, and produce a superior return on
invested capital than alternative investments.
❑Many revenue model exist but most companies rely on one or some combination of the
following
o Advertising model
o Subscription model
o Transaction fee model
o Sales model
o Affiliate model
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Revenue Model: Advertising Revenue Model
❑A company provides a forum for advertisements and receives fees from advertisers
❑Yahoo! Derives a significant amount of revenue from display and video advertising
❑Typically, fees are generated from advertisers in exchange for advertisements, which is
ultimately the classic principal among the revenue models besides sales.
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Revenue Model: Subscription Revenue Model
❑A business model where a customer must pay a subscription price to have access to the
product/service. The model was pioneered by magazines and newspapers, but is now used by
many businesses and websites.
❑Companies offer its users content or services and charges a subscription fee for access to
some or all of its offerings.
❑To successfully overcome the disinclination of users to pay for content on the Web, the
content offered must be perceived as a high-value-added, premium offering that is not
readily available elsewhere nor easily replicated.
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Revenue Model: Subscription Revenue Model…
❑Users are charged a periodic (daily, monthly or annual) fee to subscribe to a service. Many
sites combine free content with premium membership, i.e. subscriber- or member-only
content. Subscription fees do not depend on transactions. Subscribers use the content as
long and often as they want.
o Publishers and content services, e.g. magazines, - they provide text, audio or video content to users who
subscribe for a fee to get access to the service or to download the new issue: New York Times, Lynda.com
o Special services: Companies offer security and payment services to internet service providers and online
retail customers: PayPal, VeriSign
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Revenue Model: Transaction Fee Revenue Model
❑A company receives commissions based on volume for enabling or executing transactions.
❑The revenue is generated through transaction fees by the customer paying a fee for a transaction
to the operator of a platform.
❑The company is a market place operator providing the customer with a platform to place his
transactions.
❑During this process the customer may be presented as a buyer as well as a seller.
❑To actively participate in this e-market, customers must register, so both parties of a transaction
taking place are identified.
❑The amount of the transaction fee can be both – fixed and percentage calculated.
o EBAY, AMAZON
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Revenue Model: Sales Revenue Model
❑Companies derive revenue by selling goods, information, or services. Wholesalers and
retailers of goods and services sell their products online.
❑The main benefits for the customer are the convenience, time savings, fast information etc.
❑The prices are often more competitive.
o AMAZON.COM
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Revenue Model: Affiliate Revenue Model
❑Company steers business to an affiliate and receives a referral fee or percentage of the
revenue from any resulting sales
❑The affiliate program is an online solution which is based on the principle of commission.
❑Merchants advertise and sell their products and services through links to partner-websites.
❑It is a pay-for-performance model: Commissions are only paid for actual revenue or
measurable success.
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Revenue Model: Affiliate Revenue Model…
❑An affiliate-link includes a code, which identifies the affiliate. That’s how clicks, leads or
sales are tracked.
❑The affiliate therefore acts as the interface between merchants and customers.
❑This model leads to a win-win situation: the merchants sell their products or services and
the affiliates get their commissions.
❑Variations include banner exchange, pay-per-click and revenue sharing programs.
o MYPOINTS.COM earns by connecting companies with potential customers by offering special deals to its
members.
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Revenue Model…
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Market Opportunity
❑A company’s intended marketspace, the area of actual or potential commercial value in
which a company intends to operate, and the overall potential financial opportunities
available to the firm in that marketspace.
❑A potentially favorable condition in which a business can capitalize on a changing trend or
an increasing demand for a product by a demographic group that has yet to be recognized
by its competitors.
❑For a market opportunity to exist, a company must be able to identify who
its potential customers are, the specific needs that need to be met, the size of the market,
and its capacity to capture market share.
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Competitive Environment
❑Refers to the other companies selling similar products and operating in the same
marketspace
❑Also refers to the presence of substitute products and potential new entrants to the
market, as well as the power of customers and suppliers over your business.
❑Influenced by how many companies are active, how large their operations are, what the
market share of each competitor is, how profitable these firms are, etc.
❑Direct competitors are those that sell products or services that are very similar and into
the same market segment. Priceline and Travelocity sell identical products – cheap tickets.
❑Indirect competitors are those who may be in different industries but still compete
indirectly because their products can substitute for one another. Automobile manufacturers
and airline companies; both offer consumers means of transportation. CNN news and ESPN
sports.
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Competitive Advantage
❑Achieved when a company can produce a superior product and or bring the product to
market at a lower price than most, or all, of their competitors; e.g.: being able to obtain
differential access to the factors of production that are denied to their competitors.
❑Firms can compete on scope: local or global. Firms that can provide superior products at
the lowest cost on a global basis are truly advantaged.
❑First mover advantage: a competitive market advantage for a firm that results from being
the first into a marketplace with a product or service.
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Market Strategy
❑Everything a company does to promote its products and services to potential customers is
known as market strategy.
❑It is the plan the company puts together that details exactly how it intends to enter a new
market and attract new customers.
❑Facebook, Twitter as well as YouTube have social networking marketing strategy that
encourages users to put their content on the site for free, build personal profile pages,
contact their friends, and build a community; in this case customers are the marketing staff!
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Organizational Development
❑All firms need an organization to efficiently implement their business plans and strategies.
❑Many e-commerce firms have failed because they lacked the organizational structures and
supportive cultural values required to support new forms of commerce.
❑Companies hoping to grow and thrive need to have a plan for organizational development
that describes how the company will organize the work that needs to be accomplished.
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Management Team
❑The single most important element of a business model is the management team
responsible for making the model work.
❑Strong management team gives a model instant credibility to outside investors and
experience in implementing business plans.
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MAJOR BUSINES-TO-CONSUMER
(B2C) BUSINESS MODELS
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B2C BUSINESS MODELS
❑Online businesses seek to reach individual consumers. This is the most well-known and
familiar type of e-commerce
o E-tailer
o Community provider (social network)
o Content provider
o Portal
o Transaction broker
o Market creator
o Service provider
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E-Tailer
❑These are online retail stores. They come in all sizes varying from giant Amazon to small
tiny stores that have web presence.
❑Similar to typical brick-and-mortar storefronts except that customers only have to connect
to the Internet to check their inventory and place orders.
❑Some have solely online presence and others have complementary web presence (brick-
and-click)
❑Extremely competitive sector since the barrier to entry is very low and tens of thousands
of small e-tail shops have sprung up on the web.
❑Revenue model is sale of goods
Amazon.com, Drugstore.com, Dell.com, Walmart.com
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Community Provider
❑Sites where individuals with particular interests, hobbies, common experiences, or social
networks can come together and “meet” online, where
o People with similar interests can transact (buy and sell goods)
o Share interests, photos, and videos
o Communicate with like minded people and receive interest related information
❑The social network sites Facebook, LinkedIn, Twitter, and Pinterest, and hundreds of other
similar, niche sites all offer users community-building tools and services
❑Revenue model is hybrid including subscription fees, sales revenues, transaction fees,
affiliate fees, and advertising fees from other firms that are attracted by tightly focused
audience
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Content Provider
❑Information and entertainment providers such as newspapers, sports sites, and other
sources that offer customers up-to-date news and special interest how-to guidance and tips
and or information sales.
❑Content providers distribute information content, such as digital video, music, photos, text,
and artworks, over the Web.
❑Any e-commerce start-up that intends to make money by providing content is likely to
face difficulties unless it has a unique information source that others cannot access.
❑Business model: advertising, subscription fees, affiliate referral fees
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Portal
❑Offers an integrated package of content, content-search, and social network services:
news, e-mail, chat, music downloads, video streaming, calendars, etc. and they seek to be a
user’s home base
❑Business model: advertising, subscription fees, transaction fee
❑Yahoo, AOL, MSN, Facebook
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Transaction Broker
❑Processors of online sales transactions, such as stockbrokers and travel agents, that
increase customers’ productivity by helping to get things done faster and more cheaply.
o E*Trade (etrade.com), Hotels.com, Travelocity.com
❑Business model: transaction fees
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Market Creator
❑Web-based businesses that use Internet technology to create markets buyers and sellers
can meet, display products, search for products and establish prices.
❑In Priceline.com consumers are allowed to set the price they are willing to pay for various
travel accommodations and other products (sometimes called reverse auction)
❑eBay, the online auction site, is utilized by both businesses and consumers. Its model is to
create a digital electronic environment for buyers and sellers to meet, agree on a price, and
transact.
❑Business model: transaction fees
o eBay, Amazon, Priceline
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Service Provider
❑Companies that make money by selling users a service, rather than a product
❑Web 2.0 (the second stage of development of the Internet, characterized especially by the
change from static web pages to dynamic or user-generated content and the growth of social
media) applications such as photo sharing video sharing, etc. are all services provided to
customers.
❑Google delivers online application services such as Google Docs and Gmail
o visanow.com (immigration service), rocketlawyer.com (online legal service)
❑Business model: sale of service
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MAJOR BUSINESS-TO-BUSINESS
(B2B) BUSINESS MODELS
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B2B BUSINESS MODELS
❑E-Commerce in which businesses sell to other businesses.
❑More than 10 times the size of B2C e-commerce
o E-distributor
o E-procurement
o Exchange
o Industry consortium
o Private industrial network
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E-Distributor
❑Companies that supply product and services directly to individual businesses
❑E-distributors are owned by one company seeking to serve many customers.
❑The more products and services a company makes available on its site, the more attractive
that site is to potential customers.
❑W.W. Grainger, for example, is the largest distributor of maintenance, repair, and operations
(MRO) supplies.
❑Business model: sale of goods
❑Grainger.com, Partstore.com
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E-Procurement
❑Just as e-distributors provide products to other companies, e-procurement firms create and
sell access to digital electronic markets.
❑Procurement is the act of buying goods, services or works from an external source
❑E-procurement is the business-to-business purchase and sale of services through
the Internet as well as other information and networking systems, such as electronic data
interchange.
❑Firms such as Ariba (ariba.com) have created software (eg: Procurement Software
Solutions) that helps large firms organize their procumbent process by creating mini-digital
markets for single firm. It creates custom-integrated online catalogs (where suppliers firms
can list their offerings) for purchasing firms.
❑Revenue is for market-making services, supply chain management
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Exchanges
❑An independent digital electronic marketplace where hundreds of suppliers meet a smaller
number of very large commercial purchasers.
❑They serve single vertical industry such as steel, polymers, etc.
❑For buyers, B2B exchanges make it possible to gather information, check out suppliers,
collect prices, and keep up to date on the latest happenings all in one place.
❑Sellers benefit from expanded access to buyers.
❑Business model: fees and commissions on transactions.
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Industry Consortia
❑Industry-owned vertical marketplaces that serve specific industries such as automobile,
aerospace, chemical, etc.
❑Business model: Fees and commissions on transactions
❑Elemica.com, Exostar.com
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Private Industrial Network
❑Also referred to as Private Trading Exchange is a digital network designed to coordinate the
flow of communications among firms engaged in business together.
❑The network is owned by a single large purchasing firm.
❑Participation is by invitation only to trusted long-term suppliers of direct inputs.
❑Eg: Walmart operates one of the largest industrial networks in the world for its suppliers,
who on a daily basis use Walmart’s network to monitor the sales of their goods, the status
of shipments, and the actual inventory level of their goods.
❑Business Model: cost is absorbed by the network owner and recovered through production
and distribution efficiencies.
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End of the Chapter
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Chapter 02

❑Identify the key components of e-commerce business models.

❑Business model: transaction fees

❑Business model: sale of service

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