MIS 207: E-Business

Lecture 2:
E-Commerce Fundamentals

Original:
Md. Mahbubul Alam, PhD
Associate Professor

Edited:
Yasir Arefin, Lecturer
Intended Learning Outcomes

• Complete an online marketplace analysis to assess competitor,

customer, and intermediary use of the Internet as part of strategy
development,
• Identify the main business and marketplace models for electronic
communications and trading,
• Evaluate the effectiveness of business and revenue models for
online businesses.

1/26/2016 Prepared & Presentation by Md. Mahbubul Alam, PhD 2

 Situation Analysis and Environmental Scanning
• B2B traditionally sells products through its distributors, however they can
bypass distributors and sales directly and reach customers via their websites
and/or B2B marketplaces.
• B2C can market its products through online intermediaries.

1. Situation analysis: Collection and review of information about an organization’s

external environment and internal processes and resources in order to inform its
strategies.
• Online element of an organization’s environment are the part of situation
analysis (see next page).
2. Environmental Scanning: The process of continuously monitoring the
environment and events and responding accordingly.
3. Online intermediaries: Web sites which help connect web users with content they
are seeking on destination sites, e.g., search engines, shopping comparison sites and
traditional brokers, directories, blogs, social media.
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e-Business Environment

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e-Business Environment: Constraints and Opportunities
Micro-environment
• Customers
o which services are they offering via their web site that your organization
could support them in?
• Competitors
o need to be benchmarked in order to review the online services they are
offering – do they have a competitive advantage?
• Intermediaries
✔ are new or existing intermediaries offering products or services from your
competitors while you are not represented?
• Suppliers
o are suppliers offering different methods of procurement to competitors that
give them a competitive advantage?
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e-Business Environment: Constraints and Opportunities (cont’d)

Macro-environment
• Society
o what is the ethical and moral consensus on holding personal information?
• Country specific, international legal
o what are the local and global legal constraints for example, on holding
personal information, or taxation rules on sale of goods?
• Country specific, international economic
o what are the economic constraints of operating within a country or global
constraints?
• Technology
o what new technologies are emerging by which to deliver online services
such as interactive digital TV and mobile phone-based access?
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Strategic Agility

• The capability to respond to environmental opportunities and threats to

gain competitive advantages.
• “The capability to innovative and so gain competitive advantages within a
marketplace by monitoring changes within an organization’s marketplace and
then to efficiently evaluate alternative strategies and then select, review and
implement appropriate candidate strategies”.
• Strongly associated with knowledge management theory.

• Why its needed?

• Reviewing opportunities and threats of the marketplace and selecting appropriate
strategy option.
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Strategic Agility: Requirements and Characteristics?

• Efficient collection, dissemination and evaluation of different information

sources from the micro-and-macro-environment.
• Effective process for generating and reviewing the relevance of new strategies
based on creating new value for customers.
• Efficient research into potential customer value against the business value
generated.
• Efficient implementation of prototypes of new functionality to deliver customer
value.
• Efficient measurement and review of results from prototypes to revise further to
improve proposition or to end trial.

• Question: Why are environmental influence important?

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An Online Marketplace Map

9
 Online Marketplace Analysis: Elements
1. Customer segments
• Identify and summarize different target segments
• Understand their online media consumption, buyer behavior and type of
content they searched.
2. Search intermediaries
• Different search engines are popular in different country or region.
• Identify which search engine is more effective in harnessing search traffic.
• “Share of Search”: the audience share of Internet searches achieved by a
particular audience in a particular market.
• The precise key phrases used by visitors to actually reach a site from different
search engines.
3. Intermediaries and media sites (see next page)
4. Destination sites
• The sites that the marketer tries to generate traffic to.
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Online Marketplace Analysis: Elements (Cont’d)

Intermediaries and Media Sites

a) Mainstream news media sites or portal, e.g., Google news
b) Niche or vertical media sites, e.g., e-consultancy, ClickZ.com in B2B
c) Price comparison sites (also called aggregator), e.g.,
http://www.pricecanada.com/ , Money supermarket, Shopping.com
d) Super-affiliates:
• A company promoting merchant typically through a commission-based
arrangement either direct or through an affiliate network.
e) Niche affiliate or bloggers:
• Often small or individual sites, e.g., Martin Lewis of Moneysavingexpert.com
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 How do you analyse e-Marketplace?
• Unique visitors
✔ Individual visitors to a site measured through cookies or IP addresses on an
individual computer.
• Resources:
✔ Alexa (www.alexa.com): Free service, owned by Amazon, provides traffic
ranking of a site.
✔ Hitwise (www.hitwise.com): Paid service, compare audience size and search
and site usage.
✔ Comscore (www.comscore.com) : Panel service based on at-home and at-work
users, favorite tool for media planners.
✔ Forrester (www.forrester.com) : Offers reports on Internet usage & best
practice in different vertical sectors.
✔ Gartner (www.gartner.com) : Focused on technology adoption.
(Ref. pp. 63-64, Tab 2.2.)
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 Marketplace Channel Structure

• It describes the way a

manufacture / supplier delivers
products and services to its
customers.

• Distribution channel often

consist of one or more
intermediaries such as
wholesalers and retailers.

• However, manufacturers can

bypass retailers and sell direct
to the customers.
13
B2B and B2C Characteristics

Characteristics B2C B2B

Proportion of adopters with Low to medium High to very high
access
Complexity of buying Relatively simple – individual and More complex – buying process involves
decisions influencers users, specifiers, buyers, etc.

Channel Relatively simple – direct or from More complex, direct or via wholesaler,
retailer agent or distributor

Purchasing characteristics Low value, high volume or high Similar volume/value. May be high
value, low volume. May be high Involvement. Repeat orders (rebuys)
involvement more common

Product characteristic Often standardized items Standardized items or bespoke for Sale

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 A Disintermediation Process

• Disintermediation
• The removal of
intermediaries such as
distributors or brokers that
formerly linked a company
to its customers.
• Benefits
• Remove the sales and
infrastructure cost.
• 28% for Case b, 62% for Case
c.
Disintermediation of a consumer distribution channel showing (a) the
original situation, (b) disintermediation omitting the wholesaler, and c)
disintermediation omitting both wholesaler and retailer.
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Original Situation to Disintermediation to
Reintermediation

• Reintermediation
• Significant phenomenon resulting
from Internet-based
communications.
• The creation of new intermediaries
between customers and suppliers
providing services such as supplier
search and product evaluation.
• e.g., www.pricecanada.com ,
www.esurance.com

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Countermediation

• Creation of a new intermediary by an established company.

• Marketers cannot rely on the online presence of existing intermediaries-instead they
create their own online intermediaries.
• Why?
• Forming partnerships or setting up sponsorship with some intermediaries can
give better online visibility compared to competitors.
• Monitor the prices of other suppliers within this sector.
• Examples
• Creating own intermediary, like B&Q www.diy.com
• Opodo www.opodo.com, set up by nine European airlines.
• Ford, Daimler (www.covisint.com)
• Partnering with existing intermediary – Mortgage broker Charcol and Freeserve 17
 Where do We Trade?
• Electronic Marketplace
• A virtual marketplace such as the Internet in which no direct contact occurs
between buyers and sellers.
• There could be many alternative virtual locations.

• Types of location where we can trade:

• Seller-controlled: home site of organization selling products, e.g.,
www.dell.com
• Seller-oriented: intermediaries, controlled by third party, but seller-focused,
e.g., www.opodo.com
• Neutral: independent evaluator intermediaries that enable price and product
comparison, e.g., eBay, CNET.
• Buyer-oriented: Intermediaries, controlled by buyers, e.g., www.covisint.com
• Buyer-controlled: Web-site procurement posting on company’s own site,
buyers initiates the market making, e.g., GE 18
Variations in the location and scale of trading on e-
commerce sites

Most e-tailers, e.g., Amazon, Dell

Many suppliers to a single

customer, e.g., www.gxs.com (GE
Subsidiary Global eXchange
Services)

Many suppliers to many customers,

e.g., www.vetmarkets.com

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Commercial Mechanisms & Online Transactions

1. Negotiated deal: Negotiation-bargaining between single seller and buyer, e.g.,

www.commerceone.net)
2. Brokered deal: Intermediaries offering auction, e.g., www.screentrade.co.uk
3. Auction: e.g., www.eBay.com
4. Fixed-price sale: Online catalogue with fixed prices, e.g., all e-tailers.
5. Pure markets: e.g., electronic seller dealing, buyers’ and sellers’ bids instantly
6. Barter: Buyers and sellers exchanges goods, e.g., www.bartercard.co.uk ,
www.intaglio.com

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Name Your Own Price!

• Completely new
commercial mechanism.
• Users can enter the price
they wish to pay.
• Core services: airline
tickets, hotels, car hire.
• Priceline match the user’s
price and inventory,
thereafter the deal will go
ahead.

Priceline Hong Kong service

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(www.priceline.com.hk)
Multi-channel Marketplace Model

• Consumers use a combination of channels for their purchases.

• M-Channel Defines how different marketing channels should integrate and support each other.

Channel chain map for

consumers selecting an estate
agent to sell their property.
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Types of Online Intermediary

• Infomediary:
• A business who capture customer information and develop detailed profiles of individual customers
and sell to the third parties, online auction, e-mail list brokers, advertising network e.g., DoubleClick,
Google AdWords, Comscore, Hitwise.
• Metamediaries:
• Intermediaries that assist with selection and discussion of about different product and services.
• Bring buyers and sellers together, e.g., http://www.metacritic.com/ , CNET, www.download.com ,
or price comparison site.
• Other online intermediaries
• Directories (Yahoo!, Excite), Search engines (AltaVista, Infoseek)
• Malls (BarclaySquare, Buckingham Gate), Virtual resellers (Amazon, CDNow)
• Financial Intermediaries (Digiicash), Virtual Communities, online forums, fan clubs

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Business model

• Timmers (1999) defines a ‘business model’ as:

• “An architecture for product, service and information flows, including a description of the
various business actors and their roles; and a description of the potential benefits for the
various business actors; and a description of the sources of revenue”.

• Alternatively, it’s a summary of how a company

• will generate a profit
• identifies its core product or service value proposition,
• target customer
• Position in competitive marketplace or value chain
• projection for revenue and costs.

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Business model: Key Elements

• Key elements: 8
1. Value proposition: which products & services will the company offer?
2. Market or audience: which audience will the company serve and target?
3. Revenue models and cost base: How will company generate its income?
4. Competitive environment: who are the direct and indirect competitors and their possession in
the marketplace?
5. Value chain and marketing positioning: How is the company and its service positioned
compare to its competitors?
6. Representation in the physical & virtual world: relative representation in the offline and
online market, e.g., high-street presence, online only, intermediary, mixture?
7. Organizational structure: internal structure to create, promote, deliver services.
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8. Management: experience, skills and expertise of a management team.
Prepared & Presentation by Md. Mahbubul Alam, PhD 25
Alternative Perspectives on Business Models

• Marketplace position perspective

✔ Book publisher => manufacturer
✔ Amazon => retailer
✔ Yahoo! => intermediaries

• Revenue model perspective

✔ Book publisher => sell direct
✔ Amazon, Yahoo! => commission fee
✔ Yahoo!=> advertising

• Commercial arrangement perspective

✔ All companies => fixed price sales
✔ Yahoo => offers alternatives

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Publisher and Intermediary Revenue Model

• Advertising CPM (cost per thousand/mille), e.g., FT.com

• Advertising CPC (cost per click), e.g., Google Adsence (
http://adsense.google.com)
• Sponsorship of site sections or content types: typically fixed fee for a period,
• Affiliate Revenue (CPA or CPC), cost per acquisition-> the cost to the
advertiser for each outcome such as a lead or sale generated after a click to a
third-party site.
• Transaction Fee, e.g., eBay, PayPal.
• Subscription access to content or services, e.g., FT.com
• Per-per-view Access to document
• Subscription Data Access for e-mail Marketing
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Revenue Generating Techniques

• What factors to consider?

• Number and size of ad units
• Ads Capacity to be sold
• Fee level negotiated for different ads models: pay per
performance.
• Traffic
• Visitor engagement (time to stay or “stickiness”)

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Auction

• Auction:
• A process of determining the basis of product or service exchange between
a buyer and seller according to particular trading rules that help select the
best match between the buyer and seller from a number of participants.

• Offer:
• a commitment for a trader to sell under certain conditions such as a
minimum price.

• Bid:
• a commitment made by a trader to buy under certain conditions such as a
commitment to purchase at a particular price.
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Auction: Roles

• Price discovery:
• auction helps to establish a realistic price for a product, e.g., antiques

• Efficient Allocation mechanism:

• sale of products which is difficult to distribute through traditional channels. ‘Damage
inventory’, aircraft flight, e.g., www.lastminute.com

• Distribution mechanism:
• attracting particular audiences.

• Coordination mechanism:
• coordinate the sale of a product to a number of interested parties, e.g., broadband
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spectrum licenses for 3G telecoms. Prepared & Presentation by Md. Mahbubul Alam, PhD 30
 Internet Auction Basics

• Different from traditional auctions

✔Last much longer (usually a week)
✔Variable number of bidders who come and go from auction arena
• Market power and bias in dynamically priced markets
✔Neutral: Number of buyers and sellers is few or equal, e.g., Stock Exchanges
✔Seller bias: Few sellers and many buyers, e.g., eBay
✔Buyer bias: Many sellers and few buyers, e.g., Priceline, such as Sealed-bid RFQ
• Fair market value, i.e., average price for a product or service
• Price Allocation Rules
✔Uniform pricing rule: Multiple winners who all pay the same price
✔Discriminatory pricing rule: Winners pay different amount depending on what they bid
• Public vs. private information
✔Prices bid may be kept secret
❑Bid rigging
✔Open markets
❑Price matching
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 Types of Auctions
• Forward, upward or English auctions🡪 Single item up for sale to single buyer, highest
bidder wins, sellers-initiated, seller sets the rules and timing, increasing bids are placed
within a certain time limit, conventional auctions we commonly seen in physical world and
on virtual market.

• Reverse, downward, or Dutch Internet auction 🡪 Common in B2B marketplace, buyer

places a RFQ/tender, many suppliers compete, decreasing the price, NOT always lowest
price wins due to factors like quality & capability of the bidders.
• Name Your Own Price Auctions
✔Users specify what they are willing to pay for goods or services and multiple providers
bid for their business, e.g., Priceline
• Group buying auctions (demand aggregators)
✔Group buying of products at dynamically adjusted discount prices based on high volume
purchases
✔Two principles
• Sellers more likely to offer discounts to buyers purchasing in volume
• Buyers increase their purchases as prices fall
• Professional service auctions: sealed-bid, dynamic-priced market, e.g., Elance.com
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Business Model-Start-ups

1. Many dot.com (businesses whose main trading presence is on the Internet)

start-ups failed. Some succeeded and newer ones are still created.
2. Often they have been overvalued by investors who are keen to make a fast return.

• Valuing the Internet start-ups

• The cost of acquiring a customer through marketing
• The contribution margin per customer (before acquisition cost)
• The average annual revenues per year from customers and other revenues such
as banner ads and affiliate revenues
• The total number of customers
• The customer churn rate-> the proportion of customers that no longer
purchase a company’s products in a time period
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How to Assess the dot.com

1. Concept: potentiality to generate revenue, value proposition, realistic market

size.
2. Innovation: whether company merely imitates the existing real-world or online
model.
3. Execution: promotion, performance, availability, security, fulfilment (for
details, plz see page 90).
4. Traffic: Page impression (no. of visitors, no. of pages visited, no. of transactions
made).
5. Financing: company’s ability to attract venture capital or other funding to help
execute the idea. Important for promoting new business ideas.
6. Profile: company’s ability to generate favorable publicity and to create
awareness within its target market. 34