WEB BUSINESS MODELS

Web Business Models


Valuing Contacts

Web Benefits to Firms
The Value of Customer
Contact

Web-based business models
fundamentally change the way
businesses interact with customers

Shift from occasional transaction to
continuous analysis of customer
behavior

Shift from value distribution to value
creation
Evaluating Customer Contact

Online customer contact comes in many
forms

Website visits

Banner advertising

Email promotions

Cell phone price checks
 Web Chains

A Web chain is a click sequence
Can be as short as a single click
Can be as long as all possible choices on a web
site
• Decision points = event nodes
• Ending point = result node

Common Web chain starting points
» Company homepage
» Search engine or portal
» Banner ads
 BEGIN
No Notice E1: Views Page (1-CTR-NNR)
Rate (NNR) with Paid Link
R2: Notices Ad but
Click-through Rate (CTR) doesn’t click = Ad
R1: Doesn’t Notice
brand impact
Ad = $0 benefit
E2: Clicks Through
to Company Web
(1-PCR) Site = Prospects Prospect Conversion Rate (PCR)

New
Offline Induced E3: Views Web Site E4: Visits Web Site and Buys Customer
Buyer (OIB) but Doesn’t Buy (1-RR)
Repeat
(1-OIB) Buyer (RR) R5: New Customer
R3: Offline Purchase = = (Ad brand +
(Ad brand + Web Site Web Site brand +
R4: No Immediate
END

brand + Offline profit) E5: Loyal Customer Online profit +

R6: Would have bought
offline anyway = (Ad brand +
Web Site brand + Online
profit – Offline profit)
Purchase = (Ad brand +
Web Site brand impact)
Offline Buy Rate (OBR)
Future lifetime
value)
R7: Only buy online
Online Only (1-OBR) = (Ad brand + Web
Site brand + Online
Evaluating Web Chain

Web Chain Analysis calculates the

effectiveness of online strategies

Expected value of a contact: the unified contact
value

Expected value of a prospect: the unified visit
value

Expected value of a new customer

Expected value of a repeat buyer
 Evaluating Web Chains

Behavior Rates Impact Values

Variable Level Variable Level
Click-through rate 2.7% Ad-brand impact $0.00
No-notice rate 70% Web site brand $.0.30
impact
Prospect conversion 15% Offline profit $15.00
rate
Repeat buying rate 90% Online profit $23.00
Offline-induced buy 0.05 New customer LTV $125.00
rate
Offline buy rate 0.30
Evaluating Web Chain

R1 NNR

R2 1-CTR-NNR

R3 CTR*(1-PCR)*OIB

R4 CTR*(1-PCR)*(1-OIB)

R5 CTR*PCR*(1-RR)

R6 CTR*PCR*RR*OBR

R7 CTR*PCR*RR*(1-OBR)
Web Chain Evaluator
Web Chain Benefits and Probabilities
Five Main Benefits Occur in the Chain


Online contribution: the incremental profit from an
online sale

Offline contribution: incremental profit from the
sale of products through the standard channel

Ad-brand impact: value to a visitor, who sees the
ad but doesn’t click through

Web site brand impact: value of a visit to the Web
site that results in benefits, but not a sale

Lifetime customer value: future value of profits
from a new customer
 From Web Chains to Closed Loops

There’s a strong connection between Web chains
and closed-loop marketing

A Web chain is closed loop if:

The chain extends from the marketing offer to the
desired marketing response

Each step is trackable

The Internet can be used to close the loop on
traditional media advertising if unique identifiers are
included with the ad:

Dell newspaper ads contain a unique code
Closed Loop Marketing

Customer Marketing
Action Reaction

Customer
Resource
Database
Allocation
Creation

Customer Customer
Database Value
Segmentation Calculation
 The Impact of Closed Loop Marketing

On the Internet
Nobody Knows
You’re A Dog

Marketers want two results from user responses

They want consumers to make a choice that leads to
• information
• improved customer satisfaction
• a transaction
Marketers want to learn about visitors to their site
Customer Lifetime Value

The ability to track, store and analyze
individual behavior online allows firms
to calculate the present value of the
future cash flow attributed to the
relationship with any one customer

Not every customer is created equal;
high support costs can drive some
customer relationship below zero value
 Customer Lifetime Value
Individual level profitability
T
LTV   j 0    (1i )t  k 1 r jk , with
 jt t

t 1
 
 jt  Customer j profit in period t,
rjt  Customer j retention rate in period j, 0  rjt  1,
i  interest rate to discount future profits.
 Example of Lifetime Value
Profit constant at $275 per year, Retention
rate constant at 90%.Discount rate
constant at 10%, 5 year horizon.
5
LTV  275   (1.10)t  k 1.90 jk  
 t
275

t 1
 
275  (1275.1) *.9  (1275
.1)2
*(.9*.9)  275
(1.1)3
*(.9*.9*.9)  275
(1.1)4
*(.9*.9*.9*.9)  275
(1.1)5
*(.9*.9*.9*.9*.9) 
275.00  225.00  184.09  150.62  123.23  100.83  $783.77
Customer Lifetime Value
Web Benefits to Firms


Business models can be based on:

Improvement Processes

Efficiency and Effectiveness

Brand Enhancement

Category Building

Quality Improvement

Directly on generating revenue
 Improvement-Based Biz
Models

Enhancement Efficiency
Reduce costs (CISCO, UPS)
Build brand (Disney)
Free trial (Encyclopedia
Build category (Intel, BP Britannica)
Solar)
Enhance quality (NPR) Effectiveness
• Supply chain coordination
(Dell)
• Support dealers (GM)
• Support suppliers (GE)
• Collect information
(DoubleClick)
Revenue Benefits

Online capabilities create new revenue
opportunities

Incremental benefits

Advertising last-minute tee times for a reduced
price (lastminutegolfer.com)

Entirely new streams of revenue

Selling music by the song at iTunes

Enhanced products drive revenue

At Science, online content helps drive the
magazine’s print sales
 Revenue-Based Biz Models
Use the Net to Make Money
Provider Pays Customer Pays
Sponsorship Product sales
Alliances Pay-per-use
Banner advertising Subscriptions
Prospect fees Bundle sales
Sales commissions
Online Revenue Opportunities
Revenue Sources Examples

Channel Pays

Permision sponsorship Salon.com

Online advertising Facebook

Customer leads Google AdSense

Revenue sharing Amazon Associates

Purchaser Pays

Product sales iTunes

Subscriptiions Rhapsody

Versioning San Jose Mercury News

Bundled sales Science

Revenue Models


Factors in selecting payment structure:

Attitude toward risk

Ability to monitor performance

Current market emphasis

Negotiating power
Selecting a Payment Structure

Risk for Advertiser Risk for Ad Network

Sponsorship Banner Ads Prospect Fees Commissions

Fixed Payment Impressions Click through Purchase

Increasingly Performance Based and Higher Rise for Web Site

Sponsorship least risky: fixed payment

Banner Ads: payment depends on impressions
Prospect Fees & Sales Commissions: depend on success of site and
advertiser
 Bargaining Power Determines
Who Bears Risk

• Powerful sites shift risk to advertisers and

demand sponsorships
• Powerful advertisers demand accountability
and negotiate for prospect fees of a share of
transaction revenue
 Are these Biz Models mutually
exclusive?


No

Companies try to generate revenues
any way they can

Multiple revenue models are
combined on the same site