Business Models

Business Models Internet Marketing Dr. Mary Wolfinbarger Business Models    A plan for how to use the Internet to ____ ______ or increase organizational efficiency For awhile, there were more VC $ than _____________businesses (stopped in 2001) The availability of VC money coupled with the high cost of _______ _________resulted in too much money being spent and many losses Business Models Example: Reel.com  Sold copies of Titanic for $9.99 (they cost them $15)  Spent millions advertising the promo  Burned through $600K/wk – total of 7.5M of VC funds  But, it was early in the game: they were purchased by a video rental chain (Hollywood Entertainment) for $100M Business Models Example: Reel.com “This lack of business model has been in evidence across a wide swath of the Web. The underlying idea – that as long as a company is the Web and perhaps attracting like of traffic, it will eventually, ultimately, somehow turn into a real business – has been replicated across many Web Species.” --Evan Schwartz, Digital Darwinism Business Models Two steps required to make money:  Driving ______ to your site  ―_________‖ that traffic Business Models ―…offering the lowest prices and becoming the most efficient supplier…is not nearly enough. The only way to differentiate your Web venture is by creating new value-added applications, assembling bundles of information and inventing interactive services that transform mere transactions into unique, personalized experiences that competitors would have a tough time replicating.‖ --Digital Darwinism Business Models         Content Sponsorship Solution Branding Dynamic Pricing Affiliate Programs Bundling Mass Customization Value-Added Transactions Integrated Digital Commerce Content Sponsorship       Create websites Attract a lot of ____________ Sell _________ Often used in combination with other models Variation 1: software service or agent (e.g. Alexa) which tracks your behavior and sells ad space and/or information Variation 2: use content to ____ ________, e.g. Reel.com and Imdb.com Solution Branding   Identify a specific set of______ that customers face and develop a set of interactive services that addresses those problems Example:TheKnot Solution Branding These brands save _____ and ________life ―It is indeed telling that no new soft drinks or beans, soaps, detergents, no new cereals or frozen entrees, no new makes of cars and trucks have been established solely on web…none is really aimed at intricate multistep problem domains as are many of the emerging brands on the web.‖ ---Digital Darwinism  Solution Branding Example: Homeportfolio.com  Cybermediates home improvement (a ―dark ages industry‖)  Pulls together everything from high end consumers – contractor names, estimates, product specs  Search site according to room being renovated  Contractors are screened  Sell sponsorships in portfolio areas Solution Branding Also called a_____________  Some sites receive __________for referrals  Some sites aggregate sellers/manufacturers in a special niche – e.g. www.myknobs.com  Yahoo! provides one-stop website businesses for smaller sellers  Shopping agents are a related type of ―solution‖ for comparison shopping www.mysimon.com, www.shopping.com  Dynamic Pricing     Allowing prices to ________ ______with supply and demand The web is used to ―collect ______‖ Example: Band-X matches telecommunications sellers & buyers; takes 1% commission on sales Like a stock exchange for telecommunications capacity Dynamic Pricing  Example: Priceline.com – excess demand is matched with travelers (a ― ________ auction‖)  Auctions – eBay, Sharper Image Dynamic Pricing   Companies are often selling excess inventory, or products about to be retired Example: HP Printers Dynamic Pricing   Offering consumers different ______ at your website is resisted by consumers. But, is there a different way to offer ____________ prices? (THINK.) Affiliate Partners    Pay commissions to _______ ______for referrals Amazon pioneered the Amazon Associates Program How did Amazon got started in the first affiliate program? Affiliate Partners Amazon’s goals for the program: Word of _____!  Acquire new, loyal customers through referral  Enable others to participate in bookselling  Extend Amazon’s editorial influence into unique spheres  Affiliate partners can be businesses as well Affiliate Partners Drawbacks:  It cuts into profits if the customers are not ____ customers  Putting an affiliate button on your site sends ________ off your site  Difficult to control ______ of your partners  It probably _______ some advertising Affiliate Partners  Product classes w/ depth, variety probably tend to benefit most (books, CDs) Affiliate Partners      ―____ marketing‖ – your biggest fans post your logo, icons and characters on their websites Not really an affiliate rel’p, but it could be They aren’t ____ Why do some companies try to control/prevent this? Some TV fan sites have substantial fan fiction – e.g. Xena Bundling   Offer ______ bundles of information and interactive services _____ for access (as opposed to the business model of free content, revenue from advertising) Bundling Example: Wall Street Journal  ____ content proliferates on net  How to sell WSJ Interactive? Bundling Example: Wall Street Journal Answer:  6 mo free trial – had to create perception of value in the marketplace Bundling Example: Wall Street Journal Answer: Created new interactive services regularly to prevent subscriber defection  Tech Center w/high tech coverage  Personal Journal (collects stories w/keywords selected by user)  Email notification for topics in which subscriber has indicated an interest  Career center Bundling Example: Wall Street Journal  Revenue is 50% advertising, 40% subscription, 10% premium services  New York Times model is slightly different      Free content day of news Pay for back articles Revenues from advertising, classified (they are dabbling in ―behavioral‖ advertising) Email topic alert service -- $29.99 (can access articles for 90 days) www.nytimes.com Bundling Example: Tickle.com  An_________ bundle – IQ tests, personality tests, includes some major well-known academic tests  $14.95/mo -- now profitable  Dating services $19.95/mo  Also sells advertising Bundling    Research on selling ____ bundles suggests that it’s a good strategy – low MC of info goods is what makes it possible The bundle will earn ______profits than selling singly Consumers have ____ _____for some goods but not others Bundling    Charging for ______ can cause people to return Keep evolving the value bundle Invent _________ value services and keep them outside the bundle to offer as a premium product Bundling   Example: ESPN – mixes free, advertising supported services with some pay services For a fee can buy exclusive member content, expansive stat library, sports almanacs, fantasy leagues, ESPN Motion    Sports sites tend to be younger and male In January 2003, half of all male internet users between 2534 visited a sports site Paid online sports content, $2 billion in 2003, growth expected to be 20% per year for next 4-5 years Sell Custom Made Products, Then Manufacture Them      Use ____________rather than _______ Example: Dell Dell has ―negative ____ conversion‖ of 5 days Suppliers told Dell’s requirements daily—top 15 suppliers (90% of their supplies) have online procurement Products are produced ―on the network virtually‖ before actually produced Sell Custom Made Products, Then Manufacture Them Transparency:  Customers can watch their system being built in real time Sell Custom Made Products, Then Manufacture Them Mass customization has not worked well in the past  Reason? High _____ of managing unique customer rel’ps ―In some sense we are resurrecting the blacksmith, reverting back to the strict definition of the 16th century of the word „manufacture,‟ which derives from the Latin manu factus, or made by hand.‖ --Schwartz, Digital Darwinism  How dynamic trade differs Traditional Speed Product attributes Prices Production Customer relationships Strategic asset Weeks Seller-selected List Pre-sale Standard Location Early Web Days Seller-selected List Pre-sale Targeted Visibilit y Dynamic Trade Minutes Buyer-selected Market Post-sale Customized Customer database Sell Custom Made Products, Then Manufacture Them Potential Drawbacks:  _______ of custom products  Creating ―channel ______‖  Unique industry problems (e.g. digital distribution of custom-CDs – you can even cut your own) www.musicmatch.com  Nike is now offering some customized products: Sell Custom Made Products, Then Manufacture Them Lands’ End sells ______ chinos and jeans www.landsend.com  40% of their online sales are now custom pants  Costs increase, but ROI can be higher    Lower inventory Items don’t go on sale Reduced returns  www.reflect.com (owned by P&G) Value-Added Transactions       Add new _____ to transactions between sellers and buyers Example: Instill’s e•store (B to B food buying) Model: Charge a fee of $2.50 to buyers for each order processed Sign up distributors online – their incentive is to reduce catalog costs, paperwork, cost of mishandled orders eProcurement Food buying is an $150B industry in U. S. alone and 20,000 distributors relied on catalogs, phone calls and faxes Value-Added Transactions ―Like Instill, if you really want to change the industry, you‟ll have to dive into the middle and figure out ways to add tremendous value for buyer and seller.‖—Schwartz  Instill not only organizes buying, buyers can do what-if scenarios, generate reports, figure out how to lessen inefficiencies  Demand forecasting and collaboration tools have been added to support ―supply chain management‖ (More on this later in course.) Value-Added Transactions ―In the future, every single business, from health care, to education to real estate, to energy, to textiles will have one or more B to B info brokers who do exactly this.‖ --Digital Darwinism Value-Added Transactions Also possible in B to C:  Example: E*Trade  Bill Porter knew industry profits were shockingly ___ and business was terribly _________  Early Slogan: ―Someday we will all trade this way‖ Value-Added Transactions ―Price is what hooks them…but this is about more than cheap trade. It’s the customization, the research tools, the portfolio mgmt. services, the comfort factor and the quality of info. that makes them stick around.‖ --Kathy Levinson, E*Trade Value-Added Transactions ―Finance is a pure info processing game…A lot of people in the business are doing things that should be done by computers…Our industry will shrink and shrink.‖ – David E. Shaw, CEO of D. E. Shaw (a super high-tech hedge fund.) Integrate Digital Commerce in Absolutely Everything    All events, all employees, all sales components should tie in with _________ Bricks and Mortar operation should be fully _________ with online operation Example: REI has installed banks of computer kiosks in store displaying online catalog at all locations Integrate Digital Commerce in Absolutely Everything Example: REI Results?  Can order merchandise not in stock  Deep data can be accessed  Can print out full color maps of almost any destination on earth  Typical store visit is 2 hours  Customers get home and are trained to visit your website  Local events promoted on web site  Integrate Digital Commerce in Absolutely Everything Example: REI  Three channels: catalogs, stores, website ―… [REI’s] focus on the customer is what drove REI to become one of the first companies to accomplish meaningful real-time integration among all channels of distribution.‖ Digital  Darwinism Integrate Digital Commerce in Absolutely Everything   Example: REI ―[Many businesses] see the Web as competing with their other lines of businesses. But we take Web orders from the Seattle customers who drive by our stores every day. Many customers are multichannel customers. We can’t choose how are customers want to shop. So we offer our product, any time, any place and answer any question.‖ – Matt Hyde, Director of REI sales Integrate Digital Commerce in Absolutely Everything Too many companies run Web as _________ enterprise Example: Barnes and Noble (couldn’t return books ordered on the web in their store)  Integrate Digital Commerce in Absolutely Everything Need to integrate :  PCs  Smart cards  Digital telephones  Palmtop computing devices  Real World Stores  Cell phones  All business units of co. Other Business Models that haven’t done that well    Virtual Malls (host multiple online merchants) Buyer cooperatives (Mercata.com) Struggling: ASPs (application service providers) Other models Netflix? What’s the model here? www.netflix.com  A final thought ―In the future, there will be even weirder business models…we won‟t just be doing obvious things like taking mail order and taking it on the net.‖ --Tim Berners-Lee (the CERN physicist who conceived the WWW)