E-Business Models

Lecture 02 E-Business Models Jaeki Song Learning Objectives      Identify the key components of e-commerce business models. Describe the major B2C business models. Describe the major B2B business models. Recognize business models in other emerging areas of e-commerce. Understand key business concepts and strategies applicable to e-commerce. 2 Components of e-Business Models Business Model -Customer value - Scope - Price - Resources - Capabilities - Implementations Internet Performance Environment Price Competition  Price for books and CDs sold on the Internet less than conventional channel – Average 9-16%  Price increments – Price change on the Internet is smaller than conventional channel  Price dispersion – Substantial differences in price across retailers on the Internet – Heterogeneity in consumer awareness – Heterogeneity in retailer branding and trust Driving Factors   Lower buyer search costs – Promote price competition Low entry costs or low operational costs  Other factors – Tax – Shipping and handling fees E-Commerce Business Models   Business model – a set of planned activities designed to result in a profit in a marketplace E-commerce business model – a business model that aims to use and leverage the unique qualities of the Internet and the World Wide Web. 6 Eight Key Ingredients of a Business Model Business Model Components Value Proposition Revenue model Market opportunity Competitive environment Competitive advantage Key Questions Why should the customer buy from you? How will you earn money? What marketspace do you intent to serve, and what is its size? Who else occupies your intended marketspace? What special advantages does your firm bring to the marketspace? How do you plan to promote your products to attract customer? What types of organizational structures within the firm are necessary to carry out the business plan? What kinds of experiences and background are important for the company’s leaders to have? Market strategy Organizational development Management team Value Position   Defines how a company’s product or service fulfills the needs of customers. Questions   Why will customers choose to do business with your firm instead of another company? What will your firm provide that other firms do not and cannot? 8 Revenue Model   Describes how the firm will earn revenue, produce profits, and produce a superior return on invested capital. E-commerce revenue models include:      advertising model subscription model transaction fee model sales model affiliate model 9 Revenue Model  Advertising revenue model  a company provides a forum for advertisements and receives fees from advertisers (Yahoo) a company offers it users content or services and charges a subscription fee for access to some or all of it offerings (Consumer Reports or Wall Street Journal)  Subscription revenue model  10 Revenue Model  Transaction fee revenue model  a company receives a fee for enabling or executing a transaction (eBay or E-Trade)  Sales revenue model  a company derives revenue by selling goods, information, or services (Amazon or DoubleClick)  Affiliate revenue model  a company steers business to an affiliate and receives a referral fee or percentage of the revenue from any resulting sales (MyPoints) 11 Market Opportunity  Market opportunity  refers to the company’s intended marketspace and the overall potential financial opportunities available to the firm in that market space  defined by the revenue potential in each of the market niches where you hope to compete  Marketspace  the area of actual or potential commercial value in which a company intends to operate 12 Competitive Environment   Refers to the other companies operating in the same marketplace selling similar products Influenced by:  how many competitors are active  how large are their operations  the market share of each competitor  how profitable these firms are  how they price their products 13 Competitive Advantage   Achieved by a firm when it can produce a superior product and/or bring the product to market at a lower price than most, or all, of its competitors Achieved because a firm has been able to obtain differential access to the factors of production that are denied their competitors -- at least in the short term 14 Competitive Advantage  Asymmetry  exists whenever one participant in a market has more resources than other participants  First mover advantage  a competitive market advantage for a firm that results from being the first into a marketplace with a serviceable product or service 15 Competitive Advantage   Unfair competitive advantage  occurs when one firm develops an advantage based on a factor that other firms cannot purchase Perfect Market  a market in which there are no competitive advantages or asymmetries because all firms have equal access to all the factors of production  when a company uses its competitive advantage to achieve more advantage in surrounding 16 markets Market Strategy   The plan you put together that details exactly how you intend to enter a new market and attract new customers Best business concepts will fail if not properly marketed to potential customers 17 Organizational Development    Describes how the company will organize the work that needs to be accomplished Work is typically divided into functional departments Move from generalists to specialists as the company grows 18 Management Team     Employees of the company responsible for making the business model work Strong management team gives instant credibility to outside investors A strong management team may not be able to salvage a weak business model Should be able to change the model and redefine the business as it becomes necessary 19 Major Business-to-Consumer (B2C) Business Models 20 Major Business-to-Consumer (B2C) Business Models 21 Major Business-to-Consumer (B2C) Business Models  Portal  offers powerful search tools plus an integrated package of content and services  typically utilizes a combines subscription/advertising revenues/transaction fee model  may be general or specialize (vortal) 22 Major Business-to-Consumer (B2C) Business Models  E-tailer  online version of traditional retailer  includes  virtual merchants (online retail store only)  clicks and mortar e-tailers (online distribution channel for a company that also has physical stores)  catalog merchants (online version of direct mail catalog)  online malls (online version of mall)  Manufacturers selling directly over the Web 23 Major Business-to-Consumer (B2C) Business Models  Content Provider  information and entertainment companies that provide digital content over the Web  typically utilizes an advertising, subscription, or affiliate referral fee revenue model  Transaction Broker  processes online sales transactions  typically utilizes a transactions feel revenue model 24 Major Business-to-Consumer (B2C) Business Models  Market Creator  uses Internet technology to create markets that bring buyers and sellers together  typically utilizes a transaction fee revenue model  E.g. Auction     English auction Dutch auction Sealed-bid auction Double auction 25 English Auctions  The bidders announce their bids until no higher bid is forthcoming – ‘going . . . going . . . gone!’ – Ascending-price auctions – Typically set a closing time in advance Minimum bid plus a reserve price  Early buyout price  Dutch Auctions  Bidding starts at a high price and drops until a bidder accepts the price – Descending price auctions Sealed-Bid Auctions Bidders submit their bids independently and are usually prohibited from sharing information with each other  First-price sealed-bid auction  – The winner pays his amount  Second-price sealed-bid auction – The winner pays one increment over the second-highest bid received Double Auctions Buyers and sellers submit bids to an auctioneer  The auctioneer matches the seller’s offers to the buyer’s offer  – E.g. New York Stock Exchange Major Business-to-Consumer (B2C) Business Models  Service Provider  offers services online  Community Provider  provides an online community of like-minded individuals for networking and information sharing  revenue is generated by referral fee, advertising, and subscription 30 e-Business Models  Dynamic Pricing Models – Name-Your-Price Model – Comparison-Pricing Model – Demand-Sensitive Pricing Model Name-Your-Price Model Allows customers to state the price they are willing to pay  Priceline.com  – Demand collect systems » Use shopping bot that takes customer’s bid to the Priceline partners to see whether they will accept the prices for the requested products/services – Intelligent agents Comparison-Pricing Model Allows customers to poll a variety of merchants and find a desired product/service at the lowest price  Mysimon.com  – Uses intelligent-agent technology – Offers discussion groups, customer ratings, and comparison shopping Demand-Sensitive Pricing Model  Group purchasing – Individual buyers to shop in large groups to obtain group discount » The more people who buy a product in a single purchase, the lower the cost per person becomes – Mercata.com, mobshop.com, demandline.com  How it works – Buyers create requests for quotes (RFQs) – Purchasing manager monitors all aggregated RFQs – Manager negotiates through suppliers. Demand-Sensitive Pricing Model  Price R2 D1 R1 Price Discrimination D2 Marginal cost P2 P1 Q1 Q2 Q Output Demand-Sensitive Pricing Model  Benefits to Buyers – Reduce product costs – Reduce transaction costs  Benefits to Suppliers – Enhance revenue with a high-volume sales – Reduce sales costs – Improve manufacturing efficiency Major Business-to-Business (B2B) Business Models 37 Major Business-to-Business (B2B) Business Models  B2B Hub  also known as marketplace/exchange  electronic marketplace where suppliers and commercial purchasers can conduct transactions  may be a general (horizontal marketplace) or specialized (vertical marketplace)  E-distributor  supplies products directly to individual businesses 38 Major Business-to-Business (B2B) Business Models  B2B Service Provider  sells business services to other firms  Matchmaker  links businesses together  charges transaction or usage fees  Infomediary  gather information and sells it to businesses 39 Seven Unique Feature of ECommerce Technology 40 Seven Unique Feature of ECommerce Technology  Ubiquity  Alters industry structure by creating new marketing channels and expanding size of overall market  Creates new efficiencies in industry operations and lowers cost of firms’ sales operations  Enables new differentiation strategies  Global Reach  Changes industry structure by lowering barriers to entry, but greatly expands market at the same time  Lowers cost of industry and firm operations through production and sales efficiencies  Enables competition on global scale 41 Seven Unique Features of ECommerce Technology  Universal Standards  Changes industry structure by lowering barriers to entry and intensifying competition within an industry  Lowers costs of industry and firm operations by lowering computing and communications costs  Enables broad-scope strategies  Richness  Alters industry structure by reducing strength of powerful distribution channels  Change industry and firm operations costs by lessening reliance on sales force  Enhances post-sale support strategies 42 Seven Unique Features of ECommerce Technology  Interactivity  Alters industry structure by reducing threat of substitutes through enhanced customization  Reduces industry and firm costs by lessening reliance on sales force  Enable differentiation strategies  Personalization/Customization  Alters industry structure by reducing threats of substitutes, raising barriers to entry  Reduces value chain costs in industry and firm by lessening reliance on sales forces 43 Seven Unique Features of ECommerce Technology  Information Density  Changes industry structure by weakening powerful sales channels, shifting bargaining power to consumer  Reduces industry and firm operations costs by lowering costs of obtaining, processing, and distributing information about suppliers and consumers 44 Case Studies  Should we integrate our Internet business with our traditional business or should we keep the two separate? Seamless Model: Office Depot  Two reasons – Existing catalog-sales support an Internet store – Existing information systems made it easy to coordinate online stores and physical stores  Customers’ Benefit – Make shopping simple and convenient  Company’s Benefit – Cheaper to reach customers Seamless Model: Office Depot  Added Value – Each customer has its own specialized view of the OfficeDepot.com site » authorization – Provide additional discount for larger customers if they place order on online  Actually increased the traffic at its physical outlet Joint Venture Model: KB Toy  Reasons – Don’t have much experience with catalog retailing – Tend to focus exclusively on their physical stores  KB Toy and Kbkids.com – KB Toy joined with BrainPlay.com to create Kbkids.com » $80 million Joint Venture Model: KB Toy  Operation – Separation » Kbkids headquarter: Denver » KB Toy headquarter: MA – Integration » Share brand: promotion » Customer service » Purchasing function Virtual Partnership Rite Aid and Drugstore.com  Customer benefit  – Customers can pick up their Drugstore.com prescriptions at their local Rite Aid A Spectrum of Choices Model Seamless Brand Management Operation Fully integrated Fully integrated Fully integrated Mostly integrated Slightly integrated Slightly integrated Moderately integrated Moderately integrated Joint Venture Partnership Separate Decision Process Brand Separation Does the brand extend naturally to the Internet? Will we need to price differently? Integration Management Do we have the skills and experience? Will there be major channel conflict? Does the Internet threaten the current business model? Decision Process Operations Separation Do our distribution systems translate well to the Internet? Do our information systems provide a foundation on which to build? Does either systems constitute a significant competitive advantage? Integration