E-commerce Business Models and

Concepts
 E-commerce Business Models

 A business model is a set of planned activities

(sometimes referred to as business process) designed to
result in a profit in a marketplace
 A business model is not always the same as a business
strategy
 The business model is at the center of the business plan
 A business plan is a document that describes a firm’s
business model
 An e-commerce business model aims to use and leverage
the unique qualities of the Internet and the World Wide
Web
Key Elements of a Business Model

1. Value proposition
2. Revenue model
3. Market opportunity
4. Competitive environment
5. Competitive advantage
6. Market strategy
7. Organizational development
8. Management team
Key Elements of a Business Model

1. Value proposition
 Why should the customer buy from you?
 Defines how a company’s product or service fulfills
the needs of customers
 Successful e-commerce value propositions include:
personalization and customization, reduction of
product search cost, reduction of price discovery
cost, and facilitation of transactions by managing
product delivery
Key Elements of a Business Model

2. Revenue model
 How will you earn money?
 Describes how will the firm earn revenue,
generate profits, and produce a superior return
on invested capital
 Major types of e-commerce revenue models:
 Advertising revenue model – a Web site offers its users content,
services, and/or products and also provides a forum for
advertisements and receives fees from advertisers such as
Yahoo
Key Elements of a Business Model

 Subscription revenue model – a Web site offers its users content or

services and charges a subscription fee for access to some or all of its
offerings such as WSJ.com and Consumerreports.org
 Transaction fee revenue model – a company receives a fee for
enabling or executing a transaction such as eBay and E-Trade
 Sales revenue model – a company derives revenue by selling goods,
information, or service such as Amazon, LLBean, and Gap
 Affiliate revenue model – a company steers business to an affiliate and
receives a referral fee or percentage of the revenue from any resulting
sales such as MyPoints
Key Elements of a Business Model

3. Market opportunity
 What marketspace (area of actual or potential
commercial value in which company intends to
operate) do you intend to serve, and what is its size?
 Refers to the company’s intended marketspace and
the overall potential financial opportunities available
to the firm in that marketspace
 Market opportunity typically divided into smaller
niches
 Realistic market opportunity: Defined by revenue
potential in each of market niches in which company
hopes to compete
Key Elements of a Business Model

4. Competitive environment
 Who else occupies your intended marketspace?
 Refers to the other companies operating in the
same marketspace selling similar products
 Influenced by several factors: how many
competitors are active, how large their
operations are, what the market share of each
competitor is, how profitable these firms are,
and how they price their products
Key Elements of a Business Model

5. Competitive advantage
 What special advantages does your firm bring to
the marketspace?
 Achieved by a firm when it can produce superior
product and/or bring the product to market at
lower price than most or all of its competitors
 Firms also compete on scope – some can develop
global markets, while others can only develop a
national or regional market
 Firms that can provide superior products at
lower cost on a global basis are truly advantaged
Key Elements of a Business Model

 Important concepts:
 Asymmetries – 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
 Unfair competitive advantage – occurs when one
firm develops an advantage based on a factor that
other firms cannot purchase
 Leverage – when a company uses its competitive
advantages to achieve more advantage in surrounding
markets
Key Elements of a Business Model

6. Market strategy
 How do you plan to promote your products or
services to attract your target audience?
 The plan you put together that details exactly how
a company intends to enter a new market and
attract new customers
 Best business concepts will fail if not properly
marketed to potential customers
Key Elements of a Business Model

7. Organizational Development
 What types of organizational structures within the
firm are necessary to carry out the business plan?
 Plan describes how the company will organize the
work that needs to be accomplished
 Typically, work is divided into functional
departments and jobs are defined for specific titles
and responsibilities within these functional areas
 Hiring moves from generalists to specialists as
company grows
 Key Elements of a Business Model

8. Management team
 What kinds of experiences and background are
important for the company’s leaders to have?
 Employees are responsible for making the
business model work
 Strong management team gives instant
credibility to outside investors
 Strong management team may not be able to
salvage a weak business model, but should be
able to change the model and redefine the
business as it becomes necessary
 Raising Capital

 Seed capital personal funds used to start business

 Traditional sources
 Incubators provide small amount of funding and provide
services to start-ups
 Commercial banks
 Angel investors wealthy investors who invest money in
exchange for equity share of the business
 Venture capital firms invest funds they manage for other
investors
 Strategic partners
 Crowdfunding
 Using internet to allow individuals to contribute to new
ventures
 Categorizing E-commerce Business
Models

 There is no one correct way to categorize e-commerce

business models
 Our approach is to categorize according to the different
e-commerce sectors – B2C, B2B, C2C etc.
 Similar business models may appear in more than one
sector like e-tailers and e-distributors
 The type of e-commerce technology (such as m-
commerce) involved can also affect the classification of a
business model
 Some companies use multiple business models, like eBay
 B2C Business Models: Portal

 Offer users powerful Web search tools as well as an

integrated package of content and services, such as
news, e-mail, instant messaging, calendars, shopping,
music downloads, video streaming, and more, all in
one place
 Revenue models:
Advertising, subscription fees, transaction fees
 Variations:
Horizontal/General – Yahoo, AOL, MSN
Vertical/Specialized (Vortal) - Sailnet
Pure Search – Google, Ask.com
 B2C Business Models: E-tailer

 Online version of traditional retailer

 Similar to the typical “bricks-and-mortar” storefront,
except that customers only have to connect to the
Internet to check their inventory and place an order
 Revenue model: Sales
 Extremely competitive since barriers to entry are low
 Barriers to entry is the total cost of entering a new
marketplace
 Examples: Wal-Mart, JCPenny etc.
 B2C Business Models: Content Provider

Distributes information content, such as digital

video, music, photos, text, and artwork, over the
Web
Intellectual property: refers to all forms of human
expression that can be put into a tangible medium
such as text, CDs, or the Web
Examples: Real.com, WSJ.com etc.
Revenue models:
 Subscription fee, pay per download
(micropayment), advertising, affiliate referral fees
 B2C Business Models: Content Provider

 Variations:
Content owners – own the content
Syndication – do not own the content, but
syndicate (aggregate) and then distribute content
produced by others
Web aggregators – collect information from a wide
variety of sources and then add value to that
information through post-aggregation service such
as Shopping.com
 B2C Business Models: Transaction Broker

 Sites that process transactions for consumers that are

normally handled in person, by phone, or by mail
 Provides third-party services to buyers and sellers
 Examples: E-Trade, Hotels.com etc.
 Industries using this model:
 Financial services; Travel services; Job placement
services
 Revenue model:
 Transaction fees
 Primary value proposition:
 Saving time and money
 B2C Business Models: Market Creator

Build a digital environment where buyers and

sellers can meet, display products, search for
products, and establish a price for products
Examples:
 Priceline
 eBay
Revenue model:
 Transaction fee
 B2C Business Models: Service Provider

Offer services online

Revenue model:
 Sales of service
 Subscription fees
 Advertising
 Sales of marketing data
Value propositions:
 Valuable, convenient, time-saving, low-cost
alternatives to traditional service providers
Example:
 Google: Google Maps, Google Docs, Gmail, and so on
 B2C Business Models: Community Provider

Sites that create a digital online environment (social

network) where people with similar interests can
transact (buy and sell goods), share interests,
photos, and videos, communicate with like-minded
people, and receive interest-related information
Examples:
 MySpace, Facebook, Friendster etc.
Revenue models:
 Subscription fees, sales revenue, transaction fees,
affiliate fees, and advertising fees
 B2B Business Models

Net marketplaces:
 Bring hundreds to thousands of suppliers each of
with electronic catalog and potentially thousands
of purchasing firms into a single Internet-based
environment to conduct trade
 Types: E-distributor, E-procurement, Exchange,
Industry Consortium
Private industrial network:
 links a firm to its suppliers, distributors, and other
key business partners typically by using an
extranet for efficient supply chain management
and other collaborative commerce activities
 B2B Business Models

This network is owned by the buyer and it permits

the firm and designated suppliers, distributors, and
other business partners to share product design
and development, marketing, production
scheduling, inventory management, and
unstructured communication, including graphics
and e-mail
Types: Single firm, Industry-wide
 B2B Business Models: E-distributor

 Most common and most easily understood type of Net

marketplace
 Supplies products and services of thousands of direct
manufacturers directly to individual businesses MRO
 Owned by one company seeking to serve many
industrial customers
 Operate in horizontal markets and for indirect products
 Revenue model:
 Sales of goods
 Example:
 Grainger.com ($3.3bn)
 B2B Business Models: E-procurement

 An independently owned intermediary that connects

hundreds of online suppliers offering millions products
to businesses who pay fee to join the market
 Creates and sells access to digital electronic markets
and typically used for long-term contractual purchasing
 Includes the online catalogs of hundreds of suppliers
and offering value chain management (VCM) services
to both buyers and sellers
 Value chain management services include automation
of the firm’s entire procurement process on the buyer
side and automation of the selling business processes
on the seller side
 B2B Business Models: E-procurement

Also called application service providers (ASPs)

ASPs are the companies that sells access to
Internet-based software applications to other
companies
Revenue model:
 Transaction fees, usage fees, annual licensing
fees
Example:
 Ariba
 B2B Business Models: Exchanges

 Independently owned online marketplace that connects

hundreds to potentially thousands of suppliers and buyers
in a dynamic, real-time environment
 Generally create vertical markets that focus on the spot-
purchasing requirements of large firms in a single industry
 Create a powerful competition between suppliers so
number has dropped dramatically
 Revenue model:
 Charging a commission on the transaction
 Example:
 PowerSource, Converge, Foodtrader
 B2B Business Models: Industry Consortia

 Industry-owned vertical marketplaces that serve

specific industries (e.g., automobile, chemical)
 Emphasize long-term contractual purchasing
 More successful than exchanges
 Sponsored by powerful industry players
 Strengthen traditional purchasing behavior
 Revenue model:
 Fees and commissions of transactions
 Example:
 SupplyOn (Airbus, BMW, BorgWarner, Siemens, Thales)
 Bosch (one of the world’s largest suppliers of automotive
components)
 Continental (a leading automotive manufacturing company)
 Schaeffler (a global manufacturer of various types of bearings)
 B2B Business Models: Single Firm

 Company-owned network to coordinate supply chains

with a limited set of partners
 Typically evolves from a firm’s own enterprise resource
planning (ERP) systems
 Example:
Wal-Mart, Proctor&Gamble
 Business Models in Emerging
E-commerce Areas

The Internet and Web has forced us to recognize

new forms of business, such as C2C e-commerce,
P2P e-commerce, and m-commerce
Consumer-to-consumer (C2C) business models
 Helps consumers connect with other consumers
to conduct business
 Revenue model:
 Transaction fee
 Example:
 eBay, Half.com
 Business Models in Emerging
E-commerce Areas

Peer-to-peer (P2P) business models

 Technology enabling consumers to share files and
service via the Web, without a common server
 Revenue model:
 Subscription fees, Advertising, Transaction fee
 Example:
 Kazaa, Cloudmark
 Business Models in Emerging
E-commerce Areas
M-commerce
 E-commerce models using wireless technologies
 Technology platform continues to evolve
 In the United States, demand still highest for
digital content like ring tones
 Revenue model:
 Sales of goods and services
 Example:
 eBay Anywhere, PayPal Mobile
 E-commerce Enablers: The Gold Rush Model

A group of companies whose business model is

focused on providing the infrastructure necessary
for e-commerce companies to exist, grow, and
prosper
Provide hardware, operating system software,
networks and communications technology,
applications software, Web designs, consulting
services, and other tools that make e-commerce
over Web possible
 E-commerce Enablers: The Gold Rush Model
E-COMMERCE ENABLERS
INFRASTRUCTURE PLAYERS
Hardware: Web Servers IBM, HP, Dell, Sun
Software: Operating Systems and Microsoft, RedHat Linux, Sun, Apache Software
Server Software Foundation
Networking: Routers Cisco, JDS Uniphase, Lucent
Security: Encryption Software VeriSign, Check Point, Entrust, RSA
E-commerce Software Systems IBM, Microsoft, Ariba, BroadVision, BEA Systems
Streaming and Rich Media Solutions Real Networks, Microsoft, Apple, Audible
Customer Relationship Management Oracle, SAP, E.piphany
Software
Payment Systems PayPal, VeriSign, Cybersource
Performance Enhancement Akamani, Kontiki
Databases Oracle, MySql
Hosting Services Interland, IBM, WebIntellects, Quest
Slide 2-36