Chapter 1

E-commerce Business
Models and Concepts
 What Is E-commerce?
 Use of Internet and Web to transact business
 More formally:
 Digitally enabled commercial transactions
between and among organizations and
individuals

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 E-commerce vs. E-business
 E-business:
 Digital enabling of transactions and
processes within a firm, involving
information systems under firm’s control
 Does not include commercial transactions
involving an exchange of value across
organizational boundaries

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 Why Study E-commerce?
 E-commerce technology is different, more
powerful than previous technologies
 E-commerce brings fundamental changes to
commerce
 Traditional commerce:
 Consumer as passive targets
 Mass-marketing driven
 Sales-force driven
 Fixed prices
 Information asymmetry

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Eight Unique Features of
E-commerce Technology
1. Ubiquity
2. Global reach
3. Universal standards
4. Information richness
5. Interactivity
6. Information density
7. Personalization/customization
8. Social technology

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 Understanding E-commerce:
Organizing Themes
 Technology:
 Development and mastery of digital computing and
communications technology
 Business:
 New technologies present businesses with new ways
of organizing production and transacting business
 Society:
 Intellectual property, individual privacy, public welfare
policy

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E-commerce Business Models—Definitions

 Business model: set of planned activities

designed to result in a profit in a marketplace
 Business plan: document that describes a
firm’s business model
 E-commerce business model: aims to use
and leverage the unique qualities of Internet
and Web
 Eight 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
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 1. Value Proposition

 “Why should the customer buy from you?”

 Successful e-commerce value propositions:
 Personalization/customization
 Reduction of product search, price
discovery costs
 Facilitation of transactions by managing
product delivery

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 2. Revenue Model

 “How will you earn money?”

 Major types of revenue models:
 Advertising revenue model
 Subscription revenue model
 Transaction fee revenue model
 Sales revenue model
 Affiliate revenue model

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 3. Market Opportunity

 “What marketspace do you intend to serve

and what is its size?”
 Marketspace: Area of actual or potential
commercial value in which company intends to
operate
 Realistic market opportunity: Defined by revenue
potential in each market niche in which company
hopes to compete
 Market opportunity typically divided into
smaller niches
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 4. Competitive Environment

 “Who else occupies your intended marketspac

e?”
 Other companies selling similar products in the same
marketspace
 Includes both direct and indirect competitors
 Influenced by:
 Number and size of active competitors
 Each competitor’s market share
 Competitors’ profitability
 Competitors’ pricing

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 5. Competitive Advantage

 “What special advantages does your firm

bring to the marketspace?”
 Is your product superior to or cheaper to produce than
your competitors’?
 Important concepts:
 Asymmetries
 First-mover advantage, complementary resources
 Unfair competitive advantage
 Leverage
 Perfect markets

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Competitive Advantage
 Achieved when a firm can produce a superior product
and/or bring product to market at a lower price than most,
or all, of competitors
 Firms achieve competitive advantage when they are able
to obtain differential access to the factors of production
(i.e., suppliers, shippers, labor) that are denied to
competitors
 Types of competitive advantage include:
 First mover advantage—results from a firm being first
into a marketplace
 Unfair competitive advantage—occurs when one firm
develops an advantage based on a factor that other
firms cannot purchase
 6. Market Strategy
 “How do you plan to promote your products
or services to attract your target audience?”
 Details how a company intends to enter
market and attract customers
 Best business concepts will fail if not
properly marketed to potential customers

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 Business Strategy

 Plan for achieving superior long-term returns

on capital invested: that is, profit
 Five generic strategies
 Product/service differentiation
 Cost competition
 Scope
 Focus
 Customer intimacy

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 7. Organizational Development

 “What types of organizational structures

within the firm are necessary to carry out the
business plan?”
 Describes how firm will organize work
 Typically,divided into functional
departments
 As company grows, hiring moves from
generalists to specialists

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 8. Management Team

 “What kind of backgrounds should the

company’s leaders have?”
 A strong management team:
 Can make the business model work
 Can give credibility to outside investors
 Has market-specific knowledge
 Has experience in implementing business
plans

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Market Opportunity
 Refers to a company’s intended marketspace
and the overall potential financial
opportunities available to the firm in that
marketspace
 Marketspace: the area of actual or potential
commercial value in which a company intends
to operate
 Realistic market opportunity is defined by
revenue potential in each of market niches in
which company hopes to compete
Categorizing E-commerce Business Models:
Some Difficulties
 No one correct way
 We categorize business models according to
e-commerce sector (B2C, B2B, C2C)
 Some companies use multiple business
models
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 specialized (vortal)
B2C Business Models: E-tailer
 Online version of traditional retailer
 Types include:
 Virtual merchants
 Bricks-and-clicks
 Catalog merchants
 Manufacturer-direct
B2C Business Models: Content Provider

 Information and entertainment companies

that provide digital content over the Web
 Typically utilizes a subscription, pay for
download, or advertising revenue model
 Syndication a variation of standard content
provider model
B2C Business Models: Transaction Broker

 Processes online transactions for consumers

 Primary value proposition—saving of time
and money
 Typical revenue model—transaction fee
 Industries using this model include:
 Financial services
 Travel services
 Job placement services
B2C Business Models: Market Creator

 Uses Internet technology to create markets

that bring buyers and sellers together
 Examples:
 Priceline.com
 eBay.com
 Typically uses a transaction fee revenue
model
B2C Business Models: Service Provider

 Offers services online

 Value proposition: valuable, convenient, time-
saving, low-cost alternatives to traditional
service providers
 Revenue models: subscription fees or one-
time payment
B2C Business Models: Community Provider
 Sites that create a digital online environment where
people with similar interests can transact,
communicate, and receive interest-related
information.
 Typically rely on a hybrid revenue model (advertising,
subscription, affiliate referral fees)
 Examples:
 iVillage.com
 Friendster.com
 About.com
B2B Business Models: E-distributor

 Company that supplies products and services

directly to individual businesses
 Owned by one company seeking to serve
many customers
 Example: Grainger.com
B2B Business Models: E-procurement
Companies
 Create and sell access to digital electronic
markets
 B2B service provider is one type: offer
purchasing firms sophisticated set of sourcing
and supply chain management tools
 Application service providers: a subset of
B2B service providers
 Example:
 Ariba
B2B Business Models: Exchanges
 An electronic digital marketplace where
suppliers and commercial purchasers can
conduct transactions
 Usually owned by independent firms whose
business is making a market
 Generate revenue by charging transaction
fees
 Usually serve a single vertical industry
 Number of exchanges has fallen to around
200 in 2005
B2B Business Models: Industry Consortia

 Industry-owned vertical marketplaces that

serve specific industries
 Horizontal marketplaces, in contrast, sell
specific products and services to a wide
range of industries
 Example: Exostar
B2B Business Models: Private Industrial
Networks
 Digital networks (usually, but not always
Internet-based) designed to coordinate the
flow of communications among firms engaged
in business together
 Single firm network: the most common form
(Example: Walmart)
 Industry-wide networks: often evolve out of
industry associations (Example: Agentrics)
Business Models in Emerging E-commerce
Areas
 Consumer to Consumer (C2C): Provides a way for
consumers to sell to each other, with the help of an
online marketmaker such as eBay.com
 Peer-to-Peer (P2P): Links users, enabling them to
share files and common resources without a common
server
 M-commerce: Takes traditional e-commerce
business models and leverages emerging new
wireless technologies
 To date, a disappointment in the United States;
however, technology platform continues to evolve
E-commerce Enablers: The Gold Rush
Model
 Internet infrastructure companies: Companies
whose business model is focused on
providing infrastructure necessary for e-
commerce companies to exist, grow, and
prosper
 Provide hardware, software, networking,
security, e-commerce software systems,
payment systems, databases, hosting
services, etc.
 How E-commerce Changes
Business
 E-commerce changes industry structure by
changing:
 Rivalry among existing competitors
 Barriers to entry
 Threat of new substitute products
 Strength of suppliers
 Bargaining power of buyers

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Case Study: The Pirate Bay:
Searching for a Safe Haven
page: 46