E-Commerce Business Models - sabraz · PDF fileLearning Objectives • Identify the key...

Lesson 02E-Commerce Business Models

ISM 41113, Electronic Commerce

By:

S. Sabraz Nawaz

Senior Lecturer in MIT

Department of MIT

Faculty of Management and Commerce, SEUSL

Learning Objectives

• Identify the key components of e-commerce business models.

• Describe the major B2C business models.

• Describe the major B2B business models.

• Explain the key business concepts and strategies applicable to e-commerce.

ISM 41113, Electronic Commerce, By: S. Sabraz Nawaz 2

Unique Characteristics of E-Commerce

Slide 2-3

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ISM 41113, Electronic Commerce, By: S. Sabraz Nawaz

The case of Twitter

• Twitter, the social network site based on 140-character text messages, is the latest in a series of unpredicted developments on the Internet.

• Like other social network platforms, Twitter provides a platform for its users (“Tweeple”, “twitterers”, or “tweeters”) to express themselves by creating content and sharing it with others called “followers” who sign up to receive someone’s “tweets”.

• In 2011, Twitter produced $140 million in revenue but zero profits despite over $1billion in funding since its inception in 2006.

• In 2012, Twitter had an estimated 500 million registered users but only about 140 million active users, 340 million tweets worldwide. In 2012, more than 150 million tweets about Olympics and more than 80,000 tweets per minute about Usain Bolt’s 200 meter victory.


The case of Twitter

• How can Twitter make money from its users and their tweets? What is the business model?

• Its main assets:

• real-time news, user attention, and audience size

• database of tweets that contain comments, observations and opinions of the audience, and the search engine that mines those tweets for patterns.

• It is a powerful alternative media platform for the distribution of news, videos, and pictures.


The case of Twitter: How can these assets can be monetized?

• Promoted Tweets and geo-targeted Promoted Tweets. This is Twitter’s version of Google’s text ads.

• Promoted “Trends”; a section of the Twitter home page that lets users know what’s hot. A company can place a Promoted Trends banner at the top of the Trends section and when user clicks on the banner he or she is taken to the follower page for that product.

• Promoted Accounts are suggestions to follow various advertiser accounts based on the list of accounts that the users already follows

• Twitter entered into agreements with Google, Yahoo, and Microsoft to permit their search engine to index the tweets and make them available to the Internet

• Major companies like Amazon, Intuit (Quickbooks), and Dell have used Twitter to understand how their customers are reacting to products, services, and Websites and then make corrections or changes in those services and products.

• But Twitter feel shy to announce its business model!


Business Model


Business Model

• A plan for the successful operation of a business, identifying sources of revenue, the intended customer base, products, and details of financing.

• A business model is a set of planned activities designed to result in a profit in a marketplace.

• E-commerce business model aims to use and leverage the unique qualities of the Internet and the WWW.


Eight Key Elements of a Business Model

• If you hope to develop a successful business model in any arena you must make sure that the model effectively addresses the eight elements listed below


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Value Proposition

• A value proposition defines how a company’s product or service fulfills the needs of customers.

• We need to answer why customers will choose to do business with us instead of another company and what the firm will offer that others can not or do not.

• Successful value proposition will include

• Personalization and customization of product offering

• Reduction of search costs

• Reduction of price discovery costs

• Facilitating transaction by managing product delivery

• Amazon makes it possible for book lovers to shop for virtually any book in print from the comfort of their home or office, 24 hours day, and know immediately whether a book is in stock


Revenue Model

• Describes how a firm will earn revenue, generate profits, and produce a superior return on invested capital than alternative investments.

• Many revenue model exist but most companies rely on one or some combination of the following

• Advertising model

• Subscription model

• Transaction fee model

• Sales model

• Affiliate model


Revenue Model:Advertising Revenue Model

• A company provides a forum for advertisements and receives fees from advertisers

• Yahoo! Derives a significant amount of revenue from display and video advertising

• Typically, fees are generated from advertisers in exchange for advertisements, which is ultimately the classic principal among the revenue models besides sales.


Revenue Model:Subscription Revenue Model

• A business model where a customer must pay a subscription price to have access to the product/service. The model was pioneered by magazines and newspapers, but is now used by many businesses and websites.

• Companies offer its users content or services and charges a subscription fee for access to some or all of its offerings.

• To successfully overcome the disinclination of users to pay for content on the Web, the content offered must be perceived as a high-value-added, premium offering that is not readily available elsewhere nor easily replicated.

• Users are charged a periodic (daily, monthly or annual) fee to subscribe to a service. Many sites combine free content with premium membership, i.e. subscriber- or member-only content. Subscription fees do not depend on transactions. Subscribers use the content as long and often as they want.

• Publishers and content services, e.g. magazines, - they provide text, audio or video content to users who subscribe for a fee to get access to the service or to download the new issue: New York Times, Lynda.com

• Special services: Companies offer security and payment services to internet service providers and online retail customers: PayPal, VeriSign


Revenue Model:Transaction Fee Revenue Model

• A company receives commissions based on volume for enabling or executing transactions.

• The revenue is generated through transaction fees by the customer paying a fee for a transaction to the operator of a platform.

• The company is a market place operator providing the customer with a platform to place his transactions.

• During this process the customer may be presented as a buyer as well as a seller.

• To actively participate in this e-market, customers must register, so both parties of a transaction taking place are identified.

• The amount of the transaction fee can be both – fixed and percentage calculated.

• EBAY, AMAZON


Revenue Model:Sales Revenue Model

• Companies derive revenue by selling goods, information, or services. Wholesalers and retailers of goods and services sell their products online.

• The main benefits for the customer are the convenience, time savings, fast information etc.

• The prices are often more competitive.

• AMAZON.COM


Revenue Model:Affiliate Revenue Model

• Company steers business to an affiliate and receives a referral fee or percentage of the revenue from any resulting sales

• The affiliate program is an online solution which is based on the principle of commission.

• Merchants advertise and sell their products and services through links to partner-websites.

• It is a pay-for-performance model: Commissions are only paid for actual revenue or measurable success.

• An affiliate-link includes a code, which identifies the affiliate. That’s how clicks, leads or sales are tracked.

• The affiliate therefore acts as the interface between merchants and customers.

• This model leads to a win-win situation: the merchants sell their products or services and the affiliates get their commissions.

• Variations include banner exchange, pay-per-click and revenue sharing programs.

• MYPOINTS.COM earns by connecting companies with potential customers by offering special deals to its members.


Market Opportunity

• A company’s intended marketspace, the area of actual or potential commercial value in which a company intends to operate, and the overall potential financial opportunities available to the firm in that marketspace.

• A potentially favorable condition in which a business can capitalize on a changing trend or an increasing demand for a product by a demographic group that has yet to be recognized by its competitors.

• For a market opportunity to exist, a company must be able to identify who its potential customers are, the specific needs that need to be met, the size of the market, and its capacity to capture market share.


Competitive Environment

• Refers to the other companies selling similar products and operating in the same marketspace

• Also refers to the presence of substitute products and potential new entrants to the market, as well as the power of customers and suppliers over your business.

• Influenced by how many companies are active, how large their operations are, what the market share of each competitor is, how profitable these firms are, etc.

• Direct competitors are those that sell products or services that are very similar and into the same market segment. Priceline and Travelocity sell identical products – cheap tickets.

• Indirect competitors are those who may be in different industries but still compete indirectly because their products can substitute for one another. Automobile manufacturers and airline companies; both offer consumers means of transportation. CNN news and ESPN sports.


Competitive Advantage

• Achieved when a company can produce a superior product and or bring the product to market at a lower price than most, or all, of their competitors; e.g.: being able to obtain differential access to the factors of production that are denied to their competitors.

• Firms can compete on scope: local or global. Firms that can provide superior products at the lowest cost on a global basis are truly advantaged.

• First mover advantage: a competitive market advantage for a firm that results from being the first into a marketplace with a product or service.


Market Strategy

• Everything a company does to promote its products and services to potential customers is known as market strategy.

• It is the plan the company puts together that details exactly how it intends to enter a new market and attract new customers.

• Facebook, Twitter as well as YouTube have social networking marketing strategy that encourages users to put their content on the site for free, build personal profile pages, contact their friends, and build a community; in this case customers are the marketing staff!


Organizational Development

• All firms need an organization to efficiently implement their business plans and strategies.

• Many e-commerce firms have failed because they lacked the organizational structures and supportive cultural values required to support new forms of commerce.

• Companies hoping to grow and thrive need to have a plan for organizational development that describes how the company will organize the work that needs to be accomplished.


Management Team

• The single most important element of a business model is the management team responsible for making the model work.

• Strong management team gives a model instant credibility to outside investors and experience in implementing business plans.


Key Elements of a Business Model


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MAJOR BUSINES-TO-CONSUMER (B2C) BUSINESS MODELS


MAJOR BUSINES-TO-CONSUMER (B2C) BUSINESS MODELS

• Online businesses seek to reach individual consumers. This is the most well-known and familiar type of e-commerce

• E-tailer

• Community provider (social network)

• Content provider

• Portal

• Transaction broker

• Market creator

• Service provider


E-Tailer

• These are online retail stores. They come in all sizes varying from giant Amazon to small tiny stores that have web presence.

• Similar to typical brick-and-mortar storefronts except that customers only have to connect to the Internet to check their inventory and place orders.

• Some have solely online presence and others have complementary web presence (brick-and-click)

• Extremely competitive sector since the barrier to entry is very low and tens of thousands of small e-tail shops have sprung up on the web.

• Revenue model is sale of goods

• Variations:

• Virtual merchant

• Bricks-and-clicks

• Catalog merchant

• Manufacturer-direct

• Amazon.com, Drugstore.com, Dell.com, Walmart.com


Community Provider

• Sites where individuals with particular interests, hobbies, common experiences, or social networks can come together and “meet” online, 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

• The social network sites Facebook, LinkedIn, Twitter, and Pinterest, and hundreds of other similar, niche sites all offer users community-building tools and services

• Revenue model is hybrid including subscription fees, sales revenues, transaction fees, affiliate fees, and advertising fees from other firms that are attracted by tightly focused audience


Content Provider

• Information and entertainment providers such as newspapers, sports sites, and other sources that offer customers up-to-date news and special interest how-to guidance and tips and or information sales.

• Content providers distribute information content, such as digital video, music, photos, text, and artworks, over the Web.

• Any e-commerce start-up that intends to make money by providing content is likely to face difficulties unless it has a unique information source that others cannot access.

• Business model: advertising, subscription fees, affiliate referral fees


Portal

• Offers an integrated package of content, content-search, and social network services: news, e-mail, chat, music downloads, video streaming, calendars, etc. and they seek to be a user’s home base

• Business model: advertising, subscription fees, transaction fee

• Yahoo, AOL, MSN, Facebook


Transaction Broker

• Processors of online sales transactions, such as stockbrokers and travel agents, that increase customers’ productivity by helping to get things done faster and more cheaply.

• E*Trade (etrade.com), Hotels.com, Travelocity.com

• Business model: transaction fees


Market Creator

• Web-based businesses that use Internet technology to create markets buyers and sellers can meet, display products, search for products and establish prices.

• In Priceline.com consumers are allowed to set the price they are willing to pay for various travel accommodations and other products (sometimes called reverse auction)

• eBay, the online auction site, is utilized by both businesses and consumers. Its model is to create a digital electronic environment for buyers and sellers to meet, agree on a price, and transact.

• Business model: transaction fees

• eBay, Amazon, Priceline


Service Provider

• Companies that make money by selling users a service, rather than a product

• Web 2.0 (the second stage of development of the Internet, characterized especially by the change from static web pages to dynamic or user-generated content and the growth of

social media) applications such as photo sharing video sharing, etc. are all services provided to customers.

• Google delivers online application services such as Google Docs and Gmail

• visanow.com (immigration service), rocketlawyer.com (online legal service)

• Business model: sale of service


MAJOR BUSINESS-TO-BUSINESS (B2B) BUSINESS MODELS


MAJOR BUSINESS-TO-BUSINESS (B2B) BUSINESS MODELS

• E-Commerce in which businesses sell to other businesses.

• More than 10 times the size of B2C e-commerce

• E-distributor

• E-procurement

• Exchange

• Industry consortium

• Private industrial network


E-Distributor

• Companies that supply product and services directly to individual businesses

• E-distributors are owned by one company seeking to serve many customers.

• The more products and services a company makes available on its site, the more attractive that site is to potential customers.

• W.W. Grainger, for example, is the largest distributor of maintenance, repair, and operations (MRO) supplies.

• Business model: sale of goods

• Grainger.com, Partstore.com


E-Procurement

• Just as e-distributors provide products to other companies, e-procurement firms create and sell access to digital electronic markets.

• Procurement is the act of buying goods, services or works from an external source

• E-procurement is the business-to-business purchase and sale of services through the Internet as well as other information and networking systems, such as electronic data interchange.

• Firms such as Ariba (ariba.com) have created software (eg: Procurement Software Solutions) that helps large firms organize their procumbent process by creating mini-digital markets for single firm. It creates custom-integrated online catalogs (where suppliers firms can list their offerings) for purchasing firms.

• Revenue is for market-making services, supply chain management


Exchanges

• An independent digital electronic marketplace where hundreds of suppliers meet a smaller number of very large commercial purchasers.

• They serve single vertical industry such as steel, polymers, etc.

• For buyers, B2B exchanges make it possible to gather information, check out suppliers, collect prices, and keep up to date on the latest happenings all in one place.

• Sellers benefit from expanded access to buyers.

• Business model: fees and commissions on transactions.


Industry Consortia

• Industry-owned vertical marketplaces that serve specific industries such as automobile, aerospace, chemical, etc.

• Business model: Fees and commissions on transactions

• Elemica.com, Exostar.com


Private Industrial Network

• Also referred to as Private Trading Exchange is a digital network designed to coordinate the flow of communications among firms engaged in business together.

• The network is owned by a single large purchasing firm.

• Participation is by invitation only to trusted long-term suppliers of direct inputs.

• Eg: Walmart operates one of the largest industrial networks in the world for its suppliers, who on a daily basis use Walmart’s network to monitor the sales of their goods, the status of shipments, and the actual inventory level of their goods.

• Business Model: cost is absorbed by the network owner and recovered through production and distribution efficiencies.


End of Lesson


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