Chapter 2

E-commerce Business Models

and Concepts
Tweet Tweet: What’s Your Business Model?
Class Discussion

 What characteristics or benchmarks can be used to

assess the business value of a company such as
Twitter?
 Have you used Twitter to communicate with friends
or family? What are your thoughts on this service?
 What are Twitter’s most important assets?
 Which of the various methods described for
monetizing Twitter’s assets do you feel might be
most successful?

Lecturer Bett. Slide 2-2

 E-commerce Business Models
 Business model
 Set of planned activities designed to result in a
profit in a marketplace
 Business plan
 Describes a firm’s business model

 E-commerce business model

 Uses/leverages unique qualities of Internet and
Web

Lecturer Bett. Slide 2-3

 8 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
Lecturer Bett. Slide 2-4
 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
Lecturer Bett. Slide 2-5
 2. Revenue Model
 “How will the firm earn revenue,
generate profits, and produce a superior
return on invested capital?”
 Major types:
 Advertising revenue model
 Subscription revenue model
 Transaction fee revenue model
 Sales revenue model
 Affiliate revenue model
Lecturer Bett. Slide 2-6
 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

Lecturer Bett. Slide 2-7

 4. Competitive Environment
 “Who else occupies your intended
marketspace?”
 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
Lecturer Bett. Slide 2-8
 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

Lecturer Bett. Slide 2-9

 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

Lecturer Bett. Slide 2-10

 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

Lecturer Bett. Slide 2-11

 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

Lecturer Bett. Slide 2-12

 Insight on Business: Class Discussion

Is Groupon’s Business Model Sustainable?

 What is the value of Groupon to merchants?
What types of merchants benefit the most?
 What is the value of Groupon to investors?
Is Groupon overvalued ?
 What obstacles does Groupon face?
 Does Google Offers present a threat to
Groupon’s business model?

Lecturer Bett. Slide 2-13

Categorizing E-commerce Business Models
 No one correct way
 We categorize according to:
 E-commerce sector (e.g. B2B)
 E-commerce technology (e.g. m-commerce)

 Similar business models appear in more

than one sector
 Some companies use multiple business
models (e.g. eBay)
Lecturer Bett. Slide 2-14
 B2C Business Models: Portal
 Search plus an integrated package of
content and services
 Revenue models:
 Advertising, referral fees, transaction fees,
subscriptions
 Variations:
 Horizontal/General
 Vertical/Specialized (Vortal)
 Search
Lecturer Bett. Slide 2-15
 B2C Models: E-tailer
 Online version of traditional retailer
 Revenue model: Sales
 Variations:
 Virtual merchant
 Bricks-and-clicks
 Catalog merchant
 Manufacturer-direct

 Low barriers to entry

Lecturer Bett. Slide 2-16
 B2C Models: Content Provider
 Digital content on the Web
 News, music, video

 Revenue models:
 Subscription; pay per download (micropayment);
advertising; affiliate referral fees
 Variations:
 Content owners
 Syndication
 Web aggregators

Lecturer Bett. Slide 2-17

 B2C Models: Transaction Broker
 Process online transactions for
consumers
 Primary value proposition—saving time and money

 Revenue model:
 Transaction fees

 Industries using this model:

 Financial services
 Travel services
 Job placement services

Lecturer Bett. Slide 2-18

 Insight on Technology: Class Discussion

Battle of the Titans: Music in the Cloud

 Have you purchased music online or subscribed
to a music service? What was your experience?
 What revenue models do cloud music services
use?
 Do cloud music services provide a clear
advantage over download and subscription
services?
 Of the cloud services from Google, Amazon, and
Apple, which would you prefer to use and why?
Lecturer Bett. Slide 2-19
 B2C Models: Market Creator
 Create digital environment where
buyers and sellers can meet and
transact
 Examples:
 Priceline

 eBay

 Revenue model: Transaction fees

Lecturer Bett. Slide 2-20

 B2C Models: Service Provider
 Online services
 e.g., Google—Google Maps, Gmail, etc.

 Value proposition
 Valuable, convenient, time-saving, low-cost
alternatives to traditional service providers
 Revenue models:
 Sales of services, subscription fees, advertising,
sales of marketing data

Lecturer Bett. Slide 2-21

 B2C Models: Community Provider
 Provide online environment (social
network) where people with similar
interests can transact, share content,
and communicate
 e.g., Facebook, LinkedIn, Twitter

 Revenue models:
 Typically hybrid, combining advertising,
subscriptions, sales, transaction fees, affiliate
fees
Lecturer Bett. Slide 2-22
 B2B Business Models
 Net marketplaces
 E-distributor
 E-procurement
 Exchange
 Industry consortium

 Private industrial network

Lecturer Bett. Slide 2-23

 B2B Models: E-distributor
 Version of retail and wholesale store,
MRO goods and indirect goods
 Owned by one company seeking to
serve many customers
 Revenue model: Sales of goods

 e.g., Grainger.com

Lecturer Bett. Slide 2-24

 B2B Models: E-procurement
 Creates digital markets where
participants transact for indirect goods
 B2B service providers, application service
providers (ASPs)
 Revenue model:
 Service fees, supply-chain management,
fulfillment services
 e.g., Ariba

Lecturer Bett. Slide 2-25

 B2B Models: Exchanges
 Independently owned vertical digital
marketplace for direct inputs
 Revenue model: Transaction, commission
fees
 Create powerful competition between
suppliers
 Tend to force suppliers into powerful price
competition; number of exchanges has
dropped dramatically
Lecturer Bett. Slide 2-26
 B2B Models: Industry Consortia
 Industry-owned vertical digital
marketplace open to select suppliers
 More successful than exchanges
 Sponsored by powerful industry players
 Strengthen traditional purchasing behavior

 Revenue model: Transaction,

commission fees
 e.g., Exostar
Lecturer Bett. Slide 2-27
 Private Industrial Networks
 Digital network
 Used to coordinate communication
among firms engaged in business
together
 Typically evolve out of company’s
internal enterprise system
 e.g., Walmart’s network for suppliers

Lecturer Bett. Slide 2-28

 Other E-commerce Business Models
 Consumer-to-consumer (C2C)
 eBay, Craigslist

 Peer-to-peer (P2P)
 The Pirate Bay, Cloudmark

 M-commerce:
 Extends existing e-commerce business models
to service mobile workforce, consumers
 Unique features include mobility, cameras to
scan product codes, GPS
Lecturer Bett. Slide 2-29
 Insight on Society: Class Discussion

Foursquare: Check In/Check Out

 Why should you care if companies track your
location via cell phone?
 Are privacy concerns the only shortcoming of
location-based mobile services?
 Should business firms be allowed to call cell
phones with advertising messages based on
location?

Lecturer Bett. Slide 2-30

 E-commerce Enablers:
The Gold Rush Model
 E-commerce infrastructure companies
have profited the most:
 Hardware, software, networking, security
 E-commerce software systems, payment systems
 Media solutions, performance enhancement
 CRM software
 Databases
 Hosting services, etc.

Lecturer Bett. Slide 2-31

 How the Internet and the Web
Change Business
 E-commerce changes industry structure
by changing:
 Basis of competition among rivals
 Barriers to entry
 Threat of new substitute products
 Strength of suppliers
 Bargaining power of buyers

Lecturer Bett. Slide 2-32

 Industry Value Chains
 Set of activities performed by suppliers,
manufacturers, transporters, distributors,
and retailers that transform raw inputs into
final products and services
 Internet reduces cost of information and
other transactional costs
 Leads to greater operational efficiencies,
lowering cost, prices, adding value for
customers
Lecturer Bett. Slide 2-33
 E-commerce and Industry Value
Figure 2.4, Page 100 Chains

Lecturer Bett. Slide 2-34

 Firm Value Chains
 Activities that a firm engages in to
create final products from raw inputs
 Each step adds value

 Effect of Internet:
 Increases operational efficiency

 Enables product differentiation

 Enables precise coordination of steps in chain

Lecturer Bett. Slide 2-35

 E-commerce and Firm Value Chains
Figure 2.5, Page 101

Lecturer Bett. Slide 2-36

 Firm Value Webs
 Networked business ecosystem
 Uses Internet technology to coordinate
the value chains of business partners
 Coordinates a firm’s suppliers with its
own production needs using an
Internet-based supply chain
management system

Lecturer Bett. Slide 2-37

 Internet-enabled Value Web
Figure 2.6, Page 102

Lecturer Bett. Slide 2-38

 Business Strategy
 Plan for achieving superior long-term
returns on the capital invested in a
business firm
 Four generic strategies
 Differentiation
 Cost
 Scope
 Focus

Lecturer Bett. Slide 2-39