Chapter Two

Business Models for E-Commerce

Introduction

Some models are quite simple. A company produces a good or service and sells it to customers.
If all goes well, the revenues from sales exceed the cost of operation and the company realizes a
profit. Other models can be more intricately woven. Broadcasting is a good example. Radio and
later television programming has been broadcasted over the airwaves free to anyone with a
receiver for much of the past century. The broadcaster is part of a complex network of
distributors, content creators, advertisers (and their agencies), and listeners or viewers. Who
makes money and how much is not always clear at the outset. The bottom line depends on many
competing factors.

Internet commerce will give rise to new kinds of business models. That much is certain. But the
web is also likely to reinvent tried-and-true models. Auctions are a perfect example. One of the
oldest forms of brokering, auctions have been widely used throughout the world to set prices for
such items as agricultural commodities, financial instruments, and unique items like fine art and
antiquities. The Web has popularized the auction model and broadened its applicability to a wide
array of goods and services.

Business models have been defined and categorized in many different ways. This is one attempt
to present a comprehensive and cogent taxonomy of business models observable on the web. The
proposed taxonomy is not meant to be exhaustive or definitive. Internet business models

E-Business models based on the relationship of Transaction Parties

 Business to consumer (B2C)
 Business to Business (B2B)
 Consumer to Consumer (C2C)
 Consumer to Business (C2B)

1. Business to Business [B2B]

B2B (business – to‐ business) is the major and valuable model of e‐commerce.B2B (business –
to‐ business) e‐commerce is conducted between two separate businesses and has been in effect
for many years. E‐commerce plays an important role in enhancing and transforming relationships
between and among business. B2B (business – to‐ business)is also known as e‐biz, is the
exchange of products, services, or information between businesses rather than between
businesses and consumers. Although early interest centered on the growth of retailing on the
Internet (sometimes called e‐tailing), forecasts are that B2B revenue will far exceed business to
consumers [B2C] revenue in the near future. B2B (business – to‐ business) is a kind of
ecommerce, which refers to a company selling or buying from other companies. One company

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 communicates with other companies through electronic Medias. Some of these transactions
include sending and receiving orders, invoice and shopping orders. It was an attractive
alternative to the current process of printing, mailing various business documents.
Some B2B applications are the following:‐
1. Supplier Management
Electronic applications in this area helps to speed up business partnerships through the
reduction of purchase order processing costs and cycle times, and by maximizing the number
of purchase order processing with fewer people.
2. Inventory Management
Electronic applications make the order‐ship bill cycle shorter. Businesses can easily keep
track of their documents to make sure that they were received. Such a system improves
auditing capabilities, and helps reduce inventory levels, improve inventory turns, and
eliminate out‐ ofstock occurrences.
3. Distribution Management
Electronic based applications make the transmission of shipping documents much easier and
faster. Shipping documents include bill of lading, purchase orders, advance ship notices, and
manifest claims. E‐commerce also enables more efficient resource management by
certifying that documents contain more accurate data.
4. Channel Management
E‐commerce allows for speedier distribution of information regarding changes in
operational conditions to trading partners. Technical, product and pricing information can be
posted with much ease on electronic bulletin boards.
5. Payment Management
An electronic payment system allows for a more efficient payment management system by
minimizing clerical errors, increasing the speed of computing invoices, and reducing
transaction fees and costs.
Many organizations are implementing electronic commerce in numerous ways and receiving
tangible benefits but as electronic commerce matures and develops, these ways are likely to
change based on the accelerating adoption rate. There are three specific implementation models
of B2B E‐commerce:‐
• Transaction based‐ a single company establishes a common transactional method for
conducting business with its major customers or key suppliers. This offering is common across
all business units within the company and includes common tools, techniques, and infrastructure.
• Process based‐ Two companies establish a common business process to conduct business
efficiently between the two firms. The two firms establish and share this common practice
jointly, both within their firm and outside their organization with this predetermined trading
partner.
• Strategic relationship based – Two or more companies establishing a strategic relationship
partnership based on all major interactions between the organizations. This includes transactions,
processes, and any other collaboration between the organizations. From a technology perspective

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 this includes linking the CRM, ERP and SCM systems of the two organizations. This way each
organization can actually monitor sales activity, production schedules, inventory management,
and technical service exchanges.

2. Business – to Consumer [B2C]

Business – to Consumer [B2C] e‐commerce consists of the sale of products or services from a
business to the general public. Products can be anything from clothing to flowers and the
products can also be intangible products such as online banking, stock trading, and airline
reservations. Sellers that use B2C business model can increase their benefits by eliminating the
middlemen. This is called disintermediation because businesses sell products directly to
consumers without using traditional retail channels. Business – to Consumer [B2C] is basically a
concept of online marketing and distributing of products and services over the internet. It is a
natural progression for many retailers or marketer who sells directly to the consumer. The
general idea is, if you could reach more customers, service them better, make more sales while
spending less to do it that would the formula of success for implementing a B2C e‐commerce
infrastructure.
A business firm can also establish relations with customers through electronic medias. For this,
the company has to design a web site and place it on the internet. On the web site, the company
can publish all details about the product and services and that benefits customers to place orders
for these goods from the web site.
Many people were very excited about the use of B2C on the Internet, because this new
communication medium allowed businesses and consumers to get connected in entirely new
ways. The opportunities and the challenges posed by the B2C e-commerce are enormous. A large
amount of investment has gone into this and many sites have either come up or are coming up
daily to tap this growing market.
To maintain customers always with company’s web site, the company must update the
information on the web regularly. Consumers always demand greater convenience and lower
prices. Electronic commerce provides consumers with convenient shopping methods.
Some of the reasons why one should opt for B2C are:
1) Inexpensive costs, big opportunities. Once on the Internet, opportunities are immense as
companies can market their products to the whole world without much additional cost.

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 2) Globalization. Even being in a small company, the Web can make you appear to be a big
player which simply means that the playing field has been levelled by e- business. The Internet is
accessed by: millions of people around the world, and definitely, they are all potential customers.
3) Reduced operational costs. Selling through the Web means cutting down on paper costs,
customer support costs, advertising costs, and order processing costs.
4) Customer convenience. Searchable content, shopping carts. promotions, and interactive and
user-friendly interfaces facilitate customer convenience. Thus, generating more business.
Customers can also see order status, delivery status, and get their receipts online.
The example of the www.amazon.com site also involves the B2C model in which the consumer
searches for a book on their site and places an order, if required. This implies that a complete
business solution might be an integration solution of more than one business model. For
example, www.amazon.com includes the B2B model in which the publishers transact with
Amazon and the B2C model in which an individual consumer transact with the business
organization. The B2C model of e-commerce is more prone to the security threats because
individual consumers provide their credit card and personal information n the site of a business
organization. In addition, the consumer might doubt that his information is secured and used
effectively by the business organization. This is the main reason why the B2C model is not very
widely accepted. Therefore, it becomes very essential for the business organizations to provide
robust security mechanisms that can guarantee a consumer for securing his/her information.

3. Consumer to Consumer (C2C)

The C2C model involves transaction between consumers. Here, a consumer sells directly to
another consumer. eBay and www.bazee.com are common examples of online auction Web sites
that provide a consumer to advertise and sell their products online to another consumer.
However, it is essential that both the seller and the buyer must register with the auction site.
While the seller needs to pay a fixed fee to the online auction house to sell their products, the
buyer can bid without paying any fee. When a customer plans to sell his products to other
customers on the Web site of eBay, he first needs to interact with an eBay site, which in this case
acts as a facilitator of the overall transaction. Then, the seller can host his product on
www.ebay.com, which in turn charges him for this. Any buyer can now browse the site of eBay
to search for the product he interested in. If the buyer comes across such a product, he places an
order for the same on the Web site of eBay. eBay now purchase the product from the seller and

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 then, sells it to the buyer. In this way, though the transaction is between two customers, an
organization acts as an interface between the two organizations.

4. Consumer to Business (C2B)

The C2B model involves a transaction that is conducted between a consumer and a business
organization. It is similar to the B2C model, however, the difference is that in this case the
consumer is the seller and the business organization is the buyer. In this kind of a transaction, the
consumers decide the price of a particular product rather than the supplier. This category
includes individuals who sell products and services to organizations. For example,
www.monster.com is a Web site on which a consumer can post his bio-data for the services he
can offer. Any business organization that is interested in deploying the services of the consumer
can contact him and then employ him, if suitable as shown in figure.

5. Government-to-Government (G2G) model: This model involves transactions between 2

governments. For example, if the Ethiopia government wants to by oil from the Arabian
government, the transaction involved are categorized in the G2G model.
6. Government-to-Consumer (G2C) model: In this model, the government transacts with an
individual consumer. For example, a government can enforce laws pertaining to tax payments on
individual consumers over the Internet by using the G2C model.
7. Consumer-to-Government (C2G) model: In this model, an individual consumer interacts
with the government. For example, a consumer can pay his income tax or house tax online. The
transactions involved in this case are C2G transactions.

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 8. Government-to-Business (G2B) model: This model involves transactions between a
government and business organizations. For example, the government plans to build a fly over.
For this, the government requests for tenders from various contractors. Government can do this
over the Internet by using the G2B model.
9. Business-to-Government (B2G) model: In this model, the business houses transact with the
government over the Internet. For example, similar to an individual consumer, business houses
can also pay their taxes on the Internet.
E-Business models based on the relationship of Transaction Types
Based on transaction type, different types of transactions can be identified as listed below:
 Brokerage Model
 Portal Model
 Info-mediary Model
 Community Model
 Affiliation Model
 Advertising Model
BROKERAGE MODEL

At the heart of this model are third parties known as brokers, who bring sellers and buyers of
products and services together to engage in transactions. Normally, the broker charges a fee to at
least one party involved in a transaction. While many brokers are involved in connecting
consumers with retailers, they also may connect businesses with other businesses or consumers
with other consumers. A wide variety of different scenarios or business configurations fall under
the banner of a brokerage model. These include everything from Web sites posting simple online
classified ads and Internet shopping malls (Web sites that sell products from a variety of
different companies) to online marketplaces, online auctions, aggregators, and shopping bots.
The Brokerage Model in e-commerce, in essence, mirrors the offline brokerage model where the
broker acts as a third party connecting sellers and buyers to a transaction and charges fees for
their services (Rappa, 2005). The advantage of e-commerce affords brokers the ability to connect
buyers and sellers globally in contrast to the offline world where a broker may be restricted to a
certain region within their local market. For example, in the offline world, a mortgage broker
who connects people looking to purchase a house with financial institutions who sell Mortgages
may be restricted to their local area, hence creating a finite group of potential buyers. In contrast,
as a result of the Internets inherent globalization (Flew, 2008) an e-commerce mortgage broker
has the potential to reach people located outside their local area, in other states and other
countries, drastically increasing the number of potential buyers, their ability to connect more
buyers with sellers, and thus make better profits. It is well documented that eBay is one of the
most successful Auction Brokers in e-commerce.

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 AFFILIATE MODEL

The affiliate model of business, in which a business pays commissions to sellers for performing
an action, is one seen largely online. That action is usually securing a sale, but there are other
payment methods, such as getting a customer to fill out a form, click an ad, or just visit the
company's website. The affiliate model requires an advertiser — the business with the product —
and a publisher, the person bringing in sales. In this business model, both partners are making
money, but in different ways. This can be used to help garner extra sales for a business while
helping website owners make a profit from their website.

With the affiliate model, it all starts with the advertiser. This is the company paying
commissions, and it is the one actually selling the product or service. When this company
decides it wants to use affiliates to boost sales, it enters the affiliate model. The company
promises a commission for each action, and they either run the affiliate program in-house or
subscribe to an affiliate service to handle commissions and other administrative duties.

On the other side is the publisher. This website owner subscribes to the affiliate program and
embellishes his or her website with banners and links featuring affiliate tracking codes. He or she
then gets website visitors who click the link or banner. Depending on the affiliate program, the
website owner will optimize his or her website to get the best affiliate sales for the advertiser
company.

There are several payment methods in the affiliate model, and the advertiser may use one or
several. The four main types are: pay-per-click (PPC), pay-per-impression (PPI), pay-per-lead
(PPL) and pay-per-sale (PPS). The most common is PPS, in which a customer purchases a
product, and the advertiser pays the publisher a portion of that sale. PPC means that the publisher
gets paid each time someone clicks the affiliate link; PPI means that whenever a visitor lands on
the publisher’s website, he or she will be paid; PPL is when a customer fills out a form, and the
publisher gets paid for each form.

Both the publisher and the advertiser make money in this scenario. The publisher makes money
because he or she is being paid a commission for any work that coincides with the affiliate
program. Advertisers make money because they keep the majority of the sale, or get new leads
and only pay the publisher if they help the advertiser

INFO-MEDIARY MODEL
Data about consumers and their consumption habits are valuable, especially when that
information is carefully analyzed and used to target marketing campaigns. Independently
collected data about producers and their products are useful to consumers when considering a
purchase. Some firms function as infomediaries (information intermediaries) assisting buyers
and/or sellers understand a given market. Info-mediary model includes:

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 Advertising Networks -- feed banner ads to a network of member sites, thereby enabling
advertisers to deploy large marketing campaigns. Ad networks collect data about web users that
can be used to analyze marketing effectiveness.
Audience Measurement Services -- online audience market research agencies.
Incentive Marketing -- customer loyalty program that provides incentives to customers such as
redeemable points or coupons for making purchases from associated retailers. Data collected
about users is sold for targeted advertising.
Metamediary -- facilitates transactions between buyer and sellers by providing comprehensive
information and ancillary services, without being involved in the actual exchange of goods or
services between the parties.

COMMUNITY MODEL
The viability of the community model is based on user loyalty. Users have a high investment in
both time and emotion. Revenue can be based on the sale of ancillary products and services or
voluntary contributions; or revenue may be tied to contextual advertising and subscriptions for
premium services. The Internet is inherently suited to community business models and today this
is one of the more fertile areas of development, as seen in rise of social networking. The
community business mode relies extensively on some sort of community to find customers, do
marketing and create revenues. The goal of this model is to create an innate need, making sales
easier to generate.The Internet has changed the dynamic of community business models, using
viral marketing means to increase community members and product awareness. The major
players in Internet communities include the social networking giants, Facebook, Twitter and
MySpace.

ADVERTISING MODEL
The web advertising model is an extension of the traditional media broadcast model. The
broadcaster, in this case, a web site, provides content (usually, but not necessarily, for free) and
services (like email, IM, blogs) mixed with advertising messages in the form of banner ads. The
banner ads may be the major or sole source of revenue for the broadcaster. The advertising
model works best when the volume of viewer traffic is large or highly specialized. Advertising
model includes:
Portal -- usually a search engine that may include varied content or services. A high volume of
user traffic makes advertising profitable and permits further diversification of site services. Some
common examples are [Google, Yahoo!]
Classifieds -- list items for sale or wanted for purchase. Listing fees are common, but there also
may be a membership fee.
User Registration -- content-based sites that are free to access but require users to register and
provide demographic data. Registration allows inter-session tracking of user surfing habits and
thereby generates data of potential value in targeted advertising campaigns.
Contextual Advertising / Behavioral Marketing -- For example, a browser extension that
automates authentication and form fill-ins, also delivers advertising links or pop-ups as the user

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 surfs the web. Contextual advertisers can sell targeted advertising based on an individual user's
surfing activity.

PORTAL BUSINESS MODEL

Portal business models provide entry to content or services on the Internet. Search engines are
portal business models that include many kinds of content and services. They are profitable for
advertisers because they draw a large amount of user traffic. Many offer the user ways to
customize their interface making the portal even more alluring. ―The main goal of a portal is to
give each user a personalized and integrated view of corporate information and applications,‖
reports Information Management website. Successful portal sites offer much more than just
simple content; they offer many other services including email, chat, highly customizable sorting
and searching, and endless ways for personalizing your content. The user's personal information
and choices can then be used to direct targeted and more successful advertising.

Generalized Portals

Generalized portals draw an extremely high volume of traffic, usually tens of millions of visits
per month, to generic information, diverse content or services. Search engines and sites that
support lots of content are great for advertisers because the high traffic increases the profit of the
ad. To retain market share, some portal sites offer personal services like stock portfolios, news
and local information.

Special And Personalized Portals

The next step is to allow users to personalize their interface and experience through personalized
portals. These enhance the generic information offered in generalized portals. With
personalization, you can now support a specialized model. These rely on a well-defined user base
rather than high-user volume. A focused site draws a specific group of advertisers willing to pay
a higher premium to reach a certain audience.

Horizontal, Vertical, Affinity Portals

Horizontal portals are all those that offer lots of information to a broad range of visitors to sell
space to advertisers. Vertical portals specialize in a particular area and make income through
specialized advertising and through additional sources such as commission. Affinity portals offer
a much deeper range of content and services, including networking and commerce, and must
depend on additional income sources beyond advertising, often charging membership fees.

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