E-commerce Business Models

and Concepts
 Business Models
 business model
 a set of planned activities designed to result in a
profit in a marketplace
 business plan
 a document that describes a firm’s business
model
 e-commerce business model
 a business model that aims to use and leverage
the unique qualities of the Internet, the Web,
and the mobile platform
 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
 1. Value Proposition
 How does the product or service fulfill
customer needs
 E-commerce value propositions:
 Personalization/customization
 Convenience
 Price/No shipping cost
 Quick delivery
 Unparalleled Selection
 Product/service quality
 2. Revenue Model
 How will the company earn money
 Major types of revenue models:
 Advertising revenue model- Facebook
 Subscription revenue model –(freemium)Anti virus,
Consumer Reports, Wall Street News Subscription, Online Dating
 Transaction fee revenue model- ebay, E-trade, Credit
cards
 Sales revenue model – AmazonMP3, Amazon, Gap
 Affiliate revenue model – airlines/car rentals/hotels
 3. Market Opportunity
 The intended Marketspace of the
company
 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
 4. Competitive Environment
 Who else occupies your intended marketspace?”
 Other companies selling similar products in the same
marketspace
 New entrants into market, substitute products, and
power of consumers and suppliers (nature of competition)
 Includes both direct and indirect competitors (e.g.,
Netflix vs Xfinity or DirectTV)
 Influenced by:
 Number and size of active competitors
 Each competitor’s market share
 Competitors’profitability
 Competitors’pricing
 5. Competitive Advantage
 The special advantages of a firm
 Superior or cheaper product than competitors
 What makes a product superior?
 Important concepts:
 Asymmetries exist when one competitor has more resources or
differential access to them compared to other competitors
 First-mover advantage
 Unfair competitive advantage results from factors of production
that are hard to duplicate or acquire (brands, natural resources,
capital investments)
 Leverage using vast resources to move in other markets –
leveraging a large customer base, or lots of money (Apple car)
 Perfect markets do not allow for competitive advantage as all firms
have equal access to all factors of production
 6. Market Strategy
 How do you plan to promote your
products or services to attract the
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 -
IBM OS 2
 7. Organizational Development
 The types of organizational structures within
the firm necessary to carry out the business
plan
 Describes how firm will organize work

 Typically, divided into functional departments,

some organize around products, combination of
both (auto manufacturers)
 As company grows, hiring moves from
generalists to specialists
 8. Management Team
 “What kind of backgrounds should the
company’leaders have?”
 A strong management team:
 Make the business model work
 Give credibility to outside investors
 Has market-specific knowledge
 Has experience in implementing business plans
 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 (Shark tank)
 Elevator Pitch: short two-to-three minute presentation aimed at convincing
investors to invest
 Venture capital firms invest funds they manage for other
investors
 Strategic partners
 Crowdfunding
Using internet to allow individuals to contribute to new ventures

There are four main types of crowdfunding:

1. Donation-based crowdfunding: This type of crowdfunding involves
asking for a small donation from a large number of people to raise money for
something you care about.
It is best used to raise money for personal needs as well as community-based
projects
.

2. Rewards-based crowdfunding: This type of crowdfunding is typically

used to raise funds for a new startup or organization that offers a product or
service. Donors can earn rewards based on the amount they donate.
Common rewards include handmade items, prizes donated by partner compan
ies, or free products or services offered by the fundraiser organizer
.

3. Equity-based crowdfunding: This type of crowdfunding involves raising

funds by selling shares in your company to investors.
It is best suited for startups and small businesses that are looking to raise capi
tal
.
 Categorizing E-commerce
Business Models
 The book categorizes them based on:
 E-commerce sectors (B2B, and B2C)
 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, Amazon)
 B2C Models: E-tailer
 Online version of traditional retailer
(Walmart, Macys)
 Revenue model: Sales
 Variations:
 Virtual merchant (online bank)
 Bricks-and-clicks
 Catalog merchant (home shopping network)
 Sells large variety of household and personal products
 Manufacturer-direct

 Low barriers to entry

 B2C Models: Community Provider
 Provide online environment where
(social network)
people with similar interests can transact,
share content, and communicate
 Examples: Facebook, LinkedIn, Twitter,
Pinterest
 Revenue models:
 Typically hybrid, combining advertising,
subscriptions, sales, transaction fees, and so on
 B2C Models: Content Provider
 Digital content on the Web:
 News, music, video, text, artwork

 Revenue models:
 Subscription; pay per download (micropayment);
advertising; affiliate referral
 Variations:
 Syndication- firm does not own material just distributes
it (newspaper horoscopes and crossword puzzles are syndicated
content)
 Web aggregators (shopping.com, Travelocity, Priceline)
aggregate info and add value to it
 B2C Business Models: Portal
 Searching capability plus an integrated package of
content and services
 Revenue models:
 Advertising, referral fees, transaction fees,
subscriptions
 Variations:
 Horizontal/general includes all internet users
 Vertical/specialized (vortal) provides a directory of
links to information related to a particular industry or subject
matter
 Searching capabilities
 B2C Models: Transaction Broker
 Process online transactions for consumers
 Primary value proposition—saving time and money,
and enabling online transactions (stocks, credit card
and PayPal payments)
 Revenue model:
 Transaction fees

 Industries using this model:

 Financial services
 Travel services and entertainment
 Job placement services
 B2C Models: Market Creator
 Create digital environments where buyers and
sellers can meet and transact business
 Examples:
 Priceline

 eBay/OLX

 E*trade/Amazon/Daraz

 Revenue model:
 Transaction fees, fees to merchants for access
 B2C Models: Service Provider
 Online services
 Example: Google—Google Maps, Gmail, and so
on
 Value proposition
 Valuable, convenient, time-saving, low-cost
alternatives to traditional service providers
 Revenue models:
 Sales of services, subscription fees, advertising,
sale of marketing data
 B2B Business Models
 B2B relies on EDI (electronic data interchange)
 Net marketplaces (explained in upcoming slides)
 E-distributor
 E-procurement
 Exchange
 Industry consortium

 Private industrial network

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

 Example: Grainger.com

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Prentice Hall Slide 2-25
 MRO
 MRO - Maintenance, repair and operations
 Supplies consumed in the production process but
which do not either become part of the end product
or are not central to the firm's output. MRO items
include consumables (such as cleaning, laboratory, or
office supplies), industrial equipment (such as
compressors, pumps, valves) and plant upkeep
supplies (such as gaskets, lubricants, repair tools),
and computers, fixtures, furniture, etc.

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 B2B Models: E-procurement
 Creates and sells access to digital markets where
participants transact for indirect goods
 B2B service providers, application service
providers (ASPs)
 Revenue model:
 Service fees, supply-chain management,
fulfillment services
 Example: Ariba- system provides sellers with the ability to manage
catalogs, bids, purchases and invoices and provides buyers with the ability
to search for suppliers, negotiate savings, procure goods and services and
track spending.
 http://www.ariba.com/about/our-story
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 B2B Models: Exchanges
 Independently owned vertical digital marketplace
where hundreds of suppliers meet a small number
of large commercial purchasers
 Revenue model: Transaction, commission fees
 Create powerful competition between suppliers
 Tend to force suppliers into powerful price
competition; number of exchanges has dropped
dramatically
 Example, Walmart has the ability to negotiate the
best prices in the industry

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 Search Results
ICAMR: International
Search Results Consortium for Advanced Manufacturing Research
ICAMR: International Consortium for Advanced Manufacturing Research

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
 Example: Exostar used by defense industry -
http://www.exostar.com/Mission/
 ICAMR: International Consortium for Advanced Manufacturing Research

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 Private Industrial Networks
 Digital network used to coordinate among
firms engaged in business together
 Represents 75% of B2B business by large firms
 Often owned by a large network firm
 Example: Walmart’s network for suppliers
 Cost absorbed by network owner and
recovered through production and
distribution efficiencies

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 Difference between Exchange, Consortia, Private
Industrial Network

Exchange Consortia Private Industrial

Network

 Hundreds of  Is industry  Coordinate the

suppliers meet owned flow of
small number  Serves a communications
of large buyers vertical among firms
 Generate marketplace doing business
revenue by a together
commission or  Participation is
fee based on the by invitation
size of the only
transaction  Walmart
 Usually serve a operates the
single industry largest private
network

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 Class Discussion

Tweet Tweet: Twitter’s Business Model

 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?

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 B2C Business Models (Table 2.3)
 E-tailer
 Community providers create communities for
like minded people (social networks eg. Facebook)
 Content provider disseminate info (CNN, ESPN etc)
 Portal enable searching to provide info (Yahoo,
Google)
 Transaction broker (E*TRADE, Hotels.com, Travelocity)
 Market creator creates market spaces (Ebay,
Amazon)
 Service provider (Gmail, Verizon, PayPal, VisaNow.com)
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 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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 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
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 E-commerce and Industry Value Chains

Figure 2.5, Page 90

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 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

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 E-commerce and Firm Value Chains

Figure 2.6, Page 91

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 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

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 Internet-enabled Value Web

Figure 2.7, Page 92

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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: A marketing strategy where a service
supplier or product retailer gets close to customers. The benefits
include improved highly tailored problem solving capabilities,
greater customization of products to customer needs, as well as
higher customer loyalty.

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