Chapter 2

E-commerce Business Models

and Concepts
 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?
 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
 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
 “Why should the customer buy from yo
u?”
 Successful e-commerce value
propositions:
 Personalization/customization
 Reduction of product search, price discovery costs
 Facilitation of transactions by managing product
delivery
 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
 Insight on Society: Class Discussion

Foursquare: Check Your Privacy at the Door

 What revenue model does Foursquare use?
What other revenue models might be
appropriate?
 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?
 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
 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
 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
 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
 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
 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
 Raising Capital
 Seed capital
 Traditional sources
 Incubators
 Commercial banks
 Angel investors
 Venture capital firms
 Strategic partners

 Crowdfunding
 JOBS Act
 Insight on Business: Class Discussion

Crowdfunding Takes Off

 What types of projects and companies might
be able to most successfully use
crowdfunding?
 Are there any negative aspects to
crowdfunding?
 What obstacles are presented in the use of
crowdfunding as a method to fund start-ups?
 Categorizing E-commerce
Business Models
 No one correct way
 Text categorizes 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)
 B2C Business Models
 E-tailer
 Community provider (social network)
 Content provider
 Portal
 Transaction broker
 Market creator
 Service provider
 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

 B2C Models: Community Provider
 Provide online environment (social
network) where 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
 Web aggregators
 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?
 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
 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
 B2C Models: Market Creator
 Create digital environment where
buyers and sellers can meet and transact
 Examples:
 Priceline

 eBay

 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,
sales of marketing data
 B2B Business Models
 Net marketplaces
 E-distributor
 E-procurement
 Exchange
 Industry consortium

 Private industrial network

 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

 Example: Grainger.com
 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
 Example: Ariba
 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
 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
 Private Industrial Networks
 Digital network used to coordinate among
firms engaged in business together
 Typically evolve out of company’s internal
enterprise system
 Example: Walmart’s network for suppliers
 Cost absorbed by network owner and
recovered through production and
distribution efficiencies
 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, and so on
 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
 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
 E-commerce and Industry Value Chains

Figure 2.5, Page 90

 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
E-commerce and Firm Value Chains

Figure 2.6, Page 91

 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
 Internet-enabled Value Web

Figure 2.7, Page 92

 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