05 Business Models for E-commerce slides

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e-commerce

Kenneth C. Laudon

Carol Guercio Traver

business. technology. society.

eighth edition

Copyright © 2012 Pearson Education, Inc.

Chapter 5

Business Models for E-commerce

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Class Discussion

Copyright © 2012 Pearson Education Slide 5-3

Tweet Tweet: What’s Your 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?

Class Discussion


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Learning Objectives

� Identify the key components of e-commerce business models

�Describe the major B2C business models

�Describe the major B2B business models

�Recognize business models in other emerging areas of e-commerce

�Understand key business concepts and strategies applicable to e-commerce


E-commerce Business Models – Definitions

�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

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8 Key Elements of a Business Model

Slide 2-7


1. Value Proposition

� Defines how a company’s product or service fulfills the needs of customers

� Questions to ask:

� “Why should the customer buy from you?”

� What will your firm provide that others do not or cannot?

� Successful e-commerce value propositions:

� Personalization/customization

� Reduction of product search, price discovery costs

� Facilitation of transactions by managing product delivery

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2. Revenue Model

� “How will the firm earn revenue, generate profits, and produce a superior return on invested capital?”

�Major types:

�Advertising revenue model, e.g., Google

�Subscription revenue model, e.g., WSJ

�Transaction fee revenue model, e.g., eBay

�Sales revenue model, e.g., Amazon.com, Gap.com

�Affiliate revenue model, e.g., MyPoints, Epinions


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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


Marketspace and Market Opportunity in the

Software Training Market

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4. Competitive Environment

� “Who else occupies your intended marketspace?”� Other companies selling similar products in the same

marketspace

� Includes both direct (Travelocity vs Expedia) and indirect (auto makers vs airlines) 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, e.g., Amazon

� Unfair competitive advantage, e.g., Sony, Apple

� Leverage: When a company uses its competitive advantage to achieve more advantage in surrounding markets, E.g., Amazon’s moving into online grocery business leverages its huge customer database and years of e-commerce experience

� Perfect markets

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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

� Examples include:� YouTube having social network marketing strategy

which lets users to post content on the site for free;

� AOL distributing out free trial CDs through magazines and newspapers


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

� Work typically divided into functional departments, e.g, production, shipping, marketing, customer support, and finance

� As company grows, hiring moves from generalists to specialists , e.g., eBay starting out from one-person firm into multi-departmental large enterprise

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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


Categorizing E-commerce Business Models

� No one correct way

� We categorize business models according to:

� E-commerce sector (e.g. B2B, B2C, C2C)

� Type of e-commerce technology (e.g. P2P, m-commerce)

� Similar business models appear in more than one sector, e.g., e-tailer and e-distributors

� Some companies use multiple business models (e.g. eBay being B2C market maker, C2C business model, and B2C m-commerce model)

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B2C Business Models: Portal

� Search plus an integrated package of content and services

� Revenue models: � Advertising, referral fees, transaction fees,

subscriptions

� Variations: � Horizontal/General : Marketspace includes all

Internet users, e.g., Yahoo, AOL, MSN

� Vertical/Specialized (Vortal) : Focus around specific subject matter or market segment, e.g., Sailnet

� Search


B2C Models: E-tailer

� Online version of traditional retailer

� Revenue model: Sales

� Variations:� Virtual merchant– Amazon, BlueNile, Drugstore

� Bricks-and-clicks – Wal-Mart, Staples, JCPenny

� Catalog merchants – LLBean, CDW

� Manufacturer-direct – Sony, Dell, IBM

� Low barriers to entry

� Keys to success in e-tailing� Keeping expenses low,

� Selection broad, and

� Inventory controlled

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B2C Models: Content Provider� Digital content on the Web

� News, music, video, photos, text, and artwork

� Revenue models: � Subscription, e.g., Real.com’s Rhapsody Unlimited service;

� Pay per download (micropayment) , e.g., WSJ.com, Harvard Business Review;

� Advertising, e.g., CNN.com, CBSSports.com;

� Affiliate referral fees

� Variations:� Content owners: book publishers, newspapers, music publishers,

movie studios

� Syndication: content providers do not own content, but syndicate (aggregate) and then distribute contents produced by others

� Web aggregators: collect info from sources and add value to info thru post-aggregation services. E.g., shopping.com


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– E*Trade, Ameritrade, Schwab

� Travel services – Travelocity.com

� Job placement services – Monster.com

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B2C Models: Market Creator

� Create digital environment where buyers and sellers can meet and transact

� Differs from transaction brokers who carry out transactions for their customers, or act as agents in larger markets

� Examples:

� Priceline

� eBay

� Revenue model: Transaction fees


B2C Models: Service Provider

�Online services

�e.g., Google—Google Maps, Gmail, Google Docs,

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

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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


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B2B Business Models

�Net marketplaces

�E-distributor

�E-procurement

�Exchange

� Industry consortium

�Private industrial network

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B2B Models: E-distributor

� Supplies products and services directly to individual businesses

�Owned by one company seeking to serve many customers

�Revenue model: Sales of goods

� e.g., Grainger.com (largest distributor of maintenance, repair, and operations (MRO) supplies


B2B Models: E-procurement� Creates and sells access to digital markets

� Includes B2B service providers (sells business services to other firms), application service providers (ASPs sell access to Internet-based software to other companies)

� Creating custom integrated online catalogs, (where supplier firms can list their offerings) for purchasing firms

� Revenue model:� Transaction fees, service fees, supply-chain

management, fulfillment services

� e.g., Ariba, Software that helps firms organize procurement process by creating custom integrated online catalogs where supplier firms can list their offerings for purchasing firms

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B2B Models: Exchanges

� Electronic digital marketplace where hundreds of suppliers meet a smaller number of very large commercial buyers

� Independently owned vertical digital marketplace, e.g., steel, aluminum, polymers, for direct inputs to production and short-term contracts

� Revenue model: Transaction fees (based on transaction size), 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 that serve specific industries (e.g., automobile, aerospace, chemical, floral, logging)

� More successful than exchanges� Sponsored by powerful industry players

� Strengthen traditional purchasing behavior

� Revenue model: Transaction, commission fees

� e.g., Exostar – online trading exchange for aerospace and defense industry, founded by Boeing, Lockheed Martin, Rolls-Royce, Raytheon

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Private Industrial Networks

�Digital network used to coordinate communication among firms engaged in business together

�Network owned by a single large buying firm

� Typically evolve out of company’s internal enterprise system, e.g., ERP system

� e.g., Walmart’s network for suppliers


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Other E-commerce Business Models

�Consumer-to-consumer (C2C)

�eBay, Craigslist

�Peer-to-peer (P2P)

�The Pirate Bay, Cloudmark (P2P anti-spam solution to protect e-mailboxes)

�M-commerce:

�Extends existing e-commerce business models to service mobile workforce, consumers

�Unique features include mobility, cameras to scan product codes, GPS


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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.


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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


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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

� Value chain: each of these activities adds economic value to the final products

� Internet reduces cost of information and other transactional costs

� Leads to greater operational efficiencies, lowering cost, prices, adding value for customers

� Example: Dell bypassing distributors and retailers and also providing efficient CRM


E-commerce and Industry Value

ChainsFigure 5.4, Page 364

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Firm Value Chains� Activities that a firm engages in to create final

products from raw inputs

� A firm value chain: Set of 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

� Example: Amazon providing large selection of books at lower prices, and professional and consumer book reviews


E-commerce and Firm Value ChainsFigure 5.5, Page 365

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Firm Value Webs� Firms also rely on value chain of their partners (suppliers,

distributors, delivery firms)

� A value Web: Networked business ecosystem that uses Internet technology to coordinate the value chains of business partners within an industry, or within a group of firms

� 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

� Example: Amazon relies on UPS tracking system for online package tracking, and on USPS for package insertion into mail stream


Internet-enabled Value WebFigure 5.6, Page 366

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Business Strategy� Plan for achieving superior long-term returns on the

capital invested in a business firm (i.e., a plan for making a profit in a competitive environment)

� Four generic strategies1. Differentiation, by creating expectations, adding

features, and enhancing product abilities to solve related problems

2. Cost, lowered by finding new, more efficient business processes, by finding a unique resource, or lower-cost supplier

3. Scope: to compete in all markets around the globe, rather than only in local, regional, or national markets

4. Focus: to compete within a narrow market or product segment, e.g., LLBean focusing on outdoor sports apparel


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