s643: digital entrepreneurship spring 12 business models for ecommerce i. developing business models...

S643: Digital Entrepreneurship Spring ‘12

Business models for ecommerce

I. Developing business models

• What is a business model?

• Developing the ecommerce business model

• Benefits to the organization

II. Types of business models

• How the net is changing business

• Business <--> consumer

• Transaction based

III. Strategies and issues



www.perkfriday.com/images/cartoon-dotcom.jpg



What is a business model?

A plan for the structure and actions by which your organization will operate within its marketplace

A business model is a representation of the activities of a business and:

“a unique configuration of elements comprising the organization’s goals, strategies, processes, technologies and structure, conceived to create value for the customers and thus compete successfully in a particular market.” knowledge.wharton.upenn.edu/articles.cfm?catid=7&articleid=244&homepage=yes



A successful business model creates a heuristic logic that connects technical potential with the realization of economic value

It unlocks latent value from a technology

It lays out a path to take technology to market

Technological characteristics and potentials are inputs

It converts them into economic outputs through customers and markets

It mediates between technology and value creationChesbrough, H. and Rosenbloon, R.S. (2002). The role of the business model in capturing value from innovation icc.oxfordjournals.org/cgi/reprint/11/3/529.pdf



Characteristics of a business model

Articulates the value proposition - value for customers from product or service

Identifies a target market segment

Defines the value chain to create and market the product or service

Estimates the cost structure, pricing, and profit potential

Place the company into the value network of suppliers and customers

Clarifies the competitive strategy



The business model and determinants of performance

Afuah and Tucci (2000). Internet Business Models and Strategies. McGraw Hill. p. 4

Change

~Properties

~Underpinnings

Business model

~Composition and linkages

~Dynamics

Environment

~Competitive

~Macro

Performance



A business model enables the firm to

Generate growth opportunities

Respond quickly and flexibly to changes in the market

Capture the opportunities quickly and profitably

It helps in managing knowledge and human processes

It is characterized by the interdependence of its parts

Each part of the firm is a contributor to value

This requires new roles for each of the firm’s parts so that they can work together in new ways to help the company’s resource and asset base grow



In general terms, three components to consider are:

Activity: what a business does

Process: how it accomplishes what it does

Data models: the information structure of a business

A business model answers the following:

What type of business is it?

How do you plan to get it off the ground?

How will you run it?

How will you obtain and keep customers?

How will you generate revenue and turn a profit?



It is a plan for developing and using resources to gain competitive advantage

How the firm makes money, acquires market share, and grows

Who you want to reach and what you want to sell them

Components

Customer value Scope Price

Revenue sources Related activities Capabilities

Dynamics

How the model evolves as the environment changes



Environment

Competitive environment: everyone whose drive to maximize profit and minimize loss impacts your business

Who are your main competitors and what do they do?

Who are your customers and suppliers?

Macro environment: the larger socio-cultural context

How are you affected by local, state, national and international regulation?

What government relationships affect your business?

Geopolitics? Changes in the natural environment?



Ecommerce strategies are best when driven by business, not technology, concerns

One way is to dissect the buying/selling process into its various elements, from the buying side and the selling side, and with your customers and suppliers

Then, think about how you can apply each to the Web

Analyze how your customer needs are changing from a business perspective

How the web can help you address them



EURESCOM. (2002). Service Scenarios and Business Models for Mobile Commerce www.eurescom.de/.../P1102/ brochure/bmodels.html



Drafting the plan

Who are your customers and how will you reach them?

How will you encourage repeat business?

What products or services will you offer on your site?

How much can you spend setting up the site?

What are your revenue goals and what is the time frame for achieving these goals?

What features will the site need initially and what are your plans for enhancement and expansionNetQuest. (2000 - now gone). Setting up an online business www.netquest1.com/ecommerce1.htm



Other questions to consider:

Who pays?

Consumer, producer, or third parties?

What for?

Goods, services, expertise, assurances of quality or security

To whom?

Why?

Perceived value, or being locked inList, D. (2006). What is a business model? www.audiencedialogue.org/busmod.html



Benefits of an ecommerce business model to the firm

Improved planning

A business model provides a framework for decision making

It is the background for organizational action and strategic planning

Coordination

All business processes involve the organization of sub tasks and access to shared resources

A plan sets parameters for integration of activities and resources towards shared goals



Provision of value

It defines the customer base

The plan outlines how the firm will provide value to its customers (consumers or other businesses)

Source of competitive advantage

The plan outlines the position the firm will take in the marketplace

It explains how the firm will maintain this position

It outlines results of competitive intelligence gathering

It explains how the company will exploit its strengths



A business model describes the specific way the business expects to make money

While a business plan is a lengthy document, a business model should be small enough to

stay in the heads of the owner, staff, and investors

If a business model is on paper, it should be one page

A graphic, if it can be more clearly shown

There can be extras (notes and explanations) but the business model itself is a single conceptwww.webdesign.org/img_articles/4541/making-money.jpg



This is a graphic depiction of Acer’s business model

www.acer.co.nz/acer/akc/companyinfo.nsf/Page/RWPB4EDC97F7F4D777DCA256FF2001A8D14?open&current=7&



Business models can be broken down into distinct segments

“Buy-side” and “sell-side”: refers to payment direction

With whom is commerce being conducted (suppliers or customers?)

In some cases, business is being transacted with both

“Product or service type”: refers to the “stuff” of the transaction

What is it? How will it be priced?

How will it be advertised? How will it be sold and delivered?



Business models and the web

Fox, C. (2000). E-commerce business models: Business models that have succeeded and business models that have failed - International case studies www.chrisfoxinc.com/eCommerceBusinessModels.htm



The ebusiness landscape

www.nctcog.org/cs/911/images/cell-phone-sally.GIF www.podcastingnews.com/articles/images/apple_laptop.jpg

Network usersEcommerce: retail,

wholesale

Content aggregators

Market makers

Financial services

ASPs

Infrastructure providers

Backbone

ISP/OSP

Last mile

SuppliersContent creators

Software suppliers

Hardware suppliersUs



Why the internet is changing the way we do business

Mediating technology

It creates interdependencies and new relationships

Ubiquity

Connectivity rates are increasing, making the world smaller

Network externalities: it becomes more valuable as more people use it

Metcalf’s law: Value of the net = N 2, where N = # of

people online

This applies to auctions and online communities



A new distribution channel

Replacement effect --> old customers are moved from offline to online channel

Extension effect --> New customers are added to the channel

Creative destruction

New industries are created, the way existing industries operate is changing, barriers to entry are changing

Reduce transaction costs

Costs of searching for sellers and buyers, collecting information, negotiating price



Time moderation

It shrinks and expands time

Reduces information asymmetry

Information control is decentralized

Infinite virtual capacity

Processing power, storage capacity, and speed continue to increase

Reduces transaction costs

This refers to costs of searching for sellers and buyers, collecting and analyzing information, logistics etc

www.inertiatech.com/img/ebusiness.jpg



Hierarchy of ebusiness needs (after Maslow)

Fox, C. (2000). E-business models. www.chrisfoxinc.com/eCommerceBusinessModels.htm



Ecommerce business models

Merchant

Business ---> consumer (retail)

Business --> business (wholesale)

E-shop: Web marketing of a company or shop

Main goal: to sell goods and services

Secondary goal: to promote the company

Challenge: develop strategies to increase demand, cost-reduction of business processes

Revenues from sales, affiliates, and advertisinge-commerce.my-best-jobs.com/ecommerce_image/ecommerce.jpg



E-shops offer direct sales through electronic channels using an electronic catalog or other format

Consumers order goods via fill-out forms, 800 numbers, registration, fax, or surface mail

Online storefronts cover a wide variety of offerings

They combine elements of direct marketing with in-store shopping and can be more efficient than either

Customization and relationship marketing

A broader definition of product and service categories

Some shops have products that can be bought and sold only on the Web



This model has problems

Current access speeds and hardware/software configurations make online shopping frustrating

Online shopping is not as immediate as real-world experiences (glossy catalogues or department stores)

Security and privacy are major issues

Consumer behavior issues are largely unknown

We are just learning how to:

Market to net shoppers and ensure repeat customers

Use promotions and incentives effectively



Market aggregators (e-mall)

A collection of e-shops, under a common umbrella

Use a common payment method (shopping cart)

Might have a single entry point to individual e-shops

Industry (or horizontal) market: when shops belong to a certain market segment

Revenues are from membership fee, advertising, and fees on transactions (if payments are processed by the mall provider)

Challenge for estores is to distinguish themselveswww.mines.com.my/Tenants/media/emall.jpg



3rd party marketplace: an ASP for ecommerce

Companies outsource their web marketing and estore operations to a 3rd party

It can be an add-on to their other channels

It is a user interface to companies’ product catalogues

It can be enhanced by special marketing features, branding, payment, logistics, ordering, and secure transactions

Revenues can be generated on the basis of one-off membership fee, service fees, referral fees, or % of transaction value

www.govproducts.com/dod-emall.jpg



These sites sell the ability to reach motivated customers with an information- or image-rich advertising

Entry are low, so smaller firms can set up sites as well (or even better) than larger firms

There are also problems

What is the best way to implement such a concept?

We are learning about the design and layout of these sites

How can managers can evaluate the effectiveness of their sites?



Manufacturing and sales

Bypassing traditional distribution channels and selling directly to consumers

Cut out wholesalers and retailers (creating channel conflict)

Develop new direct relationships with customer

Customization and personalization

Standing order customer home pages on the company site

Has the potential to drastically cut costs and increase profits for the manufacturer



Virtual communities: value from members, customers, partners loyalty and repeat visits

They add their information to a basic environment provided by the virtual community company

The membership fees and advertising are two main sources of revenue

Can also use affiliate marketing

A virtual community can also be an important add-on to other marketing operations

It can be used to build customer loyalty and receive customer feedbackwww.educause.edu/ir/library/html/erm/erm99/images/erm9902_solloway.GIF



Market integrator

Bringing buyers and sellers in a specific market sector together

The company provide the setting for business

This is an example of a vertical market

The company is a disinterested third party

It generates revenue from transaction fees

Some charge sellers a listing fee as well

It can sell premium services (security, escrow, logistics)

Problem is achieving and sustaining critical mass



Brokerage or market maker

Bringing buyers (consumers) and sellers together

Revenue through transaction fees and advertising

Some will sell premium services

Seen in the auction, financial services, and travel sectors

These companies add value to data available on the open networks or coming from integrated business operations

Examples include investment advice and competitive intelligence

Rappa, M. (2006). Business models on the web www3.digitalenterprise.org/models/models.html



Types of brokers

Marketplace exchange (Orbitz)

Buy/sell fulfillment (CarsDirect)

Demand collection systems (Priceline)

Auctions (Ebay)

Transaction broker (Paypal)

Distributor (Bluefly)

Search agent (Simon)

Virtual marketplace (Amazon)www.fastwater.com/Library/General/v1-9_ICE/Hub-syn.gif



An interesting type of broker provides “trust”

Trust services are certification authorities and electronic notaries and other trusted third parties

They certify that consumers, merchants, banks, and others are who they say they are

Subscription fees combined with one-off service fees as well as software sales and consultancy are the sources of revenuearchive.opengroup.org/public/tech/security/pki/casm/img00005.gif



One example is the brokerage providing access to content through a searchable database

In a fee-based sites, the provider supplies and/or pays for content which the consumer pays to access

The model has had limited success, because we are unwilling to pay for content delivered in this manner

Currently few sites charge consumers to consume content

A recent trend is toward free --> fee, where visitors are able to access abstracted content at no charge, but incur a small fee for the full content



Advertising

This model is familiar to modern consumers

Two primary factors

The business provides space for the advertiser to place its logo/ad or convey its message to customers

The business provides a consumer audience that the advertiser finds attractive and appropriate for the products it is promoting

Many sites include this as part of their model

Some do it exclusivelywww.vitalnet.net/i/g_advertising.gif



Sponsored content sites sell advertising space to reduce or eliminate fees charged to visitors

A recent trend is toward sponsored “entertainment content” and sponsored search agents

Merchants or advertisers can also pay a provider for information placement in an organized listing in a search database page

These sites provide meaningful exposure for firms that would otherwise be lost in the clutter

A problem is the dependency on traffic



Types of advertising

Portal (Yahoo, MSN)

Classifieds (Monster, Craigslist)

User registration (NYTimes Digital)

Query based ad placement (Google)

Contextual advertising (Claria)

Content targeted advertising (Google)

Ultramercials (Salon)www.economist.com/images/20060708/CSF021.gif



Infomediary

Generates revenue by selling information about visitors

To gather this information, they give something away for free

Examples include: computers, net connectivity, cash for clicks and page views

In exchange, consumers must provide a lot of detailed information about themselves

Their net use is typically monitored and they are subjected to lots of advertising

Problem: the ethics of this model



Types of infomediaries

Advertising networks (Doubleclick)

Audience measurement services (Nielsen/Netratings)

Incentive marketing (Coolsavings)

Metamediary (Edmunds)www.mpellinc.com/images/promos.jpg



Value chain service provider

Provides a specific function for the value chain

Secure electronic payments, credit card processing, or logistics

For example, banks have done this offline

New approaches are also emerging in production/stock management where the specialized expertise is required to analyze and tune production

A fee- or % based scheme is the basis for revenueswww.e-pay.com.my/images/products/diagram-supply-value-chain.gif



Value chain integrators:

Focus on integrating multiple steps of the value chain

They will provide several business processes within a single corporate entity

Secure transactions, credit card processing, and server log analysis

Revenues come from consultancy fees, long term contracts, or pay-as-you-go transaction fees



Collaboration platforms

Provides sets of tools, expertise, and an environment for collaboration between enterprises

Can focus on specific functions, such as collaborative design and engineering

Involves technologies such as net audio/video conferencing, shared whiteboards, distributed GDSS

Revenues are generated by managing the platform and collecting membership and usage fee, charging for expertise

A third is selling or licensing the specialist tools (for design, workflow, document management)



Adelsberger, H. (2000). Learning Technologies: E-Business. elm.wi-inf.uni-essen.de/ en/lt/ebusiness.html



Timmers, P. (1998). Business Models for Electronic Markets www.imse.hku.hk/.../Timmers/ 98_21_n.html



Transaction based business models

The merchandise sales model

The per use model

The timed usage model

The subscription model

The auction model

The sponsorship model

The public support model



The merchandise sales model

Organized around the sale of goods or services in exchange for money or other value given at the time of the transaction

Examples are “virtual storefronts” and “on-line catalogs”

Probably the most common type of on-line commerce because of its ease of use and familiarity to consumers

Many similarities to off-line versionswww.interactivemarketinginc.com/images/conversion-rate.jpg



The per use model

Similar to “merchandise sales” except that consumers do not own the goods or services they use

Technology has not yet evolved to allow widespread deployment of this model

It will become increasingly prevalent on-line when customers can access resources on-line cheaply and easily

Purchase of a product will no longer be necessary

Video, music, text “on demand”www.cti.ru/img/solprod/whole-scheme-s-en.gif



The timed usage model

Appropriate for service businesses providing customized information or recreational opportunities requiring more than one visit

Works well when consumers are interested in frequentor prolonged access and will invest time to customize and explore the service

ISPs use it to build on-line communities where people spend long periods of time

They also seek repeat users to maximize their revenue

Interactive gaming environments or news searchingwww.smartmobs.com/archives/finalfantasyXI_comm_detail.jpg



The subscription model (borrowed from publishing)

Primarily applicable to businesses offering products (as opposed to services)

Consumers are interested in receiving various versions of the merchandise offered on an on-going basis

Based on the assumption that the products offered will be modified or updated on a continuing basis

It is most effective for providing information-based products which require regular updating

Magazines with commentary or serialized entertainment are common examples



The auction model

The site provides the “virtual space” for an ongoing auction

People register to participate

All types of digital and non-digital products are being sold

The site takes a commission on all sales

The development of trust is essential to the success of this business model

Trust in e-auctions can be managed in different waysauction-genius-course.com/blog/img/herbcartoon.jpg



The sponsorship model

Sponsorship is an ideal way to launch a business

The site and audience are so attractive that advertisers are willing to invest money for public acknowledgement of their support

The sponsor seeks an affiliation with your business in the minds of customers rather than attempting to push its own products

Also, the recipient has less obligation to the sponsor than it would to an advertiser in terms of showcasing the sponsor’s own products or services



The public support model

Public service-oriented organizations should consider adopting this model to fund their operations

The on-line world will generate demand for alternative information, entertainment, and other resources which

best be supported by contributions directly from the public

This model can ensure that less advantaged members of society receive their share of access to on-line resources



There are several generic strategies that firms use to gain competitive advantage

Blocking

The firm protects its product or service “market space”

Can be based on the uniqueness of the offering

This refers to protecting and taking advantage of intellectual property

Patents, copyrights, trade secrets, trademarks, service marks, licensing agreements

It can also be based on control over post-entry pricing

Lowering the price to retaliate against competitors



There are ways to counter blocking

Successful challenges to restrictions on intellectual property

Taking advantage of information asymmetry

Push for legal and regulatory relief

Partner with other competitors (cooptition)

Wait for technologies and customer expectations to change



Running

Based on the assumption that blocking is temporary

Involves continual adjustment and change of the business model over time

Requires paying close attention to competitors

It is a commitment to first-mover advantage

Can involve cannibalization

Introducing new products and services that undercut your older ones still in the marketplace



Partnerships

Involves teaming with another firm in one of several ways

Strategic alliances

Joint ventures

Mergers

Acquisitions

Allows the sharing of resources that neither could get on its own

This can be risky because of threats to intellectual property and trade secrets



Imitability: how easily can the product or service be copied? Complementary assets: what else is needed to exploit it?Afuah and Tucci (2000). p. 73

Difficult to make money

Inventor makes money

Owner of comp assets makes money

Holder of technology and assets or bargaining power makes money

Imit

ab

ility

Complementary assetsFreely available Tightly held and important

Lo

w

H

igh

Run

Block Block

Team

Team



Business model issues

Assumption: The net is causing disruption in many sectors of the economy

Challenge: To act in the face of this disruption (instead of react)

Issues:

Revenue balance Cost of business

Customer loyalty Organizational models

Lockin/switching costs Partnerships

Customer value Investments



Revenue balance

What % of your revenues will you generate from the web by the year 2015?

By 2018? 2021?

This is an indication of the importance of the web as a sales channel in your overall organization

Cost: The more you rely on the web, the more likely it is that you will disrupt traditional distribution and sales channels

Disintermediation

Changes in organizational structure and process



Cost of business

How much can costs be lowered using the web?

Administration, sales, customer support, advertising, accounting, human resources, suppliers

Strategy: Force them to use the web:

Ex: moving customer support to the web anddiscontinuing phone support

Cost: There will be a period of adjustment for employees, suppliers, and customers


Customer loyalty

Building and maintaining relationships with customers?

Assumption: customers are important and the main goals are to draw them in and make them return

Strategy: engage in activities designed to build trust and encourage repeated visits

Ex: 24-7 customer support

Ex: Clear privacy policies

Cost: The expense of finding out about customerswww.ssiusa.com/images/dealer/clc_black.jpg




Customer value

What kinds of digital services can be created for customers, partners, suppliers?

Strategy: Taking advantage of new technologies to provide new ways to interact

Ex: personalized content, order tracking, interactive catalogs, real-time education, customer support, return policies, web conferencing

Cost: There will be new processes and work functions that will be needed to support these activities



Stickiness

How do you get them to stay?

How do you get them to give up information to you?

Lock-in

What do you provide for them that makes it hard for them to leave?

Switching costs

How do you estimate the threshold at which it’s worth it for your customer to go elsewhere?

s643: digital entrepreneurship spring 12 business models for ecommerce i. developing business models...

Documents

business perspective

type of business

types of business models

internet business models

business models eurescom

underpinnings business

successful business

data models