E-Commerce

UNIT 2 E-COMMERCE BUSINESS MODELS Business Models

2.0 INTRODUCTION
We understood in the previous unit on “Basics of e-Commerce”, that how our digital devices like computers, tablet
Indeed, e-commerce is a newer format of conducting businesses that permits consumers to buy products/services ov

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Basics of E-Commerce In the present unit, we would try to understand how e-commerce works with
special reference to its business model and its key elements. We also try to
understand other models that support the design and implementation of e-
commerce. In continuation we would also study what are the various
possibilities of generating revenue by these online shopping stores. All
subsequent models (design models, implementation models and revenue
models) are important constituents of the bigger concept of defining the
business model of e-commerce. In general, Government of India identified
two categories of e-commerce business models one is related to
‘Informational/Communicational Design Strategy’ and the other category is
related to ‘On-line Transactional Design Strategy’.

2.1 WHAT IS A BUSINESS MODEL?

A business model is like a business plan conceived by a company so that the
company has an edge over its competitors and can make profits but it is over
and above a business plan too. It is also about specifying exact strategies and
approaches of initiating and sustaining the proposed business plan.
Its key focus stays on sustaining the proposed business by specifying ways
and means to create on-going value for the desired customers.
Some key questions that need to have answers include:
 Who are going to be the target beneficiaries of the business?
 What is the key unique proposition of the business?
 How will the business idea be implemented?
 How will it generate revenues?
 How will it interact with customers to deliver products/services?

First and foremost, a business plan must clearly delineate who the target
customer is, then highlight the differentiating product or a service that the
identified customer would seek, also called the USP – Unique Selling
Proposition, that would be unique to this business and would give an edge
over its competitors.
After that, a business model should move on to describe all the elements that
are required to demonstrate the feasibility and success of a prospective
business.
Therefore, business plan should ideally include several details including
target customer, description of the goods, details of the services that the
company has to offer, marketing strategy, revenues and expenses, start-up
costs, sources of financing and so on. To address such and related concerns ,
a business model must be a detailed description related to following
components:
i. Core business focus (why are we doing the business, who is our target
customer)
ii. Design priorities (why are we going online – to improve our brand
positioning, to promote the business across various geographies, to
eliminate intermediaries or all)
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 iii. Implementation strategies (how would this business go online, E-Commerce
directly or through existing online aggregators etc.) Business Models

iv. Revenue mechanisms (how the money flows – directly through sales
or advertisements etc.) driving that business.

2.2 KEY ELEMENTS OF A BUSINESS MODEL

To ensure that all these basic questions are adequately addressed, following are some simple steps to create a stro

1. Identify your specific audience: Targeting a wide audience won’t allow

a business to identify the right customers, who truly need and want the
product or service. Instead, when creating a business model, narrow down
the audience (expected buyers) number to two or three and do detailed
study of the buyer personas. Outline each persona’s demographics,
common challenges and the solutions of the company that it will offer.
2. Establish business processes: Before the business can go live, make a
clear understanding of the activities required to make the business model
work. It is important to determine the key business activities to establish a
proper business process. The first step is to identify the core aspects of
the business’s offering.
3. Record key business resources: What does a company need to carry out
during daily processes, find new customers and reach business goals?
Document essential business resources to ensure the business model is
adequately prepared to sustain the needs of the business. Common
example that a business may need includes a website, capital for the
business to start running, warehouses, intellectual property and the
customer lists.
4. Develop a strong, preferably a unique value proposition: For standing
among other competitors a company needs to provide some additional
value proposition to the customers in the form of an innovative service, or
a revolutionary product. Value proposition is about giving the value to
the business and how it stands out from other businesses in the market.
Once the business has got a few value propositions, then it is important to
link each of them to a service or product delivery system to determine
how the business would remain valuable to the customers over time.
5. Determine key business partners: No business can function properly
(let alone reach established goals) without key partners that donate to the
business’s ability to serve customers. While building a business model it
is significant to choose the key partners like for example suppliers,
strategic alliances, or advertising partners.
Keeping these five elements in mind, will lead to the creation of a solid business model capable of fuelling the succ
Once we are clear about what a business model is and how it is created, we shall move on to apply this basic knowl

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Basics of E-Commerce Typically for an e-commerce business, a clearly defined business plan usually
must include following four subtypes of related models:
a. Customer Based Business Model - Model that would help decide who is
the ultimate target beneficiary of the proposed e-commerce initiative.
b. Design Model –Model that would help to decide the priority for
designing the proposed e-commerce website.
c. Implementation Model–Model that would decide how we implement the
proposed e-commerce initiative including how we reach our customers,
how we sale them, how we transact a sale, how the products/ services are
distributed, how we deliver the products/ services.
d. Revenue Model–Model that would help us to generate revenue for the e-
commerce initiative as well as for the organisation/enterprise responsible
for launching the E-Commerce portal.

2.3 E-COMMERCE BUSINESS MODELS

TO UNDERSTAND TARGET
CUSTOMER
Choosing and applying the right e-commerce business model is complicated-
especially if it is a new product / service not been launched by anybody else.
These models vary depending on the target customer (or ‘buyer’), available
resources, and capabilities of both the seller and the customer.
For an easy revision, the general e-commerce business models, based on the
category of the customers are summarised herewith.
1. Business-to-Business (B2B): Business-to-business (B2B) e-commerce
portal is the one where the business is conducted between two business
entities using this portal, such as between a wholesaler and retailer. The
retailer could connect to the customer separately, using another online
store or using a physical store.
As is evident, B2B transactions happen, where one business entity, say
an automobile company purchases its varied accessories from various
suppliers using a dedicated web portal/website/app. For example, Toyota
motors have their own B2B web portal to connect to all its business
partners which is not accessible to the individual buyers.
Drop Box is a service based B2B e-commerce model where all the team
members have access to the work account created in Drop Box to store,
share, and collaborate on files.
2. Business - to - Consumer (B2C): B2C model of e-commerce is
primarily for those business entities (retailers, whole sellers and
manufacturers) who want to sell their products(or services) directly to
their consumers using online stores. For example, Laxme India is a
product based B2C FMCG company that has its online presence too in
India to connect to its customers.
3. Consumer - to –Consumer(C2C) :When individuals want to sell their
own services , or a product ( usually the used / second hand/ pre-owned
products) using Internet then they use C2C e-commerce web sites/
28 portals such as OLX, eBay, Craigslist and so on. These C2C online
 stores often use classified advertisements or may use online bidding / E-Commerce
auction systems to attract the buyer-customers. Business Models

4. Consumer- to - Business (C2B): In the C2B model, individuals

(customers) sell their products or services to a business. Using this
model, a business entity can typically extract values from the customers
by taking their business suggestions or by getting their feedback or
reviews on the existing products.
Apart from gathering feedback or reviews or press releases written by
consumers for consumers, there are dedicated freelancer C2B platforms
like ‘Up work online transaction platform’ and ‘Fiverr’ who ‘crowd
source’ freelancing services from individuals and pass it on to the
businesses who need it, obviously on contract and short-term basis.
Also, C2B concept is also used to monetise the ‘influencing’ quotient of
a popular individual to ‘sell’ or ‘brand’ a business. Influencers with high
social media following, encourages their fans and followers to buy a
particular product/service or to take an action. With present social media
hype, influencer-matching marketplaces like ‘Ifluenz’ are on the rise as
new, innovative forms of C2B. In India, ‘[Link]’, ‘Plixxo’ and
‘Chat box’ are some of the popular influencer marketing platforms.
On the similar lines, there are other possibilities of an e-commerce business
such as Business - to - Government (B2G), Government - to - Business
(G2B), Government - to - Citizen (G2C) and so on.
Once the customer has been identified and a suitable model picked up, we
move on to define the design and implementation models of e-commerce.

2.4 E-COMMERCE DESIGN MODELS

The four models that are associated with the informational/communicational
design are:
a. Brand awareness and image building model
b. Promotion model
c. Info-mediary model
d. Customisation model
a. Brand awareness and image building model: Web sites that are using
this model provide detailed and rational information about the firm and
its offerings. The model reaches motivated and desperate customers with
an information/image-rich communications message. In this type of
model, the entry barriers are low, so, smaller firms can set up this kind of
site as well. The website of Ford ([Link]) and Reebok
([Link]) are examples of brand awareness and image-building
models. As the website of ‘Ford’, not only lists all the models of its
seven famous automotive brands, but also posts about its environmental
policy, cleaner manufacturing, community involvement, and corporate
citizenship report.
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Basics of E-Commerce Similarly, the website of Reebok lets its visitors read about sports and
fitness, hear from Reebok-sponsored athletes, and learn more about
Reebok’s human-rights activities, among other things.
b. Promotion model: This website model is based on lucrative
‘advertisements’, which are attracting a potential customer to a site.
Sometimes, this model tries to provide free digital gifts such as discount
coupons, cash backs, gift cards, photography tools, etc. The website of
‘Kodak’ ([Link]) is an example of the promotion model
because it provides technical help and tutorials for its digital cameras and
offers a library of colourful, high-quality digital images that are made
downloadable.
c. Info-me-diary model: The term ‘Info-me-diary’ is a composite of two
terms – ‘information’ and ‘intermediary’. This website model aggregates
information from multiple electronic commerce retailers (intermediaries)
and provides services of searching and comparison for Internet
customers. This model sometimes offers free Internet access or free
hardware in exchange for detailed information about customer’s surfing
and purchase habits. The collected customer data is valuable and is used
for designing customized products and for target marketing campaigns.
Some firms even work as info-me-diaries by collecting and selling
information to other businesses.
This model also provides consumers with useful information about the
Web sites in the market segment. ‘Just dial’ ([Link]) is an
example of the info-me-diary model, this company provides local search
for different services in India over the phone and online. The user just
needs to register on the website. By tracking the users’ surfing pattern
info-mediary model provides the useful information to the user
d. Customisation model: This model provides customers with content that
is customised to meet their preferences by employing AI/ML algorithms.
By completely customising information needs, an e-commerce website
built on this model becomes highly attractive to its visitors.

2.5 IMPLEMENTING E-COMMERCE MODELS

Once the end customer of e-commerce has been identified, the next important
thing is to understand how e-commerce models are implemented. These e-
commerce implementation strategies constitute a part of the business model
and to know that how activities like inventory management and sourcing of
products are undertaken at the back-end of an e-commerce implementation.
There are many possibilities to this too, such as manufacturing and storing
products by the same business entity or may be finding another business
partner to do the manufacturing, stocking and so on. Based on such
possibilities, there are several-commerce implementation strategies such as
Retail Model, Brokerage Model, Mall Model, Drop Shipping Model,
Warehousing and Whole selling Model, Private Labelling, and White
Labelling Models and so on.
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1. Retail Model: When retailers directly use Internet to sell E-Commerce
products/services using Internet, it is also called ‘e-tailing’ (electronic- Business Models

retailing) and such a retailer is also called an ‘e-tailer’. e-Tailing stores

could either be a complete substitute for brick-and-mortar (the physical)
retail stores. However, some companies choose to maintain both- the
physical (brick and mortar) stores as well as its online marketplace too.
2. Brokerage model: Brokers are mediators; they bring buyers and sellers
together and facilitate transactions between buyers and sellers vary with
the type of e-commerce viz business-to-business (B2B), business-to-
consumer (B2C), or consumer-to-consumer (C2C) markets. A broker
makes its money by charging a fee for each transaction it enables.
3. Mall model: An e-mall hosts many on-line merchants. The mall typically
charges setup, monthly listing, and/or per-transaction fees.
4. Manufacturer model: This model is based on the power of the Web to
allow manufacturers to reach buyers/customers directly and thereby
compress the distribution channel.
5. Drop Shipping Model: Drop shipping is probably the most popular form
of e-commerce implementation strategy where the items are dispatched
straight to customers by the supplier. A simplified life cycle of drop
shipping (Fig 2.1) includes following steps:

An online storefront could be opened by a drop-shipping company, where a catalogue of products and services of
A supplier (or even the retailer or a manufacturer) could collaborate with any of the existing drop shipping compa
Customer places the order on online storefront.
The drop shipping company transacts with the customers through digital payment options such as credit cards and
These order details are passed on to the supplier.
The supplier packs and ships the ordered product directly to the customer.

As is obvious from these lifecycle steps, supplier has the main responsibility in Drop-Shipping. It is the supplier wh
There are also several limitations of this model as well, such as the drop shipping platform must keep track of supp

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Basics of E-Commerce This e-commerce model is best suited for those suppliers, retailers and
manufacturers who have perfect products or services, but do not have
enormous cash to create a separate e-commerce portal. Similarly, it is good
for those business entities who have vision, digital know how and resources
to create an online store but no inclination to manufacture their own products,
or maintain their own warehouses and factories.

Source: [Link]

Fig 2.1: Drop Shipping

6. Wholesaling And Warehousing Models: is one such model, where a

variety of products (and services) are available on the online store.
Obviously, to maintain these huge volumes, investment in massive
physical warehouse spaces is required but the principle of ‘economy of
sales’ assures profits, especially since both retailers and consumers could
approach such an online store. Keeping track of orders received could be
tough in this model, unless well supported by the related software.

7. Private Labelling and White Labelling: There is another possibility of

an e-commerce online store where individuals / designers / cottage
industries could ‘seek’ reputed brand labels for their products. This is
called ‘private labelling’. Such kind of private labelling e-commerce
portal brings together designers - who can’t afford to manufacture
products themselves and ‘manufacturers or ‘well-established’ brands who
want to diversify using innovative designs/ ideas.

[Link] provides this facility for a range of products. For example,

products / formula of a small, herbal cosmetic product manufacturer could be
‘private labelled’ by a reputed brand through [Link].

White labelling is just the reverse of private labelling. In this model, the
product of an existing brand could be re-packaged and labelled and sold by
another business entity.

It is relevant to point out that these are just some of the popular
implementation strategies of e-commerce and that in wake of emerging
32 technology trends and also because of excessive digitilisation popularised
during COVID times, several variations to these basic implementation E-Commerce
strategies have been adopted by the e-commerce business entities. Business Models

2.6 E-COMMERCE REVENUE MODELS

E-commerce not only involves doing business over the internet, it is also
about designing new profitable business models. After we have understood
some of the important implementation strategies for e-commerce businesses,
we would move on to understand possible modes of income generation in e-
commerce implementation. This is best explained by the revenue model
defining the e-commerce implementation.

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 Basics of E-Commerce

Advertising Revenue Model

Sales Affiliate Revenue Model

Revenue Model

e-COMMERCE REVENUE MODELS

Transaction Fee Revenue Model Subscription R venue

odele
M

Fig 2.2: E-commerce revenue models

A revenue model is a part of the business model that essentially explains

different mechanisms of income generation and its sources.

1. Advertising Revenue Model: Revenue in e-commerce businesses could

be primarily generated by hosting advertise ments of other products/
serv ices on online stores; this is the most basic model of revenue
generation referred as Advertising Revenue Model.

This model provides content and services like email, chat, etc mixed with
advertising messages in the form of banner ads. The advertising model
only works when the volume of viewer traffic is large or high. The
banner ads may be the major or sole source of revenue for the
broadcaster.
There could be several variations of this revenue model such as display-
marketing, affiliate-marketing (advertising on many websites), search-
engine-marketing (also called ‘cost per click’ or CPC model), e-mail
marketing and social-media-marketing. Google and Facebook primarily
operate using this revenue model.

2. Affiliate Revenue Model: It is a very popular variation to the

advertising revenue model that is based on pay-for-performance concept.
In this concept the sellers put advertisement of their products as ‘links’
on websites of their partners, also called affiliates. Payments are made to
the sellers when the links are clicked, and orders are placed and in return
the partners/ affiliates get some part of the revenue.

3. Subscription Revenue Model: Another very popular concept of

generating revenue is to offer some basic free services but store has a
34 subscription amount, payable either monthly, or quarterly or annually.
 That means that premium services of the e-commerce portal are available E-Commerce
only to the subscribers (also called members) . Users pay for access to Business Models

the site. High value-added content is essential. Eg Over-The-Top (OTT)

video streaming platforms like Netflix operate using subscription
revenue model.

4. Transaction Fee Revenue Model: There are certain e-commerce sites,

such as OLX, e-bay who charge a transaction fee from its users. This
transaction could be either fixed or could be in terms of percentages of
the volume of transactions undertaken.
5. Sales Revenue Model: Sale of products/ services itself generates
revenues for the sellers (who could be a retailer or wholesaler) who sell
their products online.
There could be several more variations of the aforementioned revenue
models by combining and improving these basic models. Since the e-
commerce world is evolving very rapidly, newer variations of revenue
models are expected such as group-buying, target campaigning, content -
syndication, monetisation of personal sensitive data etc and so on.
Understandably not all could be considered as pleasant variations and it
would need more strict legal enforcements at national and global levels.

2.7 IMPACT OF COVID ON e-COMMERCE

The corona virus pandemic has considerably changed the shopping behaviour
of consumers for two valid reasons- firstly the shopping sprees got reduced
due to lockdowns and secondly the downward spiral of economy curtailed the
expenditures.
However, in this transition, online stores became more popular. Even those
who had not gone online to shop now realised that they could buy essential
commodities from the safe confines of their homes. These FTUs (First Time
Users) on e-commerce sites also suddenly became aware of massive
discounts/ bargain deals available online, which probably would have never
come their notice earlier. As a result, quite a lot of consumers have switched
from shops, supermarkets, and shopping malls to online portals for the
purchase of products, ranging from basic commodities to branded goods,
even when the covid-imposed lockdowns have been lifted.
However, this is just the tip of the ice-berg- COVID and Digitilisation have
more to unfold in e-commerce sector than what we can see now. Only future
would tell.

2.8 LET US SUM UP

A business model is like a business plan conceived by a company so that the
company has an edge over its competitors and can make profits but it is over
and above a business plan too. It is also about specifying exact strategies and
approaches of initiating and sustaining the proposed business plan. Its key
focus stays on sustaining the proposed business by specifying ways and
means to create on-going value for the desired customers.
 There are some simple steps to create a strong business model namely;
Identify your specific audience, Establish business processes, Record key
business resources, Develop a strong, preferably a unique value proposition,
and Determine key business partners. Keeping these five elements in mind,
will lead to the creation of a solid business model capable of fuelling the
success of a new business entity.
Typically for an e-commerce business, a clearly defined business plan usually
must include following four subtypes of related models Customer Based
Business, Design Model, Implementation Model and Revenue Model.
There are four models that are associated with the informational/
communicational design namely; Brand awareness and image building
model, Promotion model, Info-mediary model and Customisation model.
Once the end customer of e-commerce has been identified, the next important
thing is to understand how e-commerce models are implemented. These e-
commerce implementation strategies constitute a part of the business model
and to know that how activities like inventory management and sourcing of
products are undertaken at the back-end of an e-commerce implementation.
36
There are many possibilities to this too, such as manufacturing and storing E-Commerce
products by the same business entity or may be finding another business Business Models

partner to do the manufacturing, stocking and so on. Based on such

possibilities, there are several e-commerce implementation strategies such as
Retail Model, Brokerage Model, Mall Model, Drop Shipping Model,
Warehousing and Whole selling Model, Private Labelling, White Labelling
Models and so on.
A revenue model is a part of the business model that essentially explains
different mechanisms of income generation and its sources. It has various
types namely; Advertising Revenue Model, Affiliate Revenue Model,
Subscription Revenue Model, Transaction Fee Revenue Model and Sales
Revenue Model.

The corona virus pandemic has considerably changed the shopping behaviour
of consumers for two valid reasons- firstly the shopping sprees got reduced
due to lockdowns and secondly the downward spiral of economy curtailed the
expenditures.
However, in this transition, online stores became more popular. Even those
who had not gone online to shop now realised that they could buy essential
commodities from the safe confines of their homes. These FTUs (First Time
Users) on e-commerce sites also suddenly became aware of massive
discounts/ bargain deals available online, which probably would have never
come their notice earlier. As a result, quite a lot of consumers have switched
from shops, supermarkets, and shopping malls to online portals for the
purchase of products, ranging from basic commodities to branded goods,
even when the covid-imposed lockdowns have been lifted.

2.9 KEYWORDS
Business Models: A business model is an idea conceived by a company for making profits. The business model is

Customer Based Business Model: Model that would help decide who is the
ultimate target beneficiary of the proposed e-commerce initiative.
Customisation model: This model provides customers with content that is
customised to meet their preferences by employing AI/ML algorithms.
Design Model: Model that would help to decide the priority for designing the
proposed e-commerce website.
Drop Shipping Model: Drop shipping model is probably the most popular
form of e-commerce implementation strategy where the items are dispatched
straight to customers by the supplier.
E-commerce: E-commerce is a concept that explains and elaborates upon the idea of buying and selling of product

Implementation Model: Model that would decide how we implement the

proposed e-commerce initiative including how we reach our customers, how
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Basics of E-Commerce we sale them, how we transact a sale, how the products/ services are
distributed, how we deliver the products/ services.
Info-me-diary model: This website model aggregates information from
multiple electronic commerce retailers (intermediaries) and provides services
of searching and comparison for Internet customers.
Manufacturer model: This model is based on the power of the Web to allow
manufacturers to reach buyers/customers directly and thereby compress the
distribution channel.
Pandemic: A disease that is prevalent over a whole country or the world.
Promotion model: This website model is based on lucrative
‘advertisements’, which are attracting a potential customer to a site.
Revenue Model: Model that would help us to generate revenue for the e-
commerce initiative.