C a s eR eS vt ui ed wy 101

Needleman and Angus Loten, Wall

a built-in pool for upgrades, it’s tough to determine how many users will be willing to
Street Journal, August 22, 2012;
pay and willing to stay. “Pandora IPO Prices at $16;
A freemium strategy makes sense for companies such as Pandora, where there is a Valuation $2.6 Billion,” by Eric
Savitz, [Link], June 14,
very low marginal cost, approaching zero, to support free users. It also makes sense for 2011; “Going Freemium: One Year
a company where the value to its potential customers depends on a large network, like Later,” by Ben Chestnut,
[Link], September
LinkedIn. Freemium also works when a business can be supported by the percentage 27, 2010; “Case Studies in
of customers who are willing to pay, like Pandora, especially when there are other Freemium: Pandora, Dropbox,
Evernote, Automattic and
revenues like advertising fees that can make up for shortfalls in subscriber revenues. MailChimp,” by Liz Gannes,
The freemium music streaming services don’t have to worry about their business [Link], March 26, 2010;
Free: The Future of a Radical Price,
model being sound strategy, but they do have to worry about industry goliaths like
by Chris Anderson, Hyperion, 2009.
Apple and the record labels taking a stand against them.

Case Study Questions

1. Compare Pandora’s original business model with its current business model.
What’s the difference between “free” and “freemium” revenue models?
2. What is the customer value proposition that Pandora offers?
3. Why did MailChimp ultimately succeed with a freemium model but Baremetrics
did not?
4. What’s the most important consideration when considering a freemium revenue
model?

2.6 REVIEW

KEY CONCEPTS

Identify the key components of e-commerce business models.

A successful business model effectively addresses eight key elements:
• Value proposition—how a company’s product or service fulfills the needs of customers. Typical e-com-
merce value propositions include personalization, customization, convenience, and reduction of product
search and price delivery costs.
• Revenue model—how the company plans to make money from its operations. Major e-commerce revenue
models include the advertising model, subscription model, transaction fee model, sales model, and affili-
ate model.
• Market opportunity—the revenue potential within a company’s intended marketspace.
• Competitive environment—the direct and indirect competitors doing business in the same marketspace,
including how many there are and how profitable they are.
• Competitive advantage—the factors that differentiate the business from its competition, enabling it to pro-
vide a superior product at a lower cost.
102 CHAPTER 2 E-commerce Business Models and Concepts

• Market strategy—the plan a company develops that outlines how it will enter a market and attract custom-
ers.
• Organizational development—the process of defining all the functions within a business and the skills nec-
essary to perform each job, as well as the process of recruiting and hiring strong employees.
• Management team—the group of individuals retained to guide the company’s growth and expansion.

Describe the major B2C business models.

There are a number of different business models being used in the B2C e-commerce arena. The major mod-
els include the following:
• Portal—offers powerful search tools plus an integrated package of content and services; typically utilizes a
combined subscription/advertising revenue/transaction fee model; may be general or specialized (vor-
tal).
• E-tailer—online version of traditional retailer; includes virtual merchants (online retail store only), bricks-
and-clicks e-tailers (online distribution channel for a company that also has physical stores), catalog mer-
chants (online version of direct mail catalog), and manufacturers selling directly to the consumer.
• Content provider—information and entertainment companies that provide digital content; typically utilizes
an advertising, subscription, or affiliate referral fee revenue model.
• Transaction broker—processes online sales transactions; typically utilizes a transaction fee revenue model.
• Market creator—uses Internet technology to create markets that bring buyers and sellers together; typi-
cally utilizes a transaction fee revenue model.
• Service provider—offers services online.
• Community provider—provides an online community of like-minded individuals for networking and infor-
mation sharing; revenue is generated by advertising, referral fees, and subscriptions.

Describe the major B2B business models.

The major business models used to date in the B2B arena include:
• E-distributor—supplies products directly to individual businesses.
• E-procurement—single firms create digital markets for thousands of sellers and buyers.
• Exchange—independently owned digital marketplace for direct inputs, usually for a vertical industry
group.
• Industry consortium—industry-owned vertical digital market.
• Private industrial network—industry-owned private industrial network that coordinates supply chains with
a limited set of partners.

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

E-commerce has had a major impact on the business environment in the last decade, and have affected:
• Industry structure—the nature of players in an industry and their relative bargaining power by changing
the basis of competition among rivals, the barriers to entry, the threat of new substitute products, the
strength of suppliers, and the bargaining power of buyers.
• Industry value chains—the set of activities performed in an industry by suppliers, manufacturers, trans-
porters, distributors, and retailers that transforms raw inputs into final products and services by reducing
the cost of information and other transaction costs.
• Firm value chains—the set of activities performed within an individual firm to create final products from
raw inputs by increasing operational efficiency.
• Business strategy—a set of plans for achieving superior long-term returns on the capital invested in a firm
by offering unique ways to differentiate products, obtain cost advantages, compete globally, or compete
in a narrow market or product segment.
 Review 103

QUESTIONS

1. What is a business model? How does it differ from a business plan?

2. What are the eight key components of an effective business model?
3. What are Amazon’s primary customer value propositions?
4. Describe the five primary revenue models used by e-commerce firms.
5. Why is targeting a market niche generally smarter for a community provider than targeting a large
market segment?
6. Would you say that Amazon and eBay are direct or indirect competitors? (You may have to visit the
websites or apps to answer.)
7. What are some of the specific ways that a company can obtain a competitive advantage?
8. Besides advertising and product sampling, what are some other market strategies a company might
pursue?
9. How do venture capitalists differ from angel investors?
10. Why is it difficult to categorize e-commerce business models?
11. Besides the examples given in the chapter, what are some other examples of vertical and horizontal
portals in existence today?
12. What are the major differences between virtual storefronts, such as Bluefly, and bricks-and-clicks opera-
tions, such as Walmart? What are the advantages and disadvantages of each?
13. Besides news and articles, what other forms of information or content do content providers offer?
14. What is a reverse auction? What company is an example of this type of business?
15. What are the key success factors for exchanges? How are they different from portals?
16. How have the unique features of e-commerce technology changed industry structure in the travel
business?
17. Who are the major players in an industry value chain and how are they impacted by e-commerce
technology?
18. What are five generic business strategies for achieving a profitable business?
19. What is the difference between a market opportunity and a marketspace?
20. What is crowdfunding and how does it help e-commerce companies raise capital?

PROJECTS

1. Select an e-commerce company. Visit its website or mobile app and describe its business model based
on the information you find there. Identify its customer value proposition, its revenue model, the
marketspace it operates in, who its main competitors are, any comparative advantages you believe the
company possesses, and what its market strategy appears to be. Also try to locate information about the
company’s management team and organizational structure. (Check for a page labeled “the Company,”
“About Us,” or something similar.)

2. Examine the experience of shopping online versus shopping in a traditional environment. Imagine that
you have decided to purchase a digital camera (or any other item of your choosing). First, shop for the
camera in a traditional manner. Describe how you would do so (for example, how you would gather the
necessary information you would need to choose a particular item, what stores you would visit, how
long it would take, prices, etc.). Next, shop for the item on the Web or via a mobile app. Compare and
contrast your experiences. What were the advantages and disadvantages of each? Which did you prefer
and why?

3. During the early days of e-commerce, first-mover advantage was touted as one way to success. On the
other hand, some suggest that being a market follower can yield rewards as well. Which approach has