Chapter 2
E-commerce Business Models
and Concepts
Tweet Tweet: What’s Your Business Model?
Class Discussion
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?
Lecturer Bett. Slide 2-2
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
Lecturer Bett. Slide 2-3
8 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
Lecturer Bett. Slide 2-4
1. Value Proposition
“Why should the customer buy from
you?”
Successful e-commerce value
propositions:
Personalization/customization
Reduction of product search, price discovery
costs
Facilitation of transactions by managing
product delivery
Lecturer Bett. Slide 2-5
2. Revenue Model
“How will the firm earn revenue,
generate profits, and produce a superior
return on invested capital?”
Major types:
Advertising revenue model
Subscription revenue model
Transaction fee revenue model
Sales revenue model
Affiliate revenue model
Lecturer Bett. Slide 2-6
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
Lecturer Bett. Slide 2-7
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
Lecturer Bett. Slide 2-8
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
Lecturer Bett. Slide 2-9
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
Lecturer Bett. Slide 2-10
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
Lecturer Bett. Slide 2-11
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
Lecturer Bett. Slide 2-12
Insight on Business: Class Discussion
Is Groupon’s Business Model Sustainable?
What is the value of Groupon to merchants?
What types of merchants benefit the most?
What is the value of Groupon to investors?
Is Groupon overvalued ?
What obstacles does Groupon face?
Does Google Offers present a threat to
Groupon’s business model?
Lecturer Bett. Slide 2-13
Categorizing E-commerce Business Models
No one correct way
We categorize 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)
Lecturer Bett. Slide 2-14
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
Lecturer Bett. Slide 2-15
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
Lecturer Bett. Slide 2-16
B2C Models: Content Provider
Digital content on the Web
News, music, video
Revenue models:
Subscription; pay per download (micropayment);
advertising; affiliate referral fees
Variations:
Content owners
Syndication
Web aggregators
Lecturer Bett. Slide 2-17
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
Lecturer Bett. Slide 2-18
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?
Lecturer Bett. Slide 2-19
B2C Models: Market Creator
Create digital environment where
buyers and sellers can meet and
transact
Examples:
Priceline
eBay
Revenue model: Transaction fees
Lecturer Bett. Slide 2-20
B2C Models: Service Provider
Online services
e.g., Google—Google Maps, Gmail, 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
Lecturer Bett. Slide 2-21
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
Lecturer Bett. Slide 2-22
B2B Business Models
Net marketplaces
E-distributor
E-procurement
Exchange
Industry consortium
Private industrial network
Lecturer Bett. Slide 2-23
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
e.g., [Link]
Lecturer Bett. Slide 2-24
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
e.g., Ariba
Lecturer Bett. Slide 2-25
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
Lecturer Bett. Slide 2-26
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
e.g., Exostar
Lecturer Bett. Slide 2-27
Private Industrial Networks
Digital network
Used to coordinate communication
among firms engaged in business
together
Typically evolve out of company’s
internal enterprise system
e.g., Walmart’s network for suppliers
Lecturer Bett. Slide 2-28
Other E-commerce Business Models
Consumer-to-consumer (C2C)
eBay, Craigslist
Peer-to-peer (P2P)
The Pirate Bay, Cloudmark
M-commerce:
Extends existing e-commerce business models
to service mobile workforce, consumers
Unique features include mobility, cameras to
scan product codes, GPS
Lecturer Bett. Slide 2-29
Insight on Society: Class Discussion
Foursquare: Check In/Check Out
Why should you care if companies track your
location via cell phone?
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?
Lecturer Bett. Slide 2-30
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.
Lecturer Bett. Slide 2-31
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
Lecturer Bett. Slide 2-32
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
Lecturer Bett. Slide 2-33
E-commerce and Industry Value
Figure 2.4, Page 100 Chains
Lecturer Bett. Slide 2-34
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
Lecturer Bett. Slide 2-35
E-commerce and Firm Value Chains
Figure 2.5, Page 101
Lecturer Bett. Slide 2-36
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
Lecturer Bett. Slide 2-37
Internet-enabled Value Web
Figure 2.6, Page 102
Lecturer Bett. Slide 2-38
Business Strategy
Plan for achieving superior long-term
returns on the capital invested in a
business firm
Four generic strategies
Differentiation
Cost
Scope
Focus
Lecturer Bett. Slide 2-39