E-Commerce – Digital

Markets, Digital Goods

Dr. Jithesh A
Assistant Professor of Information Systems
Indian Institute of Management Raipur
Outline
• Effect of the Internet on Business Strategy
• E-Commerce: From Product to Platforms
• Value Creation and Capture
• Case: Amazon case

2
Key Questions
• What are the distinctive features of e-commerce, digital markets,
digital goods?
• What are the major e-commerce business and revenue models?
• What are the major pricing strategies in e-commerce platform
business?

3
Scenario
• You’re a new MBA graduate, and you’ve just joined a growing retail
company, Trendy Wear, known for its unique, eco-friendly clothing line.
• The CEO has assigned you a critical task:“We want to expand our sales
online. Can you set up an e-commerce store and get it ready for launch
within the month? We’re looking to attract new customers and increase our
brand’s reach with a smooth online shopping experience.”
• Your Objectives:
• Quickly set up an attractive and functional online store.
• Ensure it’s easy to navigate, secure, and ready to handle customer orders.
• Think strategically about product presentation and pricing strategy.
• What all things will be in your consideration?
What is e-commerce?
• Refers to the buying and selling of goods and services, as well as the
exchange of money and data, over the Internet.
• It involves a range of online business transactions between
individuals, businesses, and governments through digital platforms
and electronic networks.
Types of e-commerce
• Types of E-commerce:
• B2C (Business-to-Consumer): Businesses sell products or services directly to
consumers (e.g., Amazon, Flipkart).
• B2B (Business-to-Business): Companies sell products or services to other
businesses (e.g., Alibaba, wholesale platforms).
• C2C (Consumer-to-Consumer): Consumers sell directly to other consumers
(e.g., eBay, OLX).
• C2B (Consumer-to-Business): Individuals sell products or services to
businesses (e.g., freelance platforms like Upwork).
Growth of E-Commerce
Unique Features of E-Commerce

• Mediating Technology
• Universality
• Exhibits Network Externality
• Distribution Channel
• Time Moderator
• Information Asymmetry Shrinker
• Infinite Virtual Capacity
• Low-Cost Standard
• Transaction Cost Reducer
Internet and Business Strategy

Source: Porter M. “Strategy and the Internet”, Harvard Business Review, March 2001.
E-Commerce: From Product to
Platforms

10
Understanding Platforms
• Platforms connect individuals and organizations for a common
purpose or to share a common resource
• They function at the level of an industry (or ecosystem)
• They exhibit Network Effects
• They bring together individuals and organizations so they can innovate or
interact in ways not otherwise possible, with the potential for nonlinear
increases in utility and value.
• They have different way of making money as they do not directly sell
a product or service
Understanding Platforms
• Not every industry lends itself to a platform strategy
• For a platform strategy to prevail over a product strategy
• There should be opportunities to tap the innovation capabilities of outside
firms to enhance value
• It should be more economical to enable transactions rather than to own
assets and deliver products or services directly
Understanding Platforms
• Engage Multiple Sides of the Market
• Generate Network Effects
• Solve a Chicken-or-egg problem
Understanding Platforms
Engage Multiple sides of the Market
Understanding Platforms
Generate Network Effects

• Value a user experiences increases as more people or organizations

use the same product or service and as more complementary
innovations appear
• They can be weak, positive, or negative
• Offer the potential for a platform business to generate revenue
without directly building products or delivering services themselves.
Understanding Platforms
Generate Network Effects

• Network
• Value of a network increases as more users use that service
• E.g., Mobile phones
• Utility of a mobile phone is limited if the network has only two users
• The utility increases if the network is broadened
• Metcalfe’s Law: The utility (U) of a network is proportional to the square of the number
(n) of its users

U ≈ K*n2
Understanding Platforms
Generate Network Effects
• Mobile Phones
• Search Engines
• Match-making sites
• Credit Card Companies
• Social media
Understanding Platforms
Generate Network Effects
• One-sided network where users are homogeneous
• In stock trade the role of buyers and sellers are inter-changeable
• Telephone users both receive and make calls
• Two-sided networks where users are different but play consistently the same role
in transactions
• Credit Card merchants and Card Holders are two distinct set of users
• Airlines and Travel Agents
• Video Games developers and players
• Three-sided networks
• You-Tube: Content consumers, Content providers and Advertisers
Understanding Platforms
Generate Network Effects
• Evident when a network’s value to a user depends on the number of other users
with whom that user can interact
• In a two-sided network, when members of one group have a preference
regarding the number of users in the other group, the network exhibits cross-side
network effects.
• E.g., Uber, Amazon
• When a group’s members have preferences over the number of users in one’s
own group, the network exhibits same-side network effects.
• E.g., Social media paltforms
Case 1
• In the early 2000s, MySpace was the largest social network, boasting
millions of users and widespread popularity. However, within a few
years, Facebook overtook MySpace and became the dominant social
platform. Questions to Consider:
• Why did Facebook win while MySpace faded away?
• Was it a better product, better management, or just luck?
• What challenges do platforms face in attracting users?
Understanding Platforms
Solve a Chicken-or-Egg problem
• To succeed, platforms need to attract users and providers, but each group
depends on the presence of the other.
• The "chicken-or-egg" problem refers to the dilemma of attracting sellers
when there are not many buyers and vice versa.
• Acute for two-sided market makers.
• To solve this problem, eCommerce platforms often have to undertake
strategies like:
• Seeding the Marketplace: Initially attracting sellers by offering incentives or
assistance to list their products or services on the platform.
• Promotional Offers: Attracting buyers through promotional offers, advertising, and
marketing campaigns to increase the platform's visibility and attract an initial
customer base.
• Leveraging Partnerships: Collaborating with well-known brands or influencers to
promote the platform can also help in attracting both buyers and sellers initially
Understanding Platforms
Solve a Chicken-or-Egg problem
• Pull Strategy
• Attract users through value or incentives.
• Lower barriers to initial adoption
• Freemium
• Advertising-based business model
• Incentives (E.g., PayPal)
• Facilitate Strategy
• Provide useful tools even if no one else joins.
• For example, Instagram provides a way to store your photos even if you don't share
them
• Match Strategy
• Involves analyzing user needs and preferences to deliver the most relevant.
• Airbnb uses data on user preferences, location, and price to make tailored matches
that are likely to result in a booking.
Product Vs Platforms
Product (Pipelines) Platforms
Resources Gain advantage by controlling scarce and Emphasis is on building a community and
valuable – ideally inimitable – resources leveraging the resources contributed by its
members, such as rooms in the case of Airbnb,
cars in the case of Uber, or information and ideas
in the case of social platforms. These community
resources are inherently difficult to replicate
Value Creation By optimizing the entire chain of product By facilitating interactions between external
activities producers and consumers
Value Capture Maximize lifetime value of individual Maximize total value of an expanding ecosystem in
customers a circular, iterative, feedback-driven process
Gaining Market Power Gain by supply-side economies of scale that Through demand sided economies of scale
reduce their average cost of doing business (network effects). It is a scale business
Focus Growing Sales Enhancing interactions
Metrics Inventory Turnover: how efficiently a company Interaction failures, Engagements, Match Quality,
manages its inventory levels. Negative Network Effects
Value Creation and Capture

25
Value Creation
• Building Scale
• Matchmaking
• Reducing Friction in transactions
• Complementary Services
• Complementary Technology Sales
• Advertising
Value Creation
• Build Scale – Platforms build scale in one of the two ways
• They increase their customer willingness to pay for the platform itself, such as
by adding new features and encouraging third parties to create
complementary products and services that enhance the value of the
platform
• Examples
• Sony collected a license fee on every game sold for PlayStation
• Google gave away Android for free to make money on mobile search
Value Creation
• Matchmakers
• Value comes from increasing the size of the pool and then increasing the
likelihood of a better match
• Extent to which members are prepared to pay for being matched with
another side varies from market to market
• This different explains variations in different business models
• Airbnb charges room renters and room providers but not room seekers or listers
• Tinder started as a free platform, but later became a freemium model
Value Creation
• Reducing Friction in Transactions
• Example
• Enabling secure exchange of goods or money
• Authentication (verifying user identities)
• Cryptocurrencies – Bitcoin, currency exchanges and virtual wallets
Value Creation
• Providing complementary services
• Example
• Taobao charged sellers for obtaining a better ranking in its internal search engine
• Fulfillment by Amazon (using fulfillment centers)
Value Creation
• Complementary Technology Sales
• Platforms sell technology or other goods and services apart from transaction
fees
• Paytm
• Payment gateway solutions
Value Creation
• Advertising
• Most widely used business model for transaction platforms
• Example
• TripAdvisor has user reviews of travel services and places
• Earns through advertising
• Advertising should not be seen as an unwelcome ‘tax’ on users that unilaterally degrade
their experience
• Advertising must add value to both sides, even if not to the same extent. Then
only it can play a positive role in the business model
Value Capture - Six Big Pricing Models
• Subscription Pricing
• On-Demand Pricing
• Razor-blade and reverse razor-blade pricing models
• Freemium pricing
• Auction pricing
• Free pricing
• Cheaper than negative pricing
Subscription Pricing
• Platform utilize economies of scale and scope in providing access to
products and services (aggregation economies in the supply side)
• Demand side users value variety and/or flexibility in their
consumption of products and services
• Platforms encourage higher usage and frequent / continued
engagement with the platform
• Platforms increases multi-homing costs for the demand side users
• Platforms experience zero or minimal marginal costs of transactions
On-Demand Pricing
• Platforms invest in having the supply side ready and scalable to match
the volatility in demand
• Demand side users value supply being available when and where they
need
• Platforms use pricing as a leverage to scale up and scale down
demand to match demand fluctuations
• Platforms force supply side users to make specific investments,
locking them to the platform and increasing their switching costs
• Platforms incur non-trivial variable costs for every transaction
Razor-blade and Reverse Razor-Blade Pricing
• Two pricing strategies commonly used by businesses, particularly
platforms, to attract and retain customers.
• Razor-Blade Pricing Strategy
• This is a pricing strategy where a company sells the initial product at a low
price (or even at a loss) and then makes up for the low margins by selling
complementary products or consumables at a higher margin.
• This strategy is named after the classic example where razor handles are sold
cheaply, but the blades, which are a recurrent purchase, are sold at higher
margins.
Razor-blade and Reverse Razor-Blade Pricing
• Reverse Razor-Blade Pricing Strategy
• This strategy is essentially the opposite of the razor-blade strategy.
• In this case, the initial product or service is sold at a higher price, and the
complementary products or consumables are sold at a lower price.
• This strategy can also be used to lock in users, as it encourages them to stick
with the platform to enjoy the benefits of lower costs on consumables or
complementary products/services.
Razor-blade and Reverse Razor-Blade Pricing
• Reverse Razor-Blade Pricing
• High Fixed or Variable Costs:
• Users are willing to incur either high fixed costs (like an expensive initial purchase) or
high variable costs (like ongoing expenses for consumables) in exchange for the
convenience and compatibility offered by the platform.
• Convenience and Compatibility:
• By committing to a platform, users benefit from the convenience of integrated services
and products and the compatibility between the initial product and the complementary
offerings, which can create a seamless user experience.
Freemium Pricing
• There are different segments of demand-side users with staggered
value expectations
• The platform can efficiently segment the market and engage in price
discrimination
• There is a high change that the free users will experience the
platforms’ products and services (as a trial) and a few of them will
move to the premium segment seeking differentiated services
Auction Pricing
• There is high information asymmetry among the users and between
the user and the platform
• Different users value the product / service offered uniquely, and the
primary role of the platform is to help discover the right price
Free Pricing
• Full subsidies to users where the marginal cost of acquisition and
engagement are negligible
• Typically, platforms monetize another side of the platform
Cheaper than Free Pricing
• Negative Prices?
• Incentivize users to consume products and services
• In return for data
• In return for product development / improvement
• Google’s Android – Open source and licensed versions
Factors for e-commerce success
• Trust (Tam et al., 2019)
• Competence (ability to keep promises)
• Integrity (level at which sellers acts consistently, reliably and honestly)
• Benevolence (capacity of a seller to act in customer’s best interest)
• Wang’s E-commerce Success Model
• TAM Model (Davis, 1989)
• Country-specific dynamics
Technology Acceptance Model (TAM)
(Venkatesh & Davis, 1996)
Wang's (2008) E-Commerce Systems Success
Model
Case: Amazon