Chapter-2

E-COMMERCE BUSINESS MODELS

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 E-commerce Business Models
A business model is a set of planned activities (sometimes referred to as
business processes) designed to result in a profit in a marketplace.
A business model is not always the same as a business strategy although in
some cases they are very close in so far as the business model explicitly takes
into account the competitive environment.
The business model is at the center of the business plan.
A business plan is a document that describes a firm’s business model.
 A business plan always takes into account the competitive environment.
An e-commerce business model aims to use and leverage the unique qualities
of the Internet and the World Wide Web (WWW).
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Eight Key Ingredients of E-Commerce Business
Models
If you hope to develop a successful business model in any arena, not just e-
commerce, you must make sure that the model effectively addresses the following
eight elements.
1. Value proposition
2. Revenue model
3. Market opportunity
4. Competitive environment
5. Competitive advantage
6. Market strategy
7. Organizational development
8. Management team
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 1. Value Proposition
Defines how a company’s product or service fulfils the need of customers.
“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
For instance, before Amazon existed, most customers personally traveled to book retailers
to place an order. In some cases, the desired book might not be available and the customer
would have to wait several days or weeks, and then return to the bookstore to pick it up.
Amazon makes it possible for book lovers to shop for virtually any book in print from the
comfort of their home or office, 24 hours a day, and to know immediately whether a book is
in stock. Amazon’s primary value propositions are unparalleled selection and convenience.
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 2. Revenue Model
Define “How will the firm earn revenue, generate profits, and produce a
superior return on invested capital?” We use the terms revenue model and
financial model interchangeably.
Major types:
oAdvertising revenue models: [Link]
o Subscription revenue models: [Link]
o Transaction fee revenue model: EBay, E-Trade, Hotwire
oSales revenue model: Amazon, LLbean, [Link]
o Affiliate revenue model: E-pinions, Banner Exchange

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 3. Market Opportunity
Refers to a company’s intended market space and the overall potential financial
opportunities available to the firm in that market space.
“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. The realistic market
opportunity is defined by the revenue potential in each of the market niches
where you hope to compete.

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 4. Competitive Environment
Refers to the other competitors selling similar products and operating in the same market space.
“Who else occupies your intended marketspace?”
◦ Other companies selling similar products in the same marketspace
◦ Includes both direct and indirect competitors
Influenced by:
oHow many competitors are active?
o How large operations are?
o The market share for each competitor?
o How profitable these firms are?
o How they price their product?

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 5. Competitive Advantage
Achieved when a firm can produce a superior product and/or bring a product to
market, at a lower price than competitors.
“What special advantages does your firm bring to the marketspace?”
◦ Is your product superior to or cheaper to produce than your competitors’?
Types of competitive advantage:
o First mover advantage – results from a firm being first into a marketplace.
oUnfair competitive advantage – occurs when one firm develops an advantage
based on a factor that other firms cannot purchase.

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 6. Market Strategy
Plan that details how a company intends to enter a new market and attract 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

For instance, Twitter, YouTube, and PhotoBucket have a social network marketing
strategy which encourages users to post their content on the sites for free, build
personal profile pages, contact their friends, and build a community. In these cases,
the customer is the marketing staff!

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 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

For instance, at the outset, a business may have one marketing manager. But
after two or three years of steady growth, that one marketing position may be
broken down into seven separate jobs done by seven individuals.

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 8. Management Team
Employees of the company responsible for making the business model work
“What kind of backgrounds should the company’s leaders have?”
 A strong management team may not be able to salvage a weak business model,
but the team should be able to change the model and redefine the business as it
becomes necessary.
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
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 Major Business-to-Customer (B2C) Model
Business-to-consumer (B2C) e-commerce, in which online businesses seek to
reach individual consumers, is the most well-known and familiar type of e-
commerce.
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)

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There are typically five types of online B2C business models that most companies use
online to target consumers.
1. Direct sellers.
•This is the most common model in which people buy goods from online retailers.
•These may include manufacturers or small businesses or simply online versions of
department stores that sell products from different manufacturers.
2. Online intermediaries.
These are liaisons or go-betweens who don't actually own products or services that put
buyers and sellers together.
Sites like Expedia, trivago, and Etsy fall into this category.

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3. Advertising-based B2C.
•This model uses free content to get visitors to a website.
•Those visitors, in turn, come across digital or online ads.
•Large volumes of web traffic are used to sell advertising, which sells goods and services.
•One example is media sites like HuffPost, a high-traffic site that mixes advertising with its native
content.
4. Community-based.
•Sites like Meta (formerly Facebook), which build online communities based on shared interests,
help marketers and advertisers promote their products directly to consumers. Websites typically
target ads based on users' demographics and geographical location.
5. Fee-based.
•Direct-to-consumer sites like Netflix charge a fee so consumers can access their content. The site
may also offer free but limited content while charging for most of it.
•The New York Times and other large newspapers often use a fee-based B2C business model.
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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

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 B2C Models: E-tailer
Online version of traditional retailer
Variations:Virtual merchant,Bricks-and-clicks,Catalog merchant,Manufacturer-
direct

A bricks and clicks, also sometimes called a click and mortar, business model describes a company with both a physical store
location and an online website where consumers can purchase their products. These websites are also sometimes referred to as
ecommerce websites.

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B2C Models: Content Provider
Digital content on the Web: News, music, video
Variations:Content owners,Syndication,Web aggregators

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 B2C Models: Transaction Broker
Process online transactions for consumers:Primary value proposition—saving
time and money
Industries using this model:Financial services,Travel services,Job placement
services

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 B2C Models: Market Creator
Create digital environment where buyers and sellers can meet and transact

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 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

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 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

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 B2B Business Models
Website following B2B business model sells its product to an intermediate
buyer who then sells the product to the final customer.
1. Net marketplaces
E-distributor
E-procurement
Exchange
Industry consortium

[Link] industrial network

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B2B Models: Net Marketplace

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B2B Models:Private Industrial network

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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 (Customer relationship management) software
 Databases
 Hosting services, and so on

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 How E-commerce Changes Business
It is very important to understand how Internet and Web have changed business environment, including
industry structures, business strategies, and industry and firm operations.
E-commerce changes the nature of players in an industry and their relative bargaining power by changing:
the basis of competition among competitors
 the barriers to entry
the threat of new substitute products
the strength of suppliers
the bargaining power of buyers

Set of activities performed in an industry 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 for manufacturers, distributors, customers
Leads to greater operational efficiencies, lowering prices, adding value for customers.

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