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Business models for ecommerce

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1 Business models for ecommerce
I. Developing business models • What is a business model? • Developing the ecommerce business model • Benefits to the organization II. Types of business models • How the net is changing business • Business <--> consumer • Transaction based III. Strategies and issues 1

2 I. Developing business models

3 I. Developing business models
What is a business model? A plan for the structure and actions by which your organization will operate within its marketplace A business model is a representation of the activities of a business and: “a unique configuration of elements comprising the organization’s goals, strategies, processes, technologies and structure, conceived to create value for the customers and thus compete successfully in a particular market.”

4 I. Developing business models
A successful business model creates a heuristic logic that connects technical potential with the realization of economic value It unlocks latent value from a technology It lays out a path to take technology to market Technological characteristics and potentials are inputs It converts them into economic outputs through customers and markets It mediates between technology and value creation Chesbrough, H. and Rosenbloon, R.S. (2002). The role of the business model in capturing value from innovation

5 I. Developing business models
Characteristics of a business model Articulates the value proposition - value for customers from product or service Identifies a target market segment Defines the value chain to create and market the product or service Estimates the cost structure, pricing, and profit potential Place the company into the value network of suppliers and customers Clarifies the competitive strategy

6 I. Developing business models
The business model and determinants of performance Afuah and Tucci (2000). Internet Business Models and Strategies. McGraw Hill. p. 4 Business model ~Composition and linkages ~Dynamics Change ~Properties ~Underpinnings Performance Environment ~Competitive ~Macro

7 I. Developing business models
A business model enables the firm to Generate growth opportunities Respond quickly and flexibly to changes in the market Capture the opportunities quickly and profitably It helps in managing knowledge and human processes It is characterized by the interdependence of its parts Each part of the firm is a contributor to value This requires new roles for each of the firm’s parts so that they can work together in new ways to help the company’s resource and asset base grow

8 I. Developing business models
In general terms, three components to consider are: Activity: what a business does Process: how it accomplishes what it does Data models: the information structure of a business A business model answers the following: What type of business is it? How do you plan to get it off the ground? How will you run it? How will you obtain and keep customers? How will you generate revenue and turn a profit?

9 I. Developing business models
It is a plan for developing and using resources to gain competitive advantage How the firm makes money, acquires market share, and grows Who you want to reach and what you want to sell them Components Customer value Scope Price Revenue sources Related activities Capabilities Dynamics How the model evolves as the environment changes

10 I. Developing business models
Environment Competitive environment: everyone whose drive to maximize profit and minimize loss impacts your business Who are your main competitors and what do they do? Who are your customers and suppliers? Macro environment: the larger socio-cultural context How are you affected by local, state, national and international regulation? What government relationships affect your business? Geopolitics? Changes in the natural environment?

11 I. Developing business models
Ecommerce strategies are best when driven by business, not technology, concerns One way is to dissect the buying/selling process into its various elements, from the buying side and the selling side, and with your customers and suppliers Then, think about how you can apply each to the Web Analyze how your customer needs are changing from a business perspective How the web can help you address them

12 I. Developing business models
EURESCOM. (2002). Service Scenarios and Business Models for Mobile Commerce brochure/bmodels.html

13 I. Developing business models
Drafting the plan Who are your customers and how will you reach them? How will you encourage repeat business? What products or services will you offer on your site? How much can you spend setting up the site? What are your revenue goals and what is the time frame for achieving these goals? What features will the site need initially and what are your plans for enhancement and expansion NetQuest. ( now gone). Setting up an online business

14 I. Developing business models
Other questions to consider: Who pays? Consumer, producer, or third parties? What for? Goods, services, expertise, assurances of quality or security To whom? Why? Perceived value, or being locked in List, D. (2006). What is a business model?

15 I. Developing business models
Benefits of an ecommerce business model to the firm Improved planning A business model provides a framework for decision making It is the background for organizational action and strategic planning Coordination All business processes involve the organization of sub tasks and access to shared resources A plan sets parameters for integration of activities and resources towards shared goals

16 I. Developing business models
Provision of value It defines the customer base The plan outlines how the firm will provide value to its customers (consumers or other businesses) Source of competitive advantage The plan outlines the position the firm will take in the marketplace It explains how the firm will maintain this position It outlines results of competitive intelligence gathering It explains how the company will exploit its strengths

17 I. Developing business models
A business model describes the specific way the business expects to make money While a business plan is a lengthy document, a business model should be small enough to stay in the heads of the owner, staff, and investors If a business model is on paper, it should be one page A graphic, if it can be more clearly shown There can be extras (notes and explanations) but the business model itself is a single concept

18 I. Developing business models
This is a graphic depiction of Acer’s business model

19 Business models for ecommerce
I. Developing business models • What is a business model? • Developing the ecommerce business model • Benefits to the organization II. Types of business models • How the net is changing business • Business <--> consumer • Transaction based III. Strategies and issues

20 II. Types of business models
Business models can be broken down into distinct segments “Buy-side” and “sell-side”: refers to payment direction With whom is commerce being conducted (suppliers or customers?) In some cases, business is being transacted with both “Product or service type”: refers to the “stuff” of the transaction What is it? How will it be priced? How will it be advertised? How will it be sold and delivered?

21 II. Types of business models
Business models and the web Fox, C. (2000). E-commerce business models: Business models that have succeeded and business models that have failed - International case studies

22 II. Types of business models
The ebusiness landscape Network users Infrastructure providers Ecommerce: retail, wholesale Content aggregators Market makers Financial services ASPs Backbone ISP/OSP Last mile Suppliers Content creators Software suppliers Hardware suppliers Us

23 II. Types of business models
Why the internet is changing the way we do business Mediating technology It creates interdependencies and new relationships Ubiquity Connectivity rates are increasing, making the world smaller Network externalities: it becomes more valuable as more people use it Metcalf’s law: Value of the net = N 2, where N = # of people online This applies to auctions and online communities

24 II. Types of business models
A new distribution channel Replacement effect --> old customers are moved from offline to online channel Extension effect --> New customers are added to the channel Creative destruction New industries are created, the way existing industries operate is changing, barriers to entry are changing Reduce transaction costs Costs of searching for sellers and buyers, collecting information, negotiating price

25 II. Types of business models
Time moderation It shrinks and expands time Reduces information asymmetry Information control is decentralized Infinite virtual capacity Processing power, storage capacity, and speed continue to increase Reduces transaction costs This refers to costs of searching for sellers and buyers, collecting and analyzing information, logistics etc

26 II. Types of business models
Hierarchy of ebusiness needs (after Maslow) Fox, C. (2000). E-business models.

27 II. Types of business models
Ecommerce business models Merchant Business ---> consumer (retail) Business --> business (wholesale) E-shop: Web marketing of a company or shop Main goal: to sell goods and services Secondary goal: to promote the company Challenge: develop strategies to increase demand, cost-reduction of business processes Revenues from sales, affiliates, and advertising

28 II. Types of business models
E-shops offer direct sales through electronic channels using an electronic catalog or other format Consumers order goods via fill-out forms, 800 numbers, registration, fax, or surface mail Online storefronts cover a wide variety of offerings They combine elements of direct marketing with in- store shopping and can be more efficient than either Customization and relationship marketing A broader definition of product and service categories Some shops have products that can be bought and sold only on the Web

29 II. Types of business models
This model has problems Current access speeds and hardware/software configurations make online shopping frustrating Online shopping is not as immediate as real-world experiences (glossy catalogues or department stores) Security and privacy are major issues Consumer behavior issues are largely unknown We are just learning how to: Market to net shoppers and ensure repeat customers Use promotions and incentives effectively

30 II. Types of business models
Market aggregators (e-mall) A collection of e-shops, under a common umbrella Use a common payment method (shopping cart) Might have a single entry point to individual e-shops Industry (or horizontal) market: when shops belong to a certain market segment Revenues are from membership fee, advertising, and fees on transactions (if payments are processed by the mall provider) Challenge for estores is to distinguish themselves

31 II. Types of business models
3rd party marketplace: an ASP for ecommerce Companies outsource their web marketing and estore operations to a 3rd party It can be an add-on to their other channels It is a user interface to companies’ product catalogues It can be enhanced by special marketing features, branding, payment, logistics, ordering, and secure transactions Revenues can be generated on the basis of one-off membership fee, service fees, referral fees, or % of transaction value

32 II. Types of business models
These sites sell the ability to reach motivated customers with an information- or image-rich advertising Entry are low, so smaller firms can set up sites as well (or even better) than larger firms There are also problems What is the best way to implement such a concept? We are learning about the design and layout of these sites How can managers can evaluate the effectiveness of their sites?

33 II. Types of business models
Manufacturing and sales Bypassing traditional distribution channels and selling directly to consumers Cut out wholesalers and retailers (creating channel conflict) Develop new direct relationships with customer Customization and personalization Standing order customer home pages on the company site Has the potential to drastically cut costs and increase profits for the manufacturer

34 II. Types of business models
Virtual communities: value from members, customers, partners loyalty and repeat visits They add their information to a basic environment provided by the virtual community company The membership fees and advertising are two main sources of revenue Can also use affiliate marketing A virtual community can also be an important add-on to other marketing operations It can be used to build customer loyalty and receive customer feedback

35 II. Types of business models
Market integrator Bringing buyers and sellers in a specific market sector together The company provide the setting for business This is an example of a vertical market The company is a disinterested third party It generates revenue from transaction fees Some charge sellers a listing fee as well It can sell premium services (security, escrow, logistics) Problem is achieving and sustaining critical mass

36 II. Types of business models
Brokerage or market maker Bringing buyers (consumers) and sellers together Revenue through transaction fees and advertising Some will sell premium services Seen in the auction, financial services, and travel sectors These companies add value to data available on the open networks or coming from integrated business operations Examples include investment advice and competitive intelligence Rappa, M. (2006). Business models on the web

37 II. Types of business models
Types of brokers Marketplace exchange (Orbitz) Buy/sell fulfillment (CarsDirect) Demand collection systems (Priceline) Auctions (Ebay) Transaction broker (Paypal) Distributor (Bluefly) Search agent (Simon) Virtual marketplace (Amazon)

38 II. Types of business models
An interesting type of broker provides “trust” Trust services are certification authorities and electronic notaries and other trusted third parties They certify that consumers, merchants, banks, and others are who they say they are Subscription fees combined with one-off service fees as well as software sales and consultancy are the sources of revenue

39 II. Types of business models
One example is the brokerage providing access to content through a searchable database In a fee-based sites, the provider supplies and/or pays for content which the consumer pays to access The model has had limited success, because we are unwilling to pay for content delivered in this manner Currently few sites charge consumers to consume content A recent trend is toward free --> fee, where visitors are able to access abstracted content at no charge, but incur a small fee for the full content

40 II. Types of business models
Advertising This model is familiar to modern consumers Two primary factors The business provides space for the advertiser to place its logo/ad or convey its message to customers The business provides a consumer audience that the advertiser finds attractive and appropriate for the products it is promoting Many sites include this as part of their model Some do it exclusively

41 II. Types of business models
Sponsored content sites sell advertising space to reduce or eliminate fees charged to visitors A recent trend is toward sponsored “entertainment content” and sponsored search agents Merchants or advertisers can also pay a provider for information placement in an organized listing in a search database page These sites provide meaningful exposure for firms that would otherwise be lost in the clutter A problem is the dependency on traffic

42 II. Types of business models
Types of advertising Portal (Yahoo, MSN) Classifieds (Monster, Craigslist) User registration (NYTimes Digital) Query based ad placement (Google) Contextual advertising (Claria) Content targeted advertising (Google) Ultramercials (Salon)

43 II. Types of business models
Infomediary Generates revenue by selling information about visitors To gather this information, they give something away for free Examples include: computers, net connectivity, cash for clicks and page views In exchange, consumers must provide a lot of detailed information about themselves Their net use is typically monitored and they are subjected to lots of advertising Problem: the ethics of this model

44 II. Types of business models
Types of infomediaries Advertising networks (Doubleclick) Audience measurement services (Nielsen/Netratings) Incentive marketing (Coolsavings) Metamediary (Edmunds)

45 II. Types of business models
Value chain service provider Provides a specific function for the value chain Secure electronic payments, credit card processing, or logistics For example, banks have done this offline New approaches are also emerging in production/stock management where the specialized expertise is required to analyze and tune production A fee- or % based scheme is the basis for revenues

46 II. Types of business models
Value chain integrators: Focus on integrating multiple steps of the value chain They will provide several business processes within a single corporate entity Secure transactions, credit card processing, and server log analysis Revenues come from consultancy fees, long term contracts, or pay-as-you-go transaction fees

47 II. Types of business models
Collaboration platforms Provides sets of tools, expertise, and an environment for collaboration between enterprises Can focus on specific functions, such as collaborative design and engineering Involves technologies such as net audio/video conferencing, shared whiteboards, distributed GDSS Revenues are generated by managing the platform and collecting membership and usage fee, charging for expertise A third is selling or licensing the specialist tools (for design, workflow, document management)

48 II. Types of business models
Adelsberger, H. (2000). Learning Technologies: E-Business en/lt/ebusiness.html

49 II. Types of business models
Timmers, P. (1998). Business Models for Electronic Markets 98_21_n.html

50 II. Types of business models
Transaction based business models The merchandise sales model The per use model The timed usage model The subscription model The auction model The sponsorship model The public support model

51 II. Types of business models
The merchandise sales model Organized around the sale of goods or services in exchange for money or other value given at the time of the transaction Examples are “virtual storefronts” and “on-line catalogs” Probably the most common type of on-line commerce because of its ease of use and familiarity to consumers Many similarities to off-line versions

52 II. Types of business models
The per use model Similar to “merchandise sales” except that consumers do not own the goods or services they use Technology has not yet evolved to allow widespread deployment of this model It will become increasingly prevalent on-line when customers can access resources on-line cheaply and easily Purchase of a product will no longer be necessary Video, music, text “on demand”

53 II. Types of business models
The timed usage model Appropriate for service businesses providing customized information or recreational opportunities requiring more than one visit Works well when consumers are interested in frequent or prolonged access and will invest time to customize and explore the service ISPs use it to build on-line communities where people spend long periods of time They also seek repeat users to maximize their revenue Interactive gaming environments or news searching

54 II. Types of business models
The subscription model (borrowed from publishing) Primarily applicable to businesses offering products (as opposed to services) Consumers are interested in receiving various versions of the merchandise offered on an on-going basis Based on the assumption that the products offered will be modified or updated on a continuing basis It is most effective for providing information-based products which require regular updating Magazines with commentary or serialized entertainment are common examples

55 II. Types of business models
The auction model The site provides the “virtual space” for an ongoing auction People register to participate All types of digital and non-digital products are being sold The site takes a commission on all sales The development of trust is essential to the success of this business model Trust in e-auctions can be managed in different ways

56 II. Types of business models
The sponsorship model Sponsorship is an ideal way to launch a business The site and audience are so attractive that advertisers are willing to invest money for public acknowledgement of their support The sponsor seeks an affiliation with your business in the minds of customers rather than attempting to push its own products Also, the recipient has less obligation to the sponsor than it would to an advertiser in terms of showcasing the sponsor’s own products or services

57 II. Types of business models
The public support model Public service-oriented organizations should consider adopting this model to fund their operations The on-line world will generate demand for alternative information, entertainment, and other resources which best be supported by contributions directly from the public This model can ensure that less advantaged members of society receive their share of access to on-line resources

58 Business models for ecommerce
I. Developing business models • What is a business model? • Developing the ecommerce business model • Benefits to the organization II. Types of business models • How the net is changing business • Business <--> consumer • Transaction based III. Strategies and issues

59 III. Strategies and issues
There are several generic strategies that firms use to gain competitive advantage Blocking The firm protects its product or service “market space” Can be based on the uniqueness of the offering This refers to protecting and taking advantage of intellectual property Patents, copyrights, trade secrets, trademarks, service marks, licensing agreements It can also be based on control over post-entry pricing Lowering the price to retaliate against competitors

60 III. Strategies and issues
There are ways to counter blocking Successful challenges to restrictions on intellectual property Taking advantage of information asymmetry Push for legal and regulatory relief Partner with other competitors (cooptition) Wait for technologies and customer expectations to change

61 III. Strategies and issues
Running Based on the assumption that blocking is temporary Involves continual adjustment and change of the business model over time Requires paying close attention to competitors It is a commitment to first-mover advantage Can involve cannibalization Introducing new products and services that undercut your older ones still in the marketplace

62 III. Strategies and issues
Partnerships Involves teaming with another firm in one of several ways Strategic alliances Joint ventures Mergers Acquisitions Allows the sharing of resources that neither could get on its own This can be risky because of threats to intellectual property and trade secrets

63 III. Strategies and issues
Imitability: how easily can the product or service be copied? Complementary assets: what else is needed to exploit it? Afuah and Tucci (2000). p. 73 Difficult to make money Owner of comp assets makes money Run Team Imitability Low High Block Block Team Holder of technology and assets or bargaining power makes money Inventor makes money Freely available Tightly held and important Complementary assets

64 III. Strategies and issues
Business model issues Assumption: The net is causing disruption in many sectors of the economy Challenge: To act in the face of this disruption (instead of react) Issues: Revenue balance Cost of business Customer loyalty Organizational models Lockin/switching costs Partnerships Customer value Investments

65 III. Strategies and issues
Revenue balance What % of your revenues will you generate from the web by the year 2015? By 2018? 2021? This is an indication of the importance of the web as a sales channel in your overall organization Cost: The more you rely on the web, the more likely it is that you will disrupt traditional distribution and sales channels Disintermediation Changes in organizational structure and process

66 III. Strategies and issues
Cost of business How much can costs be lowered using the web? Administration, sales, customer support, advertising, accounting, human resources, suppliers Strategy: Force them to use the web: Ex: moving customer support to the web and discontinuing phone support Cost: There will be a period of adjustment for employees, suppliers, and customers

67 III. Strategies and issues
Customer loyalty Building and maintaining relationships with customers? Assumption: customers are important and the main goals are to draw them in and make them return Strategy: engage in activities designed to build trust and encourage repeated visits Ex: 24-7 customer support Ex: Clear privacy policies Cost: The expense of finding out about customers

68 III. Strategies and issues
Customer value What kinds of digital services can be created for customers, partners, suppliers? Strategy: Taking advantage of new technologies to provide new ways to interact Ex: personalized content, order tracking, interactive catalogs, real-time education, customer support, return policies, web conferencing Cost: There will be new processes and work functions that will be needed to support these activities

69 III. Strategies and issues
Stickiness How do you get them to stay? How do you get them to give up information to you? Lock-in What do you provide for them that makes it hard for them to leave? Switching costs How do you estimate the threshold at which it’s worth it for your customer to go elsewhere?

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