1. E-commerce Business Models and Concepts
IT 361: E-Commerce Systems
Chapter 2
E-commerce Business Models and Concepts
Readings: Chapter 2 - E-commerce Business Models and Concepts

2. Tweet Tweet: Twitter’s 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?

3. E-commerce Business Models—Definitions
Business model: set of planned activities designed to result in a profit in a marketplace
Business plan: document that describes a firm’s business model
E-commerce business model: aims to use and leverage the unique qualities of Internet and Web

4. Key Ingredients of a Business Model

5. “Buy this product, and you will get this specific benefit”
Value Proposition
Defines how a company’s product or service fulfills the needs of customers
“Buy this product, and you will get this specific benefit”
Questions to ask:
Why will customers choose to do business with your firm instead of another?
What will your firm provide that others do not or cannot?
Examples of successful value propositions:
Personalization/customization
Reduction of product search costs
Reduction of price discover costs
Facilitation of transactions by managing product delivery

6. Example of Value propositions
"You get fresh, hot pizza delivered to your door in 30 minutes or less -- or it's free.“
“You package absolutely, positively has to get there overnight”
“The milk chocolate melts in your mouth, not in your hand”
“It helps building strong bones 12 ways”

7. Approach to creating a compelling customer value proposition
Know your targeted customers and both their obvious and less apparent needs and desires.
Talk to current customers and understand the product's value from their perspective.
Know the competition. What product performance does our offering provide that competition does not. Review existing competitive value propositions to develop an understanding of their relative strengths. Do they send a stronger message to potential customers than the proposition you are considering?
Research classic customer value propositions to learn from the success and failure of other marketplace offerings.
Brainstorm with both others in the company and potential customers to develop a value proposition that states your product benefits clearly and accurately and brings sustaining brand recognition to your product.
Reference: Manzi, A. M. (2010). How to Write a Strong Value Proposition. Retrieved 4 22, 2010, from Helium:

8. Revenue Model
Describes how the firm will 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

9. Market Opportunity
Refers to a company’s intended marketspace and the overall potential financial opportunities available to the firm in that marketspace
Marketspace: the area of actual or potential commercial value in which a company intends to operate
Realistic market opportunity is defined by revenue potential in each of market niches in which company hopes to compete

10. Competitive Environment
Refers to the other companies selling similar products and operating in the same marketspace
In addition; presence of substitute, potential of new entrants, power of customer, power of supplier (Firm’s environment).
Influenced by:
how many competitors are active
how large their operations are
what is the market share for each competitor
how profitable these firms are
how they price their products
Includes both direct competitors and indirect competitors

11. Competitive Advantage
Achieved when a firm can produce a superior product and/or bring product to market at a lower price than most, or all, of competitors
Firms achieve competitive advantage when they are able to obtain differential access to the factors of production that are denied to competitors
(ex. Terms from suppliers, more experience & knowledge, loyal employee, patent, network, ..)
Types of competitive advantage include:
First mover advantage—results from a firm being first into a marketplace
Unfair competitive advantage—occurs when one firm develops an advantage based on a factor that other firms cannot purchase

12. Competitive Advantage
Perfect market: A market in which there are no competitive advantage o asymmetries because all firms have equal access to all factors of production
Leverage a competitive advantage: is when a company uses its competitive advantage to achieve more advantage in surrounding market. (brand leverage).

13. Methods for creating a sustainable competitive advantage
1. Cost leadership - Cost advantage occurs when a firm delivers the same services as its competitors but at a lower cost; 2. Differentiation - Differentiation advantage occurs when a firm delivers greater services for the same price of its competitors. 3. Focus (economics) - A focused approach requires the firm to concentrate on a narrow market niche, hoping to achieve a local rather than industry wide competitive advantage.

14. Market Strategy
A plan that details how a company intends to enter a new market and attract customers
Best business concepts will fail if not properly marketed to potential customers

15. Organizational Development
Describes how the company will organize the work that needs to be accomplished (implement the business plan)
Work is typically divided into functional departments
Move from generalists to specialists as the company grows
e.g. ebay

17. Management Team
Employees of the company responsible for making the business model work
Strong management team gives instant credibility to outside investors, market-specific knowledge, and experience in implementation.
A strong management team may not be able to salvage a weak business model, but should be able to change the model and redefine the business as it becomes necessary

18. How to Identify Management Team?
What kind of experience do you need to manage your startup business?
What technical background is desired?
What kind of supervisory experience?
How many years of experience?
What job functions to be fulfilled?
Any contacts and experience in raising finance?

19. Raising Capital
Seed Fund
Incubator
Angel investors
Capital investors
Venture Capital
Crowdfunding

20. Insight on Business: Crowdfunding Takes Off Class Discussion
What types of projects and companies might be able to most successfully use crowdfunding?
Are there any negative aspects to crowdfunding?
What obstacles are presented in the use of crowdfunding as a method to fund start-ups?

21. Categorizing E-commerce Business Models: Some Difficulties
No one correct way
We categorize business models according to e-commerce sector (B2C, B2B, C2C)
Type of e-commerce technology used can also affect classification of a business model
Some companies use multiple business models

22. B2C Business Models B2B Business Models Portal E-distributor E-tailer
Content Provider
Transaction Broker
Market Creator
Service Provider
Community Provider
B2B Business Models
E-distributor
E-procurement
Exchanges
Industry Consortia
Private Industrial Networks

23. B2C Business Models: Portal
Offers powerful search tools plus an integrated package of content and services
Typically utilizes a combines subscription/advertising revenues/transaction fee model
May be general or specialized (vortal)

24. B2C Business Models: E-tailer
Online version of traditional retailer
Types include:
Virtual merchants
Bricks-and-cricks
Catalog merchants
Manufacturer-direct

25. B2C Business Models: Content Provider
Information and entertainment companies that provide digital content over the Web
Typically utilizes a subscription, pay for download, or advertising revenue model
Syndication a variation of standard content provider model

26. B2C Business Models: Transaction Broker
Processes online transactions for consumers
Primary value proposition—saving of time and money
Typical revenue model—transaction fee
Industries using this model include:
Financial services
Travel services
Job placement services

27. B2C Business Models: Market Creator
Uses Internet technology to create markets that bring buyers and sellers together
Examples:
Priceline.com
eBay.com
Typically uses a transaction fee revenue model

28. B2C Business Models: Service Provider
Offers services online
Value proposition: valuable, convenient, time-saving, low-cost alternatives to traditional service providers
Revenue models: subscription fees or one-time payment

29. B2C Business Models: Community Provider
Sites that create a digital online environment where people with similar interests can transact, communicate, and receive interest-related information.
Typically rely on a hybrid revenue model
Examples:
iVillage.com
Friendster.com
About.com

31. Insight on Technology: Battle of the Titans: Music in the Cloud Class Discussion
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?

35. B2B Business Models: E-distributor
Company that supplies products and services directly to individual businesses
Owned by one company seeking to serve many customers
Example: Grainger.com

37. B2B Business Models: E-procurement Companies
Create and sell access to digital electronic markets
B2B service provider is one type: offer purchasing firms sophisticated set of sourcing and supply chain management tools
Application service providers: a subset of B2B service providers
Example:
Ariba

39. B2B Business Models: Exchanges
An electronic digital marketplace where suppliers and commercial purchasers can conduct transactions
Usually owned by independent firms whose business is making a market
Generate revenue by charging transaction fees
Usually serve a single vertical industry
Number of exchanges has fallen to around 200 in 2005

41. B2B Business Models: Industry Consortia
Industry-owned vertical marketplaces that serve specific industries
Horizontal marketplaces, in contrast, sell specific products and services to a wide range of industries
Example: Exostar

43. B2B Business Models: Private Industrial Networks
Digital networks (usually, but not always Internet-based) designed to coordinate the flow of communications among firms engaged in business together
Single firm network: the most common form (Example: Walmart)
Industry-wide networks: often evolve out of industry associations (Example: Agentrics)

44. Business Models in Emerging E-commerce Areas
Consumer to Consumer (C2C): Provides a way for consumers to sell to each other, with the help of an online marketmaker such as eBay.com
Peer-to-Peer (P2P): Links users, enabling them to share files and common resources without a common server
M-commerce: Takes traditional e-commerce business models and leverages emerging new wireless technologies
To date, a disappointment in the United States; however, technology platform continues to evolve

45. E-commerce Enablers: The Gold Rush Model
Internet infrastructure companies: Companies whose business model is focused on providing infrastructure necessary for e-commerce companies to exist, grow, and prosper
Provide hardware, software, networking, security, e-commerce software systems, payment systems, databases, hosting services, etc.

46. How the Internet and the Web Change Business: Strategy, Structure, and Process
Important to understand how Internet and Web have changed business environment, including industry structures, business strategies, and industry and firm operations

47. Industry Structure
E-commerce changes 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
the bargaining power of buyers

49. Industry Structure
Industry Structural Analysis is performed to check a business model and its potential long-term profitability.
E-commerce can affect the structure of an industry +ve (automobile) and -ve (music, travel)
Increased price competition
Created new strategies for differentiation of products and services

50. Industry Value Chains
A set of activities performed in an industry by suppliers, manufacturers, transporters, distributors, and retailers that transform raw inputs into final products and services
Internet may change business operation at the industry level
Reduces the cost of information and other transactional costs

51. E-commerce and Industry Value Chains
Figure 2.6, Page 93

52. Analysis of the efficiency of a single firm’s operation
Firm Value Chains
Analysis of the efficiency of a single firm’s operation
A set of activities that a firm engages in to create final products from raw inputs
Internet helped firms increases operational efficiency
Outsource activities via the internet
Precisely coordinate steps in the value chain and reduce cost
Differentiate product and services

53. E-commerce and Firm Value Chains

54. Firm Value Webs
A networked business ecosystem that uses Internet technology to coordinate the value chains of business partners within an industry, or within a group of firms
Coordinates a firm’s suppliers with its own production needs using an Internet-based supply chain management system

55. Internet-Enabled Value Web

56. Business Strategy
A set of plans for achieving superior long-term returns on the capital invested in a business firm (i.e., a plan for making a profit in a competitive environment)
Why would anyone pay for a product than it costs to produce?
Four generic strategies
Differentiation (vs. commoditization)
Cost
Scope
Focus

57. Teaching Objectives
Identify the key components of e-commerce business models.
Describe the major B2C business models.
Describe the major B2B business models.
Recognize business models in other emerging areas of e-commerce.
Understand key business concepts and strategies applicable to e-commerce

58. Key Terms business model business plan e-commerce business model
value proposition
revenue model
advertising revenue model
subscription revenue model
transaction fee revenue model
sales revenue model
affiliate revenue model
market opportunity
marketspace
competitive environment
competitive advantage
asymmetry
first-mover advantage
complimentary resources
unfair competitive advantage
perfect market
leverage
market strategy
organizational development
management team
portal
e-tailer
barriers to entry
intellectual property
content provider
transaction broker
market creator
service provider
community provider
e-distributor
e-procurement firm
B2B service provider
application service provider (ASP)
scale economies
exchange
industry consortia
private industrial networks
industry structure
industry structural analysis
value chain
firm value chain
value web
business strategy
profit
differentiation
commoditization