Evaluation of Business Models
Professor Joshua Livnat, Ph.D., CPA
311 Tisch Hall
New York University
40 W. 4th St.
NY NY 10012
Tel. (212) 998-0022 Fax (212) 995-4230
jlivnat@stern.nyu.edu
Web page: www.stern.nyu.edu/~jlivnat
1
Overview
– The underlying logic for an E-Commerce
company.
– A five-step process to assess the business
model.
– Classifications of E-Commerce companies.
– Various business models.
– Implications of the business model.
– Long-term viability of business models.
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The Underlying Logic
• “Old Economy” contains market failures or
transaction costs:
– Examples:
• Information is not freely available, and is costly to gather and
process.
• Markets may be too fragmented and too dependent on local
population (personal items for sale).
• The “New Economy” company eliminates or
reduces market failure or transaction cost.
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The Underlying Logic
• Note: The deficiency in the “old” economy is
actually the opportunity for the “new” economy
company.
• However, for the opportunity to be profitably
exploited:
– It should be significant.
– The company should have adequate resources.
– The company should have the ability to generate
revenues from customers.
– The company should be able to deter competition, or
differentiate itself from its competitors.
4
Sellers’ Transaction Costs
• Order Taking Costs:
– Reduce physical facilities and number of employees dedicated to process
orders by accepting and processing orders electronically.
• Recording Costs:
– Avoid the manual data recording process by connecting the users
electronically and allowing them to enter the data themselves.
• Display Costs:
– Eliminate stores, employees in these stores, and paper catalogues, by
maintaining a virtual store.
• Mailing Costs:
– Reduce physical mail sent to customers by sending E-mail instead.
• Marketing costs:
– Replace mass marketing channels by direct marketing to relevant
customers only.
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Buyers’ Transaction Costs
• Transportation Costs:
– Avoid waste of time and money spent on travel to a
physical store.
• Timing of Transactions:
– Buyers do not need to change their schedule according
to the opening hours of the business. Web access to the
entity’s virtual site is available 24 hours a day, seven
days a week.
• Information Gathering Costs:
– Avoid the costly activity of gathering information, by
using information on the Web and Shopbots.
• Information Processing Costs:
– Buyers can save time and effort in understanding and
processing information, or by using online software and
tools.
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Other Benefits of E-commerce
• Personalization:
– By identifying customers, it is possible to offer each
individual customer a personalized service and special
offerings.
• Price Transparency:
– The Web allows consumers to compare prices more
efficiently and more effectively, anywhere and at any
time.
• Market Making:
– The Web allows the creation of efficient new markets
by the ability to aggregate cheaply many buyers and
sellers from different locations and time zones.
• Network Externalities:
– The larger is a network the more valuable it may be to
its members, rather than a smaller network.
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The Five-Step Process
• What market failures or transaction costs are
addressed by the business model?
• How effective can the E-Commerce firm be in
reducing the market failures or transaction costs?
• Will the E-commerce company be able to
expropriate benefits from customers?
• What are the necessary resources to conduct the
business?
• Can competitors erode profits?
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Application
Egreetings Network, Inc. (EGRT)
• EGRT is in the E-Card business:
– Customer selects a card from an online selection of
cards.
– Customer personalizes the card.
– Customer specifies a recipient.
– EGRT delivers the card, which can be opened by the
recipient.
– EGRT also notifies the customer that the E-Card was
sent.
• Compare EGRT to paper card companies.
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EGRT – Transaction Costs
• Buyers (customers) save the following
transaction costs:
–
–
–
–
Transportation to a physical store.
Timing of transaction (24/7).
Mailing costs.
EGRT retains recipient’s address, so there is
lower data-entry costs.
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EGRT – Transaction Costs
• EGRT saves the following transaction costs
(as compared to a paper card company):
– Display costs (no need for a retailer).
– Order-taking costs (no need to communicate
with a retailer).
– Data-entry costs (customer enters the data
directly).
– Inventory costs (no need for physical
inventory).
– Printing costs (same card can be used by more
than one customer).
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EGRT – Transaction Costs
• Marketing costs:
– Savings through personalization (customer
tastes).
– Complementary products.
• No network externalities.
• No price transparency.
• No creation of a new market.
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EGRT – Ability to Generate
Revenues
• Customers are willing to pay for paper cards. They
should also be willing to pay for E-Cards.
• However, the marginal cost of an E-Card is very
low!
• Fixed costs of content and systems are high.
• Competition may drive the price of an E-Card to
zero.
– Over 100 E-Card companies!
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EGRT – Ability to Generate
Revenues
• Revenues:
•
•
•
•
1997
$ 505,000
1998
317,000
1999
3,100,000
2000 (6 mon.) 5,900,000
• Converted from fee-paying customers to free
service in November 1998.
• Advertising revenues in 1999 and 2000!
• E-commerce sales negligible in 1999.
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EGRT – Traffic and Expenses
• In December 1999, a high traffic month:
– 21 million visitors
– 184 million web pages viewed
– 10 million E-Cards sent
• Spent about $50 million through the end of 1999.
• Selling and marketing $20 million 1997-9.
• Operations and development (R&D) $15 million
in 1997-9.
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EGRT - Content
• Gibson supplied 34% of cards and held 20%
of equity.
• In March 2000, Gibson was purchased by
American Greetings, which has its own ECard business.
• NBC owns stock in return for advertising.
EGRT can use NBC shows in content.
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EGRT - Resources
• Raised $60 million through preferred shares
in 1999.
• Raised $54 million in issuance of common
stock in December 1999.
• Had about $58 million cash and liquid
assets as of the most recent public filing
(6/30/2000).
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EGRT - Survival
• EGRT generates most of its revenues from
advertising.
• Can it survive for the long run on
advertising?
• Which companies are likely to generate
higher advertising rates?
• Does EGRT have a comparative advantage
in E-commerce?
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Summary
• Understand well the current business model.
• Assess the opportunities for changes and
transformation in the business model.
• Assess long-term revenue sources for the Ebusiness.
• Assess long-term costs to operate the business.
• Is the business viable? Can competitors erode
profits?
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