Business Models
Key Ingredients of Business Models:
1. Value Proposition
a. Defines how a company’s product/service fulfills the needs of customers
b. Successful e-commerce value propositions may include:
 Personalization and customization of product offerings
 Reduction of product search costs
 Facilitation of transactions by managing product delivery
2. Revenue Model
a. Describes how the firm will earn revenue, generate profits, and produce a
superior return on invested capital
b. Common e-commerce revenue models:
 Advertising model – a web site that offers users content,
services, and/or products in exchange for being a forum for
advertising (i.e., Yahoo.com)
 Subscription model – a web site that offers users content,
services, and/or products in exchange for a subscription fee (i.e.,
Yahoo Platinum)
 Transaction fee model – a company receives a fee for enabling
or executing a transaction (i.e., E-bay, E-trade)
 Sales model – a company derives revenue by selling goods,
information, or services to customers (i.e., LLBean.com)
 Affiliate model – sites that steer business to an affiliate for a
referral fee or a percentage of the resulting sales (MyPoints.com)
3. Market Opportunity
a. Refers to the company’s intended marketspace and the overall potential
financial opportunities available
b. Examples of market opportunity:
 Finding a market niche and focusing on meeting the needs of that
niche.
 Selling to small businesses rather than well-established larger
companies
4. Competitive Environment
a. Refers to the other companies selling similar products and operating in the
same marketspace
b. Competition can also come from:
 similar substitute products
 potential new entrants to the market
 power of customers
 power of suppliers
c. Direct versus indirect competition – indirect competitors may be in
different industries but still compete indirectly because their products can
substitute for one another (i.e., CNN.com and ESPN.com are indirect
competitors because they provide different services but still compete for
consumer’s time online)
5. Competitive Advantage
a. How firms achieve a competitive advantage:
 Low cost - when they can produce a superior product and bring
it to market at a lower cost than competitors
 Differentiation – making your product somehow different than
the competitors
 Focus/scope – regional, national, or global markets
6. Market Strategy
a. The plan that details exactly how the business intends to enter the market
and attract customers
b. Example: AOL sending out millions of free CD ROMs to attract new users
7. Organizational Development
c. Describes how the company will organize the work that needs to be done
d. Fast-growth companies (such as e-commerce) need employees and a set of
business procedures
8. Management Team
a. Employees of the company responsible for making the business work
b. Strong management team gives a business instant credibility with outside
investors
Categorizing Business Models
1. B2C Business Models
a. Portal – offer web search tools, news, email, instant messaging,
calendars, shopping and generate revenue through advertising and
charging for premium services. (Vertical Portals (vortals) – focus on a
particular subject or market segment (i.e., Sailnet.com)
b. E-Tailer – online retail stores
c. Content Providers – distribute information content, such as digital news,
music, photos and video over the web
d. Transaction Broker – site that processes transactions that used to be
handled in person, by phone, or by mail (largest transaction brokers in
financial services, travel services, job placement services)
e. Market Creator – builds a digital environment where buyers and sellers
can meet, display products, search for products.
f. On-line auction site – Ebay.com promotes auctions between individuals
and businesses (reverse auction site – priceline.com allows customers to
set the price they are willing to pay for travel accommodations and other
products)
g. Service Provider – offers services online (i.e., business advice,
information storage) for a fee or supported through advertising revenues
and collecting of personal information
h. Community provider – create a digital online environment where people
with similar interests can interact
2. B2B Business Models
a. E-distributor – a company that supplies products and services directly to
individual businesses (i.e., Grainger)
b. E-procurement – a company that creates mini digital markets for a single
firm and helps it organize its procurement process (i.e., Ariba)
c. Exchanges (hubs) – A company that acts as a neutral 3rd party to set up
exchanges among suppliers and buyers. (i.e., ChemConnect)
d. Industry Consortia – an industry owned vertical market place (i.e.,
Exostar.com for the aerospace and defense industry)
e. Private Industrial Networks – (i.e., WalMart)
How the
Internet
Influences
Industry
Structure
Figure 2.5,
Page 91
SOURCE: Porter, 2001.
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