Lesson 02
E-Commerce Business Models
ISM 41113, Electronic Commerce
By:
S. Sabraz Nawaz
Senior Lecturer in MIT
Department of MIT
Faculty of Management and Commerce, SEUSL
Learning Objectives
• Identify the key components of e-commerce business models.
• Describe the major B2C business models.
• Describe the major B2B business models.
• Explain the key business concepts and strategies applicable to e-commerce.
ISM 41113, Electronic Commerce, By: S. Sabraz Nawaz
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The case of Twitter
• Twitter, the social network site based on 140-character text messages, is the
latest in a series of unpredicted developments on the Internet.
• Like other social network platforms, Twitter provides a platform for its users
(“Tweeple”, “twitterers”, or “tweeters”) to express themselves by creating
content and sharing it with others called “followers” who sign up to receive
someone’s “tweets”.
• In 2011, Twitter produced $140 million in revenue but zero profits despite over
$1billion in funding since its inception in 2006.
• In 2012, Twitter had an estimated 500 million registered users but only about 140
million active users, 340 million tweets worldwide. In 2012, more than 150
million tweets about Olympics and more than 80,000 tweets per minute about
Usain Bolt’s 200 meter victory.
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The case of Twitter
• How can Twitter make money from its users and their tweets? What is the
business model?
• Its main assets:
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real-time news, user attention, and audience size
database of tweets that contain comments, observations and opinions of the audience, and
the search engine that mines those tweets for patterns.
It is a powerful alternative media platform for the distribution of news, videos, and pictures.
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The case of Twitter: How can these assets can be
monetized?
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Promoted Tweets and geo-targeted Promoted Tweets. This is Twitter’s version of Google’s text
ads.
Promoted “Trends”; a section of the Twitter home page that lets users know what’s hot. A
company can place a Promoted Trends banner at the top of the Trends section and when user
clicks on the banner he or she is taken to the follower page for that product.
Promoted Accounts are suggestions to follow various advertiser accounts based on the list of
accounts that the users already follows
Twitter entered into agreements with Google, Yahoo, and Microsoft to permit their search
engine to index the tweets and make them available to the Internet
Major companies like Amazon, Intuit (Quickbooks), and Dell have used Twitter to understand
how their customers are reacting to products, services, and Websites and then make corrections
or changes in those services and products.
But Twitter feel shy to announce its business model!
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Business Model
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Business Model
• A plan for the successful operation of a business, identifying sources of revenue,
the intended customer base, products, and details of financing.
• A business model is a set of planned activities designed to result in a profit in a
marketplace.
• E-commerce business model aims to use and leverage the unique qualities of
the Internet and the WWW.
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Eight Key Elements of a Business Model
• If you hope to develop a successful business model in any arena you must make
sure that the model effectively addresses the eight elements listed below
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Value Proposition
Revenue Model
Market Opportunity
Competitive Environment
Competitive Advantage
Market Strategy
Organizational Development
Management Team
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Value Proposition
• A value proposition defines how a company’s product or service fulfills the needs
of customers.
• We need to answer why customers will choose to do business with us instead of
another company and what the firm will offer that others can not or do not.
• Successful value proposition will include
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Personalization and customization of product offering
Reduction of search costs
Reduction of price discovery costs
Facilitating transaction by managing product delivery
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 day, and know immediately whether a book is in stock
ISM 41113, Electronic Commerce, By: S. Sabraz Nawaz
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Revenue Model
• Describes how a firm will earn revenue, generate profits, and produce a superior
return on invested capital than alternative investments.
• Many revenue model exist but most companies rely on one or some
combination of the following
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Advertising model
Subscription model
Transaction fee model
Sales model
Affiliate model
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Revenue Model:
Advertising Revenue Model
• A company provides a forum for advertisements and receives fees from
advertisers
• Yahoo! Derives a significant amount of revenue from display and video
advertising
• Typically, fees are generated from advertisers in exchange for advertisements,
which is ultimately the classic principal among the revenue models besides
sales.
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Revenue Model:
Subscription Revenue Model
A business model where a customer must pay a subscription price to have access to the
product/service. The model was pioneered by magazines and newspapers, but is now
used by many businesses and websites.
Companies offer its users content or services and charges a subscription fee for access
to some or all of its offerings.
To successfully overcome the disinclination of users to pay for content on the Web, the
content offered must be perceived as a high-value-added, premium offering that is not
readily available elsewhere nor easily replicated.
Users are charged a periodic (daily, monthly or annual) fee to subscribe to a service.
Many sites combine free content with premium membership, i.e. subscriber- or
member-only content. Subscription fees do not depend on transactions. Subscribers
use the content as long and often as they want.
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Publishers and content services, e.g. magazines, - they provide text, audio or video content to
users who subscribe for a fee to get access to the service or to download the new issue: New York
Times, Lynda.com
Special
services: Companies offer security and payment services to internet service providers and
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online retail customers: PayPal, VeriSign
Revenue Model:
Transaction Fee Revenue Model
• A company receives commissions based on volume for enabling or executing
transactions.
• The revenue is generated through transaction fees by the customer paying a fee
for a transaction to the operator of a platform.
• The company is a market place operator providing the customer with a platform
to place his transactions.
• During this process the customer may be presented as a buyer as well as a seller.
• To actively participate in this e-market, customers must register, so both parties
of a transaction taking place are identified.
• The amount of the transaction fee can be both – fixed and percentage
calculated.
ISM 41113, Electronic Commerce, By: S. Sabraz Nawaz
• EBAY, AMAZON
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Revenue Model:
Sales Revenue Model
• Companies derive revenue by selling goods, information, or services.
Wholesalers and retailers of goods and services sell their products online.
• The main benefits for the customer are the convenience, time savings, fast
information etc.
• The prices are often more competitive.
• AMAZON.COM
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Revenue Model:
Affiliate Revenue Model
Company steers business to an affiliate and receives a referral fee or percentage of the
revenue from any resulting sales
The affiliate program is an online solution which is based on the principle of
commission.
Merchants advertise and sell their products and services through links to partnerwebsites.
It is a pay-for-performance model: Commissions are only paid for actual revenue or
measurable success.
An affiliate-link includes a code, which identifies the affiliate. That’s how clicks, leads or
sales are tracked.
The affiliate therefore acts as the interface between merchants and customers.
This model leads to a win-win situation: the merchants sell their products or services
and the affiliates get their commissions.
Variations include banner exchange, pay-per-click and revenue sharing programs.
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MYPOINTS.COM earns by connecting companies with potential customers by offering
special deals to its members.
Market Opportunity
• A company’s intended marketspace, the area of actual or potential commercial
value in which a company intends to operate, and the overall potential financial
opportunities available to the firm in that marketspace.
• A potentially favorable condition in which a business can capitalize on a
changing trend or an increasing demand for a product by a demographic group
that has yet to be recognized by its competitors.
• For a market opportunity to exist, a company must be able to identify who
its potential customers are, the specific needs that need to be met, the size of
the market, and its capacity to capture market share.
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Competitive Environment
• Refers to the other companies selling similar products and operating in the same
marketspace
• Also refers to the presence of substitute products and potential new entrants to
the market, as well as the power of customers and suppliers over your business.
• Influenced by how many companies are active, how large their operations are,
what the market share of each competitor is, how profitable these firms are, etc.
• Direct competitors are those that sell products or services that are very similar
and into the same market segment. Priceline and Travelocity sell identical
products – cheap tickets.
• Indirect competitors are those who may be in different industries but still
compete indirectly because their products can substitute for one another.
ISM 41113,manufacturers
Electronic Commerce, By: S. Sabrazand
Nawaz airline companies; both offer consumers means
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Automobile
of transportation. CNN news and ESPN sports.
Competitive Advantage
• Achieved when a company can produce a superior product and or bring the
product to market at a lower price than most, or all, of their competitors; e.g.:
being able to obtain differential access to the factors of production that are
denied to their competitors.
• Firms can compete on scope: local or global. Firms that can provide superior
products at the lowest cost on a global basis are truly advantaged.
• First mover advantage: a competitive market advantage for a firm that results
from being the first into a marketplace with a product or service.
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Market Strategy
• Everything a company does to promote its products and services to potential
customers is known as market strategy.
• It is the plan the company puts together that details exactly how it intends to
enter a new market and attract new customers.
• Facebook, Twitter as well as YouTube have social networking marketing strategy
that encourages users to put their content on the site for free, build personal
profile pages, contact their friends, and build a community; in this case
customers are the marketing staff!
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Organizational Development
• All firms need an organization to efficiently implement their business plans and
strategies.
• Many e-commerce firms have failed because they lacked the organizational
structures and supportive cultural values required to support new forms of
commerce.
• Companies hoping to grow and thrive need to have a plan for organizational
development that describes how the company will organize the work that needs
to be accomplished.
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Management Team
• The single most important element of a business model is the management
team responsible for making the model work.
• Strong management team gives a model instant credibility to outside investors
and experience in implementing business plans.
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Key Elements of a Business Model
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ISM 41113, Electronic Commerce, By: S. Sabraz Nawaz
MAJOR BUSINES-TO-CONSUMER
(B2C) BUSINESS MODELS
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MAJOR BUSINES-TO-CONSUMER (B2C)
BUSINESS MODELS
• Online businesses seek to reach individual consumers. This is the most wellknown and familiar type of e-commerce
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E-tailer
Community provider (social network)
Content provider
Portal
Transaction broker
Market creator
Service provider
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E-Tailer
• These are online retail stores. They come in all sizes varying from giant Amazon
to small tiny stores that have web presence.
• Similar to typical brick-and-mortar storefronts except that customers only have
to connect to the Internet to check their inventory and place orders.
• Some have solely online presence and others have complementary web
presence (brick-and-click)
• Extremely competitive sector since the barrier to entry is very low and tens of
thousands of small e-tail shops have sprung up on the web.
• Revenue model is sale of goods
• Amazon.com, Drugstore.com, Dell.com, Walmart.com
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Community Provider
• Sites where individuals with particular interests, hobbies, common experiences,
or social networks can come together and “meet” online, where
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People with similar interests can transact (buy and sell goods)
Share interests, photos, and videos
Communicate with like minded people and receive interest related information
• The social network sites Facebook, LinkedIn, Twitter, and Pinterest, and
hundreds of other similar, niche sites all offer users community-building tools
and services
• Revenue model is hybrid including subscription fees, sales revenues, transaction
fees, affiliate fees, and advertising fees from other firms that are attracted by
tightly focused audience
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Content Provider
• Information and entertainment providers such as newspapers, sports sites, and
other sources that offer customers up-to-date news and special interest how-to
guidance and tips and or information sales.
• Content providers distribute information content, such as digital video, music,
photos, text, and artworks, over the Web.
• Any e-commerce start-up that intends to make money by providing content is
likely to face difficulties unless it has a unique information source that others
cannot access.
• Business model: advertising, subscription fees, affiliate referral fees
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Portal
• Offers an integrated package of content, content-search, and social network
services: news, e-mail, chat, music downloads, video streaming, calendars, etc.
and they seek to be a user’s home base
• Business model: advertising, subscription fees, transaction fee
• Yahoo, AOL, MSN, Facebook
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Transaction Broker
• Processors of online sales transactions, such as stockbrokers and travel agents,
that increase customers’ productivity by helping to get things done faster and
more cheaply.
• E*Trade (etrade.com), Hotels.com, Travelocity.com
• Business model: transaction fees
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Market Creator
• Web-based businesses that use Internet technology to create markets buyers
and sellers can meet, display products, search for products and establish prices.
• In Priceline.com consumers are allowed to set the price they are willing to pay
for various travel accommodations and other products (sometimes called
reverse auction)
• eBay, the online auction site, is utilized by both businesses and consumers. Its
model is to create a digital electronic environment for buyers and sellers to
meet, agree on a price, and transact.
• Business model: transaction fees
• eBay, Amazon, Priceline
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Service Provider
• Companies that make money by selling users a service, rather than a product
• Web 2.0 (the second stage of development of the Internet, characterized especially by the
change from static web pages to dynamic or user-generated content and the growth of
social media) applications such as photo sharing video sharing, etc. are all services
provided to customers.
• Google delivers online application services such as Google Docs and Gmail
• visanow.com (immigration service), rocketlawyer.com (online legal service)
• Business model: sale of service
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MAJOR BUSINESS-TO-BUSINESS (B2B)
BUSINESS MODELS
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MAJOR BUSINESS-TO-BUSINESS (B2B)
BUSINESS MODELS
• E-Commerce in which businesses sell to other businesses.
• More than 10 times the size of B2C e-commerce
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E-distributor
E-procurement
Exchange
Industry consortium
Private industrial network
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E-Distributor
• Companies that supply product and services directly to individual businesses
• E-distributors are owned by one company seeking to serve many customers.
• The more products and services a company makes available on its site, the more
attractive that site is to potential customers.
• W.W. Grainger, for example, is the largest distributor of maintenance, repair,
and operations (MRO) supplies.
• Business model: sale of goods
• Grainger.com, Partstore.com
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E-Procurement
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Just as e-distributors provide products to other companies, e-procurement firms create
and sell access to digital electronic markets.
Procurement is the act of buying goods, services or works from an external source
E-procurement is the business-to-business purchase and sale of services through
the Internet as well as other information and networking systems, such as electronic
data interchange.
Firms such as Ariba (ariba.com) have created software (eg: Procurement Software
Solutions) that helps large firms organize their procumbent process by creating minidigital markets for single firm. It creates custom-integrated online catalogs (where
suppliers firms can list their offerings) for purchasing firms.
Revenue is for market-making services, supply chain management
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Exchanges
• An independent digital electronic marketplace where hundreds of suppliers
meet a smaller number of very large commercial purchasers.
• They serve single vertical industry such as steel, polymers, etc.
• For buyers, B2B exchanges make it possible to gather information, check out
suppliers, collect prices, and keep up to date on the latest happenings all in one
place.
• Sellers benefit from expanded access to buyers.
• Business model: fees and commissions on transactions.
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Industry Consortia
• Industry-owned vertical marketplaces that serve specific industries such as
automobile, aerospace, chemical, etc.
• Business model: Fees and commissions on transactions
• Elemica.com, Exostar.com
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Private Industrial Network
• Also referred to as Private Trading Exchange is a digital network designed to
coordinate the flow of communications among firms engaged in business
together.
• The network is owned by a single large purchasing firm.
• Participation is by invitation only to trusted long-term suppliers of direct inputs.
• Eg: Walmart operates one of the largest industrial networks in the world for its
suppliers, who on a daily basis use Walmart’s network to monitor the sales of
their goods, the status of shipments, and the actual inventory level of their
goods.
• Business Model: cost is absorbed by the network owner and recovered through
production and distribution efficiencies.
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End of Lesson
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