Unit 2: Business Models for E-Business

1) E-Business models based on the relationship of Transaction Parties

-Business to consumer (B2C)
-Business to Business (B2B)
-Consumer to Consumer (C2C)
-Consumer to Business (C2B)
2) E-Business models based on the relationship of Transaction Types
-Brokerage Model
-Aggregator Model
-Info-mediary Model
-Value Chain Model
-Community Model
-Advertising Model

Introduction to Business Model

A business model is the method of doing business by which a company can sustain itself, that is,
generate revenue. The business model spells out how a company makes money by specifying
where it is positioned in the value chain.
Some models are quite simple. A company produces goods or services and sells it to customers.
If all goes well, the revenues from sales exceed the cost of operation and the company realizes
profit. Other models can be more complex. Radio and television broadcasting is a good example.
The broadcaster is part of a complex network of distributors, content creators, advertisers, and
listeners or viewers. Who makes money and how much, It is not always clear at the outset. The
bottom line depends on many competing factors.

For our understanding, e-commerce can be defined as any form of business transaction in which
the parties interact electronically.' A transaction in an electronic market represents a number of
interactions between parties. For instance, it could involve several trading steps, such as marketing,
ordering, payment, and support for delivery. An electronic market allows the participating sellers
and buyers to exchange goods and services with the aid of information technology. Electronic
markets have three main functions such as: (i) matching buyers and sellers, (ii) facilitating
commercial transactions, and (iii) providing legal infrastructure. Information technology
permeates all the three functions and also helps to increase market efficiency and reduce
transaction costs.

The interaction between participants is supported by electronic trade processes that are basically
search, valuation, payment and settlement, logistics, and authentication, as shown in Figure 2.1.
The Internet and the World Wide Web allow companies to efficiently implement these key trading

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processes. For instance, many search services and brokers are available to help buyers find
information, products, and merchants in electronic markets.

E-commerce can be formally defined as technology-mediated exchanges between parties

(individuals, organizations, or both) as well as the electronically-based intra- or inter-
organizational activities that facilitate such exchanges. It is global. It favours intangible things—
ideas, information, and relationships. And it is intensely interlinked. These three attributes produce
a new type of marketplace and society.

A company's business model is the way in which it conducts business in order to generate
revenue. In the new economy, companies are creating new business models and reinventing old
models. Reading the literature, we find business models categorized in different ways. Presently,
there is no single, comprehensive and cogent taxonomy of Web business models that one can point
to. Although there are many different ways to categorize e-business models, they can be broadly
classified as follows:
1) E-Business models based on the relationship of Transaction Parties
2) E-Business models based on the relationship of Transaction Types

E-Business models based on the relationship of Transaction Parties

Electronic markets are emerging in various fields. Different industries have markets with different
characteristics. For example, an information B2C market differs in many respects from the
automotive B2B market.

The information B2C market represents companies that sell digital information goods, such as
news, articles, music, books, or digital videos. In the information B2C market, the electronic
infrastructure not only helps match customers and sellers, but also acts as the distribution channel,
delivering products to customers.

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In the automotive B2B market, the products traded, such as parts and components of cars, have a
high degree of specificity. The market infrastructure used is to be mainly based on Electronic Data
Interchange (EDI) over expensive VAN services. EDI involves the exchange of standardized,
structured information between organintions, permitting direct communication between computer
systems. B2B is also a closed market in the sense that the number of participants involved in
trading is limited and known a priori.

Understanding the nature of the market's requirements is critical for creating the underlying e-
business infrastructure. The relation between B2B and B2C models is clearly shown in Figure 2.3.

B2B covers business transactions along the various interactions existing in the value chain
from producers of raw materials to retailers and consumers including manufacturers and
distributors. On the contrary. B2C reflects only the interactions between a customer and a retailer.
Basically, B2C transactions include the following steps: (i) account acquisition. (ii) product
discovery through search and browse, (iii) price negotiation, (iv) payment, and (v) product
delivery. In some cases, customer services may also exist.

E-commerce can be classified according to the transaction partners such as 1) business to-

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consumer (B2C), 2) business-to-business (B2B), 3) business-to-government (B2G), 4)
consumer to-consumer (C2C), and 5) consumer-to-business (C2B). Within these broad
categories, there are a number of variations in the way the models are implemented. Table 2.1
summarizes souse of the current e-business models. The contents of this table are illustrated in the
form of a diagram in Figure 2.4.

1) Business-to-Consumer (B2C)

The B2C model involves transactions between business organizations and consumers. It applies
to any business organization that sells its products or services to consumers over the Internet. These
sites display product information in an online catalog and store it in a database. The B2C model
also includes services online banking, travel services, and health information and many more as
shown in figure below.

Consumers are increasingly going online to shop for and purchase products, arrange financing,
arrange shipment or take delivery of digital products such as software, and get service after the
sale. B2C e-business includes retail sales, often called e-retail (or e-tail), and other online
purchases such as airline tickets, entertainment venue tickets, hotel rooms, and shares of stock.
Some B2C e-businesses provide high-value content to consumers for a subscription fee.
Examples of e-business following this subscription model include the Wall Street Journal
(financial news and articles), Consumer Reports (product reviews and evaluations), and ediels.com
(nutritional counseling).

B2C e-business models include virtual malls, which are websites that host many online
merchants. Virtual malls typically charge setup, listing, or transaction fees to online merchants,
and may include transaction handling services and marketing options. Examples of virtual malls
include excite.com, choicemall, women.com, networkweb.com, amazon.com, Zshops.com, and
yahoo.com.

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 E-tailers that offer traditional or Web-specific products or services only over the Internet are
sometimes called virtual merchants, and provide another variation on the B2C model. Examples
of virtual merchants include amazon.com (books. electronics, toys, and music), eToys.com
(children's books and toys), and ashford.com (personal accessories).
Some businesses supplement a successful traditional mail-order business with an online
shopping site, or move completely to Web-based ordering. These businesses are sometimes called
catalogue merchants. Examples include avan.com (cosmetics and fragrances), chefs (cookware
and kitchen accessories), Omaha Steaks (premium steaks, meats, and other gourmet food), and
Harry and David (gourmet food gifts).
Many people were very excited about the use of B2C on the Internet, because this new
communication medium allowed businesses and consumers to get connected in entirely new ways.
The opportunities and the challenges posed by the B2C e-commerce are enormous. A large amount
of investment has gone into this and many sites have either come up or are coming up daily to tap
this growing market.

Some of the reasons why one should opt for B2C are:
1) Inexpensive costs, big opportunities. Once on the Internet, opportunities are immense as
companies can market their products to the whole world without much additional cost.
2) Globalization. Even being in a small company, the Web can make you appear to be a big
player which simply means that the playing field has been leveled by e- business. The
Internet is accessed by: millions of people around the world, and definitely, they are all
potential customers.
3) Reduced operational costs. Selling through the Web means cutting down on paper costs,
customer support costs, advertising costs, and order processing costs.
4) Customer convenience. Searchable content, shopping carts. Promotions and interactive and
user-friendly interfaces facilitate customer convenience. Thus, generating more business.
Customers can also see order status, delivery status, and get their receipts online.
5) Knowledge management. Through database systems and information management, you
can find out who visited your site, and how to create, better value for customers.

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 Processes in B2C (How Does B2C Work?)
B2C e-commerce is more than just an online store. It really is about managing the entire process,
but just using technology as a tool for order processing and customer support. Figure 2.5 depicts
the processes in B2C.

The B2C process is now explained in greater details:

1) Visiting the virtual mall. The customer visits the mall by browsing the online catalogue—
a very organized manner of displaying products and their related information such as price,
description, and availability. Finding the right product becomes easy by using a keyword search
engine. Virtual malls may include a basic to an advanced search engine, product rating system,
content management, customer support systems, bulletin boards, newsletters and other
components which make shopping convenient for shoppers.
2) Customer registers. The customer has to register to become part of the site's shopper
registry. This allows the customer to avail of the shop's complete services. The customer becomes
a part of the company's growing database and can use the same for knowledge management and

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 data mining.
3) Customer buys products. Through a shopping cart system, order details, shipping
charges, taxes, additional charges and price totals are presented in an organized manner. The
customer can even change the quantity of a certain product. Virtual malls have a very
comprehensive shopping system, complete with check-out forms.
4) Merchant processes the order. The merchant then processes the order that is received
from the previous stage and fills up the necessary forms.

5) Credit card is processed. The credit card of the customer is authenticated through a
payment gateway or a bank. Other payment methods can be used as well, such as debit cards,
prepaid cards, or bank-to-bank transfers.

6) Operations management. When the order is passed on to the logistics people, the
traditional business operations will still be used. Things like inventory management. total quality
management, warehousing, optimization and project management should still be incorporated
even though it is an e-business. Getting the product to the customer is still the most important
aspect of e-commerce.
7) Shipment and delivery. The product is then shipped to the customer. The customer can
track the order/delivery as virtual malls have a delivery tracking module on the website which
allows a customer to check the status of a particular order.
8) Customer receives. The product is received by the customer, and is verified. The
system should then tell the firm that the order has been fulfilled.
9) After-sales service. After the sale has been made, the firm has to make sure that it
maintains a good relationship with its customers. This is done through customer relationship
management or CRM.

The example of the www.amazon.com site also involves the B2C model in which the consumer
searches for a book on their site and places an order, if required. This implies that a complete
business solution might be an integration solution of more than one business model. For example,
www.amazon.com includes the B2B model in which the publishers transact with Amazon and the
B2C model in which an individual consumer transact with the business organization. The B2C
model of e-commerce is more prone to the security threats because individual consumers provide
their credit card and personal information n the site of a business organization. In addition, the
consumer might doubt that his information is secured and used effectively by the business
organization. This is the main reason why the B2C model is not very widely accepted. Therefore,
it becomes very essential for the business organizations to provide robust security mechanisms
that can guarantee a consumer for securing his/her information.

2) Business to Business (B2B)

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The B2B model involves electronic transactions for ordering, purchasing, as well as other
administrative tasks between business houses. It includes trading goods, such as business
subscriptions, professional services, manufacturing, and wholesale dealings. Sometimes in the
B2B model, business may exist between virtual companies, neither of which may have any
physical existence. In such cases, business is conducted only through the Internet.

Let us look at the example of www.amazon.com. As you know, www.amazon.com is an online

bookstore that sells books from various publishers including Wrox, O’Reilly, Premier Press, and
so on. In this case, the publishers have the option of either developing their own site or displaying
their books on the Amazon site (www.amazon.com), or both. The publishers mainly choose to
display their books on www.amazon.com at it gives them a larger audience. Now, to do this, the
publishers need to transact with Amazon, involving business houses on both the ends, is the B2B
model as shown in figure below.

Thus, B2B is that model of e-commerce whereby a company conducts its trading and other
commercial activity through the Internet and the customer is another business itself. This
essentially means commercial activity between companies through the Internet as a medium.
This is supposed to be a huge opportunity area on the Web. Companies have by and large
computerized all the operations worldwide and now they need to go into the next stage by linking
their customers and vendors. This is done by supply chain software, which is an integral part of
your ERP application. Companies need to set up a backbone of B2B applications, which will
support the customer requirements on the Web. Many B2B sites are company and industry
specific, catering to a community of users, or are a combination of forward and backward
integration. Companies have achieved huge savings in distribution-related costs due to their B2B
applications.

Major Advantages of B2B

1) Direct interaction with customers. This is the greatest advantage of e-business.

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 2) Focussed sales promotion. This information gives authentic data about the likes, dislikes
and preferences of clients and thus helps the company bring out focussed sales promotion
drives which arc aimed at the right audience.

3) Building customer loyalty. It has been observed that online customers can be more loyal
than other customers if they are made to feel special and their distinct identity is recognized
and their concerns about privacy are respected. It has also been found that once the
customers develop a binding relationship with a site and its product, they do not like to
shift loyalties to another site or product.

4) Scalability. This means that the Web is open and offers round-the-clock access. This
provides an access never known before, to the customer. This access is across locations
and time zones. Thus a company is able to handle many more customers on a much wider
geographical spread if it uses an e-business model. The company can set up a generic parent
site for all locations and make regional domains to suit such requirements. Microsoft is
using this model very successfully.

5) Savings in distribution costs. A company can make huge savings in distribution, logistical
and after-sales support costs by using e-business models. Typical examples are of computer
companies, airlines, and telecom companies.

Processes for Business-to-Business Transactions and Models

B2B interactions involve much more complexity than B2C. For instance, typical B2B transactions
include, among others, the following steps:

(viii) send PO to vendor,

(i) review catalogues, (ix) prepare invoice,
(ii) identify specifications. (x) make payment,
(iii) define requirements, (xi) arrange shipment, and
(iv) post request for proposals (REP). (xii) organize product inspection and
(v) review vendor reputation. reception.
(vi) select vendor.
(vii) fill out purchase orders (PO).

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Due to the large number of transactions involved, business-to-business operations can be too risky
if e-business sites cannot guarantee adequate quality of service in terms of performance,
availability, and security.

3) Consumer to Consumer (C2C)

The C2C model involves transaction between consumers. Here, a consumer sells directly to
another consumer. eBay and www.bazee.com are common examples of online auction Web sites
that provide a consumer to advertise and sell their products online to another consumer. However,
it is essential that both the seller and the buyer must register with the auction site. While the seller
needs to pay a fixed fee to the online auction house to sell their products, the buyer can bid without
paying any fee. The site brings the buyer and seller together to conduct deals as shown in figure
below.

Let us now look at the previous figure with respect to eBay. When a customer plans to sell his
products to other customers on the Web site of eBay, he first needs to interact with an eBay site,
which in this case acts as a facilitator of the overall transaction. Then, the seller can host his product
on www.ebay.com, which in turn charges him for this. Any buyer can now browse the site of eBay
to search for the product he interested in. If the buyer comes across such a product, he places an
order for the same on the Web site of eBay. eBay now purchase the product from the seller and
then, sells it to the buyer. In this way, though the transaction is between two customers, an
organization acts as an interface between the two organizations.

There are also a number of new consumer-to-consumer expert information exchanges that are
expected to generate $6 billion in revenue by 2005. Some of these exchanges, such as AskMe.com
and abuzz, are free, and some allow their experts to negotiate fees with clients. InfoRocket.com,
one of the first question-and-answer marketplaces, is driven by a person-to-person auction format.
The InfoRocket.com bidding system allows a person who submits a question to review the profiles
of the "experts" who offer to answer the question. When the person asking the question accepts an
"expert" offer, infoRocket.com bills the person's credit card, delivers the answer, and takes a 20

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percent commission.
4) Consumer to Business (C2B)

The C2B model involves a transaction that is conducted between a consumer and a business
organization. It is similar to the B2C model, however, the difference is that in this case the
consumer is the seller and the business organization is the buyer. In this kind of a transaction, the
consumers decide the price of a particular product rather than the supplier. This category includes
individuals who sell products and services to organizations. For example, www.monster.com is a
Web site on which a consumer can post his bio-data for the services he can offer. Any business
organization that is interested in deploying the services of the consumer can contact him and then
employ him, if suitable as shown in figure.

C2B Business Model

Let us look at another example of the C2B model. William Ward needs to buy an airline ticket for
his journey from New York to New Jersey. William needs to travel immediately. Therefore, he
searches a Web site for a ticket. The Web site offers bidding facility to people who want to buy
tickets immediately. On the Web site, William quotes the highest price and gets the ticket.

In addition to the models discussed so far, five new models are being worked on that involves
transactions between the government and other entities, such as consumer, business organizations,
and other governments. All these transactions that involve government as one entity are called e-
governance. The various models in the e-governance scenario are:

• Government-to-Government (G2G) model: This model involves transactions between 2

governments. For example, if the American government wants to by oil from the Arabian
government, the transaction involved are categorized in the G2G model.
• Government-to-Consumer (G2C) model: In this model, the government transacts with an
individual consumer. For example, a government can enforce laws pertaining to tax payments on
individual consumers over the Internet by using the G2C model.
• Consumer-to-Government (C2G) model: In this model, an individual consumer interacts with
the government. For example, a consumer can pay his income tax or house tax online. The
transactions involved in this case are C2G transactions.
• Government-to-Business (G2B) model: This model involves transactions between a
government and business organizations. For example, the government plans to build a fly over.

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For this, the government requests for tenders from various contractors. Government can do this
over the Internet by using the G2B model.
• Business-to-Government (B2G) model: In this model, the business houses transact with the
government over the Internet. For example, similar to an individual consumer, business houses
can also pay their taxes on the Internet.

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