E-commerce

business. technology. society.

Sixth Edition

Kenneth C. Laudon
Carol Guercio Traver

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Chapter 2
E-commerce Business Models
and Concepts

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 Tweet Tweet: What’s Your Business
Model?
Class Discussion
 What characteristics or benchmarks can be used to
assess the business value of a company such as
Twitter that does have revenue?
 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 possible methods described for
monetizing Twitter’s assets do you feel might be
most successful?
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 E-commerce Business Models
 Business model
 Set of planned activities designed to result in a
profit in a marketplace

 Business plan
 Describes a firm’s business model

 E-commerce business model

 Uses/leverages unique qualities of Internet and
Web
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8 Key Elements of a Business Model
1. Value proposition
2. Revenue model
3. Market opportunity
4. Competitive environment
5. Competitive advantage
6. Market strategy
7. Organizational development
8. Management team
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 1. Value Proposition
 Why should the customer buy from you?
 Successful e-commerce value
propositions:
 Personalization/customization
 Reduction of product search, price discovery costs
 Facilitation of transactions by managing product delivery

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 2. Revenue Model
 How will the firm 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

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 3. Market Opportunity
 What marketspace do you intend to
serve and what is its size?
 Marketspace: Area of actual or potential commercial value
in which company intends to operate
 Realistic market opportunity: Defined by revenue
potential in each of market niches in which company
hopes to compete
 Market opportunity typically divided into
smaller niches

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 4. Competitive Environment
 Who else occupies your intended
marketspace?
 Other companies selling similar products in the same
marketspace
 Includes both direct and indirect competitors

 Influenced by:
 Number and size of active competitors
 Each competitor’s market share
 Competitors’ profitability
 Competitors’ pricing

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 5. Competitive Advantage
 What special advantages does your firm bring
to the marketspace?
 Achieved when firm produces superior product or
can bring product to market at lower price than
competitors
 Important concepts:
 Asymmetries
 First-mover advantage
 Unfair competitive advantage
 Leverage
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 6. Market Strategy
 How do you plan to promote your
products or services to attract your
target audience?
 Details how a company intends to enter market
and attract customers
 Best business concepts will fail if not properly
marketed to potential customers

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 7. Organizational Development
 What types of organizational structures
within the firm are necessary to carry out
the business plan?
 Describes how firm will organize work
 Typically divided into functional departments

 Hiring moves from generalists to specialists as company

grows

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 8. Management Team
 What kinds of experiences and
background are important for the
company’s leaders to have?
 Employees are responsible for making the business model
work
 Strong management team gives instant credibility to
outside investors
 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
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 Insight on Business
Online Grocers: Finding and
Executing the Right Model
Class Discussion
 Why do you think Webvan failed?
 Why are more traditional grocery chains succeeding online
today?
 Why would an online customer pay the same price as in the
store plus a delivery charge? What’s the benefit to the
customer?
 What are the important success factors for FreshDirect?
 Do you think FreshDirect would work in your town?
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 Categorizing E-commerce
Business Models
 No one correct way
 We categorize business models according to:
 E-commerce sector (B2C, B2B, C2C)
 Type of e-commerce technology; i.e., m-commerce

 Similar business models appear in more than

one sector
 Some companies use multiple business
models; e.g., eBay
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 B2C Business Models: Portal
 Search plus an integrated package of content
and services
 Revenue models:
 Advertising, subscription fees, transaction fees

 Variations:
 Horizontal/General

 Vertical/Specialized (Vortal)

 Pure Search

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 Insight on Technology
Can Bing Bong Google?
Class Discussion

 How many of you use Google, Yahoo, or Microsoft’s

Bing? Does the class differ from the overall Web
population?
 Why do you use a particular search engine?
 Why is Google moving beyond search and advertising
into applications?
 How is Bing trying to distinguish itself from Google?
Do you think this strategy will work?
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 B2C Models: E-tailer
 Online version of traditional retailer
 Revenue model: Sales
 Variations:
 Virtual merchant
 Bricks-and-clicks
 Catalog merchant
 Manufacturer-direct

 Low barriers to entry

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 B2C Models: Content Provider
 Digital content on the Web
 News, music, video

 Revenue models:
 Subscription; pay per download (micropayment);
advertising; affiliate referral fees

 Variations:
 Content owners
 Syndication
 Web aggregators

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B2C Models: Transaction Broker
 Process online transactions for consumers
 Primary value proposition—saving time and money

 Revenue model:
 Transaction fees

 Industries using this model:

 Financial services
 Travel services
 Job placement services

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 B2C Models: Market Creator
 Uses Internet technology to create
markets that bring buyers and sellers
together
 Examples:
 Priceline
 eBay

 Revenue model: Transaction fees

Slide 2-21
 B2C Models: Service Provider
 Online services
 e.g., Google: Google Maps, Google Docs, and so on

 Value proposition
 Valuable, convenient, time-saving, low-cost alternatives to
traditional service providers
 Revenue models:
 Sales of services, subscription fees, advertising, sales of
marketing data

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 B2C Models: Community
Provider
 Provides online environment (social
network) where people with similar
interests can transact, share content, and
communicate
 E.g., Facebook, MySpace, LinkedIn

 Revenue models:
 Advertising fees, subscription fees, sales revenues,
transaction fees, affiliate fees
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 B2B Business Models
 Net marketplaces
E-distributor
E-procurement
Exchange
Industry consortium
 Private industrial network
Single firm
Industry-wide

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 B2B Models: E-distributor
 Supplies products and services directly to
individual businesses
 Owned by one company seeking to serve
many customers
 Revenue model: Sales of goods

 Example: Grainger.com

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 B2B Models: E-procurement
 Creates and sells access to digital
electronic markets
 Includes B2B service providers, application service
providers (ASPs)

 Revenue model:
 Transaction fees, usage fees, annual licensing fees

 Example: Ariba

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 B2B Models: Exchanges
 Electronic digital marketplace where suppliers
and purchasers conduct transactions
 Usually owned by independent firms whose business is
making a market
 Usually serve a single vertical industry

 Revenue model: Transaction, commission fees

 Create powerful competition between
suppliers
 Number has dropped dramatically
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B2B Models: Industry Consortia
 Industry-owned vertical marketplaces that
serve specific industries (e.g., automobile,
chemical)
 More successful than exchanges
 Sponsored by powerful industry players

 Strengthen traditional purchasing behavior

 Example: Exostar

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 Private Industrial Networks
 Designed to coordinate flow of communication
among firms engaged in business together
 Electronic data interchange (EDI)

 Single firm networks

 Most common form
 Example: Wal-Mart’s network for suppliers

 Industry-wide networks
 Often evolve out of industry associations
 Example: Agentrics

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 Business Models in Emerging
E-commerce Areas
 Consumer-to-consumer (C2C)
 Examples: eBay, Half.com

 Peer-to-peer (P2P)
 Examples: The Pirate Bay, Cloudmark

 M-commerce:
 E-commerce models using wireless technologies
 Technology platform continues to evolve
 In the United States, demand still highest for digital
content like ring tones
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 Insight on Society
Where R U?
Class Discussion

 Why should you care if companies track your

location via cell phone?
 What is the “opt-in” principle and how does it
protect privacy?
 Should business firms be allowed to call cell
phones with advertising messages based on
location?
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 E-commerce Enablers: The Gold
Rush Model
 E-commerce infrastructure companies:
 Hardware, software, networking, security

 E-commerce software systems, payment systems

 Media solutions, performance enhancement

 CRM software

 Databases

 Hosting services, etc.

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 How the Internet and the Web
Change Business
 E-commerce changes industry structure by
changing:
 Basis of competition among rivals
 Barriers to entry
 Threat of new substitute products
 Strength of suppliers
 Bargaining power of buyers

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 Industry Value Chains
 Set of activities performed by suppliers,
manufacturers, transporters, distributors, and
retailers that transform raw inputs into final
products and services
 Internet reduces cost of information and other
transactional costs
 Leads to greater operational efficiencies,
lowering cost, prices, adding value for
customers
Slide 2-34
 E-commerce and Industry Value
Figure 2.5, Page 103
Chains

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 Firm Value Chains
 Activities that a firm engages in to create
final products from raw inputs
 Each step adds value

 Effect of Internet:
 Increases operational efficiency

 Enables product differentiation

 Enables precise coordination of steps in chain

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 E-commerce and Firm Value
Figure 2.6, Page 104
Chains

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 Firm Value Webs
 Networked business ecosystem
 Uses Internet technology to coordinate the
value chains of business partners
 Within an industry

 Within a group of firms

 Coordinates a firm’s suppliers with its own

production needs using an Internet-based
supply chain management system
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 Internet-Enabled Value Web
Figure 2.7, Page 105

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 Business Strategy
 Plan for achieving superior long-term
returns on the capital invested in a
business firm
 Four generic strategies
1. Differentiation
2. Cost
3. Scope
4. Focus

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permission of the publisher. Printed in the United States of America.

Copyright © 2010 Pearson Education, Inc.  

Publishing as Prentice Hall

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