E-Commerce (CSC330)

Dr Muhammad Zeeshan Babar

Lecture 3
CHAPTER 2: E-COMMERCE BUSINESS
MODELS AND CONCEPTS
 Learning Objective
 Identify the key components of e-commerce business models.
 Describe the major B2C business models.
 Describe the major B2B business models.
 Understand key business concepts and strategies applicable to e-commerce.
E-COMMERCE BUSINESS MODELS

 INTRODUCTION
 A business model is a set of planned activities (sometimes referred to as business processes)
designed to result in a profit in a marketplace.
 A business model is not always the same as a business strategy, although in some cases
they are very close insofar as the business model explicitly takes into account the
competitive environment
 The business model is at the center of the business plan. A business plan is a document
that describes a firm’s business model
 An e-commerce business model aims to use and leverage the unique qualities of the
Internet, the Web, and the mobile platform.
 EIGHT KEY ELEMENTS OF A BUSINESS
MODEL
 These elements are value proposition,
revenue model, market opportunity,
competitive environment, competitive
advantage, market strategy,
organizational development, and
management team
Value Proposition

 A company’s value proposition is at the very heart of its business model. A value
proposition defines how a company’s product or service fulfills the needs of customers
 To develop and/or analyze a firm’s value proposition, you need to understand why
customers will choose to do business with the firm instead of another company and what
the firm provides that other firms do not and cannot.
 From the consumer point of view, successful e-commerce value propositions include
personalization and customization of product offerings, reduction of product search costs,
reduction of price discovery costs, and facilitation of transactions by managing product
delivery.
Revenue Model

 Revenue model describes how the firm will earn revenue, produce profits, and produce a
superior return on invested capital
 The following major revenue models: advertising, subscription, transaction fee, sales, and
affiliate.
 In the advertising revenue model, a company that offers content, services, and/or
products also provides a forum for advertisements and receives fees from advertisers.
 In the subscription revenue model, a company that offers content or services charges a
subscription fee for access to some or all of its offerings.
 In a freemium strategy, the companies give away a certain level of product or services for
free, but then charge a subscription fee for premium levels of the product or service.
Revenue Model

 In the transaction fee revenue model, a company receives a fee for enabling or executing
a transaction.
 In the sales revenue model, companies derive revenue by selling goods, content, or
services to customers.
 In the affiliate revenue model, companies that steer business to an “affiliate” receive a
referral fee or percentage of the revenue from any resulting sales.
 For example, MyPoints makes money by connecting companies with potential customers
by offering special deals to its members. When they take advantage of an offer and make a
purchase, members earn “points” they can redeem for freebies, and MyPoints receives a
fee.
Subscription Revenue Model
Primary Revenue Models
Market Opportunity

 The term market opportunity refers to the company’s intended marketspace (i.e., an area
of actual or potential commercial value) and the overall potential financial opportunities
available to the firm in that marketspace
Competitive Environment

 A firm’s competitive environment refers to the other companies selling similar products
and operating in the same marketspace.
 The competitive environment for a company is influenced by several factors: how many
competitors are active, how large their operations are, what the market share of each
competitor is, how profitable these firms are, and how they price their products.
 Firms typically have both direct and indirect competitors. Direct competitors are
companies that sell very similar products and services into the same market segment.
 Indirect competitors are companies that may be in different industries but still compete
indirectly because their products can substitute for one another
Competitive Advantage

 Firms achieve a competitive advantage when they can produce a superior product and/ or
bring the product to market at a lower price than most, or all, of their competitors
 Firms that can provide superior products at the lowest cost on a global basis are truly
advantaged.
 An asymmetry exists whenever one participant in a market has more resources—financial
backing, knowledge, information, and/or power—than other participants. Asymmetries
lead to some firms having an edge over others, permitting them to come to market with
better products, faster than competitors, and sometimes at lower cost.
 One rather unique competitive advantage derives from being a first mover. A first mover
advantage is a competitive market advantage for a firm that results from being the first
into a marketplace with a serviceable product or service
Competitive Advantage

 However, in the history of technology-driven business innovation, most first movers often
lack the complementary resources needed to sustain their advantages, and often follower
firms reap the largest rewards
 Some competitive advantages are called “unfair.” An unfair competitive advantage occurs
when one firm develops an advantage based on a factor that other firms cannot purchase
 In perfect markets, there are no competitive advantages or asymmetries because all firms
have access to all the factors of production (including information and knowledge) equally.
 However, real markets are imperfect, and asymmetries leading to competitive advantages do
exist, at least in the short term
 Companies are said to leverage their competitive assets when they use their competitive
advantages to achieve more advantage in surrounding markets
Market Strategy

 No matter how tremendous a firm’s qualities, its marketing strategy and execution are
often just as important. The best business concept, or idea, will fail if it is not properly
marketed to potential customers.
 Market strategy is the plan you put together that details exactly how you intend to enter a
new market and attract new customers.
 For instance, Twitter, YouTube, and Pinterest have a social network marketing strategy that
encourages users to post their content for free, build personal profile pages, contact their
friends, and build a community. In these cases, the customer becomes part of the marketing
staff!
Organizational Development

 Companies that hope 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.
 Typically, work is divided into functional departments, such as production, shipping,
marketing, customer support, and finance
 For instance, eBay founder Pierre Omidyar started an online auction site, according to
some sources, to help his girlfriend trade Pez dispensers with other collectors, but within a
few months the volume of business had far exceeded what he alone could handle. So he
began hiring people with more business experience to help out. Soon the company had
many employees, departments, and managers who were responsible for overseeing the
various aspects of the organization.
Management Team

 Arguably, the single most important element of a business model is the management team
responsible for making the model work.
 A strong management team gives a model instant credibility to outside investors, immediate
market-specific knowledge, and experience in implementing business plans
 Eventually, most companies get to the point of having several senior executives or managers.
 To be able to identify good managers for a business start-up, first consider the kinds of
experiences that would be helpful to a manager joining your company What kind of technical
background is desirable. What kind of supervisory experience is necessary. How many years
in a particular function should be required. What job functions should be fulfilled first:
marketing, production, finance, or operations. Especially in situations where financing will
be needed to get a company off the ground, do prospective senior managers have experience
and contacts for raising financing from outside investors.
RAISING CAPITAL

 Raising capital is one of the most important functions for a founder of a start-up business and its
management team.
 Not having enough capital to operate effectively is a primary reason why so many start-up
businesses fail.
 Many entrepreneurs initially “bootstrap” to get a business off the ground, using personal funds
derived from savings, credit card advances, home equity loans, or from family and friends. Funds
of this type are often referred to as seed capital.
 Once such funds are exhausted, if the company is not generating enough revenue to cover
operating costs, additional capital will be needed
 One of the most important aspects of raising capital is the ability to boil down the elements of the
company’s business plan into an elevator pitch, a short two-to-three minute (about the length of
an elevator ride, giving rise to its name) presentation aimed at convincing investors to invest
KEY ELEMENTS OF A BUSINESS MODEL
KEY ELEMENTS OF AN ELEVATOR PITCH
RAISING CAPITAL

 Incubators (sometimes also referred to as accelerators) such as Y Combinator typically

provide a small amount of funding, but more importantly, also provide an array of services
to start-up companies that they select to participate in their programs, such as business,
technical, and marketing assistance, as well as introductions to other sources of capital
 Angel investors are typically wealthy individuals (or a group of individuals) who invest
their own money in an exchange for an equity share in the stock in the business.
 Venture capital investors invest funds they manage for other investors such as investment
banks, pension funds, insurance companies, or other businesses, and usually want to obtain
a larger stake in the business and exercise more control over the operation of the business
 Crowdfunding involves using the Internet to enable individuals to collectively contribute
money to support a project
MAJOR BUSINESS-TO-CONSUMER (B2C)
BUSINESS MODELS
 Business-to-consumer (B2C) e-commerce, in which online businesses seek to reach
individual consumers, is the most well-known and familiar type of e-commerce
MAJOR BUSINESS-TO-CONSUMER (B2C)
BUSINESS MODELS
E-TAILER

 Online retail stores, often called e-tailers, come in all sizes, from giant Amazon to tiny local stores.
 E-tailers are similar to the typical bricks-and-mortar storefront, except that customers only have to
connect to the Internet or use their smartphone to place an order.
 Some e-tailers, which are referred to as “bricks-and-clicks,” are subsidiaries or divisions of existing
physical stores and carry the same products. REI, JCPenney, Barnes & Noble, Walmart, and Staples are
examples of companies with complementary online stores.
 Others, however, operate only in the virtual world, without any ties to physical locations. Amazon, Blue
Nile, and Bluefly are examples of this type of e-tailer.
 Several other variations of e-tailers—such as online versions of direct mail catalogs, online malls, and
manufacturer-direct online sales—also exist.
 This sector, however, is extremely competitive. Because barriers to entry (the total cost of entering a
new marketplace) into the e-tail market are low, tens of thousands of small e-tail shops have sprung up
COMMUNITY PROVIDER

 Although community providers are not a new phenomenon, the Internet has made such
sites for like-minded individuals to meet and converse much easier, without the limitations
of geography and time to hinder participation.
 Community providers create an online environment where people with similar interests
can transact (buy and sell goods); share interests, photos, videos; communicate with like-
minded people; receive interest related information; and even play out fantasies by
adopting online personalities called avatars.
 Community members frequently request knowledge, guidance, and advice. Lack of
experienced personnel can severely hamper the growth of a community, which needs
facilitators and managers to keep discussions on course and relevant
 Online communities benefit significantly from offline word-of-mouth, viral marketing.
CONTENT PROVIDER

 Content providers distribute information content, such as digital video, music, photos,
text, and artwork
 Content providers can make money via a variety of different revenue models, including
advertising, subscription fees, and sales of digital goods
 Of course, not all online content providers charge for their information: just look at the
websites or mobile apps for ESPN, CIO, CNN, and the online versions of many
newspapers and magazines
 Some content providers, however, do not own content, but syndicate (aggregate) and then
distribute content produced by others. Syndication is a major variation of the standard
content provider model.
PORTAL

 Portals such as Yahoo, MSN, and AOL offer users powerful search tools as well as an
integrated package of content and services, such as news, e-mail, instant messaging, calendars,
shopping, music downloads, video streaming, and more, all in one place. Initially, portals
sought to be viewed as “gateways” to the Internet
 Portals do not sell anything directly—or so it seems—and in that sense they can present
themselves as unbiased
 Portals generate revenue primarily by charging advertisers for ad placement, collecting referral
fees for steering customers to other sites, and charging for premium services
 Yahoo, AOL, and others like them are considered to be horizontal portals because they define
their marketspace to include all users of the Internet
 Vertical portals (sometimes called vortals) attempt to provide similar services as horizontal
portals, but are focused around a particular subject matter or market segment
TRANSACTION BROKER

 Companies that process transactions for consumers normally handled in person, by phone,
or by mail are transaction brokers.
 The largest industries using this model are financial services, travel services, and job
placement services
 The online transaction broker’s primary value propositions are savings of money and time
by providing timely information
 Given rising consumer interest in financial planning and the stock market, the market
opportunity for online transaction brokers appears to be large
 Transaction brokers make money each time a transaction occurs.
 Travel sites generate commissions from travel bookings and job sites generate listing fees
from employers up front, rather than charging a fee when a position is filled
MARKET CREATOR

 Market creators build a digital environment in which buyers and sellers can meet, display and
search for products and services, and establish prices
 Prior to the Internet and the Web, market creators relied on physical places to establish a market
 The Web changed this by making it possible to separate markets from physical space. Prime
examples are Priceline, which allows consumers to set the price they are willing to pay for
various travel accommodations and other products (sometimes referred to as a reverse auction),
and eBay, the online auction site utilized by both businesses and consumers
 The market opportunity for market creators is potentially vast, but only if the firm has the
financial resources and marketing plan to attract sufficient sellers and buyers to the marketplace
 Uber, Airbnb, and Lyft are another example of the market creator business model
SERVICE PROVIDER

 While e-tailers sell products online, service providers offer services online.
 Photo sharing, video sharing, and user-generated content (in blogs and social networks) are
all services provided to customers
 Service providers use a variety of revenue models. Some charge a fee, or monthly
subscriptions, while others generate revenue from other sources, such as through
advertising and by collecting personal information that is useful in direct marketing
 Many service providers employ a freemium revenue model, in which some basic services
are free, but others require the payment of additional charges
 Obviously, some services cannot be provided online. For example, dentistry, plumbing, and
car repair cannot be completed via the Internet. However, online arrangements can be
made for these services
MAJOR BUSINESS-TO-BUSINESS (B2B)
BUSINESS MODELS
 Business-to-business (B2B) e-commerce, in which businesses sell to other businesses, is
around 10 times the size of B2C e-commerce, even though most of the public attention has
focused on B2C
 For instance, it is estimated that revenues for all types of B2B e-commerce in the United
States will total around $6.3 trillion in 2017, compared to about $695 billion for all types
of B2C e-commerce
MAJOR BUSINESS-TO-BUSINESS (B2B)
BUSINESS MODELS
E-DISTRIBUTOR

 Companies that supply products and services directly to individual businesses are e-
distributors.
 W.W. Grainger, for example, is the largest distributor of maintenance, repair, and
operations (MRO) supplies
 E-distributors are owned by one company seeking to serve many customers
 One-stop shopping is always preferable to having to visit numerous sites to locate a
particular part or product
E-PROCUREMENT

 Just as e-distributors provide products to other companies, e-procurement firms create

and sell access to digital markets.
 Firms such as Ariba, for instance, have created software that helps large firms organize
their procurement process by creating mini-digital markets for a single firm. Ariba creates
custom-integrated online catalogs (where supplier firms can list their offerings) for
purchasing firms
 On the sell side, Ariba helps vendors sell to large purchasers by providing software to
handle catalog creation, shipping, insurance, and finance. Both the buy and sell side
software is referred to generically as “value chain management” software.
 B2B service providers make money through transaction fees, fees based on the number of
workstations using the service, or annual licensing fees
E-PROCUREMENT

 In the software world, firms such as Ariba are sometimes also called Software as a Service
(SaaS) or Platform as a Service (PaaS) providers; they are able to offer firms much lower
costs of software by achieving scale economies.
 Scale economies are efficiencies that result from increasing the size of a business, for
instance, when large, fixed-cost production systems (such as factories or software systems)
can be operated at full capacity with no idle time.
EXCHANGES

 An exchange is an independent digital marketplace where hundreds of suppliers meet a

smaller number of very large commercial purchasers
 Exchanges are owned by independent, usually entrepreneurial start-up firms whose
business is making a market, and they generate revenue by charging a commission or fee
based on the size of the transactions conducted among trading parties
 The greater the number of sellers and buyers, the lower the sales cost and the higher the
chances of making a sale. The ease, speed, and volume of transactions are summarily
referred to as market liquidity
 In theory, exchanges make it significantly less expensive and time-consuming to identify
potential suppliers, customers, and partners, and to do business with each other. As a result,
they can lower transaction costs—the cost of making a sale or purchase
INDUSTRY CONSORTIA

 Industry consortia are industry-owned vertical marketplaces that serve specific

industries, such as the automobile, aerospace, chemical, floral, or logging industries
 In contrast, horizontal marketplaces sell specific products and services to a wide range of
companies
 Vertical marketplaces supply a smaller number of companies with products and services of
specific interest to their industry, while horizontal marketplaces supply companies in
different industries with a particular type of product and service, such as marketing related,
financial, or computing services.
 Industry consortia have tended to be more successful than independent exchanges in part
because they are sponsored by powerful, deep-pocketed industry players, and also because
they strengthen traditional purchasing behavior rather than seek to transform it
PRIVATE INDUSTRIAL NETWORKS

 A private industrial network (sometimes referred to as a private trading exchange or

PTX) 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.
 These networks typically evolve out of a firm’s own enterprise resource planning (ERP)
system, and are an effort to include key suppliers in the firm’s own business decision
making
 For instance, Walmart operates one of the largest private 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.
HOW E-COMMERCE CHANGES BUSINESS:
STRATEGY, STRUCTURE, AND PROCESS
 The eight unique features of E-commerce has some implications related to it.
HOW E-COMMERCE CHANGES BUSINESS:
STRATEGY, STRUCTURE, AND PROCESS
INDUSTRY STRUCTURE

 Industry structure refers to the nature of the players in an industry and their relative
bargaining power.
 An industry’s structure is characterized by five forces: rivalry among existing competitors,
the threat of substitute products, barriers to entry into the industry, the bargaining power
of suppliers, and the bargaining power of buyers
 When you describe an industry’s structure, you are describing the general business
environment in an industry and the overall profitability of doing business in that
environment.
 An industry structural analysis is an effort to understand and describe the nature of
competition in an industry, the nature of substitute products, the barriers to entry, and the
relative strength of consumers and suppliers
INDUSTRY STRUCTURE

 E-commerce can affect the structure and dynamics of industries in very different ways.
 Consider the recorded music industry, an industry that has experienced significant change
because of e-commerce. Historically, the major record companies owned the exclusive
rights to the recorded music of various artists
 With the entrance into the marketplace of substitute providers such as Napster and Kazaa,
millions of consumers began to use the Internet to bypass traditional music labels and their
distributors entirely
 Clearly, e-commerce creates new industry dynamics that can best be described as the give
and take of the marketplace, the changing fortunes of competitors
INDUSTRY STRUCTURE

 Yet, in other industries, e-commerce has strengthened existing players. In the chemical and
automobile industries, e-commerce is being used effectively by manufacturers to strengthen their
traditional distributors
 In these industries, e-commerce technology has not fundamentally altered the competitive forces
—bargaining power of suppliers, barriers to entry, bargaining power of buyers, threat of
substitutes, or rivalry among competitors— within the industry
 Inter-firm rivalry (competition) is one area of the business environment where e-commerce
technologies have had an impact on most industries
 It is impossible to determine if e-commerce technologies have had an overall positive or negative
impact on firm profitability in general. Each industry is unique, so it is necessary to perform a
separate analysis for each one. Clearly, e-commerce has shaken the foundations of some
industries, in particular, content industries (such as the music, newspaper, book, and software
industries) as well as other information-intense industries such as financial services
INDUSTRY VALUE CHAINS

 While an industry structural analysis helps you understand the impact of e-commerce
technology on the overall business environment in an industry, a more detailed industry
value chain analysis can help identify more precisely just how e-commerce may change
business operations at the industry level
 A value chain is the set of activities performed in an industry or in a firm that transforms
raw inputs into final products and services
 Each of these activities adds economic value to the final product; hence, the term value
chain as an interconnected set of value-adding activities.
 Figure 2.4 illustrates the six generic players in an industry value chain: suppliers,
manufacturers, transporters, distributors, retailers, and customers.
INDUSTRY VALUE CHAINS
INDUSTRY VALUE CHAINS

 By reducing the cost of information, e-commerce offers each of the key players in an
industry value chain new opportunities to maximize their positions by lowering costs
and/or raising prices
 For instance, manufacturers can reduce the costs they pay for goods by developing
Internet-based B2B exchanges with their suppliers. Manufacturers can develop direct
relationships with their customers, bypassing the costs of distributors and retailers.
Distributors can develop highly efficient inventory management systems to reduce their
costs, and retailers can develop highly efficient customer relationship management systems
to strengthen their service to customers
 Customers in turn can search for the best quality, fastest delivery, and lowest prices,
thereby lowering their transaction costs and reducing prices they pay for final goods.
FIRM VALUE CHAINS
FIRM VALUE CHAINS

 Firm value chain the set of activities a firm engages in to create final products from raw inputs
 Each step in the process of production adds value to the final product.
 In addition, firms develop support activities that coordinate the production process and
contribute to overall operational efficiency. Figure 2.5 illustrates the key steps and support
activities in a firm’s value chain.
 E-commerce offers firms many opportunities to increase their operational efficiency and
differentiate their products. For instance, firms can use the Internet’s communications
efficiency to outsource some primary and secondary activities to specialized, more efficient
providers without such outsourcing being visible to the consumer
 Finally, firms can use e-commerce to provide users with more differentiated and high-value
products
FIRM VALUE WEBS
FIRM VALUE WEBS

 While firms produce value through their value chains, they also rely on the value chains of
their partners—their suppliers, distributors, and delivery firms
 A value web is a networked business ecosystem that uses e-commerce technology to
coordinate the value chains of business partners within an industry, or at the first level, to
coordinate the value chains of a group of firms.
 Value web coordinates a firm’s suppliers with its own production needs using an Internet-
based supply chain management system.
 Firms also use the Internet to develop close relationships with their logistics partners. For
instance, Amazon relies on UPS tracking systems to provide its customers with online
package tracking, and it relies on the U.S. Postal Service systems to insert packages
directly into the mail stream
BUSINESS STRATEGY

 A business strategy is a set of plans for achieving superior long-term returns on the capital
invested in a business firm. A business strategy is therefore a plan for making profits in a
competitive environment over the long term
 Profit is simply the difference between the price a firm is able to charge for its products
and the cost of producing and distributing goods
 There are four generic strategies for achieving a profitable business: differentiation, cost,
scope, and focus.
 The specific strategies that a firm follows will depend on the product, the industry, and the
marketplace where competition is encountered.
BUSINESS STRATEGY

 Differentiation refers to all the ways producers can make their products or services unique
and distinguish them from those of competitors.
 The opposite of differentiation is commoditization—a situation where there are no
differences among products or services, and the only basis of choosing is price
 As economists tell us, when price alone becomes the basis of competition and there are
many suppliers and many customers, eventually the price of the good/service falls to the
cost to produce it (marginal revenues from the nth unit equal marginal costs). And then
profits are zero! This is an unacceptable situation for any business person. The solution is
to differentiate your product or service and to create a monopoly-like situation where you
are the only supplier.
BUSINESS STRATEGY

 There are many ways businesses differentiate their products or services. A business may start with a core
generic product or service, but then create expectations among users about the “experience” of consuming
the product or using the service— “Nothing equals the experience of driving a BMW.”
 E-commerce offers some unique ways to differentiate products and services, such as the ability to
personalize the shopping experience and to customize the product or service to the particular demands of
each consumer
 Adopting a strategy of cost competition means a business has discovered some unique set of business
processes or resources that other firms cannot obtain in the marketplace.
 When a firm discovers a new, more efficient set of business processes, it can obtain a cost advantage over
competitors. Then it can attract customers by charging a lower price, while still making a handsome profit
 Competing on cost can be a short-lived affair and very tricky. Competitors can also discover the same or
different efficiencies in production. And competitors can also move production to low-cost areas of the
world. Also, competitors may decide to lose money for a period as they compete on cost.
BUSINESS STRATEGY

 A scope strategy is a strategy to compete in all markets around the globe, rather than
merely in local, regional, or national markets.
 A focus/market niche strategy is a strategy to compete within a narrow market segment
or product segment. This is a specialization strategy with the goal of becoming the premier
provider in a narrow market
 Another generic strategy is customer intimacy, which focuses on developing strong ties
with customers. Strong linkages with customers increase switching costs (the costs of
switching from one product or service to a competing product or service) and thereby
enhance a firm’s competitive advantage
 For example, Amazon’s one-click shopping that retains customer details and
recommendation services based on previous purchases makes it more likely that customers
will return to make subsequent purchases.
BUSINESS STRATEGY