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Business models for ecommerce
I. Developing business models
• What is a business model?
• Developing the ecommerce business model
• Benefits to the organization
II. Types of business models
• How the net is changing business
• Business <--> consumer
• Transaction based
III. Strategies and issues
L561: Information Systems Design for Digital Entrepreneurship
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www.cartoonstock.com/newscartoons/cartoonists/rte/lowres/rten92l.jpg
L561: Information Systems Design for Digital Entrepreneurship
I. Developing business models
• What is a business model?
A plan for the structure and actions by which your
organization will operate within its marketplace
A business model is a representation of the activities
of a business and:
“a unique configuration of elements comprising the
organization’s goals, strategies, processes,
technologies and structure, conceived to create value
for the customers and thus compete successfully in a
particular market.”
http://knowledge.wharton.upenn.edu/articles.cfm?catid=7&articleid
=244&homepage=yes
L561: Information Systems Design for Digital Entrepreneurship
A successful business model creates a heuristic logic that
connects technical potential with the realization of
economic value
It unlocks latent value from a technology
It lays out a path to take technology to market
It takes technological characteristics and potentials as
inputs
It converts them into economic outputs through
customers and markets
It mediates between technology and value creation
Chesbrough, H. and Rosenbloon, R.S. (2002). The role of the business model
in capturing value from innovation
http://icc.oxfordjournals.org/cgi/reprint/11/3/529.pdf
L561: Information Systems Design for Digital Entrepreneurship
Characteristics of a business model
Articulates the value proposition - value for customers
from product or service
Identifies a target market segment
Defines the value chain to create and market the product
or service
Estimates the cost structure, pricing, and profit potential
Place the company into the value network of suppliers
and customers
Clarifies the competitive strategy
L561: Information Systems Design for Digital Entrepreneurship
The business model and determinants of performance
Business model
~Composition and linkages
~Dynamics
Change
~Properties
Performance
~Underpinnings
Environment
~Competitive
~Macro
Afuah and Tucci (2000). Internet Business Models and Strategies.
McGraw Hill. p. 4
L561: Information Systems Design for Digital Entrepreneurship
A business model enables the firm to
Generate growth opportunities
Respond quickly and flexibly to changes in the market
Capture the opportunities quickly and profitably
It must be effective in managing knowledge and human
processes
It will be characterized by the interdependence, rather
than independence, of its parts
Each part of the firm is a contributor to value
This requires new roles for each of the firm’s parts so
that they can work together in new ways to help the
company’s resource and asset base grow
L561: Information Systems Design for Digital Entrepreneurship
In general terms, three components to consider are:
Activity: what a business does
Process: how it accomplishes what it does
Data models: the information structure of a business
More specifically, a business plan answers the following:
What type of business is it?
How do you plan to get it off the ground?
How will you run it?
How will you obtain and keep customers?
How will you generate revenue and turn a profit?
How much money do you need to do this?
L561: Information Systems Design for Digital Entrepreneurship
Developing the business model
The plan for developing and using resources to gain
competitive advantage
How the firm makes money, acquires market share,
and grows
Who you want to reach and what you want to sell them
Components
Customer value
Scope
Price
Revenue sources
Related activities Capabilities
Implementation
Sustainability
Dynamics
How will the model evolve as the environment changes?
L561: Information Systems Design for Digital Entrepreneurship
Environment
Competitive environment: everyone whose drive to
maximize profit and minimize loss impacts your business
Who are your main competitors and what do they do?
Who are your customers and suppliers?
Macro environment: the larger socio-cultural context
How are you affected by local, state, national and
international regulation?
What relationships with the governments affect your
business?
Are you affected by geopolitics? Change in the natural
environment?
L561: Information Systems Design for Digital Entrepreneurship
Developing the ecommerce business model
Ecommerce strategies are best when driven by business,
not technology, concerns
One way is to dissect the buying/selling process into its
various elements, from the buying side and the selling
side, and with your customers and suppliers
Then, think about how you can apply each to the Web
Analyze how your customer needs are changing from a
business perspective
How the web can help you address them
L561: Information Systems Design for Digital Entrepreneurship
Developing the plan
EURESCOM. (2002). Service Scenarios and Business Models for Mobile
Commerce
.
http://www.eurescom.de/.../P1102/ brochure/bmodels.html
L561: Information Systems Design for Digital Entrepreneurship
Drafting the plan
Who are your customers and how will you reach them?
How will you encourage repeat business?
What products or services will you offer on your site?
How much can you spend setting up the site?
What are your revenue goals and what is the time
frame for achieving these goals?
Can you process on-line orders and keep your
customers satisfied?
What features will the site need initially and what are
your plans for enhancement and expansion
NetQuest. (2000 - now gone). Setting up an online business
http://www.netquest1.com/ecommerce1.htm
L561: Information Systems Design for Digital Entrepreneurship
Other questions to consider:
Who pays?
Consumer, producer, or third parties?)
What for?
Goods, services, expertise, assurances of quality or
security
To whom?
Why?
Perceived value, or being locked in
List, D. (2006). What is a business model?
http://www.audiencedialogue.org/busmod.html
L561: Information Systems Design for Digital Entrepreneurship
Benefits of an ecommerce business model to the firm
Improved planning
A business model provides a framework for decision
making
It is the background for organizational action and
strategic planning
Coordination
All business processes involve the organization of
sub tasks and access to shared resources
A plan sets parameters for integration of activities
and resources towards shared goals
L561: Information Systems Design for Digital Entrepreneurship
Provision of value
It defines the customer base
The plan outlines how the firm will provide value to its
customers (consumers or other businesses)
Source of competitive advantage
The plan outlines the position the firm will take in the
marketplace
It explains how the firm will maintain this position
It outlines results of competitive intelligence gathering
It explains how the company will exploit its strengths
L561: Information Systems Design for Digital Entrepreneurship
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A business model describes the specific way the
business expects to make money
While a business plan is a lengthy document, a
business model should be small enough to stay in the
heads of the owner, staff, and investors
If a business model is on paper, it should be one page
A graphic, if it can be more clearly shown
There can be extras (notes and explanations) but the
business model itself is a single concept
www.webdesign.org/img_articles/4541/making-money.jpg
L561: Information Systems Design for Digital Entrepreneurship
This is a graphic depiction of Acer’s business model
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L561: Information Systems Design for Digital Entrepreneurship
Business models for ecommerce
I. Developing business models
• What is a business model?
• Developing the ecommerce business model
• Benefits to the organization
II. Types of business models
• How the net is changing business
• Business <--> consumer
• Transaction based
III. Strategies and issues
L561: Information Systems Design for Digital Entrepreneurship
Business models can be broken down into distinct
segments
“Buy-side” and “sell-side”: refers to payment direction
With whom is commerce being conducted (suppliers
or customers?)
In some cases, business is being transacted with both
“Product or service type”: refers to the “stuff” of the
transaction
What is it?
How will it be priced?
How will it be advertised?
How will it be sold and delivered?
L561: Information Systems Design for Digital Entrepreneurship
Business models and the web
Fox, C. (2000). E-commerce business models: Business models that
have succeeded and business models that have failed - International
case studies
http://www.chrisfoxinc.com/eCommerceBusinessModels.htm
L561: Information Systems Design for Digital Entrepreneurship
The ebusiness landscape
Network users
Infrastructure providers
Ecommerce: retail,
wholesale
Backbone
Content aggregators
ISP/OSP
Market makers
Last mile
Financial services
ASPs
Suppliers
Content creators
Software suppliers
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Hardware suppliers
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L561: Information Systems Design for Digital Entrepreneurship
Why the internet is changing the way we do business
Mediating technology
It creates interdependencies and new relationships
Ubiquity
Connectivity rates are increasing, making the world
smaller
Network externalities
It becomes more valuable as more people use it
Metcalf’s law: Value of the net = N , where N = # of
people online
2
This applies to auctions and online communities
L561: Information Systems Design for Digital Entrepreneurship
More:
A new distribution channel
Replacement effect --> old customers are moved from
offline to online channel
Extension effect --> New customers are added to the
channel
Creative destruction
New industries are created, the way existing industries
operate is changing, barriers to entry are changing
Reduce transaction costs
The costs of searching for sellers and buyers, collecting
information, negotiating price
L561: Information Systems Design for Digital Entrepreneurship
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More:
Time moderation
It shrinks and expands time
Reduces information asymmetry
www.inertiatech.com/img/ebusiness.jpg
Information control is decentralized
We can access much more information more easily
Infinite virtual capacity
Processing power, storage capacity, and speed continue
to increase
Reduces transaction costs
This refers to costs of searching for sellers and buyers,
collecting and analyzing information, logistics etc
L561: Information Systems Design for Digital Entrepreneurship
Hierarchy of ebusiness needs (after Maslow)
Fox, C. (2000). E-business models.
http://www.chrisfoxinc.com/eCommerceBusinessModels.htm
L561: Information Systems Design for Digital Entrepreneurship
• Ecommerce business models
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Merchant
Business ---> consumer (retail)
Business --> business (wholesale)
E-shop: Web marketing of a company or shop
Main goal: to sell goods and services
Secondary goal: to promote the company
Challenge is to develop strategies to increase demand
Other goals: cost-reduction of business processes
Revenues from reduced costs, increased sales,
affiliates, and advertising
e-commerce.my-best-jobs.com/ecommerce_image/ecommerce.jpg
L561: Information Systems Design for Digital Entrepreneurship
E-shops offer direct sales through electronic channels
using an electronic catalog or other format
Consumers order goods via fill-out forms, 800 numbers,
registration, fax, or surface mail
Online storefronts cover a wide variety of offerings
They combine elements of direct marketing with instore shopping and can be more efficient than either
Customization and relationship marketing
A broader definition of product and service categories
becomes possible
Some shops have products that can be bought and
sold only on the Web
L561: Information Systems Design for Digital Entrepreneurship
This model has problems
Current access speeds and hardware/software
configurations make online shopping frustrating
Online shopping is not as immediate as real-world
experiences (glossy catalogues or department stores)
Security and privacy are major issues
Consumer behavior issues are largely unknown
We are just learning how to:
Market to net shoppers
Ensure repeat customers
Use promotions and incentives effectively
L561: Information Systems Design for Digital Entrepreneurship
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Market aggregators
E-mall: a collection of e-shops, under a common umbrella
Might be use a common payment method (one shopping
cart)
Might have a single entry point to individual e-shops
Industry (or horizontal) market: When shops belong to a
certain market segment
Revenues are from membership fee, advertising, and
fees on transactions (if payments are processed by the
mall provider)
Challenge for estores is to distinguish themselves
www.mines.com.my/Tenants/media/emall.jpg
L561: Information Systems Design for Digital Entrepreneurship
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3rd party marketplace: an ASP for ecommerce
Companies outsource their web marketing and estore
operations to a 3rd party
It can be an add-on to their other channels
It is a user interface to companies’ product catalogues
It can be enhanced by special marketing features,
branding, payment, logistics, ordering, and secure
transactions
Revenues can be generated on the basis of one-off
membership fee, service fees, referral fees, or % of
transaction value
www.govproducts.com/dod-emall.jpg
L561: Information Systems Design for Digital Entrepreneurship
These sites sell the ability to reach motivated customers
with an information- or image-rich advertising
Entry are low, so smaller firms can set up sites as well (or
even better) than larger firms
There are also problems
What is the best way to implement such a concept?
We are learning about the design and layout of these
sites
How can managers can evaluate the effectiveness of
their sites?
L561: Information Systems Design for Digital Entrepreneurship
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Manufacturing and sales
Bypassing traditional distribution
channels and selling directly to
consumers
Cut out wholesalers and retailers (creating channel
conflict)
Develop new direct relationships with customer
Customization and personalization
Standing order customer home pages on the company
site
Has the potential to drastically cut costs and increase
profits for the manufacturer
e-learning.dmst.aueb.gr/mis/Cases/Dell/Case/Overview_Images/DEll_model.jpg1
L561: Information Systems Design for Digital Entrepreneurship
Virtual communities: the value
comes from members’ loyalty
(customers or partners) and
repeat visits
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They add their information to a basic environment
provided by the virtual community company
The membership fees and advertising are two main
sources of revenue
Can also use affiliate marketing
A virtual community can also be an important add-on to
other marketing operations
It can be used to build customer loyalty and receive
customer feedback
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L561: Information Systems Design for Digital Entrepreneurship
Market integrator
Bringing buyers and sellers in a specific market sector
together
The company provide the setting for business
This is an example of a vertical market
The company is a disinterested third party
It generates revenue from transaction fees
Some charge sellers a listing fee as well
It can sell premium services (security, escrow, logistics)
Problem is achieving and sustaining critical mass
L561: Information Systems Design for Digital Entrepreneurship
Brokerage or market maker
Bringing buyers (consumers) and sellers together
Revenue is generated through transaction fees and
advertising
Some will sell premium services
Seen in the auction, financial services, and travel sectors
These companies add value to data available on the open
networks or coming from integrated business operations
Examples include investment advice and competitive
intelligence
Rappa, M. (2006). Business models on the web
http://www3.digitalenterprise.org/models/models.html
L561: Information Systems Design for Digital Entrepreneurship
Types of brokers
Marketplace exchange
(Orbitz)
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Buy/sell fulfillment
(CarsDirect)
Demand collection
systems (Priceline)
Auctions (Ebay)
Transaction broker (Paypal)
Distributor (Bluefly)
Search agent (Simon)
Virtual marketplace (Amazon)
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L561: Information Systems Design for Digital Entrepreneurship
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An interesting type of broker
provides “trust”
Trust services are certification
authorities and electronic
notaries and other trusted third
parties
They certify that consumers, merchants, banks, and
others are who they say they are
Subscription fees combined with one-off service fees as
well as software sales and consultancy are the sources of
revenue
archive.opengroup.org/public/tech/security/pki/casm/img00005.gif
L561: Information Systems Design for Digital Entrepreneurship
One example is the brokerage providing access to content
through a searchable database
In a fee-based sites, the provider supplies and/or pays
for content which the consumer pays to access
The model has had limited success, because we are
unwilling to pay for content delivered in this manner
Currently few sites charge consumers to consume
content
A recent trend is toward free --> fee, where visitors are
able to access abstracted content at no charge, but
incur a small fee for the full content
L561: Information Systems Design for Digital Entrepreneurship
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Advertising
This model is familiar to modern
consumers
Two primary factors
The business provides space for the advertiser to
place its logo/ad or somehow convey its message to
customers
The business provides a consumer audience that the
advertiser finds attractive and appropriate for the
products it is promoting
Many sites include this as part of their model
Some do it exclusively
www.vitalnet.net/i/g_advertising.gif
L561: Information Systems Design for Digital Entrepreneurship
Sponsored content sites sell advertising space to reduce
or eliminate fees charged to visitors
A recent trend is toward sponsored “entertainment
content” and sponsored search agents
Merchants or advertisers can also pay a provider for
information placement in an organized listing in a
search database page
These sites provide meaningful exposure for firms that
would otherwise be lost in the clutter
A problem is the dependency on traffic
L561: Information Systems Design for Digital Entrepreneurship
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Types of advertising
Portal (Yahoo, MSN)
Classifieds (Monster, Craigslist)
User registration (NYTimes
Digital)
Query based ad placement (Google)
Contextual advertising (Claria)
Content targeted advertising (Google)
Ultramercials (Salon)
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L561: Information Systems Design for Digital Entrepreneurship
Infomediary
The site generates revenue by selling information about
visitors
To gather this information, they give something away for
free
Examples include: computers, net connectivity, cash
for clicks and page views
In exchange, consumers must provide a lot of detailed
information about themselves
Their net use is typically monitored
They also are subjected to lots of advertising
Problem: the ethics of this model
L561: Information Systems Design for Digital Entrepreneurship
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Types of infomediaries
Advertising networks (Doubleclick)
Audience measurement services (Nielsen/Netratings)
Incentive marketing (Coolsavings)
Metamediary (Edmunds)
www.mpellinc.com/images/promos.jpg
L561: Information Systems Design for Digital Entrepreneurship
Value chain service provider
Provides a specific function for the
value chain
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Secure electronic payments, credit
card processing, or logistics
For example, banks have done
this offline
New approaches are also emerging in production/stock
management where the specialized expertise is required
to analyze and tune production
A fee- or % based scheme is the basis for revenues
www.e-pay.com.my/images/products/diagram-supply-value-chain.gif
L561: Information Systems Design for Digital Entrepreneurship
Value chain integrators:
Focus on integrating multiple steps of the value chain
They will provide several business processes within a
single corporate entity
Secure transactions, credit card processing, and
server log analysis
Revenues come from consultancy fees, long term
contracts, or pay-as-you-go transaction fees
L561: Information Systems Design for Digital Entrepreneurship
Collaboration platforms
Provides sets of tools, expertise, and an environment for
collaboration between enterprises
Can focus on specific functions, such as collaborative
design and engineering
Involves technologies such as net audio/video
conferencing, shared whiteboards, distributed GDSS
Revenues are generated by managing the platform and
collecting membership and usage fees
Another stream is charging for expertise
A third is selling or licensing the specialist tools (e.g. for
design, workflow, document management)
L561: Information Systems Design for Digital Entrepreneurship
Ebusiness models
Adelsberger, H. (2000). Learning Technologies: E-Business.
http://elm.wi-inf.uni-essen.de/ en/lt/ebusiness.html
L561: Information Systems Design for Digital Entrepreneurship
Timmers, P. (1998). Business Models for Electronic Markets
http://www.imse.hku.hk/.../Timmers/ 98_21_n.html
L561: Information Systems Design for Digital Entrepreneurship
Transaction based business models
The merchandise sales model
The per use model
The timed usage model
The subscription model
The auction model
The sponsorship model
The public support model
L561: Information Systems Design for Digital Entrepreneurship
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The merchandise sales model
Organized around the sale of goods or
services in exchange for money or other
value given at the time of the transaction
Examples are “virtual storefronts” and “on-line
catalogs”
Probably the most common type of on-line commerce
because of its ease of use and familiarity to consumers
Many similarities to off-line versions
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L561: Information Systems Design for Digital Entrepreneurship
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The per use model
Similar to “merchandise sales”
except that consumers do not own the
goods or services they use
Technology has not yet evolved to allow widespread
deployment of this model
It will become increasingly prevalent on-line when
customers can access resources on-line cheaply and
easily
Purchase of a product will no longer be necessary
Video, music, text “on demand”
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L561: Information Systems Design for Digital Entrepreneurship
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The timed usage model
Appropriate for service businesses
providing customized information or
recreational opportunities requiring more
than one visit
Works well when consumers are interested in frequent
or prolonged access and will invest time to customize
and explore the service
ISPs use this to build on-line communities where people
spend long periods of time
They also seek repeat users to maximize their revenue
Examples: interactive gaming environments or news
searching functions
www.smartmobs.com/archives/finalfantasyXI_comm_detail.jpg
L561: Information Systems Design for Digital Entrepreneurship
The subscription model
Subscription models are borrowed from publishing
Primarily applicable to businesses offering products (as
opposed to services)
Consumers are interested in receiving various versions of
the merchandise offered on an on-going basis
Based on the assumption that the products offered will
be modified or updated on a continuing basis
It is most effective for providing information-based
products which require regular updating
Magazines with commentary or serialized entertainment
are common examples
L561: Information Systems Design for Digital Entrepreneurship
The auction model
The site provides the “virtual space”
for an ongoing auction
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People register with the site to
participate
All types of digital and non-digital
products are being sold
The site takes a commission on all sales
The development of trust is essential to the success of
this business model
There are different strategies for managing trust in eauctions
auction-genius-course.com/blog/img/herbcartoon.jpg
L561: Information Systems Design for Digital Entrepreneurship
The sponsorship model
Sponsorship is an ideal way to launch a business
The site and audience are so attractive that advertisers
are willing to invest money for public acknowledgement
of their support
The sponsor seeks an affiliation with your business in
the minds of customers rather than attempting to push
its own products
Also, the recipient has less obligation to the sponsor
than it would to an advertiser in terms of showcasing
the sponsor’s own products or services
L561: Information Systems Design for Digital Entrepreneurship
The public support model
Public service-oriented organizations should consider
adopting this model to fund their operations
The on-line world will generate demand for alternative
information, entertainment, and other resources which
best be supported by contributions directly from the
public
This model can ensure that less advantaged members
of society receive their share of access to on-line
resources
L561: Information Systems Design for Digital Entrepreneurship
Business models for ecommerce
I. Developing business models
• What is a business model?
• Developing the ecommerce business model
• Benefits to the organization
II. Types of business models
• How the net is changing business
• Business <--> consumer
• Transaction based
III. Strategies and issues
L561: Information Systems Design for Digital Entrepreneurship
III. Strategies and issues
There are several generic strategies that firms use to gain
competitive advantage
Blocking
The firm protects its product or service “market space”
Can be based on the uniqueness of the offering
This refers to protecting and taking advantage of
intellectual property
Patents, copyrights, trade secrets, trademarks, service
marks, licensing agreements
It can also be based on control over post-entry pricing
Lowering the price to retaliate against competitors
L561: Information Systems Design for Digital Entrepreneurship
There are ways to counter blocking
Successful challenges to restrictions on intellectual
property
Taking advantage of information asymmetry
Push for legal and regulatory relief
Partner with other competitors (cooptition)
Wait for technologies and customer expectations to
change
L561: Information Systems Design for Digital Entrepreneurship
Running
Based on the assumption that blocking is temporary
Involves continual adjustment and change of the
business model over time
Requires paying close attention to competitors
It is a commitment to first-mover advantage
Can involve cannibalization
Introducing new products and services that undercut
your older ones still in the marketplace
L561: Information Systems Design for Digital Entrepreneurship
Partnerships
Involves teaming with another firm in one of several ways
Strategic alliances
Joint ventures
Mergers
Acquisitions
Allows the sharing of resources that neither could get on
its own
This can be risky because of threats to intellectual
property and trade secrets
L561: Information Systems Design for Digital Entrepreneurship
High
Difficult to
make money
Run
Team
Block
Low
Imitability
Putting the strategies into context
Afuah and Tucci
(2000). p. 73
Owner of comp
assets makes
money
Inventor makes
money
Block Team
Holder of technology
and assets or
bargaining power
makes money
Freely available
Tightly held and important
Complementary assets
Imitability: how easily can the product or service be copied?
Complementary assets: what else is needed to exploit it?
L561: Information Systems Design for Digital Entrepreneurship
• Business model issues
Assumption: The net is causing disruption in many
sectors of the economy
Challenge: To act in the face of this disruption (instead
of react)
Issues:
Revenue balance
Cost of business
Customer loyalty
Organizational models
Lockin
Switching costs
Customer value
Partnerships
Investments
L561: Information Systems Design for Digital Entrepreneurship
Revenue balance
What % of your revenues will you generate from the
web by the year 2005?
By 2007? 2010?
This is an indication of the importance of the web as
a sales channel in your overall organization
Cost: The more you rely on the web, the more likely it is
that you will disrupt traditional distribution and sales
channels
Disintermediation
Changes in organizational structure and process
L561: Information Systems Design for Digital Entrepreneurship
Cost of business
How much can costs be lowered using the web?
Administration, sales, customer support, advertising,
accounting, human resources, suppliers
Strategy: Force them to use the web:
Ex: moving customer support to the web and
discontinuing phone support
Cost: There will be a period of adjustment for employees,
suppliers, and customers
L561: Information Systems Design for Digital Entrepreneurship
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Customer loyalty
How can you build and maintain
relationships with customers?
Assumption: customers are important
and the main goals are to draw them in
and make them return
Strategy: engage in activities designed to build trust and
encourage repeated visits
Ex: 24-7 customer support
Ex: Clear privacy policies
Cost: The expense of finding out about customers
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L561: Information Systems Design for Digital Entrepreneurship
Customer value
What kinds of digital services can be created for
customers, partners, suppliers?
Strategy: Taking advantage of new technologies to
provide new ways to interact
Ex: personalized content, order tracking, interactive
catalogs, real-time education, customer support,
return policies, web conferencing
Cost: There will be new processes and work functions
that will be needed to support these activities
L561: Information Systems Design for Digital Entrepreneurship
Stickiness
How do you get them to stay?
How do you get them to give up information to you?
Lock-in
What do you provide for them that makes it hard
them to leave?
for
Switching costs
How do you estimate the threshold at which it’s
worth it for your customer to go elsewhere?
L561: Information Systems Design for Digital Entrepreneurship