Electronic Commerce: Business Models, Strategies, Investment and

Implementation in the Network Economics

Minder Chen, Ph.D.Associate Professor of Management Information Systems

E-Mail: minder.chen@csuci.eduWeb site: http://faculty.csuci.edu/minder.chen/

EC - 2 © Minder Chen, 1996-2011

Electronic Commerce: Introduction

E-Business

E-Commerce

Internet Commerce

Commerce

TravelocityMicrosoft expediaPriceline.com

EC - 4 © Minder Chen, 1996-2011

Priceline.com

• Priceline (PCLN) was recognized in 2010 for being the single best-performing stock in the S&P 500 over the past five years.

• Reverse auction, customer-driven e-commerce

• Perishable goods/services

• Orbitz.com

• Kayak.com

• Hotwire.com

EC - 5 © Minder Chen, 1996-2011

The Low-Friction Market

"[The Internet] will carry us into a new world of low friction, low-overhead capitalism, in which market information will be plentiful and transaction costs low."

-- Bill Gates, The Road Ahead

"Where there is a friction, there is opportunity!"

-- Net Ready.

EC - 6 © Minder Chen, 1996-2011

EC Business Opportunities

New business models and ideas are driving EC initiatives.

Internet technologies are enablers.

Innovative Ideas, Business models, and Business strategies

Funding

Business and technical talents

Technological enablers

EC - 7 © Minder Chen, 1996-2011

EC and Business Processes

Seller Customer

Co

rpo

rate

Dat

abas

es

Provide Info

Get customer

Provide info

Fulfill order

Support

Identify need

Find source

Evaluate offerings

Purchase

Operate, Maintain, Repair

Phone, fax, e-mail

Web site

Newsgroups

Net communities

Web site

EDI

Web site, phone, fax, e-mail, e-mailing list

Credit cards, e-cashP.O.s

Demos, reviews

Send info

Data sheets, catalogs, demos

Request info

Web surfing

Web searches, web ads

Deliver soft goods electronically

Selling Process Procurement Process

EC - 8 © Minder Chen, 1996-2011

The Cycle of Electronic Commerce

Customers Online Ads Online Orders

Standard Orders

Access

SearchesQueriesSurfing

Distribution

Online: soft goodsDelivery: hard goods

Electronic Customer Support

Follow-on Sales

EC - 9 © Minder Chen, 1996-2011

Changes in the Net Economy

• Business environment – Local / Physical Global /Virtual

• Business assets – Tangible Intangible

• Business change – Periodic Continuous

• Business production– Mass Production Mass Customization

Mass Personalization

• Customization is under direct user control: the user explicitly selects between certain options (a "portal" site with headlines from the New York Times or from the Wall St. Journal; enter ticker symbols for the stocks you want to track).

• Personalization is driven by the computer which tries to serve up individualized pages to the user based on some form of model of that user's needs.

-- http://www.useit.com/alertbox/981004.html

EC - 10 © Minder Chen, 1996-2011

Network and Information Economy• Information is costly to produce but cheap to

reproduce. – Price information according to its value not its cost.

• Managing intellectual property. – Maximize the value of your intellectual property, not the

terms and conditions that maximize the protection.

• Information as an “experience good”– Consumers must experience it to value it.

– Brand and trust building is critical.

• The economics of attention– A wealth of information creates a poverty of attention.

Source: Information Rules

EC - 11 © Minder Chen, 1996-2011

Popularity Adds Value in a Network

Val

ue

to U

ser

Number of Compatible User

Vicio

us c

ycle

Vir

tuou

s cy

cle

Networks• Real: LAN, Internet, Fax • Virtual: Virtual community, Chat

room, Instant messenger, Skype, FaceBook

Positive Network

Externality

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Externality, PageRank, Traffic, and Ads

• Externalities is a concept that holds that money is not the only scarcity in the world. Chief among the others are your time and respect.

• “Attention economy” and “reputation economy” are too fuzzy to measure. But, because of Google (and other search engines), we can now convert from reputation (PageRank) to attention (traffic) to money (ads).

Adapted from: [PDF]why $o.oois the future of business  (free) Chris Anderson

EC - 13 © Minder Chen, 1996-2011

Challenge• Consumers: Everything on the Internet should to be free.

• Merchant: How can I make a profit if everything is free.

• Examples: – Free web browsers: Netscape Communicator and Internet Explorer

– Free email: Juno, mail.yahoo.com and hotmail.com

– Free Internet Access: Freeserve in Britain

– Free PC: eMachine and CompuServe; Free-PC

– Free web hosting: Geocities, Angelfire, Zoom

– Free ...

Pri

ce

Year

$250

$0

1930 1999

Cost of a 3-minute Long Distance Call

Gilder's Law All tangible and intangible items that can be copied adhere to the law of inverted pricing and become cheaper as they improve.

Anticipate this cheapness in your pricing strategy and product/service development strategy

All tangible and intangible items that can be copied adhere to the law of inverted pricing and become cheaper as they improve.

Anticipate this cheapness in your pricing strategy and product/service development strategy

EC - 14 © Minder Chen, 1996-2011

[PDF]why $o.oois the future of business  (free) Chris Anderson[PDF]FREE: The Future of Radical Price

EC - 15 © Minder Chen, 1996-2011

Moving Your Business Online• Companies are motivated by either fear or greed to

move to their businesses to the net.

• To .com your company is becoming an imperative.

• They have to obsolete their current business models and work very hard to search a new business model.

• Be aware of internet tax law and interstate/international commerce laws.

– http://en.wikipedia.org/wiki/Internet_taxes

Your competitor is just one-click away

EC - 16 © Minder Chen, 1996-2011

Business Models Based on the Value Chain in the Market Place

Raw material producer

Manufacturer

Distributor

Retailer

Consumer

ExchangeExchange

Examples: • B2B: alibaba.com• B2C: Amazon.com

• C2B: Priceline.com• C2C: eBay.com,

craiglist.com

C2B

B2C

B2C C2CNew Middleman

• Independent market operators

• Consortia

Service Providers: • Logistics• Financial

Channel Conflict

Online Procurement

Buyer-side EC Model

EC - 17 © Minder Chen, 1996-2011

Market Capitalization

Market Cap (4/16/99)

$11.6 Billion

$ 4.3 Billion

$ 2.5 Billion

$ 2.5 Billion

Who Can Afford Not to Play in the Internet EC Space?

Cap: 9.771B Share: $57 7/16

As 6/28/2011

Symbol Price Chg Chg % Market Cap

PCLN 495.40 8.30 1.70% 23.94B

EC - 18 © Minder Chen, 1996-2011

• No vendor loyally• No switching costs• Time-insensitive• Short-term• Casual• Many vendors• Products differentiated

on price, image

• Relationship-based• Very high switching costs• Extremely time-sensitive• Long-term• Mission-critical• Few partners• Partners differentiated on

reliability, flexibility

Business-to-ConsumerBusiness-to-Consumer Business-to-BusinessBusiness-to-Business

Business-to-Business vs. Business-to-Consumer

<

EC - 19 © Minder Chen, 1996-2011

Business Channel: Multi-Channel Presence

Buyer Seller

• Brick-and-mortar – Face-to-Face

• Mail order– Mail – Printed catalog

• Phone order – Telex– Phone– Fax

• Electronic commerce • EDI• Email• Web

Multi-channel plays will have extraordinary power if companies elegantly blend and synchronize those channels.

Pure Play

Cli

ck a

nd

Mo

rtar

EC - 20 © Minder Chen, 1996-2011

The B2C Business Models – Bricks, Clicks, Revolution and Evolution

Bricks Clicks

Bricks & Clicks

• Sat on the sidelines for the explosion • Evolved to online commerce• Online services are incremental• Not huge differentiators for clients• Source of convenience• Took advantage of lessons learned• Assets CHEAP from Click failures

• Mergers or sales of assets to Bricks• Folding bricks ventures into portfolio• Narrow focus of offerings

eBay, Amazon, Webvan, Wingspan Bank, Yahoo

Gap, Safeway, Wallmart

• Bricks organizations set up separate click organizations to give the required freedom to operate in the fast moving Click environment

or• Clicks organizations were created through VC capital

Wells Fargo, Safeway, Barnes and Noble

EC - 21 © Minder Chen, 1996-2011

Showrooming at Retail Stores

Source: http://online.wsj.com/article/SB10001424052702304587704577334370670243032.html http://www.cnn.com/2012/06/17/opinion/greene-showrooming/index.html

EC - 22 © Minder Chen, 1996-2011

Web Metrics• Hit – any Web server request that generates a log file entry. A

page has many elements (html, gifs), each generating a hit.

• Page – Web server file that is sent to client user agent, usually a browser.

• Session – all actions (i.e. requests, resets) made in single visit, from entry until logout or time out (e.g., 20 minutes of no activity).

• Visitor – a user or bot/spider/crawler that makes requests at a site. Can be new, returning, registered, anonymous.

• Buyer – visitor that purchases something

• Customer – a visitor that registers (sometimes defined as buyer)

• Conversion – rate at which visitors transition to desired state (buyers, customers, registered, started checkout)

• Host – remote machine, identified by IP address, used for visit.

• Referrers – Page that provides a link to another page. Can be internal or external

• Web logs, Google Analytics, and Alexa

EC - 23 © Minder Chen, 1996-2011

• Hit/page hit/ Referrers/ Host (location), domain, IP address/

EC - 24 © Minder Chen, 1996-2011

Product Variety Comparison for Internet and Brick-and-Mortar Channels

Product Category Large Online Retailer

Typical LargeBrick-and-Mortar Store

Books 3,000,000 40,000 – 100,000

CDs 250,000 5,000 – 15,000

DVDs 18,000 500 – 1,500

Digital Cameras 213 36

Portable MP3 players

128 16

Flatbed Scanners 171 13

http://www.heinz.cmu.edu/~mds/smr.pdf

The unlimited “shelf space” of the Internet. Free:The Future of a Radical Price, Chris Anderson

EC - 25 © Minder Chen, 1996-2011

Pure Players vs. Physical Retailers

http://www.wired.com/wired/images.html?issue=12.10&topic=tail&img=1http://www.wired.com/wired/archive/12.10/tail_pr.html

EC - 26 © Minder Chen, 1996-2011

EC - 27 © Minder Chen, 1996-2011

Mass Customization: http://www.zazzle.com/

– The unfulfilled need of a user again was the mother The unfulfilled need of a user again was the mother of inventionof invention: The two brothers, Bobby and Jeff Beaver, wanted to create a cool t-shirt to advertise a party at their fraternity (in order to "draw in plenty of nice girls"). They realized how difficult it was at that time to get high-quality custom t-shirts without having to order larger quantities at a promotions company or to rely on the low quality of heat-transfer at the local copy store.

– unique digital custom printing technologies

– Zazzle is not a technology company – it is a "market maker".

– "Niching the niche“ - a mass customization ecosystem

http://mass-customization.blogs.com/mass_customization_open_i/sneaker/

EC - 28 © Minder Chen, 1996-2011

EC Strategies: 4 Cs

CommerceCommerce

ContentContentCommunityCommunity

CustomersCustomers

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Customers

• Obsess over your customers

• Remember that the Web is an infant– What do you have to offer that the physical world

cannot in order to attract customers?

• If you make one customer unhappy, he won't tell five friends -- he'll tell 5,000 on newsgroups, list servers, and so on.

– "Word of mouth" (WOM) factor gets amplified on the Net

• The shifts of balance of power away from business and toward customer.

- Jeff Bezos

EC - 30 © Minder Chen, 1996-2011

Self Assessment: Customer Caring

What do your customers need? What requests do they make of you?

How do you respond to customer’s requests?

What kind of information can they get from you?

What process do they go through? How do you produce and distribute it to them?

What are the steps that your customers have to take

to complete a purchase transactions?

How do they get shipment status?

How are exceptions handled?

What do you need from customer? What do you know about customer preferences?

What information could you use to better target your

product and service offerings?

What to build relationships? How can you engage customers in an ongoing dialog?

How can you continue to provide information, products,

and services to reinforce your ongoing relationships?

EC - 31 © Minder Chen, 1996-2011

Is EC Appropriate for You?

Industries who set up virtual storefronts

EC - 32 © Minder Chen, 1996-2011

Technology-Fit: Customer and Product

Cu

sto

me

r N

ee

d fo

r P

rod

uct

Info

rma

tion

High

Low

Customer Demographics MatchPoor High

Earlier AdopterSecond Wave

Second WaveWeb Laggards

TideDenny's

AAFedExpMicrosoft

NikePepsi

Jenny CraigChrysler

Source: Forrester Research

Co

mp

as

sio

n a

bo

ut

the

pro

du

ct

(SM

M)

EC - 33 © Minder Chen, 1996-2011

Virtual Communities

Virtual Community

Users

• Money

• Content• Demographics

Providers

• Content• Hard goods• Games• Services

Other Websites

Advertisers

• Advertising

EC - 34 © Minder Chen, 1996-2011

www.parentsoup.com

http://parenting.ivillage.com/ -- Community Web Site

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Groupon Business Model

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Group Buying Sites

Site Name Number of Cities

Rewards for Sharing With Friends

Type of Deals iPhone App

Groupon.com 42 $10 for you if new invitee joins and buys a deal

Hip city locales and activities

Yes

LivingSocial.com

13 Free deal if 3 friends buy it; $5 to invitees who sign up; $5 to you if they buy a deal

Hip city locales and activities

Yes

Tippr.com 1 Deal gets better as more people buy it

Hip city locales and activities

No

Woot.com online None Technology gadgets

Yes

Gilt.com online $25 for each invitee who buys

High fashion Yes

Ideeli.com online $25 for each invitee who buys

High fashion No

Source: http://online.wsj.com/article/SB10001424052748704896104575139692395314862.html

EC - 37 © Minder Chen, 1996-2011

Revenue Streams

• Transaction

• Subscription / Listing Fee

• Value-added services

• Donation and Sponsorship

• Advertising – Google AdWords

– Google AdSense

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Multifaceted Model for Web-Based EC Design• ATTRACT: Hits

– Communities of interest

– Changing topics for repeat customers

– Features that encourage customers to explore

• ENGAGE: Leads– Special areas encourage customer to register (i.e. selection of articles customized for

visitors interests)

• PARTICIPATE: Sales revenue– Free download (video, audio, & software)

– Shopping– Chat and News

– Subscription

• JUMP: Advertising revenue

– Other products of interest to customer– Other sites of interest to customer

Adapted from Netscape Communications Inc., 1996.

Attract

Engage

Participate

Jump

EC - 39 © Minder Chen, 1996-2011

TransactTransact

Man

age

Man

age

PaymentPayment

AdvertisingAdvertising

Order processingOrder processing

FulfillmentFulfillment

MerchandisingMerchandising

Lead generationLead generation

CustomerCustomerserviceservice

Objectives Of An eCommerce SiteObjectives Of An eCommerce Site

Engage

Engage

EC - 40 © Minder Chen, 1996-2011

EC Site Life Cycle

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Opening Online Business• Identify a need and a niche

• Determine what you have to offer (products/services)

• Set your business goals

• Design your EC architecture

• Assemble your EC teams

• Build your web site

• Set up a system to handle sales

• Provide customer services

• Advertise/promote your online business (online and offline)

• Evaluate site performance & improve continuously

EC - 42 © Minder Chen, 1996-2011

EC Hosting• Yahoo!Small Business

– http://smallbusiness.yahoo.com/ecommerce/

• Ebay– http://pages.ebay.com/help/sell/sell-getstarted.html

• Amazon Marketplace– http://www.amazon.com/gp/help/customer/display.html?

nodeId=1161232

• Drupal.org– http://drupal.org/hosting

•  Wordpress: Open source solution for a web site. – http://wordpress.org/ 

• Webs.com: Webs’ point-and-click Site Builder requires no technical skills.

EC - 43 © Minder Chen, 1996-2011

Web Site Architecture Design: Website Navigation Diagram

EC - 44 © Minder Chen, 1996-2011

Site Elements• Home page

– Menu-driven, News-oriented

– Path-based, Splash screens or image maps

• Graphics and texts

• Submenus pages and subsites (alternative home pages for special audiences)

• Tables of contents, site indexes, site maps

• Product/service/information pages

• "What's new" pages

• Search features• Contact information

– Street address, phone number, fax numbers, maps, travel directions, parking information

• User feedback and victual community pages

• Bibliographies and appendixes

• FAQ (Frequently Asked Questions) pages

• Customized server error pages

Source: Web Style Guide

EC - 45 © Minder Chen, 1996-2011

Cross-Selling and Up-Selling

Amazon’s Collaborative Filtering/Recommendation system

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Personalization

EC - 47 © Minder Chen, 1996-2011

The Evolution of EC Implementation

Maturity

Fu

nct

ion

alit

y

Publishing (Brochure-ware)AdvertisingMarketingInformation

Customer Interactivity Registration / FormsEmailGames / Chat room / eForum

Web-based TransactionProduct database queries / SearchElectronic PaymentsFund transfer

Process IntegrationFulfillmentSettlementWorkflow

ExtensioneCRMeProcurement / SCM eMarketplace / Auction

1:1 Relationship

Real-time organizations

Communities of Interests

Marketplace creator

EC - 48 © Minder Chen, 1996-2011

Future EC Trends• Broadband internet connection: I.e., ADSL, Cable modem

• Streaming media and web-based learning

• More interactive virtual community

• Customization and personalization

• Mini-portal and corporate portal

• Affiliate partner

• Multiple-channel integration

• E-commerce is driving E-business

• Affordable EC software and hosting service for small-medium-size companies

• Emerging standards such as XML to enable Business-to-Business electronic commerce

EC - 49 © Minder Chen, 1996-2011

Elevator Pitch  Our business [list name] will deliver [list key deliverables] to [list key beneficiaries] to enable them to [list key benefits]. The business is headed by [list founder and key executives, investors, and advisors] that have [list key background and qualifications]. The business [will launch/was launched] on [date] and we [will begin/began] delivering [first product or service] on [date]. We expect to prove our business model and achieve profitable growth on [date] and anticipate that the terminal value of the business will be [list anticipated value], which represents a [list return] to investors. The total cost to achieve this goal will be [total cost], which includes the following key cost categories [list]. We have currently received [list dollars of funding secured to date] from the following sources [list]. We anticipate receiving the remainder of the funding by [date] from [list sources]. The key risks for the project are [list risks]. These risks will be managed by [list key approached to managing each risk].

• Source: Applegate and Saltrick, “Developing an Elevator Pitch for a New Venture.”

•  

EC - 50 © Minder Chen, 1996-2011

Elevator Pitch • Elevator Pitch – What is it?

– In the time it takes to ride an elevator from the 1st to the 10th floor – explain the gist of your business idea to a stranger!

– An elevator pitch conveys the businesses’ key features and rationale in a clear, concise way so that it can be communicated easily to others

• Who is the primary audience?– Potential investors, customers, suppliers, partners, employees– Anyone who has or could have a stake in your business

• Why does it matter?– Communicate – What, why, how, where and when– Teaser to generate interest – the upfront hook!– Share a coherent vision of the firm’s goals and high level strategy

for achieving these goals– And, last but not least - Raise $$$!– Plus, it might be your only shot!

http://nuvc.innuvation.org/Elevator_Pitch_Workshop_v2.ppt

EC - 51 © Minder Chen, 1996-2011

Key Issues

• Overview of the problem your business will solve and opportunity it will address

– Why does this problem matter?

– How severe is it?

– How big is the opportunity?

– How fast is it growing?

– Why has it not been solved yet?

– Why can you solve it when others could not?

• What value is being created?

• Who are the primary beneficiaries? – Think about who is capturing the value

– Consider that some groups may capture more than others – these represent the ideal first customers

EC - 52 © Minder Chen, 1996-2011

Products/Services and Competitors

• What are the products and services that you will deliver to solve the problem

• How do these products and services meet the unsolved market problem?

– Do they immediately solve the entire problem?

– Or what is the product and service “path” for getting there?

• Who are the competitors and why are your products and services superior?

– Focus on direct competitors

– Consider segmenting direct competitors by type

– Why, where and how does each competitor or type fall short?

EC - 53 © Minder Chen, 1996-2011

Revenues and Resources

• How do you plan to generate revenues– Short term– Longer term if there is a twist or kicker

• Hit the high points of your business model– Profitability – Leverage – As revenues and size increases, do gross

and/or operating margins improve?– Scale efficiencies - how do the mechanics and economics

of your business model scale

• What are the resources required?– Money – Capital intensity?– Time – core development, unique product versions for

different customer types, distribution channel build, etc– Team background and expertise – what are the critical

competencies of the team?

EC - 54 © Minder Chen, 1996-2011

Teaser and Vision

• Teaser to pique interest– Punchy, crisp and clearly articulated

– Incentivizes stakeholders to care by logically presented the case for how the business benefits them

– Delivered with confidence but not cockiness

– Should leave them wanting to hear more about the details at a later date

• Communicate a common vision and goals– Everyone on the same page, working toward the

same goal

– Minimize non-productive activities, speeds up time to market

EC - 55 © Minder Chen, 1996-2011

Raising Money

• Raise $$$– Distilling the essence of your business idea into a

few critical points reflects well on you

– Strong elevator pitch results in more favorable assessment of your talents by potential backers» VCs would rather back a Grade A management team with a

Grade B product than vice versa

– Decisions to proceed forward with due diligence are often made on the basis of the elevator pitch and the accompanying follow up conversation by seasoned VCs

EC - 56 © Minder Chen, 1996-2011

Cash Flow

How

What

Who

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Describe a Business Model: 9 Building Blocks

OfferOffer

Cost Structure

Cost Structure

CustomerRelationships

CustomerRelationships

CustomerSegmentsCustomerSegments

Competencies, Activities, Resources

Competencies, Activities, Resources

Partner NetworkPartner Network

RevenueStreamsRevenueStreams

Distribution Channels

Distribution Channels

Key Issues To Solve

Key Issues To Solve

Source: Describe and Improve your Business Model

WhoWhatHow

How Much?

EC - 58 © Minder Chen, 1996-2011

Reverse Engineering Facebook’s Business Model with Ballpark Figures

http://www.businessmodelalchemist.com/

EC - 59 © Minder Chen, 1996-2011

Five Essential Elements Of Business

Source: Ram Charan, What the CEO Wants You to Know