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Slide 2-1
IT 361: E-Commerce Systems
Chapter 2
E-commerce Business Models and Concepts
Readings: Chapter 2 - E-commerce Business Models and Concepts
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Slide 2-2
Tweet Tweet: Twitter’s Business ModelClass Discussion
• What characteristics or benchmarks can be used to assess the business value of a company such as Twitter?
• 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 various methods described for
monetizing Twitter’s assets do you feel might be most successful?
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Slide 2-3
E-commerce Business Models—Definitions• Business model: set of planned activities
designed to result in a profit in a marketplace• Business plan: document that describes a
firm’s business model• E-commerce business model: aims to use and
leverage the unique qualities of Internet and Web
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Slide 2-4
Key Ingredients of a Business Model
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Slide 2-5
Value Proposition• Defines how a company’s product or service fulfills the needs of
customers“Buy this product, and you will get this specific benefit”
• Questions to ask: Why will customers choose to do business with your firm
instead of another? What will your firm provide that others do not or cannot?
• Examples of successful value propositions: Personalization/customization Reduction of product search costs Reduction of price discover costs Facilitation of transactions by managing product delivery
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Example of Value propositions"You get fresh, hot pizza delivered to your door in 30 minutes or less -- or it's free.“
“You package absolutely, positively has to get there overnight”
“The milk chocolate melts in your mouth, not in your hand”
“It helps building strong bones 12 ways”
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Approach to creating a compelling customer value proposition
• Know your targeted customers and both their obvious and less apparent needs and desires.
• Talk to current customers and understand the product's value from their perspective.
• Know the competition. What product performance does our offering provide that competition does not. Review existing competitive value propositions to develop an understanding of their relative strengths. Do they send a stronger message to potential customers than the proposition you are considering?
• Research classic customer value propositions to learn from the success and failure of other marketplace offerings.
• Brainstorm with both others in the company and potential customers to develop a value proposition that states your product benefits clearly and accurately and brings sustaining brand recognition to your product.
Reference: Manzi, A. M. (2010). How to Write a Strong Value Proposition. Retrieved 4 22, 2010, from Helium: http://www.helium.com/items/1161368-increase-sales-how-to-increase-brand-recognition-writing-a-strong-value-proposition
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Slide 2-8
Revenue Model
• Describes how the firm will 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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Slide 2-9
Market Opportunity
• Refers to a company’s intended marketspace and the overall potential financial opportunities available to the firm in that marketspace
• Marketspace: the area of actual or potential commercial value in which a company intends to operate
• Realistic market opportunity is defined by revenue potential in each of market niches in which company hopes to compete
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Slide 2-10
Competitive Environment• Refers to the other companies selling similar
products and operating in the same marketspace• In addition; presence of substitute, potential of new
entrants, power of customer, power of supplier (Firm’s environment).
• Influenced by: how many competitors are active how large their operations are what is the market share for each competitor how profitable these firms are how they price their products
• Includes both direct competitors and indirect competitors
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Slide 2-11
Competitive Advantage
• Achieved when a firm can produce a superior product and/or bring product to market at a lower price than most, or all, of competitors
• Firms achieve competitive advantage when they are able to obtain differential access to the factors of production that are denied to competitors (ex. Terms from suppliers, more experience & knowledge, loyal employee, patent, network, ..)
• Types of competitive advantage include: First mover advantage—results from a firm being
first into a marketplace Unfair competitive advantage—occurs when one
firm develops an advantage based on a factor that other firms cannot purchase
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Slide 2-12
Competitive Advantage
• Perfect market: A market in which there are no competitive advantage o asymmetries because all firms have equal access to all factors of production
• Leverage a competitive advantage: is when a company uses its competitive advantage to achieve more advantage in surrounding market. (brand leverage).
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Methods for creating a sustainable competitive advantage
1. Cost leadership - Cost advantage occurs when a firm delivers the same services as its competitors but at a lower cost;
2. Differentiation - Differentiation advantage occurs when a firm delivers greater services for the same price of its competitors.
3. Focus (economics) - A focused approach requires the firm to concentrate on a narrow market niche, hoping to achieve a local rather than industry wide competitive advantage.
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Slide 2-14
Market Strategy
• A plan that details how a company intends to enter a new market and attract customers
• Best business concepts will fail if not properly marketed to potential customers
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Slide 2-15
Organizational Development
• Describes how the company will organize the work that needs to be accomplished (implement the business plan)
• Work is typically divided into functional departments
• Move from generalists to specialists as the company grows
• e.g. ebay
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Slide 2-17
Management Team
• Employees of the company responsible for making the business model work
• Strong management team gives instant credibility to outside investors, market-specific knowledge, and experience in implementation.
• A 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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Slide 2-18
How to Identify Management Team?
• What kind of experience do you need to manage your startup business?
• What technical background is desired?• What kind of supervisory experience?• How many years of experience?• What job functions to be fulfilled?• Any contacts and experience in raising
finance?
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Slide 2-19
Raising Capital
• Seed Fund• Incubator• Angel investors• Capital investors• Venture Capital• Crowdfunding
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Slide 2-20
Insight on Business: Crowdfunding Takes OffClass Discussion
• What types of projects and companies might be able to most successfully use crowdfunding?
• Are there any negative aspects to crowdfunding?
• What obstacles are presented in the use of crowdfunding as a method to fund start-ups?
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Slide 2-21
Categorizing E-commerce Business Models: Some Difficulties
• No one correct way• We categorize business models according to e-
commerce sector (B2C, B2B, C2C)• Type of e-commerce technology used can also
affect classification of a business model• Some companies use multiple business
models
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Slide 2-22
• B2C Business Models– Portal– E-tailer– Content Provider– Transaction Broker– Market Creator– Service Provider– Community Provider
• B2B Business Models– E-distributor– E-procurement– Exchanges – Industry Consortia– Private Industrial
Networks
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Slide 2-23
B2C Business Models: Portal
• Offers powerful search tools plus an integrated package of content and services
• Typically utilizes a combines subscription/advertising revenues/transaction fee model
• May be general or specialized (vortal)
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Slide 2-24
B2C Business Models: E-tailer
• Online version of traditional retailer• Types include:
Virtual merchants Bricks-and-cricks Catalog merchantsManufacturer-direct
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Slide 2-25
B2C Business Models: Content Provider
• Information and entertainment companies that provide digital content over the Web
• Typically utilizes a subscription, pay for download, or advertising revenue model
• Syndication a variation of standard content provider model
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Slide 2-26
B2C Business Models: Transaction Broker
• Processes online transactions for consumers• Primary value proposition—saving of time and
money• Typical revenue model—transaction fee • Industries using this model include:
Financial services Travel services Job placement services
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Slide 2-27
B2C Business Models: Market Creator
• Uses Internet technology to create markets that bring buyers and sellers together
• Examples: Priceline.com eBay.com
• Typically uses a transaction fee revenue model
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Slide 2-28
B2C Business Models: Service Provider
• Offers services online• Value proposition: valuable, convenient, time-
saving, low-cost alternatives to traditional service providers
• Revenue models: subscription fees or one-time payment
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Slide 2-29
B2C Business Models: Community Provider
• Sites that create a digital online environment where people with similar interests can transact, communicate, and receive interest-related information.
• Typically rely on a hybrid revenue model• Examples:
iVillage.com Friendster.com About.com
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Slide 2-31
Insight on Technology: Battle of the Titans: Music in the Cloud
Class Discussion• Have you purchased music online or subscribed to
a music service? What was your experience?• What revenue models do cloud music services use?• Do cloud music services provide a clear advantage
over download and subscription services? • Of the cloud services from Google, Amazon, and
Apple, which would you prefer to use, and why?
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Slide 2-35
B2B Business Models: E-distributor
• Company that supplies products and services directly to individual businesses
• Owned by one company seeking to serve many customers
• Example: Grainger.com
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Slide 2-37
B2B Business Models: E-procurement Companies
• Create and sell access to digital electronic markets
• B2B service provider is one type: offer purchasing firms sophisticated set of sourcing and supply chain management tools
• Application service providers: a subset of B2B service providers
• Example: Ariba
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Slide 2-39
B2B Business Models: Exchanges
• An electronic digital marketplace where suppliers and commercial purchasers can conduct transactions
• Usually owned by independent firms whose business is making a market
• Generate revenue by charging transaction fees• Usually serve a single vertical industry• Number of exchanges has fallen to around 200
in 2005
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Slide 2-41
B2B Business Models: Industry Consortia
• Industry-owned vertical marketplaces that serve specific industries
• Horizontal marketplaces, in contrast, sell specific products and services to a wide range of industries
• Example: Exostar
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Slide 2-43
B2B Business Models: Private Industrial Networks
• Digital networks (usually, but not always Internet-based) designed to coordinate the flow of communications among firms engaged in business together
• Single firm network: the most common form (Example: Walmart)
• Industry-wide networks: often evolve out of industry associations (Example: Agentrics)
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Slide 2-44
Business Models in Emerging E-commerce Areas
• Consumer to Consumer (C2C): Provides a way for consumers to sell to each other, with the help of an online marketmaker such as eBay.com
• Peer-to-Peer (P2P): Links users, enabling them to share files and common resources without a common server
• M-commerce: Takes traditional e-commerce business models and leverages emerging new wireless technologies
• To date, a disappointment in the United States; however, technology platform continues to evolve
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Slide 2-45
E-commerce Enablers: The Gold Rush Model
• Internet infrastructure companies: Companies whose business model is focused on providing infrastructure necessary for e-commerce companies to exist, grow, and prosper
• Provide hardware, software, networking, security, e-commerce software systems, payment systems, databases, hosting services, etc.
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Slide 2-46
How the Internet and the Web Change Business: Strategy, Structure, and Process
• Important to understand how Internet and Web have changed business environment, including industry structures, business strategies, and industry and firm operations
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Slide 2-47
Industry Structure
• E-commerce changes the nature of players in an industry and their relative bargaining power by changing:
the basis of competition among rivals the barriers to entry the threat of new substitute products the strength of suppliers the bargaining power of buyers
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Slide 2-48
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Slide 2-49
Industry Structure
• Industry Structural Analysis is performed to check a business model and its potential long-term profitability.
• E-commerce can affect the structure of an industry +ve (automobile) and -ve (music, travel)– Increased price competition– Created new strategies for differentiation of
products and services
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Slide 2-50
Industry Value Chains
• A set of activities performed in an industry by suppliers, manufacturers, transporters, distributors, and retailers that transform raw inputs into final products and services
• Internet may change business operation at the industry level
• Reduces the cost of information and other transactional costs
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Slide 2-51
E-commerce and Industry Value ChainsFigure 2.6, Page 93
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Slide 2-52
Firm Value Chains
• Analysis of the efficiency of a single firm’s operation
• A set of activities that a firm engages in to create final products from raw inputs
• Internet helped firms increases operational efficiency– Outsource activities via the internet– Precisely coordinate steps in the value chain and
reduce cost– Differentiate product and services
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Slide 2-53
E-commerce and Firm Value Chains
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Slide 2-54
Firm Value Webs
• A networked business ecosystem that uses Internet technology to coordinate the value chains of business partners within an industry, or 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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Slide 2-55
Internet-Enabled Value Web
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Slide 2-56
Business Strategy
• A set of plans for achieving superior long-term returns on the capital invested in a business firm (i.e., a plan for making a profit in a competitive environment)
• Why would anyone pay for a product than it costs to produce?
• Four generic strategies Differentiation (vs. commoditization) Cost Scope Focus
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Teaching Objectives
• Identify the key components of e-commerce business models.
• Describe the major B2C business models.• Describe the major B2B business models.• Recognize business models in other emerging
areas of e-commerce.• Understand key business concepts and
strategies applicable to e-commerce
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Key Terms•business model•business plan•e-commerce business model•value proposition•revenue model•advertising revenue model•subscription revenue model•transaction fee revenue model•sales revenue model•affiliate revenue model•market opportunity•marketspace•competitive environment•competitive advantage•asymmetry•first-mover advantage•complimentary resources•unfair competitive advantage•perfect market•leverage•market strategy•organizational development•management team•portal•e-tailer
•barriers to entry•intellectual property•content provider•transaction broker•market creator•service provider•community provider•e-distributor•e-procurement firm•B2B service provider•application service provider (ASP)•scale economies•exchange•industry consortia•private industrial networks•industry structure•industry structural analysis•value chain•firm value chain•value web•business strategy•profit•differentiation•commoditization