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eCommerce-Selling New Value. Creating Business Cases in an Uncertain Environment. Session Objectives. Review the key components of an eCommerce business case Discuss steps needed to build a persuasive analysis - PowerPoint PPT Presentation
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eCommerce-Selling New ValueeCommerce-Selling New Value
Creating Business Cases in an Uncertain EnvironmentCreating Business Cases in an Uncertain Environment
2
Session Objectives
• Review the key components of an eCommerce business case
• Discuss steps needed to build a persuasive analysis• Examine a case that demonstrates the complexities of
eCommerce business case development
3
A business case generally consists of three components.
Business Model
Financial Model
Data and Assumptions
A business strategy specifying the primary approach and rationale for pursuing an eCommerce opportunity
The financial analysis of a proposed business model consisting of baseline projections, revenue and expense estimates and valuations
The data, analysis and assumptions which support the financial model
4
Several common eCommerce business models exist and new ones emerge continually.
Portal
ContentProvider
Shopping/Commerce
ISP/Web Host
AuctionSite
Community
SoftwareProvider
SecurityServices
ConsultingAdvertising
5
eCommerce financial models rely upon the same components as traditional businesses.
Baseline Projections
Expense Estimates
Revenue Estimates
Valuations
BusinessModel and Logic
6
The data and assumptions that drive eCommerce financial models are the crux of the business case.
• Online Population• Households Making Online Purchases• Percentage of Online Purchasers
Visiting MakeMeRich.com
• Percentage Purchasing from MakeMeRich.com
• Average Purchase Amount• Other Revenues
• Development Costs• General and Advertising Expenses• Operating Costs
Baseline
Revenue
Expense
Valuation
Income StatementBalance SheetCash Position
Net Present ValueInternal Rate of Return
Earnings MultipleRevenue MultiplePayback Period
7
Session Objectives
• Review the key components of an eCommerce business case
• Discuss steps needed to build a persuasive analysis• Examine a case that demonstrates the complexities of
eCommerce business case development
8
Sample Business Case Approaches :
2. Stand-alone Web Venture
1. Quick & Dirty
4. ePremium - assessing market valuation impact
3. eCommerce initiative for existing businesses
9
Revenue
Capital
Costs
10mmNPV
x
Revenue
Capital
Costs
10mmNPV
x
Revenue
Capital
Costs
10mmNPV
x
Revenue
Capital
Costs
150mmNPV
The “quick and dirty” approach can be used to qualify multiple opportunities or model competitors.
Approach 1: Quick & Dirty
10
RewardsTransaction
ServicesCommerce
Media Placement Services
(e.g. Double Click)
Branded Advertiser/
Sponsor
Transactive Content
Sponsorship/Advertising
B
ount
y
In
terc
hang
e
R
even
ue
Sha
ring
B
ount
y
Banner Rates Click Throughs Leads
Purchases Advertising Spending
Return/Cash Flow
User
Access Fee
Help Line Fee
Customer Care
For a stand-alone web venture, we develop a model of all sources of revenue and expense.
Approach 2: Web Venture
11
Enhance Revenue
Reduce Costs
Reduce Non-Care Related Costs
Reduce Care Related CostsPotential
eCommerce Benefits
Attract/Retain More Members
Expand Share of Each Customer
($ x)
Value Potential
($ y)
$ p
$ q
($ A)
$ BIs there compelling value? $ B-A
Health Services: CareFirst Example
eCommerce initiatives for existing businesses focus on cost reduction and revenue enhancement.
Approach 3: Existing Business
12
Market Capitalisation (US$ Bn)
AOL
$ 132
Time-Warner
$ 76
Amazon.com Barnes & Noble
$ 24$ 2
eSchwab
$ 43
Merill Lynch
$ 29
eBay Sotheby’s
$ 23
$ 2
$ 16$ 9
@Home Cablevision
$ 34 $ 33
Yahoo CBS
= Internet based companies
Sources: Mary Meeker (AC), Andersen Consulting analysis.
Yahoo’s NPAT for FY98 was US$32m. Estimate for FY99 is $104 m.
Amazon.com posted a net loss of US$(74.4)m for 1998.
AOL recorded a net loss of US$(0.5)Bn in 1997 and net income of only US$160 m in 1998.
= Traditional ‘Bricks and mortar’
The impact of eCommerce initiatives on shareholder value can be a driving factor.
Approach 4: Valuing the ePremium
13
The business case is a living deliverable that evolves with the stage of development.
Broad ranges, reliable to +/- 40%
Reliable to +/- 25%
Reliable to +/- 10 or less
Future
Capability DevelopmentPlanning
Analysis Design Build and Test Deploy
• Reasonable assumptions• Directionally correct• Comparable opportunities
• Conceptual design complete• Business / tech requirements defined• Development options narrowed
• Detailed design complete• Development options selected• Pricing finalized
• Operational requirements known• Release schedule known• Issues / risks mitigated
14
Business case development is an iterative process with four basic steps.
DevelopBusiness
Logic
CollectData
BuildSpreadsheet
PerformSensitivityAnalysis
ClientCheckpoints
• Structure the analysis
• Confirm logic fits client strategy
• Define key metrics
• Conduct research
• Normalize data
• Document assumptions
• Design workbook
• Enter data and documentation
• Check data and formulas
• Identify key sensitivities
• Alter variables within reasonable range
• Establish best/worstand most likely cases
15
How fast is the Internet growing in Belgium?What are the demographics of users?
How much eCommerce is being conducted?
Investment reports, research firms and publications are the best sources of eCommerce data.
Research Firms:ForresterGartner GroupIDCJupiter
Investment Banks:Alex BrownBankBoston Robertson StephensCSFBMerrill Lynch
Publications:Business 2.0International Journal of eCommerceInternet WorldRed Herring
16
Estimates and projections differ by source, implying the need for additional analysis.
0
2
4
6
8
10
12
14
16
18
1996 1997 1998 1999 2000
PSI
Booz Allen
Tower Group
On-Line Banking Projections (US)
MillionsofUsers
17
eCommerce revenue estimates are generated by analyzing four primary sources of income.
Sources of Revenue
Transactions
Fees(Annual/Periodic)
Sponsorships
Other
Advertising Slotting fees Preferred provider certification
Value-added content subscriptions• Equity research• Portfolio management
Services• Advice• Customer profiling• Alerts• Value-added network (ISP)• Other premium services
Commissions on sale of own/other’s products• Bounties• Percentage of transaction (bp)
Referral fees Transaction processing fees Wallet-related revenue
Sale of aggregated user information that does not compromise customer privacy
18
Estimating eCommerce advertising revenue is a complex task.
Advertising and Sponsorship Revenue Assumptions
Universal Advertising AssumptionsAverage page views/user per monthTotal banner ads per page
Non-targeted AdvertisingPercent of total ad spaceCPMInventory sold
Highly-targeted AdvertisingPercent of total ad spaceCPMInventory sold
Sponsorship AssumptionsSponsorship spaces per pageCPMInventory sold
352
80%$30
20%
20%$45
30%
1$25
50%
19
eCommerce expense estimates are highly dependent upon the client’s business model.
Sources of Expenses
Marketingand Sales
Product/Service Development
Customer Care
TechnologyInfrastructure
Subscriber/merchant acquisition Promotional branding Relationship management
Content, tools,application• “Normal content”• Expert/celebrity
Aggregation• Web scraping• Site scraping
Technical support Customer support Billing
Hardware Software Hosting Integration
G&A
Salaries Occupancy Equipment Other
20
Rough estimates of eCommerce site development costs can be useful for high-level business cases.
Get on the Map Run with the Pack MarketDifferentiator
Future Cost of an eCommerce Site (Circa 2000)
Source: Gartner Group, “Electronic Commerce and Extanet Applications,” May 7, 1999
$300,000 to $1 million
$1 million to $5 million
$5 million to $20+million
21
Sensitivity analysis helps the team refine the business case and communicate key assumptions.
Best Worst Likely
Traffic Volume 700 500 600
% Purchasing 15% 5% 10%
Avg. Purchase $75 $25 $50
Revenue $7,875 $625 $3,000
Key Steps
• Identify key assumptions
• Establish reasonable ranges
• Vary each item independently
• Refine estimates if warranted
• Communicate critical items
22
Business case data is presented using common financial statements and client-specific metrics.
Projected Statement of Income
Revenues
Advertising & Sponsorships
Transactions
Expenses
Marketing and Sales
Customer Care
Technology
General and Admin.
Margin
Investment Requirements
NPV (12% discount rate)
2000
$3.8
($25.6)
$31.5
$3.2
$6.2
$22.0
$2.1
$10.5
$1.0
2001
$15.2
($6.8)
$15.1
$15.0
$8.4
$10.5
$3.2
2002
$33.3
($2.6)
$31.1
$31.5
$18.3
$10.5
$6.7
2003
$54.1
$32.2
$11.4
$24.0
$29.7
$9.3
$11.1
2004
$71.6
$55.4
$54.1
$22.5
$39.4
$9.3
$14.7
($mm)
23
Several lessons are worth sharing.
Project Team:• Begin data gathering as early
as possible• Expect to dedicate a strong
resource for the duration• Guide spreadsheet
organization and design• Ensure sufficient self-checks• Document excessively• Staff the right skills• Spread model ownership
Client:• Leverage sponsor early to get
internal contacts and data• Get buy-in on model from a
senior finance representative• Do not show numbers without
a detailed internal review• Do not try to walk executives
through the model• Train client to assume
ownership of model
24
Session Objectives
• Review the key components of an eCommerce business case
• Discuss steps needed to build a persuasive analysis• Examine a case that demonstrates the complexities of
eCommerce business case development
25
A major European bank wanted to explore banking and commerce opportunities via the mobile phone.
Applications of Interest:• Banking balance inquiry• Banking transactions• Securities alerts• Securities transactions• Mobile eCommerce• Web content delivery
Chip Card:
• Security• Payments• Reload eCash
26
The existing GSM infrastructure implied the need to partner with a telecommunications company.
GSMNetwork
TelcoMessageGateway
Core BankingSystems
MobileApplications
Mobile Phone & Smart Card
FixedNetwork
BankCustomer
BankingApplications
Proposed Technical Architecture
27
However, new technologies promise to provide direct access to the customer and greater usage.
Offering Internet-like services is expected to propel adoption.
Emerging Mobile Technologies
Compact HTML
WAP
STK
Mo
bil
e S
erv
ice
Us
ag
e
% o
f m
ob
ile
su
bs
cri
be
rs
100%
0%1999 2000 2001 2002 2003 2004
28
The team needed to develop baseline usage data for different launch dates and technical platforms.
Customer gain of starting with STK over starting with WAP
Customer gain of starting with WAP over starting with CHTML
Earlier introduction of services builds greater user base
1.M
ob
ile B
an
kin
g U
sers
(m
illio
ns)
1.5
1.0
1.0.5
0.01997 1998 1999 2000 2001 2002 2003 2004
Start with SMS
Start with STK
Start with WAP
Start with CHTML
29
The team estimated the start-up costs and revenue streams from each alternative.
Start-up Costs Total Benefits/Expenses per Customer (1)
(Year 2004)
•620,000 estimated mobile banking users in 2004
•CHF 23.4m additional earnings before taxes in 2004
Annual fee
Transaction fees
Savings - mobile CASH downloads
Telco messaging fees
Call center
Application maintenance
Other
Other
CHF 56
CHF 21
Introducing and supporting new platforms is costly.
m CHF 1999 2000 2001
Marketing 0.4 2.0 0.0
Hardware 0.5 0.2 0.4
Software 1.8 2.5 5.3
Systems Integration2.8 1.7 0.0
Total 5.4 6.5 5.7
30
After evaluating several partnering options, the team recommended a telco alliance approach.
Cash Flow Analysis
Financials (m CHF):5 Year NPV 1.310 Year NPV 22.9Payback Year 2003
Rationale:StrategicTelco subsidiesTelco technical expertise
KEYCash from Operations
Investments
31
Several lessons were learned on this project.• Technical expertise is essential to many business cases• Alliance discussions and data exchange move at different
speeds across different industries and cultures• Alliance management knowledge capital helpful to frame
negotiations, but expertise required to conduct them• Significant time needed to educate clients on new
technologies
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