Lecture 4E-commerce Business Models

Jifeng LuoAntai College of Management, SJTU

jifengluo@gmail.com

E-commerce business models

Business Model

B2C Business Models

B2B Business Models

Business Models in emerging areas

E-commerce Business Models—Definitions

Business model

• the architectural configuration of the components of

transactions designed to exploit business opportunities

Business plan

• Describes a firm’s business model

E-commerce business model

• Uses/leverages unique qualities of Internet and Web

Business Model

A story of how a business works• the method of doing business by which a company can

generate revenue.

Needs to pass two critical tests• Narrative test

• Numbers test

Think of business modeling as the managerial equivalent of the scientific method - you start with a hypothesis, which you then test in action and revise when necessary.

At the end of the day, the business model should be condensed onto one page

Strategy vs. Business Model

Strategy = Business Model?• Business models describe, as a system, how the

pieces of a business fit together. But they don’t factor in one critical dimension of performance: competition.

• Sooner or later—and it is usually sooner—every enterprise runs into competitors. Dealing with that reality is strategy’s job. A competitive strategy explains how you will do better than your rivals.

• A firm’s strategy is deeply rooted in that particular firm’s competitive environment.

Which comes first: strategy or business model

Case: strategy vs. business model

Although you may think that Wal-Mart pioneered a new business model on its road to success, the reality is that the model was really no different than the one Kmart was using at the time. But it was what Sam Walton chose to do differently than Kmart, such as focusing on small towns as opposed to large cities and everyday low prices, that was the real reason for his success.

Although Sam Walton’s model was the same as Kmart's, his unique strategy made him a success.

Key Ingredients of a Business Model

segment

marketing

Value Proposition

Defines how a company’s product or service fulfills the needs of customersQuestions 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, price discovery costs• Facilitation of transactions by managing product

delivery

Revenue Model

Describes how the firm will earn revenue, generate profits, and produce a superior return on invested capital

Major types:• Sales revenue model

• Advertising revenue model

• Subscription revenue model

• Transaction fee revenue model

• Affiliate revenue model

Micro-payment

Intellectual Property Rights Protection

Market Segment

Refers to a company’s intended market space and overall potential financial opportunities available to the firm in that market space

• Market space

• Area of actual or potential commercial value in which company intends to operate

• Realistic market opportunity

• Defined by revenue potential in each of market niches in which company hopes to compete

Competitive Environment

Refers to the other companies selling similar products and operating in the same market space

Influenced by:• Number of active competitors• Each competitor’s market share• Competitors’ profitability• Competitors’ pricing

Includes both direct competitors and indirect competitors

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

• First mover advantage vs. fast follower advantage• Unfair competitive advantage

Perfect market: No competitive advantages or asymmetries

Leverage: When a company uses its competitive advantage to achieve more advantage in surrounding markets

Marketing Strategy

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

Organizational Development

Plan that describes how the company will organize the work that needs to be accomplished

• Work is typically divided into functional departments

• Hiring moves from generalists to specialists as company grows

Slide 2-15

Management Team

Employees of the company responsible for making the business model work

Strong management team gives instant credibility to outside investors

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

Value Proposition

Cost

Mkting: CRSegment

Competitive Advantage

PartnersCore BP

Revenue

SWOT CustomerProduct

Finance

Mkting: Channel

[Osterwalder (2010) Business Model Generation]

Business Model Template

Case: Made.com

低廉的价格高品质的家具

成本结构：没有中间商、仓库、零售商、库存成本

客户关系：投票竞赛、购买

客户

核心资源：客户、设计师、

40 多家家具厂商生产组织流程（ 16 位在上海）

采购和物流流程寻找设计师流程

收入来源：网上零售

基础设施

客户提供物

财务

商业模式描述了企业如何创造价值，传递价值，捕捉价值的基

本原理

渠道通路：互联网

[Osterwalder (2010) Business Model Generation]

Made.com Business Model

欧洲的优秀家具设计师

苹果 iPod/iTunes 商业模式画布价值主张

渠道通路

客户关系

客户细分

收入来源

成本结构

重要伙伴

核心资源

关键业务

实惠的高品质

实惠的高品质

生产制造

生产制造

众包众包

物流采购物流采购

设计师设计师

客户参与客户参与

大众市场大众市场

转换成本转换成本

网站网站

销售收入销售收入

设计师合作设计师合作

软件软件品质品质

人力资源人力资源

运营运营

人力资源

人力资源

营销与销售

营销与销售

中国家具厂

中国家具厂

E-commerce business models

Business Model

B2C Business Models

B2B Business Models

Business Models in emerging areas

B2C Business Models: Portal

Value proposition: a place where consumers start their Web searching and stay a long time to read news, find entertainment, and meet others.

Offers powerful search tools plus an integrated package of content and services

Typically utilizes a combined subscription/advertising revenues/transaction fee model

Today, seen as “destination” site rather than gateway

May be general (horizontal) or specialized (vertical)

Examples: Yahoo, MSN, AOL, Ask.com, Sina

B2C Business Models: E-tailer

Online version of traditional retailer

Value proposition: sell products online, with lower price (?) and higher convenience

Types include:

• Virtual merchants

• Bricks-and-clicks

• Catalog merchants

• Manufacturer-direct

Low barriers to entry

B2C Business Models: Content Provider

Value proposition: distribute digital content, information and entertainment, over the Web

Typical revenue models:• Subscription (WSJ.com, free headlines and text, charge

or subscription for premium content; importance of micropayment system)

• Pay for download (itune.com; real.com)• Advertising

Variations:• Syndication (youtube.com)• Web aggregators (fatwallet.com, Craigslist/同城网 )• User-generated (Wikipedia)

B2C Business Models: Transaction Broker

Processes online transactions for consumers

Primary value proposition—saving time and money

Typical revenue model—transaction fee

Largest industries using this model:• Financial services (Scottrade.com)

• Travel services (expedia.com; ctrip.com)

• Job placement services (Monster.com, zhaopin.com)

B2C Business Models: Market Creator

Uses Internet technology to create markets that bring buyers and sellers together

Examples:• Priceline

• eBay

Typically uses a transaction fee revenue model

B2C Business Models: Service Provider

Offers services online• e.g. Google: Google Maps, Google Docs, dianping,

ask.com, Facebook, Dropbox etc.

Value proposition • Valuable, convenient, time-saving, low-cost alternatives

to traditional service providers (e.g. legal service from Linklaters BlueFlag

Revenue models• Subscription fees

• One-time payment

• Ads

B2C Business Models: Community Provider

Creates online environment (social network) where people with similar interests can transact and communicate.

Value proposition: a fast, convenient, one-stop site where users can focus on their most important concerns and interests, share the experience with friends, and learn more about their own interests.

Typical revenue model: Hybrid• Including advertising fees, subscription fees, sales revenues,

transaction fees, affiliate fees

Examples:• iVillage, 宽带山 , 天涯论坛

E-commerce business models

Business Model

B2C Business Models

B2B Business Models

Business Models in emerging areas

Net Marketplaces

Many different ways to classify Net marketplaces such as based on: Pricing mechanism Nature of market served Ownership

Another method: Classify Net marketplaces based on their business functionality What businesses buy (direct vs. indirect goods) How business buy (spot purchasing vs. long-term

sourcing)

Types of Procurement

Types of goods purchased• Direct goods: Goods integrally involved in production

process• Indirect goods: All other goods not directly involved in

production process (MRO goods)

Methods of purchasing• Contract purchasing: Involves long-term written

agreements to purchase specified products, with agreed-upon terms and quality

• Spot purchasing: Involves purchase of goods based on immediate needs in larger marketplaces that involve many suppliers

Pure Types of Net Marketplaces

B2B Business Models: E-distributor

Supplies products and services directly to individual businesses

Owned by one company seeking to serve many customers. Revenue model: sales of goods

Example: Grainger.com – distributor of MRO supplies

• Catalog sales and physical distribution centers

• Went online in 1995; one-stop shopping is critical

Long tail theory vs. winner-take-all

E-distributors

Most common type of Net marketplace

Provide electronic catalogs that represent products of thousands of direct manufacturers

Typically independently owned intermediaries that offer industrial customers single source from which to order indirect goods on spot basis

Typically operate in horizontal markets because they serve many different industries with products from many different suppliers

Example: W.W. Grainger

B2B Business Models: Exchanges

Value proposition: provide an electronic digital marketplace where suppliers and commercial purchasers can conduct transactions

Usually owned by independent firms whose business is making a market

Revenue model: Transaction fees

Usually serve a single vertical industry

Number of exchanges has fallen dramatically in U.S.

Why different fates in USA and China?

B2B Business Models: E-procurement

Value proposition: creates and sells access to digital electronic markets

• Includes B2B service providers, application service providers (ASPs)

Revenue models:• Transaction fees, usage fees, annual licensing fees

Ariba• Software that helps firms organize procurement

process by creating mini-digital markets.

E-procurement

Independently owned intermediaries connecting hundreds of online suppliers offering millions of indirect goods to business firms who pay fees to join the marketTypically used for long-term contractual purchasing of indirect goodsExpand on business model of e-distributors Typically offer value chain management (VCM) services, such as automation of firm’s entire procurement process on buyer side, automation of selling business processes on seller sideSometimes referred to as many-to-many marketExample: Ariba

Slide 2-38

B2B Business Models: Industry Consortia

Industry-owned vertical marketplaces that serve specific industries (e.g. automobile, chemical, floral, logging)

Enable buyers to purchase direct inputs from limited set of invited participants; long-term contractual purchasing and development of stable relationships

• Supply smaller number of companies with product and services relevant to industry

• Sponsored by powerful industry players• Strengthen traditional purchasing behavior

Exostar: Online trading exchange for aerospace and defense industry

Net Marketplace Trends

Slide 2-40

B2B Business Models: Private Industrial Networks

Digital networks designed to coordinate the flow of communications among firms engaged in business together

Single firm network: Most common form • Wal-Mart or P&G

Industry-wide networks: Often evolve out of industry associations, a response to single firm network

• Agentrics

What Are Private Industrial Networks?

Web-enabled networks for coordination of trans-organizational business processes (collaborative commerce)

Range in scope from single firm to entire industry

Example: Procter & Gamble

Main Types of Internet-Based B2B Commerce

Net marketplaces: Bring together potentially thousands of sellers and buyers in single digital marketplace operated over Internet

• Transaction-based• Supports many-to-many as well as one-to-many relationships• Alibaba

Private industrial networks: Bring together small number of strategic business partner firms that collaborate to develop highly efficient supply chains

• Relationship-based• Support many-to-one and many-to-few relationships• Largest form of B2B e-commerce• WalMart’s Retail link

Implementation Barriers

Difficulties getting suppliers to join; Concerns about sharing of proprietary data (security)

Implementation is complex, time consuming and expensive

Integration into existing ERP systems and EDI networks (economic, tech, business process change)

Requires change in mindset and behavior of employees