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Business Models - Part 2Business Models - Part 2

CPS 181s

Jan 30, 2003

Components of a Business ModelComponents of a Business ModelComponents of a Business ModelComponents of a Business Model

Value ClusterValue Cluster

Online OfferingOnline Offering

Resource SystemResource System

Financial ModelFinancial Model

What are the Financial Models What are the Financial Models Available to e-Commerce Available to e-Commerce

Firms?Firms?

What are the Financial Models What are the Financial Models Available to e-Commerce Available to e-Commerce

Firms?Firms?Financial model that follows from the resource

system A review of the revenue models Nine approaches to shareholder value/profit

models Growth models and how to pursue revenue

growth

Revenue vs Shareholder Revenue vs Shareholder Value/ProfitValue/Profit

Revenue vs Shareholder Revenue vs Shareholder Value/ProfitValue/Profit

Revenue Models clearly identify the flow of cash into the organization (the “pipeline”)

Shareholder Value/Profit Models identify how the company will generate cash or ultimately make a profit (the quantity)

1) Types of Revenue Models1) Types of Revenue Models1) Types of Revenue Models1) Types of Revenue ModelsAdvertising (Yahoo)

banners, interstitial, site sponsorships, event underwriting (Yahoo)Product, Service, or Information Sales (Amazon)

Sales of goods on siteTransaction (eBay, e-Trade)

Revenue accrual from charging a fee or taking a portion of the transaction sum for facilitating a customer-seller transaction

Subscription (Consumer Reports, WSJ)Subscriber fees for magazines, newspapers, other information/service businesses

Affiliate (MyPoints)A company steers business to an affiliate and receives a referral fee or

percentage of revenue from resulting sale

2) Types of Shareholder 2) Types of Shareholder Value/Profit ModelsValue/Profit Models

2) Types of Shareholder 2) Types of Shareholder Value/Profit ModelsValue/Profit Models

OfflineOver twenty profit models

Example - “blockbuster” profit model> not movie generating, but franchising, transactional

revenue, licensing, merchandising, and other revenue sources

Example - “base and follow-on” model> primary product is a “loss leader” while real profit from

follow-on products (razor blades, printer cartridges)etc.

2) Types of Shareholder Value/Profit 2) Types of Shareholder Value/Profit Models….Models….

2) Types of Shareholder Value/Profit 2) Types of Shareholder Value/Profit Models….Models….

OnlineNine Profit ModelsDiffer from traditional valuations

Shift from Profit to Shareholder-Value Focus> market capitalization, rather than profit (share price times the

number of shares outstanding)Shift from Supply-Side Language to Demand-Side

Language> Significant finance gain (price of offering or price of of shares)

result of what a company does to a market need> Focus on core benefits a customer is looking for

Introduce New Ways of Creating Value> reflect evolution of eCommerce

Does Profit Matter?Does Profit Matter?Does Profit Matter?Does Profit Matter?

Begin by building profit…….Begin by building user base…..

Point-Counterpoint

Build Profit Build User Base

Basic financial rules will eventually apply Cash flow drives shareholder value Shareholders will become frustrated as time

passes

Standards will ultimately dictate success Standards require huge investments in building

a customer base Once customer base dominates other firms will

concede and eventually large margins will beavailable

Point-Counterpoint: Does Profit Matter? Point-Counterpoint: Does Profit Matter? Build Profit Or Build User Base? Build Profit Or Build User Base?

Point-Counterpoint: Does Profit Matter? Point-Counterpoint: Does Profit Matter? Build Profit Or Build User Base? Build Profit Or Build User Base?

Online Profit ModelsOnline Profit ModelsOnline Profit ModelsOnline Profit Models

Company and User-Derived Value CreationMetamarkets PortalTraditional and Reverse AuctionsCategory-Specific Portal

Company-Derived Value CreationBest InformationWidest AssortmentLowest PricesBroadcast User NetworkBest ExperienceMost Personalized

Company and User-Derived Value Company and User-Derived Value CreationCreation

Company and User-Derived Value Company and User-Derived Value CreationCreation

Metamarkets PortalBuyers and sellers based upon customer activities to achieve goals

(CarPoint)Success Factors

Building and sustaining a large number of buyers and sellersFrequently results in a single, large winner with multiple second-tier players

ThreatA higher level portal with more inclusiveness

Traditional and Reverse AuctionsBidding up - traditional (e-Bay)Bidding down - often business-to-business until no further bids receivedAuction house takes transaction feesSuccess Factors

Often winner-take-all and strong brand nameThreats

Alternative portalsLoose brand credibilityEmergence of pure low-price player

Company and User-Derived Value Company and User-Derived Value Creation...Creation...

Company and User-Derived Value Company and User-Derived Value Creation...Creation...

Category-Specific PortalFocus on one category (Chemdex)More supply-side than demand-side drivenSuccess factors

Leverage network economicsBuilding of customer base, with increasing switching costs

> Locked in due to increasingly useful customer profile, inter-user communications, and experience with the site

ThreatsEmergence of metamarket player who rolls activities into a single site (

eToys)

Niche players chipping away at category (Sony Playstation)Brand name offline may be a challenge (ToysRUs)

Company-Derived Value CreationCompany-Derived Value CreationCompany-Derived Value CreationCompany-Derived Value CreationBest Information

most timely, “freshest,” and most credible information product or service

Forrester.com, salon.com, The Standard, zagat.comrevenue from product as, services, information,

advertising revenueprofit from customer perception that the site is more

accurate, credible, and timely informationSuccess factors

hiring best analysts and staffmost timely and accurate information

ThreatsPerception that others just as timelyPrice sensitivity to freshest information too greatCost for most timely information prohibitive

“Best of class” excellence on a key customer need or benefit

Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...Widest Assortment

breadth of product, service, and information coverage or inventory in the chosen product category

CDNow.com, ArtistDirect.com, SecondSpin.com revenue derived from product sales, with selective premium

pricing on the most desirable products Success Factors

reducing customer uncertainty building a strong brand presence repeating buying and spreading word quality of additional information Inventory must be complemented with value-added services

Threats further specialization in the product category megabrands attempt to aggregate consumers at a higher level

Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...

Lowest Prices promises lowest prices online maybe specific to a product category LowestFare.com, AllBooks4Less.com, buy.com

Success Factors Margins minimal or non-existent, requiring strong back

office systems Leverage scale economies Requires outstanding supply chain management,

procurement, operational excellenceThreats

Emergence of shop bots (mySimon.com) Strong brand players who create uncertainty, creating

niche players

Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...

Broadcast User Network pure demand based model relies on the fast buildup of

the user network ICQ, RealNetworks.com, mercata.com, Mobshop.com

Success factors building of strong customer base, customer's extent of

viral marketing, trademarked software or patentsThreats

emergence of alternative standards fundamental technology shift backward or forward integration of complementary

players

Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...Best Experience

Best experience regardless of price FAOSwartz.com, Ashford.com Revenue expected to originate from products, services, or

information Profit maintained by premium prices across entire range of

productsSuccess factors

Sourcing of best products Outstanding service A shift in customer preferences to brand labels

Threats Emergence of lower priced offerings that have similar

benefits Lack of perceived value in higher priced goods A shift to emergent brand labels, as compared to historic

favorites

Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...

Most personalized Best customization of the consumer experience Reflect.com

Success factors deep customer knowledge ability to continual refresh and mine the customer database consumer’s ability to feel complete ability to customize

experienceThreats

Emergence of new players who offer a newer, richer, more personalized experience

New technologies that displace older technologies that allow other companies to catch up and match the older company’s customer experience

3) Financial Growth Models3) Financial Growth Models3) Financial Growth Models3) Financial Growth ModelsThird component of a financial model is the

firm’s revenue growth strategy or growth model

Revenue growth can come from a deeper penetration in the current market, new product development, new market development, complete new products and markets

Revenue Growth Choices: 1-800-flowersRevenue Growth Choices: 1-800-flowersRevenue Growth Choices: 1-800-flowersRevenue Growth Choices: 1-800-flowers

New

Existing

PR

OD

UC

TS

Existing New Existing New

Plans to branch into a wide variety of product categories

GardenworksGardenworks

Greatfoods.comGreatfoods.com

Home DecorHome DecorPlow & HearthPlow & Hearth

ON-LINE MARKETS OFF-LINE MARKETS

PlantsPlants

Gourmet TreatsGourmet Treats

Greeting CardsGreeting Cards

Corporate Gift Services

Corporate Gift Services

In-Store SeminarsIn-Store Seminars

Point-Counterpoint

Pure Dot-com Start Brick-and-Mortar Start

Not constrained by Old-Economy culture

Not constrained by physical world assets that have no value in digital world

Can operate fast

New rules apply

Great examples - Amazon, Yahoo

Old-economy business culture does apply

Have assets -- brand, channels, people -- that have tremendous value in digital world

Can operate “right”

Old financial rules supercede new rules

Great examples - GE.com, Dellonline.com

Would You Rather Be? A Dot-Com Or Brick-And-Would You Rather Be? A Dot-Com Or Brick-And-Mortar Business?Mortar Business?

Would You Rather Be? A Dot-Com Or Brick-And-Would You Rather Be? A Dot-Com Or Brick-And-Mortar Business?Mortar Business?

2003 Taxonomy of 2003 Taxonomy of eCommerce Business ModelseCommerce Business Models

2003 Taxonomy of 2003 Taxonomy of eCommerce Business ModelseCommerce Business Models

BrokerageAdvertisingInfomediaryMerchantManufacturerAffiliateCommunitySubscriptionUtility

Brokerage ModelBrokerage ModelBrokerage ModelBrokerage Model

Marketmakers – bring buyers and sellers together for a fee on each transaction

Marketplace Exchange (Orbiz.com)Buy/Sell Fulfillment (Carsdirect.com)Demand Collection System (Priceline.com)Auction Broker (eBay.com)Transaction Broker (PayPal.com)Bounty Broker (BountyQuest.com)Distributor (Questlink.com)Search Agent (MySimon.com)Virtual Mall (ChoiceMall.com)

Advertising ModelAdvertising ModelAdvertising ModelAdvertising Model

Free (usually) content mixed with advertising (only works where viewer traffic is large or highly specialized)

Portal (Yahoo.com)Personalized Portal (MyYahoo.com)Niche Portal (iVillage.com)Classifieds (Monster.com)Registered Users (NYTimesDigital.comQuery-based Paid Placements (Google.com)Contextual Advertising (Gator.com)Ultramercials (Salon.com)

Infomediary ModelInfomediary ModelInfomediary ModelInfomediary Model

Assist buyers or sellers to understand a given market

Advertising Networks (DoubleClick.com)Audience Measurement Services (Nielson.com)

Incentive Marketing (MyPoints.com)Metamediary (Edmunds.com)

Merchant ModelMerchant ModelMerchant ModelMerchant Model

Wholesalers or retailers of goods and services

Virtual Merchant (Amazon.com)Catalog Merchant (Frontgate.com)Click & Mortar (Barnes & Noble)Bit Vendor (Eyewire.com)

Manufacturer ModelManufacturer ModelManufacturer ModelManufacturer Model

Direct sales to compress the distribution channels

Brand Integrated Content (bmwfilms.com)

Affiliate ModelAffiliate ModelAffiliate ModelAffiliate Model

Provides purchase Opportunity wherever people may be surfing (pay for performance) (Amazon.com)

Banner ExchangePay per ClickRevenue Sharing

Community ModelCommunity ModelCommunity ModelCommunity Model

Based on user loyalty. Users usually make a significant investment of time and emotion.

Voluntary Contributor Model (WCPE.org)Knowledge Networks (WebMonkey.com)

Subscription ModelSubscription ModelSubscription ModelSubscription Model

Subscription fee for serviceContent Services (Listen.com, Netflix.com)Person-to-Person Networking Services (Classmates.com)

Trust Services (Truste.com)Internet Service Providers (AOL, Earthlink)

Utility ModelUtility ModelUtility ModelUtility Model

On-demand, pay as you go metered services

Metered Subscriptions (Slashdot.com)

Migrating to Profitable Migrating to Profitable eCommerce Business ModelseCommerce Business Models

Migrating to Profitable Migrating to Profitable eCommerce Business ModelseCommerce Business Models

eBusiness is evolutionary rather than disruptive Success=compelling value proposition. Firms learn thru constant

experimentation and feedback eBusiness can both leverage intangible assets such as customer

perceptions, but also exposes associated weaknesses Firms discovering they must build more centralized infrastructure Requires three management imperatives:

IT Governance to insure strategic positioningHuman resource alignmentCustomer connectedness for market experiments

Strategic Partnerships for agile response Firms struggling to find metrics for making sound business

decisions

Jeanne Ross, Michael Vitale, and Peter Weill: FROM PLACE TO SPACE: Migrating to Profitable Electronic Commerce Business Models, MIT Sloan School of Management working Paper No. 4358-01