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e-commerce
Kenneth C. Laudon
Carol Guercio Traver
business. technology. society.
eighth edition
Copyright © 2012 Pearson Education, Inc.
Chapter 5
Business Models for E-commerce
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Class Discussion
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Tweet Tweet: What’s Your Business Model?
� 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?
Class Discussion
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Learning 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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E-commerce Business Models – Definitions
�Business model
�Set of planned activities designed to result in a
profit in a marketplace
�Business plan
�Describes a firm’s business model
� E-commerce business model
�Uses/leverages unique qualities of Internet and
Web
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8 Key Elements of a Business Model
Slide 2-7
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1. Value Proposition
� Defines how a company’s product or service fulfills the needs of customers
� Questions to ask:
� “Why should the customer buy from you?”
� What will your firm provide that others do not or cannot?
� Successful e-commerce value propositions:
� Personalization/customization
� Reduction of product search, price discovery costs
� Facilitation of transactions by managing product delivery
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2. Revenue Model
� “How will the firm earn revenue, generate profits, and produce a superior return on invested capital?”
�Major types:
�Advertising revenue model, e.g., Google
�Subscription revenue model, e.g., WSJ
�Transaction fee revenue model, e.g., eBay
�Sales revenue model, e.g., Amazon.com, Gap.com
�Affiliate revenue model, e.g., MyPoints, Epinions
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3. Market Opportunity
� “What marketspace do you intend to
serve and what is its size?”� Marketspace: Area of actual or potential commercial
value in which company intends to operate
� Realistic market opportunity: Defined by revenue
potential in each market niche in which company hopes
to compete
�Market opportunity typically divided
into smaller niches
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Marketspace and Market Opportunity in the
Software Training Market
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4. Competitive Environment
� “Who else occupies your intended marketspace?”� Other companies selling similar products in the same
marketspace
� Includes both direct (Travelocity vs Expedia) and indirect (auto makers vs airlines) competitors
� Influenced by:� Number and size of active competitors
� Each competitor’s market share
� Competitors’ profitability
� Competitors’ pricing
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5. Competitive Advantage
� “What special advantages does your firm bring to the marketspace?”� Is your product superior to or cheaper to produce than your
competitors’?
� Important concepts:� Asymmetries
� First-mover advantage, complementary resources, e.g., Amazon
� Unfair competitive advantage, e.g., Sony, Apple
� Leverage: When a company uses its competitive advantage to achieve more advantage in surrounding markets, E.g., Amazon’s moving into online grocery business leverages its huge customer database and years of e-commerce experience
� Perfect markets
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6. Market Strategy
� “How do you plan to promote your products or services to attract your target audience?”
� Details how a company intends to enter market and attract customers
� Best business concepts will fail if not properly marketed to potential customers
� Examples include:� YouTube having social network marketing strategy
which lets users to post content on the site for free;
� AOL distributing out free trial CDs through magazines and newspapers
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7. Organizational Development
� “What types of organizational structures within the firm are necessary to carry out the business plan?”
� Describes how firm will organize work
� Work typically divided into functional departments, e.g, production, shipping, marketing, customer support, and finance
� As company grows, hiring moves from generalists to specialists , e.g., eBay starting out from one-person firm into multi-departmental large enterprise
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8. Management Team
� “What kind of backgrounds should the
company’s leaders have?”
�A strong management team:
�Can make the business model work
�Can give credibility to outside investors
�Has market-specific knowledge
�Has experience in implementing business plans
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Categorizing E-commerce Business Models
� No one correct way
� We categorize business models according to:
� E-commerce sector (e.g. B2B, B2C, C2C)
� Type of e-commerce technology (e.g. P2P, m-commerce)
� Similar business models appear in more than one sector, e.g., e-tailer and e-distributors
� Some companies use multiple business models (e.g. eBay being B2C market maker, C2C business model, and B2C m-commerce model)
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B2C Business Models: Portal
� Search plus an integrated package of content and services
� Revenue models: � Advertising, referral fees, transaction fees,
subscriptions
� Variations: � Horizontal/General : Marketspace includes all
Internet users, e.g., Yahoo, AOL, MSN
� Vertical/Specialized (Vortal) : Focus around specific subject matter or market segment, e.g., Sailnet
� Search
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B2C Models: E-tailer
� Online version of traditional retailer
� Revenue model: Sales
� Variations:� Virtual merchant– Amazon, BlueNile, Drugstore
� Bricks-and-clicks – Wal-Mart, Staples, JCPenny
� Catalog merchants – LLBean, CDW
� Manufacturer-direct – Sony, Dell, IBM
� Low barriers to entry
� Keys to success in e-tailing� Keeping expenses low,
� Selection broad, and
� Inventory controlled
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B2C Models: Content Provider� Digital content on the Web
� News, music, video, photos, text, and artwork
� Revenue models: � Subscription, e.g., Real.com’s Rhapsody Unlimited service;
� Pay per download (micropayment) , e.g., WSJ.com, Harvard Business Review;
� Advertising, e.g., CNN.com, CBSSports.com;
� Affiliate referral fees
� Variations:� Content owners: book publishers, newspapers, music publishers,
movie studios
� Syndication: content providers do not own content, but syndicate (aggregate) and then distribute contents produced by others
� Web aggregators: collect info from sources and add value to info thru post-aggregation services. E.g., shopping.com
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B2C Models: Transaction Broker
�Process online transactions for
consumers� Primary value proposition—saving time and money
�Revenue model: � Transaction fees
� Industries using this model:� Financial services– E*Trade, Ameritrade, Schwab
� Travel services – Travelocity.com
� Job placement services – Monster.com
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B2C Models: Market Creator
� Create digital environment where buyers and sellers can meet and transact
� Differs from transaction brokers who carry out transactions for their customers, or act as agents in larger markets
� Examples:
� Priceline
� eBay
� Revenue model: Transaction fees
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B2C Models: Service Provider
�Online services
�e.g., Google—Google Maps, Gmail, Google Docs,
etc.
�Value proposition
�Valuable, convenient, time-saving, low-cost
alternatives to traditional service providers
�Revenue models:
�Sales of services, subscription fees, advertising,
sales of marketing data
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B2C Models: Community Provider
�Provide online environment (social
network) where people with similar
interests can transact, share content,
and communicate
�e.g., Facebook, LinkedIn, Twitter
�Revenue models:
�Typically hybrid, combining advertising,
subscriptions, sales, transaction fees, affiliate
fees
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B2B Business Models
�Net marketplaces
�E-distributor
�E-procurement
�Exchange
� Industry consortium
�Private industrial network
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B2B 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
� e.g., Grainger.com (largest distributor of maintenance, repair, and operations (MRO) supplies
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B2B Models: E-procurement� Creates and sells access to digital markets
� Includes B2B service providers (sells business services to other firms), application service providers (ASPs sell access to Internet-based software to other companies)
� Creating custom integrated online catalogs, (where supplier firms can list their offerings) for purchasing firms
� Revenue model:� Transaction fees, service fees, supply-chain
management, fulfillment services
� e.g., Ariba, Software that helps firms organize procurement process by creating custom integrated online catalogs where supplier firms can list their offerings for purchasing firms
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B2B Models: Exchanges
� Electronic digital marketplace where hundreds of suppliers meet a smaller number of very large commercial buyers
� Independently owned vertical digital marketplace, e.g., steel, aluminum, polymers, for direct inputs to production and short-term contracts
� Revenue model: Transaction fees (based on transaction size), commission fees
� Create powerful competition between suppliers
� Tend to force suppliers into powerful price competition; number of exchanges has dropped dramatically
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B2B Models: Industry Consortia
� Industry-owned vertical digital marketplace that serve specific industries (e.g., automobile, aerospace, chemical, floral, logging)
� More successful than exchanges� Sponsored by powerful industry players
� Strengthen traditional purchasing behavior
� Revenue model: Transaction, commission fees
� e.g., Exostar – online trading exchange for aerospace and defense industry, founded by Boeing, Lockheed Martin, Rolls-Royce, Raytheon
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Private Industrial Networks
�Digital network used to coordinate communication among firms engaged in business together
�Network owned by a single large buying firm
� Typically evolve out of company’s internal enterprise system, e.g., ERP system
� e.g., Walmart’s network for suppliers
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Other E-commerce Business Models
�Consumer-to-consumer (C2C)
�eBay, Craigslist
�Peer-to-peer (P2P)
�The Pirate Bay, Cloudmark (P2P anti-spam solution to protect e-mailboxes)
�M-commerce:
�Extends existing e-commerce business models to service mobile workforce, consumers
�Unique features include mobility, cameras to scan product codes, GPS
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E-commerce Enablers:
The Gold Rush Model
� E-commerce infrastructure companies
have profited the most:
�Hardware, software, networking, security
�E-commerce software systems, payment systems
�Media solutions, performance enhancement
�CRM software
�Databases
�Hosting services, etc.
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How the Internet and the Web
Change Business
� E-commerce changes industry structure
by changing:
�Basis of competition among rivals
�Barriers to entry
�Threat of new substitute products
�Strength of suppliers
�Bargaining power of buyers
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Industry Value Chains
� Set of activities performed by suppliers, manufacturers, transporters, distributors, and retailers that transform raw inputs into final products and services
� Value chain: each of these activities adds economic value to the final products
� Internet reduces cost of information and other transactional costs
� Leads to greater operational efficiencies, lowering cost, prices, adding value for customers
� Example: Dell bypassing distributors and retailers and also providing efficient CRM
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E-commerce and Industry Value
ChainsFigure 5.4, Page 364
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Firm Value Chains� Activities that a firm engages in to create final
products from raw inputs
� A firm value chain: Set of activities that a firm engages in to create final products from raw inputs
� Each step adds value
� Effect of Internet:
� Increases operational efficiency
� Enables product differentiation
� Enables precise coordination of steps in chain
� Example: Amazon providing large selection of books at lower prices, and professional and consumer book reviews
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E-commerce and Firm Value ChainsFigure 5.5, Page 365
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Firm Value Webs� Firms also rely on value chain of their partners (suppliers,
distributors, delivery firms)
� A value Web: Networked business ecosystem that uses Internet technology to coordinate the value chains of business partners within an industry, or within a group of firms
� Uses Internet technology to coordinate the value chains of business partners
� Coordinates a firm’s suppliers with its own production needs using an Internet-based supply chain management system
� Example: Amazon relies on UPS tracking system for online package tracking, and on USPS for package insertion into mail stream
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Internet-enabled Value WebFigure 5.6, Page 366
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Business Strategy� Plan 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)
� Four generic strategies1. Differentiation, by creating expectations, adding
features, and enhancing product abilities to solve related problems
2. Cost, lowered by finding new, more efficient business processes, by finding a unique resource, or lower-cost supplier
3. Scope: to compete in all markets around the globe, rather than only in local, regional, or national markets
4. Focus: to compete within a narrow market or product segment, e.g., LLBean focusing on outdoor sports apparel
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