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E-commerce Business Models and
Concepts
Learning objectives E-commerce Business Models Major Business-to-Consumer (B2C) Business Models Major Business-to-Business (B2B) Business Models How E-commerce changes business strategy, structure, and Process Careers in E-commerce Review
2.1 E-Commerce Business Models
Business Model: A set of planned activities designed to result in a profit in the marketplace Business Plan: A document that describes a firm’s business model E-commerce business model : A business model that aims to use and leverage the unique qualities of the Internet, the Web, and the mobile platform
Eight Key Elements of a Business Model
The eight key business model elements are value proposition, revenue model, market opportunity, competitive environment, competitive advantage, market strategy, organizational development, and management team. Value proposition and revenue model are the most important, but other elements are equally important.
Value Proposition
Value Proposition : defines how a company’s product or service fulfills the needs of customers A company's value proposition defines how its product or service fulfills the needs of customers. Successful e-commerce value propositions include personalization and customization of product offerings, reduction of product search costs, price discovery costs, and facilitation of transactions by managing product delivery. Amazon's primary value propositions are unparalleled selection and convenience.
Revenue Model
Revenue Model : describes how the firm will earn revenue, generate profits, and produce superior return on invested capital Advertising revenue model: a company provides a forum for advertisements and receives fees from advertisers Subscription revenue model : a company that offers its users content or services and charges a subscription fee for access to some or all of its offerings
Market Opportunity
Market Opportunity : refers to a company’s intended marketspace and the overall potential financial opportunities available to the firm the that marketspace. Marketspace: The area of actual or potential commercial value which a company intends to operate
Competitive Environment
Competitive Environment: refers to the other companies operating in the same marketspace selling similar products
Competitive Advantage
Competitive Advantage : Achieved by a firm when it can produce a superior product and/or bring the product to the market at a lower price than most, or all, of its competitors Some firms can develop global markets, while other firms can develop only a national or regional market. Firms that can provide superior products at the lowest cost on a global basis are truly advantaged. Firms achieve competitive advantages because they have somehow been able to obtain differential access to the factors of production that are denied to their competitors—at least in the short term. Asymmetry: Exists whenever one participant in a market has more resources than other participants Asymmetries lead to some firms having an edge over others, permitting them to come to market with better products, faster than competitors, and sometimes at lower cost. First-mover advantage : A competitive market advantage for a firm that results from being the first into a marketplace with a serviceable product or service Complementary resources : resources and assets are not irectly involved in the production of the product but required for success, such as marketing, management, financial assets, and reputation. Unfair competitive advatage : occurs when one firm develops an advantage based on a factor that other firms cannot purchase Brands are built upon loyalty, trust, reliability, and quality. Once obtained, they are difficult to copy or imitate, and they permit firms to charge premium prices for their products Perfect markets : A market in which there are no competitive advantages or asymmetries because all firms have equal access to all the factors of production
Incubators : typically provide a small amount of funding and also an array of service to startup companies Angel Investors: Typically wealthy individuals or a group of individuals who invests their own money in exchange for an equity to share in the stock of a business; often are the first outside investors in a startup Venture capital investors: typically invest funds they manage for other investors; usually later-stage investors Crowdfunding: involves using the internet to enable individuals to collectively contribute money to support a project.
Categorizing E-commerce Business Models: Some Difficulties
The number of e-commerce business models is growing, but there is no one correct way to categorize them. The approach is to categorize business models according to the different major e-commerce sectors (B2C and B2B) in which they are utilized. Companies often use a variety of different business models as they attempt to extend into as many areas of
e-commerce as possible. Mobile e-commerce refers to the use of mobile devices and cellular and wide area networks. Mobile e-commerce is not a distinct business model, and social e-commerce and local e-commerce are subsectors of B2C and B2B e-commerce. Companies use multiple business models to leverage their brands, infrastructure investments, and assets developed with one business model into new business models. E-commerce enablers provide the hardware, operating system software, networks and communications technology, applications software, web design, consulting services, and other tools required for e-commerce. These firms have profited the most from the development of e-commerce.
2.2 Major Business-to-Consumer (B2C) Business Models Business-to-consumer (B2C) e-commerce, in which online businesses seek to reach individual consumers, is the most well-known and familiar type of e-commerce.
post-aggregation services. E-commerce startups face difficulty unless they have a unique information source that others cannot access.
Portal
Portals: Offer users powerful search tools as well as an integrated package of content and services all in one place Portals offer users powerful search tools and an integrated package of content and services. They are marketed as places where consumers will stay to read news, find entertainment, and meet other people. The market opportunity is large, with 290 million people in the US accessing the Internet in 2020. The top three portals/search engines are Google, Microsoft's MSN/Bing, and Verizon Media. Being first in the market gives customers access to shared ideas, standards, and experiences. Traditional portals such as Facebook, Yahoo, AOL, MSN, and others are horizontal portals, while vertical portals such as Sailnet focus on a particular subject matter or market segment. Google is also a portal, focusing primarily on search and advertising services.
Transaction Broker
Transaction Broker: community providerprocesses transactions for conzumers that are normally handled in person, by phone, or by mail. Transaction brokers are companies that process transactions for consumers normally handled in person, by phone, or by mail. Their primary value propositions are savings of money and time, as well as timely information and opinions. Companies such as Monster offer job searchers a national marketplace for their talents and employers a national resource for that talent. The challenge for online brokers is to overcome consumer fears by emphasizing security and privacy measures and providing a broad range of financial services. Travel sites generate commissions from travel bookings and job sites generate listing fees from employers.
Market Creator
Market Creator : Builds a digital environment where buyers and sellers can meet, display products, search for products, and establish a price for the products. Market creators create digital environments for buyers and sellers to meet, display and search for products and services, and establish prices. Prior to the Internet and Web, market creators relied on physical places to establish a market. eBay is one of the few e-commerce companies that has been profitable virtually from the beginning due to its no inventory or production costs. The market opportunity for market creators is potentially vast, but only if the firm has the financial resources and marketing plan to attract sufficient sellers and buyers. Examples include eBay, Uber, Airbnb, and Lyft. On-demand service companies (also known as sharing economy companies) have developed online platforms that allow people to sell services in a marketplace that operates in the cloud
and relies on the Web or smartphone apps to conduct transactions. These companies unlock the economic value in spare resources and have created huge online markets.
Service Provider
Service Provider: offers service online Online service providers offer a variety of services, such as photo sharing, video sharing, and user-generated content. Google has led the way in developing online applications, while other personal services such as medical bill management, financial and pension planning, and travel recommendation are also growing. Some services cannot be provided online, but online arrangements can be made for them. Financial transaction brokers also provide services such as college tuition and pension planning. Travel brokers and service providers offer consumers valuable, convenient, time-saving, and low-cost alternatives to traditional service providers. Research has found that time starvation is a major factor in online buying behavior. The market opportunity for service providers is as large as the variety of services that can be provided and potentially is much larger than the market opportunity for physical goods. Marketing must allay consumer fears and build confidence and trust among current and potential customers. 2.3 Major Business-to-Business (B2B) Business Models
E-distributor
E-distributors : a company that supplies products and services directly to individual businesses E-distributors are companies that supply products and services directly to individual businesses. W. W. Grainger, for example, is the largest distributor of MRO supplies and its e-commerce platform has produced over $5.6 billion in U.S. sales. Critical mass is a factor.
E-procurement
E-procurement firms : creates and sells access to digital markets B2B service providers : sells business service to other firms Scale economies: effciens that arise from increasing the size of the business E-procurement firms create and sell access to digital markets, such as Ariba, which creates custom-integrated online catalogs and helps vendors sell to large purchasers. B2B service providers make money through transaction fees, fees based on the number of workstations using the service, or annual licensing fees. Software as a service (SaaS) or platform as a service (PaaS) providers are able to offer firms much lower costs of software by achieving scale economies. This is more efficient than having every firm build its own supply chain management system, and permits firms such as Ariba to specialize and offer their software at a cost far less than the cost of developing it.
2.4 How E-commerce changes business: Strategy, Structure, and Process The Internet has changed the business environment, making it easier for new competitors to enter and intensify competition. It also presents new opportunities for creating value, branding products, charging premium prices, and enlarging an offline physical business.
Industry Structure
Industry Structure : refers to the nature of the players in an industry and their relative bargaining power E-commerce has the potential to change industry structure, which is characterized by five forces: rivalry, substitute products, barriers to entry, suppliers, and buyers. Industry structural analysis : An effort to understand and describe the nature of competition in an industry, the nature of substitute products, the barriers to entry, and the relative strength of consumers and suppliers E-commerce has had a significant impact on the structure and dynamics of industries, such as the recorded music industry, travel industry, chemical and automobile industries, and the content industries. New forms of distribution created by new market entrants can completely change the competitive forces in an industry, such as free access to Wikipedia for a $699 set of World Book encyclopedias or a $40 DVD. Inter-firm rivalry (competition) is one area where e-commerce technologies have had an impact on most industries. E-commerce has increased price competition in nearly all markets, changing the scope of competition from local and regional to national and global. It has also enabled firms to differentiate their products or services from others. It is impossible to determine if e-commerce technologies have had an overall positive or negative impact on firm profitability in general. However, it has shaken the foundations of some industries, such as content and financial services, and has changed relationships with suppliers.
Industry Value Chains
Value Chain : the set of activities performed in an industry or in a firm that transforms raw inputs into final products and services Industry value chain analysis is an important tool for understanding the impact of e-commerce on industry and firm operations. It is composed of six generic players: suppliers, manufacturers, transporters, distributors, retailers, and customers.
E-commerce offers key players in an industry value chain new opportunities to reduce costs and/or raise prices, bypassing distributors and retailers. Customers can search for the best quality, fastest delivery, and lowest prices, reducing transaction costs and prices.
Firm Value Chains
Firm Value Chain : the set of activities a firm engages in to create final products from raw inputs E-commerce technology can affect a firm's value chain, which is a set of activities that add value to the final product and contribute to operational efficiency.
