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Electronic copy available at: http://ssrn.com/abstract=2161742

Electronic Commerce Business Models: A Conceptual Framework

Utkarsh Majmudar Ganesh N. Prabhu

July 2000

Please address all correspondence to:

Prof. Utkarsh Majmudar Visiting Faculty (Finance & Control Area) Indian Institute of Management Bannerghatta Road Bangalore - 560 076 India Fax: (080) 6584050 E m a i l ! utkarsh&qimbxmeUn

Copies of the Working Papers may be obtained from the FPM & Research Office

Electronic copy available at: http://ssrn.com/abstract=2161742

Electronic Commerce Business Models: A Conceptual Framework

Utkarsh Majmudar and Ganesh N. Prabhu

Abstract

The recent boom in the new economy of internet based commerce has created a large

number of firms with a variety of business models that aim to leverage the power of the

internet to further their business goals. In this paper we attempt to provide a

conceptual framework for understanding e-commerce business models on a number of

important dimensions - nature of consumer activity, nature of e-commerce activity,

target customers, targeting strategy, revenue generating modes, procfactfcerwce

delivery modes, payment collection modes, operating modes, market places,

advantage mechanisms and domination characteristics. We also examine means of

improving value proposition and net-friendliness for e-commerce activities and identify

areas where e-commerce models have not been explored or fully exploited so far.

Since the range of economic activities on the internet is vast and growing, newer

models and opportunities are likely to emerge through improvements in internet

technologies as well as innovations in their application to business contexts. Hence

any conceptual framework on e-commerce business models, including our own, can

never be comprehensive.

Electronic Commerce Business Models: A Conceptual Framework - 1 -

Electronic copy available at: http://ssrn.com/abstract=2161742

Electronic Commerce Business Models: A Conceptual Framework

Introduction

The recent boom in the new economy of internet based commerce has spawned a large

number of firms with a variety of business models that aim to leverage the power of the internet to

further their business goals. This paper provides a conceptual framework for understanding these

business models and their characteristics. The conceptual framework is shown in Figure 1.

Locating Electronic Commerce in the Internet Economy

We define electronic commerce as use of the internet medium for conducting economic

transactions. Electronic commerce is a part of a larger internet economy. Conceptually, the internet

economy can be divided into four layers (Barua etal., 1999). Each layer of the internet economy is

listed below with descriptions of the types of companies and names of some of the actual companies in

each category.

(a) Layer One: The Internet Infrastructure Layer. This layer includes companies with products and

services that help create a network infrastructure, a prerequisite for electronic commerce. The

categories in this infrastructure layer include: Internet backbone providers (e.g., MCI); Internet

service providers (e.g. AOL); Networking hardware and software companies (e.g., Cisco); PC and

Server manufacturers (e.g. HP); Security vendors; Fiber optics makers; Line acceleration hardware

manufacturers (Barua, etal., 1999).

(b) Layer Two: The Internet Applications Layer: Products and services in this layer build upon the

above IP network infrastructure and make it technologically feasible to perform business activities

online. The categories in this applications layer include: Internet consultants (e.g., USWeb/CKS,

Scient, etc); Internet commerce applications (e.g., Netscape); Multimedia applications (e.g.,

RealNetworks); Web development software (e.g., Adobe); Search engine software (e.g., Inktomi);

Online training; Web-enabled databases etc.(Barua etal., 1999).

Electronic Commerce Business Models: A Conceptual Framework - 2 -

electronic markets by facilitating the meeting and interaction of buyers and sellers over the Internet.

They act as catalysts in the process through which investments in the infrastructure and

applications layers are transformed into business transactions. The categories in this intermediary

layer include: Online brokerages (e.g., ETrade); Online travel agents (ITN); Market makers in

vertical industries; Content aggregators (e.g., Cnet,); Portals/Content providers (e.g., Yahoo);

Internet ad brokers (e.g., Doubleclick); Online advertisers (Barua et.al., 1999).

(d) Layer Four: The Internet Commerce Layer Internet commerce involves the sales of products and

services to consumers or businesses over the Internet The categories in this Internet commerce

layer include: E-tailers (e.g., Amazon.com, eToys.com); Manufacturers selling online (e.g., Cisco,

Dell, IBM); Fee/Subscription-based companies (e.g., WSJ.com); Airlines selling online tickets

(Southwest.com); Online entertainment and professional services (Barua etal., 1999).

Many companies operate at multiple layers in the internet economy. For instance, Microsoft

and IBM are important players at the internet infrastructure, applications, and internet commerce layers,

while AOL (before the acquisition of Netscape) is a key player in the infrastructure, intermediary and

commerce layers. Similarly Cisco and Dell are important players at both the infrastructure and

commerce layers. As suggested by Barua etal. (1999), even though the four-layer internet economy

framework makes it difficult to separate revenues for multi-layer players, it presents a more realistic

view of the internet economy than a monolithic conceptualization that does not distinguish between the

different layers. Further, this classification helps in analyzing how companies choose to enter one

internet layer, choosing later to extend their activities to the other layers (Barua etal., 1999).

In this paper we treat e-commerce firms as those that principally belong to the fourth layer, but may

include some from the third layer as well.

Electronic Commerce Business Models: A Conceptual Framework - 3 -

Payment collection modes • Physical • Virtual

Revenue sources Sale of goods/services; Agent fees, Priced packaged information; Advertising Revenue; Priced information; Sale of aggregated marketing information

m A

Revenue

Activities • B2B (Single/Multiple) • B2C (Single/Multiple) <- • C2B (Single/Multiple) • C2C (Single/Multiple)

£_

Firms (Click only or click-n-mortar) > Pure e-commerce

• e-shops,e-groceries, e-mails > E-commerce portals

• Verticals, Horizontals, Sportals

Pro. iuct

Pricing • Buyer dominated • Seller dominated • Parity relationship

Advantage mechanism • Fixed price • Name your price • Buyer aggregation • Real-time buyer seller matching • Auctions • Tender and Request for Proposal • Consortia

Product Delivery • Physical • Virtual

Product Types • Sale of goods/services • Packaged marketing information • Advertisement banners • Priced information • Agent Services • Research and Development

Target Market • Niche • Broad

Figure 1

Electronic Commerce Business Models: A Conceptual Framework -4-

Customer Activities in Electronic Commerce

Economic transactions over the internet consists of four major sequential activities by the

prospective customer. The two initial activities are:

(a) Product or service search: The prospective customer searches for the required product or service

with appropriate features either in the physical world or over the internet. This search process can

be short and simple for products with few features and quite long and difficult for products with

large number of features that have to be evaluated comprehensively. Internet sites like

productorium.com offer product-feature search and comparison services for relatively complex

consumer products that have multiple suppliers - therefore facilitating the search and evaluation

process.

(b) Price search: After searching for the appropriate product or service, the prospective customer

searches for price offerings on the required product or service either in the physical world or over

the internet. This search process can be limited in scope in cases where brand preferences are

strong, only one supplier exists, unit costs are low or the product commands low customer

involvement for purchase. It can be extensive in scope in cases where low or no brand preferences

exist, multiple reliable suppliers exist, unit costs are high or the product requires high involvement

for purchase.

Product and price search can be iterative in some cases. These are followed by:

appropriately, the customer makes an actual purchase either in the physical world or over the

internet.

(d) Payment: Once the product or service has been purchased, the customer makes a payment (for

the goods or services received) either in the physical world or over the internet

These sequential activities may end at the first or second point without any economic

transaction being affected. While the internet can support the first two activities and does so in most

Electronic Commerce Business Models: A Conceptual Framework - 5 -

cases, we consider an economic xransacnon 10 De pan OT electronic commerce oniy IT me actual

purchase utilises the internet.

Electronic Commerce Activities

To affect and influence one or more of the four major sequential activities by the prospective

customer as described above, e-commerce firms act directly or indirectly in several ways as given

below:

(a) Direct selling of goods and/or services over the internet: This involves providing product

information and price details on the internet to enable a customer to buy the product or service

through online or offline payment mechanisms. This is what is commonly recognised as e-

commerce activity.

(b) Provision of packaged marketing or company information on a company homepage: Though,

this would not classify as e-commerce but it does provide important information about the

company's products and provoke direct or indirect enquiries and subsequent purchase.

packaged information regarding the company advertised and provides links to the company's

homepage. The host company may also earn some revenue by providing advertising space. This is

not a true form of e-commerce but adds a revenue generating activity.

(d) Priced information: Firms may provide priced information regarding products or services or

provide comparative information that may be of value to niche customers. In some cases, the

information may be provided free to end-customers as the featured firms/products pay for the

service.

(e) Agent services: Firms may act as internet based agents and provide an internet site that helps in

bringing the buyer and the seller together and therefore earn commission income.

Electronic Commerce Business Models: A Conceptual Framework - 6 -

(f) Research and development: Firms may gather product preference and use information through

their own sites or through popular general sites (doubleclick.com) through registration information

or through contests and use the information to provided targeted products. This supports e-

commerce activity.

Targeting Prospective Customers in E-Commerce

The target customer segment for the firm could be either niche or broad as given below:

(a) Niche: Involves targeting a niche single customer or a group of customers within a population of

appropriate customers. These are typically targeted through information on specialised sites or

through registration information gathered from general or specialised site or through search engine

key words entered by the prospective customer.

(b) Broad: Involves targeting the entire population of appropriate customers, typically through

information presented on general or specialised sites depending on the product.

Targeting Strategy in E-Commerce

The targeting strategy used by the firm could be either based on providing:

(a) Cost advantage in terms of overall transaction and lifetime costs over other products available in

either physical stores or over the internet or both. Cost leadership in the physical world involves

becoming a low cost producer through gaining experience, investing in large scale production

facilities, using economies of scale and carefully monitored operating costs (Porter 1985). While

these hold in e-commerce also, cost leadership positions can be enhanced over the internet by

reducing transaction costs through appropriate use of internet capabilities.

(b) Differentiation in terms of features and/or services. Differentiation in the physical world involves

development of unique products or services and building on brand or customer loyalty (Porter

1985). While these hold in e-commerce also, differentiation positions can be enhanced over the

Electronic Commerce Business Models: A Conceptual Framework - 7 -

internet by providing value added services and customisation features through appropriate use of

internet capabilities.

Firms may pursue different e-commerce approaches depending on whether they are targeting

a niche customer segment or a broad customer segment and whether they are adopting a

differentiation strategy or a cost leadership strategy. The options are shown in Table 1 along with

appropriate examples.

Table 1

Niche Customer Segment

Broad Customer Segment

Internet Based Differentiation Focus Internet Differentiation

Eg. Jbmountainbikes.com Broad Internet Differentiation

Eg. Oldtools.com

Internet Based Cost Leadership Focus Internet Cost Leadership

Eg. southwest.com Broad Internet Cost Leadership

Eg. amazon.com

E-Commerce Revenue Generating Modes

The nature of electronic commerce activity also dictates the revenue generation modes that

can be adopted by the firm. Apart from revenue generation modes adopted in the physical world, firms

can develop new revenue generating modes through the appropriate use of internet capabilities.

Some revenue generating modes adopted by e-commerce firms are:

(a) Profit from purchase/sale of goods: These are typically in the nature of trading profits as existing

in the physical world though the reach of the internet can enhance its quantum.

(b) Agent fees: Income generated by an agent for bringing the buyer and the seller together. This is

usually charged from the seller, though in some cases both parties may be charged. This is as it

exists in the physical world though the reach of the internet can enhance its quantum.

is rendered more valuable to the consumer as it is appropriately collected, classified and in an

easily searchable form. This is as it exists in the physical world though internet capabilities can

provide greater currency to the information.

Electronic Commerce Business Models: A Conceptual Framework - 8 -

(d) Advertising revenues: Revenues generated through advertisements put as images or scrollbars

or pop-ups on popular internet sites. Revenues may be calculated based on "page-views" (number

of people visiting the page where the advertisement is displayed) or "dick-throughs" (number of

people clicking the advertisement image to visit the sponsors web-site). Revenues are based on

measures similar to those that apply to physical hoardings or newspaper/magazine advertisements.

However, internet capabilities can provide more accurate measures of viewership in terms of

number and quality than possible for physical hoardings or newspaper/magazine advertisements.

(g) Priced information: Income generated from providing priced information regarding products or

services or providing comparative information that may be of value to niche customers. These differ

from agent commissions, though in some cases, the information may be provided free to end

customers as the featured firms/products pay for the service.

(h) Income from sale of aggregated marketing information: Firms may like to sell aggregated traffic

and customer data to marketing research firms. This is arevenue source for firms.

E-Commerce Product Delivery Modes

There could be two types of product delivery modes in electronic commerce activity:

(a) Physical: Delivery through physical shops or delivery through delivery services providers such as

courier services. The transaction ends with safe delivery except in cases where the physical

product requires maintenance, repairs, replacements and other types of follow-up activity. In the

latter cases, the follow-up can be provided either by local agents of the firm or by the firm itself.

Such follow-up can be either through visits or email or a combination of the two.

(b) Virtual: Typically used for information products (reports, music, software etc). After payments have

been made, the product may be made available for viewing on the screen or for direct download or

through e-mail delivery. Any follow-up required is usually through email.

Electronic Commerce Business Models: A Conceptual Framework - 9 -

E-Commerce Payment Collection Modes

There could be two types of payment collection modes in electronic commerce activity:

(a) Physical: Payments collected through agents from physical shops or against delivery through

delivery services providers such as courier services.

(b) Virtual: Payments collected through credit cards, charge cards, smart cards, gift cheques, e-cash

or frequent flier points.

E-Commerce Operating Modes

There can be three mayor modes of handling electronic commerce business operations:

(a) Completely outsourced operations: Activities like web-hosting, back-end processing and order

fulfilment are outsourced to other specialised firms or a consortia. The firm that builds the product

chooses to concentrate on its physical world operations or on manufacturing alone.

(b) Completely self-handled operations: All e-commerce related activities like web-hosting, back-end

processing and order fulfilment activities are handled in-house in parallel with its physical world

operations and manufacturing.

fulfilment) are handled by the firm in parallel with its physical world operations and manufacturing,

while the rest (typically web-hosting) are outsourced to specialised firms or to consortia.

E-Commerce Market Places

The e-commerce market place (where buying and selling occurs) could take the shape of:

(a) Pure E-Commerce Shops: Like physical shops, pure e-commerce shops are places where only

product and price information is provided and the purchase transaction is conducted. These are of

three types: (1) e-shops, (2) e-groceries and (3) e-mails.

(1) e-shops: a single shop typically selling a single type of product or service on a single site.

Electronic Commerce Business Models: A Conceptual Framework -10 -

(2) e-groceries: a single shop typically selling multiple types of related products or services on a

single site.

(3) e-mails: a set of multiple shops selling a variety of products and/or services that are hosted by

a single mall site. The mall may have a single owner/manager or multiple owners/managers.

Some malls may provide for order and/or payment consolidation across shops within the mall,

while others may need the customer to place individual orders or make individual payments for

each shop in the mall. Malls typically have a theme that decides the types of shops that are

included in it. The theme may be based on geographical location (eg. an Indian mall) or based

on the type of goods sold (eg. a clothes mall) or a combination of both.

(b) E-Commerce Portals: Unlike typical physical shops, these are places where apart from providing

product and price information and conducting the purchase transaction, additional information and

links to other related sites are provided to the customer to aid and influence the purchase decision.

A portal also provides useful related or unrelated information to a potentially non-transacting

customer - such as specialised repair and care information, new product or technology

developments etc. Apart from revenues from the purchase and sale of goods and services, popular

portals also draw commission revenues or obtain discounts from product manufacturers and

providers of related services for providing them visibility. Portals can be (1) vertical (vortals) or (2)

horizontal (hortal) or (3) spot (sportal).

(1) Vertical portal: It typically showcases a single product category and provides information on

multiple brands of that products as well as closely related product information. It typically caters

to a subset of the audience that is interested in that product alone either as a buyer, user or

seller and will seek out the portal to meet its needs. Vertical portals can draw commission

revenues or discounts due to the targeting they provide.

(2) Horizontal portal: It typically carries a range of largely unrelated product categories and

provides information on multiple brands of the set of products that it chooses to carry as well as

Electronic Commerce Business Models: A Conceptual Framework -11 -

a host of related product information as well as unrelated or loosely related information and

services. It typically attempts to attract a large and wide variety of customers to its site by

providing a broad range of products and services in the hope that some visiting customers may

purchase from the site. Horizontal portals can draw commission revenues or discounts due to

the visibility they provide.

(3) Spot portal: It attempts to combine the advantages of the horizontal and vertical portals (eg.

computor.com). It typically carries a range of related product categories and provides

information on multiple brands of the set of products that it chooses to carry as well as a host of

related product information and services. Therefore it is broader in the range of products it

carries than a vortal and provides more products and product information in each product

category than a hortal. It typically attempts to attract a fairly large but targeted customer

segment to its site that is likely to buy the type of related products that it features. Spot portals

can draw commission revenues or discounts due to the combination of targeting and visibility

they provide.

Table 2 depicts the types of shops and portals that are possible.

Table 2

E Commerce Shops E Commerce Portals

Single Product E-Shop Vertical Portal

Multiple Related Products E-Grocery Spot Portal

Multiple Unrelated Products E-Mail Horizontal Portal

Matrix of E-Commerce Models

Two principal business models - commonly known as B28 (business-to-business) and B2C

(business-to-consumer) proliferate in the e-commerce market space today. The reverse variants like

C2B (consumer-to-business) and C2C (consumer-to-consumer) are emerging but less commonly

adopted. However, buyers in the e-commerce market space can be either single or multiple individual

consumers or single or multiple businesses. Similarly sellers in the e-commerce market space can be

either single or multiple individual consumers or single or multiple businesses. (Consumer sellers are

Electronic Commerce Business Models: A Conceptual Framework -12 -

individuals interested in selling used products second hand or in selling partially used or unused

services that they are unable to utilise fully.) Therefore the buyer-seller space in e-commerce could also

be viewed more comprehensively as shown in Table 3.

Table 3

Business Seller

Consumer Seller

Single Multiple Single Multiple

Business Buyer Single SB to SB MB to SB SCtoSB MCtoSB

Multiple

M6MMB SCtoMB MCtoMB

Consumer Buyer Single SBtoSC MBtoSC SCtoSC MCtoSC

Multiple mmm MBtoMC SCtoMC MCtoMC

Abbreviations: S: Single; M: Multiple; B: Business; C: Consumer

Each of these are combinations that can provide potentially viable business models. However

the five models that are highlighted in the chart seem to be the most commonly adopted models. The

rest are either uncommon or have not been adopted so far - providing areas for exploration and

exploitation by e-commerce firms in future.

Deriving Advantage through E-Commerce Business Models

Within each principal business model one could have mechanisms to derive advantage for the

business or the customer through the nature of delivery, customisation, seller characteristics, price-

setting mechanism etc. Therefore one could conceive the matrix in Table 4 for conceptualising the

business model configuration (examples are provided for each of the models wherever available).

Let us see as to how each market place works:

(a) Fixed price model: The seller offers a list of goods available at pre-determined prices. The

consumer's choice is limited to take it or leave it.

(b) Name your price: Different products are put out for sale. The consumer sets the price that he is

willing to pay. Net agents' scout for the seller who is willing to sell at the price quoted by the

consumer. The sale is fixed and the consumer is required to buy the product.

Electronic Commerce Business Models: A Conceptual Framework - 1 3 -

orders from a large number of customers. As soon as the order level touches a pre-specified level,

the sale is triggered and the benefit of quantity discounts passed on to the consumer.

(d) Real time buyer-seller matching: A real-time exchange brings name brand retailers, small stores

and individual sellers in a single market where one can instantly compare total prices (including tax

& shipping). If the customer doesn't like the prices that he sees, he can ask the sellers to give the

customer a better deal.

(e) Auctions: They are similar to auctions in the real world. Sellers place items for sale and may quote

a reserve (minimum) price. Buyers bid for the items and (typically) the highest bidder gets the item

as long as his bid is higher than the reserve price.

(f) Tender and Request for Proposal process: Typically used by government agencies for inviting

tenders for buying and selling of items.

(g) Consortia: This is a variant of buyer aggregation that is typically found in the B2B segment. A

number of businesses with similar buying requirements get together for buying at a common place.

On the other hand, there could be a large number of sellers willing to sell to a common pool of

buyers.

Table 4

Advantage Mechanism Fixed Price Model Name Your Price Buyer Aggregation Real Time Matching Auctions Tender RFP Processes Consortia

Basic Business Model B2B

Cisco, Intel

Freemarkets.com Ec21.nbc.gov e-steel.com

B2C Amul.com Priceline.com Buyasone.com Nextag.com e-bay.com

na e-steel.com

C2B na

Priceline.com

na na

C2C na na na

e-bay.com na na

na: not applicable

Electronic Commerce Business Models: A Conceptual Framework - 1 4 -

Domination in E-Commerce Markets

E-commerce markets can be designed in ways that are dominated by either the buyer or the

seller in terms of who sets the price or who dominates in the price setting negotiation (if any). In a few

markets neither party dominates and there is a parity relationship. The price setting process could be

static (one price for all customers) or dynamic (prices change depending on the buyer and/or the time of

sale).

The nature and implications of the three market domination categories are given below:

(a) Buyer dominated: Here the buyer has the upper hand in the transaction. These include Name

Your Price, Buyer Aggregation, Tender and Request for Proposal Process, Auctions and Consortia.

(b) Seller dominated: Here the seller has the upper hand in the transaction. Fixed Price models fits

into this category.

Buyer-Seller matching fits in this category.

Click-Only or Click-n-Mortar E-Commerce Firms

There are two broad types of firms engaged in electronic commerce: pure plays (click-only) and

hybrids (click-fi-mortar). Pure plays are firms that do not have a physical presence (like Amazon.com;

which sells on the net only and does not own any physical bookstores). While others have a physical as

well as an internet presence (like BarnesandNoble.com, which has a large network of retail bookshops

and sells on the net too). Both pure plays as well as hybrids engage in a wide variety of businesses viz.

travel, books, software, consumer electronics, groceries etc.

Factors Affecting Potential Sale in E-Commerce

There are several factors that can affect the potential sale of any product/ service over the

internet.

Electronic Commerce Business Models: A Conceptual Framework -15 -

We list some of the factors or variables that can affect the potential sale of any product/service

over the net (partly based on Rajiv and Saxena, 2000):

(a) Value for money: Does the sale of the product over the net provide additional benefit to the

consumer? Is the benefit purely monetary in terms of price reductions or is the monetary benefit (if

any) enhanced by ease of transaction or improved product delivery.

(b) Commodity Product/Service: Lesser the difference between products, the easier the choice

process for the consumer over the net. Fewer comparisons have to be made - price becomes the

major differentiating factor.

net, especially for otherwise commodity products. They also reduce search costs over the net.

(d) Support services: Products/services that require lesser amount of support (order tracking,

warranties, after-sales, call centres etc.) are more likely to succeed over the net. Bse a delivery

mechanism for support services needs to be built in along with the sale transaction mechanism.

(e) Sensory data processing: Products that entail greater sensory involvement of the consumer are

less likely to succeed as the product cannot be sensed effectively. Else a sensory delivery

mechanism for sensory involvement of the consumer needs to be built in along with the sale

transaction mechanism.

(f) Consumer choice: Modes of selling that enable a consumer to make better choices (through

product category or brand comparisons) will improve the success of the product over the net

(g) Payment mechanisms: Ease of payment and security of payment mechanisms are concerns for

potential customers. Ceteris paribus, barter and coupon schemes can enhance sales over the net.

(h) Personalisation: The more customer-friendly and personalised the interface (customers can define

which related sites they wish to visit or what information they would like to be provided when they

Electronic Commerce Business Models: A Conceptual Framework - 1 6 -

(i) Seamless integration: Various stores on the site and various functionalities need to be tightly

integrated (for example timely update of prices), to provide the consumer with the ease of

transaction that would attract and attach the customer.

(j) Transaction costs: Any lowering of transaction cost for customers will attract them to the site. This

could take the form of using a single site to conduct transactions over multiple sites (snaz.com) or

reduce the customer's efforts in going to a physical store to ensure quality of products.

(k) Unit cost: Lower the per unit cost of the goods or service, lower the propensity to transact over the

net if physical purchase transactions are fast, easy and cheap. An internet transaction, however

small and simple requires a minimum fixed investment in terms of time for search and time for

transaction as well as the cost of internet connectivity that may not justify purchases of small unit

cost except along with other high unit cost items.

(I) Frequency of purchase: Higher the frequency of purchase of the goods or service, lower the

propensity to transact over the net if physical purchase transactions are fast, easy and cheap. An

internet transaction, however small and simple requires a minimum fixed investment in terms of

time for search and time for transaction as well as the cost of internet connectivity that may not

justify frequent and repeated purchases that can be handled through rate contracts and regular

door deliveries.

Enhancing Product/Service Value Propositions through E-Commerce

Typically value offerings in an e-commerce transaction are derived from providing the

consumer with products/services which provide greater benefit to the consumer through the transaction

over the net as compared to the purely physical transaction.

This enhanced value offering can be due to:

(a) reducing the physical space between the buyer and the seller;

(b) reaping economies of a shortened value chain through disintermediation;

Electronic Commerce Business Models: A Conceptual Framework - 1 7 -

(d) provision of easily accessible related information through the net.

Apart from providing purchase access to customers unable to undertake physical transactions,

where these advantages are relatively large in proportion to the value of the product, it improves the

value proposition for the buyer while maintaining or enhancing margins for the seller. Ceteris paribus,

an improvement in the value proposition of the product through its transaction over the net can

potentially improve the propensity of customers to purchase it over the net. This assumes that the

accessibility, transaction cost and level of difficulty for both types of transactions remains the same.

This is however mediated by the inherent net-friendliness of the product as described in the next

section.

Impact of Net-Friendliness of Product/Service in E-Commerce

Not all products/services lend themselves to an enhanced value offering through transactions

over the net. In some products/services, difficulties related to the nature of the product or the nature of

the transaction may reduce the value offering on a transaction over the net - thus reducing the

propensity of the consumer to use the net for transactions of such products. Difficulties that are related

to the nature of the product/service itself are said to be due to the inherent net friendliness of the

product (Rajiv and Saxena, 2000). For example, in a fabric purchase context, the customer normally

feels the texture of the fabric before purchase and therefore will be reluctant to purchase it over the net

- this renders fabrics as an inherently non-net-friendly product. Therefore, we could consider a

continuum of products/services from completely non-net-friendly to highly net-friendly ones depending

on how important the net-friendly or non-net-friendly feature is to the purchase decision of the

customer.

However, certain value-added services and mechanisms can shift non-net-friendly

products/services to a higher level of net-friendliness. To develop such value-added services and

Electronic Commerce Business Models: A Conceptual Framework -18 -

mechanisms firms need to understand the features that are likely to influence a product/service's

degree of net-friendliness.

Value-Proposition - Net-Friendliness Matrix

If we combine the degree of net-friendliness as a continuum with the level of improvement in

the value proposition of transactions over the internet as a continuum we have the e-commerce market

space given in Figure 2. It indicates that certain products and services are inherently more appropriate

for e-commerce transactions. Firms can develop mechanisms to enhance value propositions and/or

net-friendliness at a cost - such costs can be marginal in some products or prohibitive in others

impacting the overall e-commerce business proposition.

Figure 2

Non Net Friendly <- - • Highly Net Friendly

Low Value Proposition Improvement Worst Net Product (avoid)

High Value Proposition Improvement Needs Net Friendliness Support

Good for Click & Mortar

Best Net Product

Mechanisms to Improve Net Friendliness:

Several mechanisms have been developed to improve the net-friendliness of inherently non-

net-friendly products.

We present and explain some of the mechanisms adopted by the existing e-commerce firms:

(a) Sending samples by mail/courier: Example: Sending a sample of small pieces of fabric to the

customer by mail enables the customer to feel the texture prior to purchase.

(b) Better Computer Imaging: Example: Car sites use high quality three dimensional imaging with

multiple perspectives and "walk-arounds" to provide the customer an almost live model appearance

on screen prior to purchase.

Electronic Commerce Business Models: A Conceptual Framework -19-

against the user's stated monitor type, model and settings so that the customer can view authentic

undistorted 'real" colours prior to purchase.

(d) User demonstration: Example: Demonstration of use on screen or video where user training is

essential as part of the sale process - as in household appliances.

(e) Onscreen trials: Example: Viewers can try combinations of furniture sets and relative placements

on a virtual drawing room to make suitability assessments prior to purchase.

(f) Product details and comparisons: Example: In complex multiple feature products, sites like

productorium.com provide easy selection and comparison databases and navigation tools to

facilitate the customers product selection and suitability matching process

Mechanisms to Improve Value Proposition over the Net:

Several mechanisms have been developed by firms to improve the value proposition of the

products they sell over the internet. These mechanisms are conceptually of three types:

(a) those that are based on value propositions that can be offered in physical stores - these include

discounts, coupons, gift cheques, games, quizzes, contests, demonstrations etc.

(b) those that harness the capabilities of the internet to offer value propositions that cannot be offered

in physical stores - these include wide or targeted search facilities, wide-net internet based

auctions, electronic cash transactions, instant email alerts etc.

manufacturers over the net that are customised at the time of manufacture within a limited set of

customer feature options and combinations without any major additional cost to a manufacturer

who is geared for flexible manufacturing. This can be an advantage over the limited range available

in physical stores.

Electronic Commerce Business Models: A Conceptual Framework - 20 -

Conclusion

The recent boom in the new economy of internet based commerce has spawned a large

number of firms with a variety of business models that aim to leverage the power of the internet to

further their business goals. Forrester Research has shown that e-commerce could generate $6.9

trillion in revenues by 2003 (Forrester Research in ABC News, 2000).

In this paper we have attempted to provide a conceptual framework for understanding e-

commerce business models on a number of important dimensions like nature of consumer and e-

commerce activity, target customers, targeting strategy, revenue generating modes, product/service

delivery modes, payment collection modes, operating modes, market places, advantage mechanisms

and domination characteristics. We have examined means of improving value proposition and net-

friendliness for e-commerce activities. We have also identified areas where e-commerce models have

not been explored or fully exploited so far. Since the range of economic activities on the internet is vast

and growing, newer models and opportunities are likely to emerge through improvements in internet

technologies as well as innovations in their application to business contexts. Hence any conceptual

framework on e-commerce business models, including our own, can never be comprehensive.

References

Porter, Michael. Competitive Advantage: Creating and Sustaining Superior Performance, The Free Press, 1985.

Rajiv R and Saxena, Shailendra. E-Commerce; Emerging Imperatives for Indian Businesses, Contemporary Concerns Study, Indian Institute of Management, Bangalore, 2000.

Tas, Jeroen. eBusines Transformation, Presentation, Mphasis-BFL, http://www.mphasis.com/jeroenpaper.pdf, 2000.

Anitesh Barua, Jon Pinnell, Jay Shutter, and Andrew B. Whinston. Measuring the Internet Economy, Center for Research in Electronic Commerce, The University of Texas at Austin, http://crec.bus.utexas.edu, 1999.

Forrester Research http://more.abcnews.qo.com/$ection$/bu$iness/dailvnews/intemetiob$000606.htmlt 2000.

Electronic Commerce Business Models: A Conceptual Framework - 21 -