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E-commerce 2021: Business. Technology. Society.

Sixteenth Edition

Chapter 2

E-commerce Business Models and Concepts

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Learning Objectives

2.1 Identify the key components of e-commerce business models.

2.2 Describe the major B2C business models.

2.3 Describe the major B2B business models.

2.4 Understand key business concepts and strategies applicable to e-commerce.

Coping with a Pandemic: Small Businesses Reinvent with E-commerce

Class Discussion

Prior to the pandemic, did you physically shop at small businesses in your community?

What steps have small businesses with which you are familiar taken to continue operating during the pandemic?

How likely are you to continue new consumer behaviors instituted during the pandemic after it is over? For instance, if you ordered groceries online, will you continue to do so?

E-commerce Business Models

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

Eight Key Elements of a Business Model

Value proposition

Revenue model

Market opportunity

Competitive environment

Competitive advantage

Market strategy

Organizational development

Management team

1. Value Proposition

“Why should the customer buy from you?”

Successful e-commerce value propositions:

Personalization/customization

Reduction of product search, price discovery costs

Facilitation of transactions by managing product delivery

2. Revenue Model

“How will you earn money?”

Major types of revenue models:

Advertising revenue model

Subscription revenue model

Freemium strategy

Transaction fee revenue model

Sales revenue model

Affiliate revenue model

Insight on Society: Foursquare’s Evolving Business Model: Leveraging Your Location

Class discussion:

Why has the shift in Foursquare’s business model been the key to success for Foursquare?

How comfortable are you with the ability of Foursquare to characterize behavior into various personas?

What is your opinion of Foursquare’s characterization of itself as one of the “good guys” in the location data industry?

How is Foursquare attempting to cope with a more privacy-conscious business environment?

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

4. Competitive Environment

“Who else occupies your intended marketspace?”

Other companies selling similar products in the same marketspace

Includes both direct and indirect competitors

Influenced by:

Number and size of active competitors

Each competitor’s market share

Competitors’ profitability

Competitors’ pricing

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

Unfair competitive advantage

Leverage

Perfect markets

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

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

Typically, divided into functional departments

As company grows, hiring moves from generalists to specialists

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

Raising Capital

Seed capital

Elevator pitch

Traditional sources

Incubators, angel investors

Commercial banks, venture capital firms

Strategic partners

Equity crowdfunding

J O B S Act

Insight on Business: Startups Turn to Crowdfunding

Class Discussion

Would you feel comfortable investing in a startup that raises capital using equity crowdfunding? Why or why not?

Why is it important to democratize access to capital?

What obstacles are presented in the use of crowdfunding as a method to fund startups?

Categorizing E-commerce Business Models

No one correct way to categorize

Text categorizes according to:

E-commerce sector (e.g., B2B)

E-commerce technology (e.g., m-commerce)

Similar models appear in different sectors

Companies may use multiple business models (e.g., eBay)

E-commerce enablers

B2C Business Models

E-tailer

Community provider (social network)

Content provider

Portal

Transaction broker

Market creator

Service provider

B2C Models: E-Tailer

Online version of traditional retailer

Revenue model: Sales

Variations:

Virtual merchant

Bricks-and-clicks

Catalog merchant

Manufacturer-direct

Low barriers to entry

B2C Models: Community Provider

Provide online environment (social network) where people with similar interests can transact, share content, and communicate

Examples: Facebook, LinkedIn, Twitter, Pinterest

Revenue models:

Typically hybrid, combining advertising, subscriptions, sales, transaction fees, and so on

B2C Models: Content Provider

Digital content on the Web:

News, music, video, text, artwork

Revenue models:

Use variety of models, including advertising, subscription; sales of digital goods

Key to success is typically owning the content

Variations:

Syndication

Aggregators

Insight on Technology: Connected Cars and the Future of E-commerce

Class Discussion

How are new connected car technologies also creating new business models?

What is the potential impact on different forms of e-commerce, such as the content industry?

Why are tech companies so interested in the connected car platform?

Are there any issues with respect to “connected” cars?

B2C Business Models: Portal

Search plus an integrated package of content and services

Revenue models:

Advertising, referral fees, transaction fees, subscriptions for premium services

Variations:

Horizontal/general (examples: Yahoo, A O L, M S N)

Vertical/specialized (vortal) (example: Sailnet)

Search (examples: Google, Bing)

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

Travel services

Job placement services

B2C Models: Market Creator

Create digital environment where buyers and sellers can meet and transact

Examples: Priceline, eBay

Revenue model: Transaction fees, fees to merchants for access

On-demand service companies (sharing economy): platforms that allow people to sell services

Examples: Uber, Airbnb

B2C Models: Service Provider

Online services

Examples: Google

Google Maps, Gmail, and so on

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

B2B Business Models

Net marketplaces

E-distributor

E-procurement

Exchange

Industry consortium

Private industrial network

B2B Models: E-distributor

Version of retail and wholesale store, M R O goods, and indirect goods

Owned by one company seeking to serve many customers

Revenue model: Sales of goods

Example: Grainger

B2B Models: E-procurement

Creates digital markets where participants transact for indirect goods

B2B service providers, S a a S and P a a S providers

Scale economies

Revenue model:

Service fees, supply-chain management, fulfillment services

Example: Ariba

B2B Models: Exchanges

Independently owned vertical digital marketplace for direct inputs

Revenue model: Transaction, commission fees

Create powerful competition between suppliers

Tend to force suppliers into powerful price competition; number of exchanges has dropped dramatically

Example: Go2Paper

B2B Models: Industry Consortia

Industry-owned vertical digital marketplace open to select suppliers

More successful than exchanges

Sponsored by powerful industry players

Strengthen traditional purchasing behavior

Revenue model: Transaction, commission fees

Example: SupplyOn

B2B Models: Private Industrial Networks

Digital network used to coordinate among firms engaged in business together

Typically evolve out of large company’s internal enterprise system

Key, trusted, long-term suppliers invited to network

Example: Walmart’s network for suppliers

How E-commerce Changes Business

E-commerce changes industry structure by changing:

Rivalry among existing competitors

Barriers to entry

Threat of new substitute products

Strength of suppliers

Bargaining power of buyers

Industry structural analysis

Industry Value Chains

Set of activities performed by suppliers, manufacturers, transporters, distributors, and retailers that transform raw inputs into final products and services

Internet reduces cost of information and other transactional costs

Leads to greater operational efficiencies, lowering cost, prices, adding value for customers

Figure 2.4 E-commerce and Industry Value Chains

Figure 2.4, Page 89.

Every industry can be characterized by a set of value-adding activities performed by a variety of actors. E-commerce potentially affects the capabilities of each player as well as the overall operational efficiency of the industry.

Alt Text

Long description: An illustration depicts industry value chains, as follows: The value chain begins with suppliers. Manufacturers use supply chain management systems. Distributors use inventory management systems. Retailers use efficient customer response systems. Customers are the last link in the chain. Manufacturers can use transporters with transportation management systems to move inventory directly to customers via alternative direct channels such as the web.

Firm Value Chains

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

Figure 2.5 E-commerce and Firm Value Chains

Figure 2.5, page 90.

Every firm can be characterized by a set of value-adding primary and secondary activities performed by a variety of actors in the firm. A simple firm value chain performs five primary value-adding steps: inbound logistics, operations, outbound logistics, sales and marketing, and after sales service.

Alt Text

Long description: An illustration depicts firm value chains, as follows: Primary activities in a firm value chain include inbound logistics, operations, outbound logistics, sales and marketing, and after sales service. Secondary activities include administration, human resources, information systems, procurement, and finance and accounting.

Firm Value Webs

Networked business ecosystem

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

Figure 2.6 Internet-Enabled Value Web

Figure 2.6, page 91.

Internet technology enables firms to create an enhanced value web in cooperation with their strategic alliance and partner firms, customers, and direct and indirect suppliers.

Alt Text

Long description: An illustration depicts an internet enabled value web, as follows: In a value web, a firm or industry uses e commerce technology to coordinate with strategic alliance and partner firms, customers through customer relationship management or C R M systems, and indirect suppliers or M R O and direct suppliers through E R P systems and legacy systems and supply chain management systems, private industrial networks and net marketplaces.

Business Strategy

Plan for achieving superior long-term returns on capital invested: that is, profit

Five generic strategies

Product/service differentiation

Cost competition

Scope

Focus/market niche

Customer intimacy

E-commerce Technology and Business Model Disruption

Disruptive technologies

Digital disruption

Sustaining technology

Stages

Disruptors introduce new products of lower quality

Disruptors improve products

New products become superior to existing products

Incumbent companies lose market share

Careers in E-commerce

Position: Assistant Manager of E-business

Qualification/Skills

Preparing for the Interview

Possible Interview Questions

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