Internet Commerce Business Models

Business models are perhaps the most discussed and least understood aspect of the web. There is
so much talk about how the web changes traditional business models. But there is little clear-cut
evidence of exactly what this means.
In the most basic sense, a business model is the method of doing business by which a company
can sustain itself -- that is, generate revenue. The business model spells-out how a company
makes money by specifying where it is positioned in the value chain.
Some models are quite simple. A company produces a good or service and sells it to customers.
If all goes well, the revenues from sales exceed the cost of operation and the company realizes a
profit. Other models can be more intricately woven. Broadcasting is a good example. Radio and
later television programming has been broadcasted over the airwaves free to anyone with a
receiver for much of the past century. The broadcaster is part of a complex network of
distributors, content creators, advertisers (and their agencies), and listeners or viewers. Who
makes money and how much is not always clear at the outset. The bottom line depends on many
competing factors.
Internet commerce will give rise to new kinds of business models. That much is certain. But the
web is also likely to reinvent tried-and-true models. Auctions are a perfect example. One of the
oldest forms of brokering, auctions have been widely used throughout the world to set prices for
such items as agricultural commodities, financial instruments, and unique items like fine art and
antiquities. The Web has popularized the auction model and broadened its applicability to a wide
array of goods and services.
Business models have been defined and categorized in many different ways. This is one attempt
to present a comprehensive and cogent taxonomy of business models observable on the web. The
proposed taxonomy is not meant to be exhaustive or definitive. Internet business models
continue to evolve. New and interesting variations can be expected in the future.

The basic categories of business models discussed in the table below include:

 Brokerage
 Advertising

 Infomediary
  Merchant

 Manufacturer (Direct)

 Affiliate

 Community

 Subscription

 Utility

The models are implemented in a variety of ways, as described below with examples. Moreover,
a firm may combine several different models as part of its overall Internet business strategy. For
example, it is not uncommon for content driven businesses to blend advertising with a
subscription model.

Business models have taken on greater importance recently as a form of intellectual property that
can be protected with a patent. Indeed, business models (or more broadly speaking, "business
methods") have fallen increasingly within the realm of patent law. A number of business method
patents relevant to e-commerce have been granted. But what is new and novel as a business
model is not always clear. Some of the more noteworthy patents may be challenged in the courts.

Models

1) Brokerage

Brokers are market-makers: they bring buyers and sellers together and facilitate transactions.
Brokers play a frequent role in business-to-business (B2B), business-to-consumer (B2C), or
consumer-to-consumer (C2C) markets. Usually a broker charges a fee or commission for each
transaction it enables. The formula for fees can vary. Brokerage models include:

Marketplace Exchange -- offers a full range of services covering the transaction process, from
market assessment to negotiation and fulfillment. Exchanges operate independently or are
backed by an industry consortium.
Buy/Sell Fulfillment -- takes customer orders to buy or sell a product or service, including terms
like price and delivery.

Demand Collection System -- the patented "name-your-price" model pioneered by

Auction Broker -- conducts auctions for sellers (individuals or merchants). Broker charges the
seller a listing fee and commission scaled with the value of the transaction. Auctions vary widely
in terms of the offering and bidding rules.

Transaction Broker -- provides a third-party payment mechanism for buyers and sellers to
settle a transaction.

Distributor -- is a catalog operation that connects a large number of product manufacturers with
volume and retail buyers. Broker facilitates business transactions between franchised distributors
and their trading partners.

Search Agent -- a software agent or "robot" used to search-out the price and availability for a
good or service specified by the buyer, or to locate hard to find information.

Virtual Marketplace -- or virtual mall, a hosting service for online merchants that charges
setup, monthly listing, and/or transaction fees. May also provide automated transaction and
relationship marketing services.

2) Advertising Model

The web advertising model is an extension of the traditional media broadcast model. The
broadcaster, in this case, a web site, provides content (usually, but not necessarily, for free) and
services (like email, IM, blogs) mixed with advertising messages in the form of banner ads. The
banner ads may be the major or sole source of revenue for the broadcaster. The broadcaster may
be a content creator or a distributor of content created elsewhere. The advertising model works
best when the volume of viewer traffic is large or highly specialized. It can take any of these
forms:
Portal -- usually a search engine that may include varied content or services. A high volume of
user traffic makes advertising profitable and permits further diversification of site services. A
personalized portal allows customization of the interface and content to the user. A niche portal
cultivates a well-defined user demographic.
Classifieds -- list items for sale or wanted for purchase. Listing fees are common, but there also
may be a membership fee.
User Registration -- content-based sites that are free to access but require users to register and
provide demographic data. Registration allows inter-session tracking of user surfing habits and
thereby generates data of potential value in targeted advertising campaigns.
Contextual Advertising / Behavioral Marketing -- freeware developers who bundle adware with
their product
Content-Targeted Advertising -- pioneered by Google, it extends the precision of search
advertising to the rest of the web. Google identifies the meaning of a web page and then
automatically delivers relevant ads when a user visits that page.
Intromercials -- animated full-screen ads placed at the entry of a site before a user reaches the
intended content.
Ultramercials -- interactive online ads that require the user to respond intermittently in order to
wade through the message before reaching the intended content.
3) Informediary Model

Data about consumers and their consumption habits are valuable, especially when that
information is carefully analyzed and used to target marketing campaigns. Independently
collected data about producers and their products are useful to consumers when considering a
purchase. Some firms function as infomediaries (information intermediaries) assisting buyers
and/or sellers understand a given market.
4) Merchant Model
These are wholesalers and retailers of goods and services. Sales may be made based on list prices
or through auction.
Virtual Merchant --or e-tailer, is a retail merchant that operates solely over the web.
Catalog Merchant -- Combines mail, telephone and online ordering.
Bit Vendor -- a merchant that deals strictly in digital products and services and, in its purest
form, conducts both sales and distribution over the web.

5) Manufacturing Model/Direct

The manufacturer or "direct model", it is predicated on the power of the web to allow a
manufacturer (i.e., a company that creates a product or service) to reach buyers directly and
thereby compress the distribution channel. The manufacturer model can be based on efficiency,
improved customer service, and a better understanding of customer preferences. It includes:

Purchase -- the sale of a product in which the right of ownership is transferred to the buyer.

Lease -- in exchange for a rental fee, the buyer receives the right to use the product under a
“terms of use” agreement. The product is returned to the seller upon expiration or default of the
lease agreement. One type of agreement may include a right of purchase upon expiration of the
lease.

License -- the sale of a product that involves only the transfer of usage rights to the buyer, in
accordance with a “terms of use” agreement. Ownership rights remain with the manufacturer
(e.g., with software licensing).

6) Affiliate Model

In contrast to the generalized portal, which seeks to drive a high volume of traffic to one site, the
affiliate model, provides purchase opportunities wherever people may be surfing. It does this by
offering financial incentives (in the form of a percentage of revenue) to affiliated partner sites.
The affiliates provide purchase-point click-through to the merchant. It is a pay-for-performance
model -- if an affiliate does not generate sales, it represents no cost to the merchant. The affiliate
model is inherently well-suited to the web, which explains its popularity. Variations include,
banner exchange, pay-per-click, and revenue sharing programs.
Banner Exchange -- trades banner placement among a network of affiliated sites.

Pay-per-click -- site that pays affiliates for a user click-through.

7) Subscription Model

Users are charged a periodic -- daily, monthly or annual -- fee to subscribe to a service. It is not
uncommon for sites to combine free content with "premium" (i.e., subscriber- or member-only)
content. Subscription fees are incurred irrespective of actual usage rates. Subscription and
advertising models are frequently combined.
Content Services -- provide text, audio, or video content to users who subscribe for a fee to gain
access to the service.
Person-to-Person Networking Services -- are conduits for the distribution of user-submitted
information, such as individuals searching for former schoolmates.
Trust Services -- come in the form of membership associations that abide by an explicit code of
conduct, and in which members pay a subscription fee.
Internet Services Providers -- offer network connectivity and related services on a monthly
subscription.
8) Utility Model

The utility or "on-demand" model is based on metering usage, or a "pay as you go" approach.
Unlike subscriber services, metered services are based on actual usage rates. Traditionally,
metering has been used for essential services (e.g., electricity water, long-distance telephone
services). Internet service providers (ISPs) in some parts of the world operate as utilities,
charging customers for connection minutes, as opposed to the subscriber model common in the
U.S.

Metered Usage -- measures and bills users based on actual usage of a service.

Metered Subscriptions -- allows subscribers to purchase access to content in metered portions