5 Business Models

E-commerce 2013
business. technology. society.

ninth edition
Kenneth C. Laudon
Carol Guercio Traver
Copyright © 2013 Pearson Education

Chapter 5
Business Models for E-Commerce
Copyright © 2013 Pearson Education

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
Copyright © 2013 Pearson Education Slide 2-3

Eight Key Elements of a Business Model
1. Value proposition
2. Revenue model
3. Market opportunity
4. Competitive environment
5. Competitive advantage
6. Market strategy
7. Organizational development
8. 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 the firm earn revenue,
generate profits, and produce a superior
return on invested capital?”
◼ Major types:
❖ Advertising revenue model
❖ Subscription revenue model
❖ Transaction fee revenue model
❖ Sales revenue model
❖ Affiliate revenue model

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

Categorizing E-commerce
Business Models
◼ No one correct way
◼ Text categorizes according to:
❖ E-commerce sector (e.g., B2B)
❖ E-commerce technology (e.g., m-commerce)
◼ Similar business models appear in more than

one sector
◼ Some companies use multiple business
models (e.g., eBay)

B2C Business Models
◼ E-tailer
◼ Community provider (social network)
◼ Content provider
◼ Portal
◼ Transaction broker
◼ Service provider

B2C Models: E-tailer
◼ Online version of traditional retailer
◼ Revenue model: Sales
◼ Variations?
◼ Low barriers to entry

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, Pinterest
◼ Revenue models:
❖ Typically hybrid, combining advertising,
subscriptions, sales, transaction fees, affiliate
fees

B2C Models: Content Provider
◼ Digital content on the Web
❖ News, music, video, text, artwork
◼ Revenue models:
❖ Subscription; pay per download (micropayment);
advertising; affiliate referral
◼ Variations?

B2C Business Models: Portal
◼ Search plus an integrated package of
content and services
◼ Revenue models:
❖ Advertising, referral fees, transaction fees,
subscriptions
◼ Variations?

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
◼ e.g.,
❖ Priceline
❖ eBay
◼ Revenue model: Transaction fees

B2C Models: Service Provider
◼ Online services
❖ e.g., Google—Google Maps, Gmail, 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

B2B business models
Business models and marketplace control

1. Suppliers
2. Customers
3. Intermediaries
Other business models

1. Virtual corporation
2. Networking between headquarters and subsidiaries
3. Online services to business
Copyright © 2003 Thomson Learning/South Western

Copyright © 2003 Sherif Kamel Copyright © 2002 Marketspace LLC
1. Supplier-oriented marketplace
Most common B2B business model.

Environment for most of over 85% of the
manufacturer-driven electronic stores.
Individual consumers and business buyers use the
model.
Architecture is the same for B2C.

Supplier-Oriented B2B/B2C marketplace architecture
Consumer Business
Customer
Supplier’s
Electronic Store
Consumer
Supplier’s Customer’s
Business
Products Order
Catalog Information Customer
B2C EC
B2B EC
Cases
Dell Computers sold 90% of their computers to business

buyers over the Internet.
Cisco sold 1 billion US dollars worth of routers, switches
and network interconnections devices in 1998 through
the Internet.
Need to have a good and dynamic web site and a group
of loyal customers.
The model is not convenient to large and frequent
buyers.
Information stored on the suppliers servers and not on
the buyer’s information system.
B2B and B2C platforms differ in terms of shopping cart
characteristics.
Case: www.ingram.com
Computer Reseller Ingram Micro.

Open only to existing and subscribed customers.
Building loyalty with its frequent buyers.
Percentage of gain could be 600% more than offline
auctions, on average.

www.ingram.com

2. Buyer-oriented marketplace
Ideal for large and frequent buyers.

Big buyers should open their own marketplace.
The marketplace is open on the buyer’s servers and
suppliers are invited to bid on the announced.
Great opportunity for competitive and committed
suppliers.

Buyer-oriented B2B marketplace architecture
Business
Buyer’s Supplier
Electronic Store
Business
Supplier
Buyer’s
Supplier’s
Requesting Products
Bid Information
Catalog

3. Intermediary-oriented marketplace
The market place where consumers and business

buyers meet.
Architecture is very close to that in the B2C cases.

Intermediary-oriented B2B marketplace model
Intermediary’s
Electronic Store
Business
Supplier
Business
Customer
Business
Supplier
Business
Customer
Customer’s Supplier’s
Order Shared Product
Information Product Information
Catalog
www.techsavvy.com

www.travelocity.com

Virtual corporation
The most up-to-date re-engineered form of

organizational structure = Virtual Corporation.
Typical organization with business partners sharing costs
and resources for the purpose of producing a product or
service.
Mainly dependent of B2B platforms.
Modern VC is a network of creative people, resources,
and ideas connected by online services and/or the
Internet.

Virtual corporation goals
Excellence Utilization Opportunisim
Resources of the
Each partner brings its VC can find and meet
business partners are
core competence to market opportunity
frequently under utilized,
form an all-star Better than an
could be more profitable
winning team individual company
in the case of a VC

B2B platform for virtual corporation
Electronic mail
Desktop video conferencing
Knowledge sharing
Groupware
EDI

Networking between headquarters and subsidiaries
Franchiser vs. Franchisee
Electronic mail
Message boards
Chat rooms
Online corporate data access
www.marriott.com

B2B and the supply chain
B2B applications consist of a series of processes and

roles that represent the supply chain of a specific product
and/or service.
External operations with partners outside the
organization are as important as the interaction between
the units within the organization.
Raw Supply Chain Process

End-user
material

Supply chain divisions
Upstream Activities Internal Activities Downstream Activities
Involving material Involving Involving distribution

manufacturing and and sale of products
and service inputs
packaging of goods to distributors and
from suppliers
customers

Online services to business
Famous online services include:

Tourism
Employment placement/job market
Real state
Trading stocks
Cyber banking
Insurance
Auctions

It is important to note that…
There are 2 categories of internet businesses

Pure play
– Businesses having only an online presence
 www.amazon.com
 www.ebay.com
Bricks and clicks
– Businesses combining online presence with traditional offline
operations.
 www.bn.com
 www.nordstrom.com
 www.nytimes.com

B2C pure-play business models
Direct sellers
Make money by selling products or services to consumers.
Intermediaries
Facilitate transactions between buyers and sellers and receive a
percentage of the value of each transaction.
Advertising-based models
Have ad inventory on their site and sell it to interested parties.
Community-based models
allow users worldwide to interact with one another on the basis of
interest areas.
Fee-based models
charge viewers a subscription fee to view content.

Bricks-and-clicks business model
For some product categories, individuals have to touch,

feel, or try on a product before buying.
Delivering products is a hassle for dot-coms.
Product returns can be tricky.
Salespeople can help customers by answering product
questions, providing feedback, and suggesting other
products.
Spin off the online venture.
Create a strategic partnership.
Create a joint venture between a bricks-and-mortar store
and an online company.
Integrate the online operation with the existing physical
operation by creating a division within the company.
B2B pure-play business models
Business markets are unique in many ways:

High value of purchases
Large order size
Items purchased
Purchase specificity
Team buying
Use of buying specialists
Special services required
Team selling
Vendor/value analysis
Leasing
Competitive bidding
Derived demand and cyclical demand
Number and location of buyers

EDI and Extranets

EDI
– Created on a closed network—systems did not speak to one another.
Extranets
– An intranet that is adapted so that external parties are provided
varying degrees of access to information.
B2B marketplaces—net markets

Broadly described as all online marketplaces where buyers and sellers
congregate to exchange goods and services for money.
Net markets can be organized either horizontally or vertically.

Types of net markets…

1. Buy-centric markets are organized by large, influential buyers as
a place where small and fragmented sellers can sell their goods.
2. Sell-centric markets are markets where one or more big sellers
build a marketplace for small, fragmented buyers.
3. Neutral exchanges appear when both the sellers and the buyers
are fragmented.

Why do use net markets?

Selection of buyers or sellers (global markets) is greater.
Dynamic markets may be a great place to move inventory quickly.
Efficient exchange process minimizes employee time.
Prices are low due to expanded access to sellers.
Some one-time deals are available only to online audiences.

Challenges faced by eMarketplaces…

Building traffic is a big challenge for eHubs.
Competing eMarketplaces.
Integrating other sales channels with eMarketplaces.

Incorporating the Internet/Web for more effective business
Steps include…
1. Business assessment
2. Delivering value to the consumer
3. Define revenue model
4. Implementation

Step #1: Business assessment
Digitality and profit orientation

Digitality
– The digitality of a business is the proportion of a business that is
online.
Profit orientation
– Each company must determine whether its online operation is a
service to consumers or if it will provide income for the organization.

Step #2: Delivering value to the consumer
Value
A consumer’s perception of the consequence of using a product
or service in relation to prior expectations.
Steps to deliver value include…
1. Identify how different consumers perceive value.
2. Choose which value elements will be delivered.
3. Provide the value—build the business in such a way that it
manifests the desired elements.
4. Develop an integrated communications package to help
customers learn about the nature of the value.
5. Assess how customers perceive the value being delivered.

Step #2: Delivering value to the consumer
Value drivers in physical versus virtual spaces…

Physical space value drivers – the 4 Ps
– Product
– Price
– Place
– Promotion
Virtual space drivers – the Internet toolkit

– Commerce
– Communication
– Cost reduction
– Connectivity
– Community
– Content
– Computing

Step #3: Define revenue model
Ways to maximize profits.

1. Commerce - Selling products or services to consumers or
businesses.
2. Advertising - Selling advertising space to interested advertisers.
3. Fees - Charging fees to consumers for various services.
4. Sale of consumer information - Aggregating consumer behavior
information and selling it to interested companies.
5. Credit - Receiving money from the consumer on day 1 and
paying vendors after a long period of time (float).

Step #3: Define revenue model
eBusiness typically have intangible and informational

assets.
One of the primary benefits of the Internet is the ease of
linkage between firms.

Step #4: Implementation
Internet time
Higher visibility of errors
Lower switching costs
More complex linkages

Step #4: Implementation
Why CRM systems fail?

Losing sight of why the CRM system is being implemented.
Not having a clear sponsor who owns the vision.
Underestimating the difficulties of integration.
Why CRM systems succeed?

Allocate adequate resources.
Provide incentives for business units to collaborate.
Consider the activities of both online and offline competitors.
Build an Internet culture.
Allow customer input to drive design.


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E-commerce 2013

business. technology. society.

Copyright © 2013 Pearson Education

Copyright © 2013 Pearson Education

Copyright © 2013 Pearson Education Slide 2-3

Copyright © 2013 Pearson Education Slide 2-4

Copyright © 2013 Pearson Education Slide 2-5

Copyright © 2013 Pearson Education Slide 2-6

Copyright © 2013 Pearson Education Slide 2-7

Copyright © 2013 Pearson Education Slide 2-8

Copyright © 2013 Pearson Education Slide 2-9

◼ “How do you plan to promote your

Copyright © 2013 Pearson Education Slide 2-10

Copyright © 2013 Pearson Education Slide 2-11

Copyright © 2013 Pearson Education Slide 2-12

◼ Similar business models appear in more than

Copyright © 2013 Pearson Education Slide 2-13

Copyright © 2013 Pearson Education Slide 2-14

Copyright © 2013 Pearson Education Slide 2-15

Copyright © 2013 Pearson Education Slide 2-16

Copyright © 2013 Pearson Education Slide 2-17

Copyright © 2013 Pearson Education Slide 2-18

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◼ Revenue model: Transaction fees

Copyright © 2013 Pearson Education Slide 2-20

Copyright © 2013 Pearson Education Slide 2-21

Business models and marketplace control

Other business models

Copyright © 2003 Thomson Learning/South Western

Most common B2B business model.

Copyright © 2003 Thomson Learning/South Western

Dell Computers sold 90% of their computers to business

Computer Reseller Ingram Micro.

Copyright © 2003 Thomson Learning/South Western

Copyright © 2003 Thomson Learning/South Western

Ideal for large and frequent buyers.

Copyright © 2003 Thomson Learning/South Western

Copyright © 2003 Thomson Learning/South Western

The market place where consumers and business

Copyright © 2003 Thomson Learning/South Western

Copyright © 2003 Thomson Learning/South Western

Copyright © 2003 Thomson Learning/South Western

The most up-to-date re-engineered form of

Copyright © 2003 Thomson Learning/South Western

Excellence Utilization Opportunisim

Copyright © 2003 Thomson Learning/South Western

Copyright © 2003 Thomson Learning/South Western

Franchiser vs. Franchisee

Copyright © 2003 Thomson Learning/South Western

B2B applications consist of a series of processes and

Raw Supply Chain Process

Copyright © 2003 Thomson Learning/South Western

Upstream Activities Internal Activities Downstream Activities

Involving material Involving Involving distribution

Copyright © 2003 Thomson Learning/South Western

Famous online services include:

Copyright © 2003 Thomson Learning/South Western

There are 2 categories of internet businesses

Copyright © 2003 Thomson Learning/South Western