CHAPTER TWO

2. Business Model for Electronic Commerce

A business model is a set of planned activities designed to result in a profit in a market place.
An electronic commerce business model aims to use and leverage the unique qualities of the
internet and the World Wide Web.
2.1. Key Elements of Business Model
There are eight key ingredients of a business model that are of interest for this particular course.
These are:
2.1.1. Value proposition
From firm’s point of view it defines how company’s product or service fulfills the needs of
customers. The following questions should be adequately answered.
- Why will customers choose to do business with your firm instead of another company?
- What will your firm provide that other firms do not and can can’t?
From customer’s point of view, electronic commerce value proposition refers to
personalization, customization, and reduction of search costs.
2.1.2. Revenue Model
It describes how the firm will earn revenue, produce profit, and produce a superior return on
invested capital. There are five revenue models:
Advertising Revenue model: A web site that offers its users content, services, and/or
products also provides a forum for advertisements and receive fee from advertisers. The
best example is www.yahoo.com.
Subscription Revenue Model: A web site that offers its users content or services charges
a subscription fee for access to some or all of its offerings. Examples include
www.bbc.com.uk, www.newsweek.com, wall street journal, financial times etc.
Transaction Revenue Model: A company receives a fee for enabling or executing a
transaction. E.g. www.ebay.com
Sales Revenue model: Companies derive revenue by selling goods, information, or
services to customers.
Affiliate Revenue Model: Web sites that steer business to an “affiliate” receive referrals
fee or percentage of the revenue from any resulting sales. E.g. www.mypoint.com
2.1.3. Market Opportunity
It refers to the company’s intended market space and the overall potential financial opportunities
available to the firm in that market space.
2.1.4. Competitive Environment
It refers to the other companies operating in the same market space selling similar products. It is
influenced by:
✓ How large their operations are;
✓ How many competitors are active;
✓ What the market share of each competitor is;

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 ✓ How profitable these firms are; and
✓ How they price their products
• Direct competitors – companies that sell products or services that are very similar and into
the same market segment
- Example: Priceline.com and Travelocity.com
• Indirect competitors – companies that may be in different industries but that still compete
indirectly because their products can substitute for one another
- Example: CNN.com and ESPN.com
2.1.5. Competitive Advantage
It is achieved by a firm when firms can produce a superior product and/or bring the product to
market at a lower price than most, or all, or its competitors. Competitive advantage may arise
due to asymmetry; the firm in the market has more resources- Financial backing, knowledge,
information, and/or power- than other participants. Companies leverage their competitive assets
when they use their competitive advantages to achieve more advantage in surrounding markets
The asymmetry can be:
➢ Patent;
➢ Connection;
➢ Image; and
➢ First mover advantage
Types of competitive advantage include:
- First mover advantage – results from a firm being first into a marketplace
- Unfair competitive advantage – occurs when one firm develops an advantage based on a
factor that other firms cannot purchase
2.1.6. Market Strategy
It is plan that a company put together that details exactly how it intend to enter a new market
and attract new customers. For example, www.yahoo.com advertises aggressively to attract
more number of users where as some companies partner each other.
2.1.7. Organizational Development
It describes how the company will organize the work that needs to be accomplished. Work is
divided into the following:
o Functional departments;
o Defined area within the function;
o Responsibilities; and
o Hiring people
2.1.8. Management Team
It refers to the employees of the company responsible for making the business model work. The
management team’s ability and credibility to outside investors, immediate market-specific
knowledge, and experience in implementing business plans are key factors for success. In
pooling effective management team, the following questions should be answered:
▪ What kind of technical background is desirable?

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 ▪ What kind of supervisory experience is necessary?
▪ Which job functions should be filled first? Marketing, operations, finance, etc
▪ Do prospective senior managers have experience and contacts for raising financing from
outside investors?
2.2. Electronic Business Models Based on Relationship of Transaction Parties
3.2.1. Business-to-Consumer (B2C)
It involves business organizations that sell products directly to consumers. Examples include
www.amazon.com, www.ediets.com, www.pets.com etc. Firms reach individual consumers
through the following business-to-consumer models:
I. Portal: They offer users powerful web search tools as well as integrated package of content
and service such as news, e-mail, instant messaging, calendars, shopping, music downloads,
video, business information, all in one place. Portals do not sell anything directly and in that
sense they can present themselves as unbiased. They generate revenue primarily by charging
advertisers for advertising placement, collecting referral fees for steering customers to other
sites, and charging for premium services. Portals fall into two categories:
 Horizontal/General portals: They define their markets space to include all users of the
internet. Good examples in this case are www.yahoocom, www.americanonline.com,
www.msn.com , www.google.com etc. They seek to be user’s home base.
 Verticals/specialized: They focus around a particular subject matter or subject market or
market segment. E.g. www.iboat.com, www.sailnet.com etc.
II. Electronic Tailer: It is online retail store where time-starved customers can shop at any hour
of the day or night without leaving home or office. The different type of electronic tailers are
discussed as under:
❖ Virtual Merchant: Online version of retail store, where customers can shop at any hour
of the day or night. A very good example is www.amazon.com.
❖ Click-and-Mortar: online distribution channel for company that also has physical
stores. E.g. www.walmart.com.
❖ Catalog Merchant: online version of direct mail catalog. E.g. www.landsend.com,
www.llbean.com
❖ Manufacturer Direct: Online sales made directly by the manufacturer itself. E.g.
www.dell.com and www.compaq.com.
III. Content Providers: They are information and entertainment companies that provide digital
content over the Web. A way of internet service provision that can be defined broadly to
include all forms of intellectual property. They distribute information content such as digital
news, music, photo, video, and art work over the web. They make money by charging
subscribers a subscription fee. Some make money by selling advertising spaces. It is the
second largest source of B2C e-commerce revenue in 2002. Examples are
www.sportsline.com, www.cnn.com, www.espn.com, etc.
IV. Transaction Broker: Sites that process transactions for consumers normally handled in
person, by phone, or mail. The largest industries using this model are financial services,

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 travel services, and job placement services. The online transaction broker’s primary value
propositions are saving of money and time. Online stock brokers receive commissions that
are considerably less than traditional brokers, with many offering substantial deals.
Transaction brokers make money each time a transaction occurs. Examples include
www.ethiojobs.net, www.etrade.com etc.
V. Market Creator: It builds a digital environment where buyers and sellers can meet, display
products search for products and establish price for products. E.g. www.priceline.com,
www.ebay.com, www.amazon.com etc.
VI. Service Provider: They are companies that make money by selling users a service, rather
than a tangible product. Examples are www.myconsulting.com, www.lawinfo.com,
www.cfo.com etc.
VII. Community Providers: They are sites that create a digital online environment where people
with similar interests can transact (buy and sell goods), communicate with like minded
people, receive interest related information, and even play out fantasies by adopting online
personalities. It rely on a hybrid revenue model that includes subscription fees, sales
revenues, transaction fee, affiliate fees and advertising fees from other firms who are
attracted by a tightly focused audience.
E.g.www.village.com,www.blackplanet.com,www.epinions.com, www.oxygen.com, and
www.about.com etc.
2.2.2. Major Business-to-Business (B2B) Models
It is about a commercial transaction between businesses that focus on selling to other businesses.
It includes the following:
1) Marketplace/Exchange (B2B Hub): It is digital/electronic market place where suppliers
and commercial purchasers can conduct transaction. Business-to-Business Hubs make it
possible to gather information, check out suppliers, collect prices, and keep up-to-date on
the latest happening all in one place. Sellers, on the other hand, benefit from expanded
access to buyers. They make transaction and inventory carrying cost lower. B2B hubs rely
on transaction fee for their existence. They can be of two type:
 Vertical market places that serve specific industries, for example. www.e-steel.com
 Horizontal marketplaces that sell specific products to a wide range of companies.
E.g, www.tradeout.com etc.
2) Electronic Distributor: They are companies that supply products and services directly to
individual businesses. Where as Business-to-business hubs pull together many businesses,
making it possible for them to do business with other companies, electronic distributors are
set up by one company seeking to serve many customers. With electronic distributors, the
more products and services a company makes available on its site, the more attractive that
site to potential customers. E.g. www.grainger.com
3) Business-to-Business Service providers: They sell services to other firms. Traditional
business-to-business service providers offer online equivalents to common business
services such as accounting, financial services, human resource management (HRM),

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 printing, and so on. The other category may include www.salesforce.com and
www.corio.com which rent internet-based software applications to businesses and collect
rental fee.
4) Match makers: Companies that make money by linking other companies and taking cut
of any business that occur via a transaction or usage fee are called matchmakers. For
example, www.iship.com compares prices among shipping companies. Once a company
has the cheapest shipper for its particular package, it pays www.iship.com a fee in order to
get service the shipments.
5) Infomediary: It is a company that would act as custodian, agents, and broker of customer
information marketing it to businesses on consumer’s behalf while protecting their privacy
at the same time. They can be classified into two:
 Audience Brokers: they capture information about customers and use it to help
advertisers find the most appropriate audience. The source of information is sales of
information. E.g. www.doubleclick.com
 Lead Generators: They gather customers data from which they then create customer
profile or reference. They then direct vendors of products and services that fit the
profiles of the customer. The source of revenue here is referral fee.
2.2.2. Major Business Models in Emerging E-commerce areas
There are new forms of business such as:
Consumer-to-consumer (C2C) Business Models: They provide a way for consumers to sell
to each other, with help of an online business. For example, www.half.com enables
consumers to sell off unwanted books, movies, etc to other consumers. www.eBay.com is
also a person-to-person online trading community with more than 23 million registered
users.
Peer-to-Peer (P2P) Business Models: They link users, enabling them to share files and
computer resources without a common server. For example, www.groovenetwork.com
help its workers share files, calendars, work schedules, and plans without burdening central
servers.
M-Commerce: it is a short form of mobile commerce which permits mobile access to the
web. Wireless networks utilize newly available bandwidth and communication protocols
to connect mobile users to the internet.
2.3. Business Models Based on the Relationship of transaction types
Business models are basically ruled by two parameters:
❖ Control: It is hierarchically controlled and at lower level there is no control so that it is
self organizing
❖ Value Integration: The addition of value to a product or service because of the web
business opportunities.
Based on these two parameters, the following types of transactions can be identified:
A. The Brokerage Model: it is characteristics are:
▪ The price discovery mechanism is its key principle

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 ▪ It is a meeting point for sellers and buyers
▪ Auctions and exchanges are the models of transaction
▪ It a free market consisting of global network of buyers and sellers
▪ It is virtual market space enabled by the internet
▪ It encompasses all types of organizations
One of the brokerage models is auction model. Auction sites act as a company or form through
which internet users can log on and assume the role of either the seller or buyer. As a seller, you
are able to post an item you wish to sell, the minimum price you require to sell your item and
deadline to close the auction. As a bidder, you may search the site for availability of the item you
are looking for, view the current bidding activity, and place a bid.
B. Aggregator Model: Sales can be made based on list prices. In some cases goods and
services are unique to the web and do not have a traditional “Brick-and-Mortar” store front.
The following are some of the aggregator models:
➢ Virtual merchant: This is a business that operates only from the web and offer either
traditional or web specific goods or services
➢ Catalog merchant: This is the migration of mail order to a web based order business
➢ Surf-and-Turf: it is traditional Brick-and- mortar establishment with web store front
➢ Bit Vendor: This is a business that sell goods and services that can themselves be
distributed as bytes of information over the internet
➢ Subscription model: users pay for access to site.

C. Infomediary Model: It is an organizer of virtual community who helps companies to

collect, manage, and maximize the value of information about consumers. Data about
consumers and their buying habits are extremely valuable especially when that information
is carefully analyzed and used to target marketing campaigns. An infomediary may offer
users free internet access or free hardware in exchange for detailed information about their
purchasing habits. Infomediary can be classified in terms of their relationship- open (non-
proprietary, giving anyone free access) or closed (proprietary, restricting access)- with
buyers and sellers into four groups:
o Specialized agents: The related proprietary (financial) networks are sanctioned off the
broader internet by having closed relationship with both buyers and sellers. Their
business performance depends on their:
✓ Ability to deliver value through scope
✓ Specialization (a well defined and lucrative niche)
✓ Infrastructure ( a platform for transaction)
o Generic agents: They maintain open relationship with both buyers and suppliers and
involve no relationship specific investment. They create value through their
comprehensive and unbiased service often generating revenue from advertising, which is
based on eyeballs or a number of unique user clicks.

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 o Supplier agents: They start off in this quadrant, sponsored either by specific companies
with a vested interest in selling their products or by close affiliation to core group of
sellers. Thus, they don’t provide unbiased options for buyers. A good example is
www.auto.com
o Buyer agents: They establish relationship with a core set of buyers, working on their
behalf and any number of suppliers. To succeed, they must build a large base of clients
and win their trust. E.g. www.infoseek.com.
D. Electronic Community Model: They are commercially sponsored sites where members
congregate online and exchange views on issues of interest. They are formed when groups
of people meet online to fulfill certain needs, which include personal interest, relationships,
entertainments, and transaction. For example, agriculture online (www.agriculture.com ) is
e-community where farmers and others (around 5 million) can find commodity prices, recent
farm news, and chat room of all type. The other example is parent soup
(www.parentsoup.com ) which is an online community of more than 200,000 parents.
E. Value Chain: Value chain moves businesses away from discrete streams of data about the
product being made to one unified pool of information-one that even extends outside the
company to suppliers and customers. The goal is to develop full interaction among all members
of the chain resulting in lower inventories, higher customer satisfaction and shorter time to
market.

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