business modells for electronic markets

3 Vol.8 – No.2 – 1998

Focus ThemeFocus ThemeFocus ThemeFocus ThemeFocus Theme

Business Models for Electronic MarketsBusiness Models for Electronic MarketsBusiness Models for Electronic MarketsBusiness Models for Electronic MarketsBusiness Models for Electronic Markets

by Paul Timmers, European Commission, Directorate-General III, April 1998*

sive development in electronic commerce.The reasons for that are, of course, theInternet and the World Wide Web, whichare making electronic commerce muchmore accessible. They offer easily usableand low cost forms of electronic com-merce. Electronic commerce on the basisof the Internet is set to become a veryimportant way of doing business.

Forrester (1997) forecasts that business-to-business (B-to-B) electronic commercewill grow to $327 billion in the year2002 — that is the value of goods and serv-ices traded via the Internet. This excludesthe value of the hardware, software andservices that are needed to perform elec-tronic commerce, whose value is estimatedat several hundred billions of dollars like-wise. Between 1996 and 1997 electroniccommerce has been growing at over 1000percent per year. While such high growthrates will not be sustained, it is clear thatelectronic commerce will become perva-sive: Datamonitor (1997) expects in 5 yearstime 630,000 US companies and 245,000European companies to be involved in full-fledged integrated B-to-B electronic com-merce. The Report on Electronic Commerce(1998) expects that the business-to-busi-ness penetration rate will grow from 10%in 1997 to 90% in 2001.

Although the number of consumers on theNet by the year 2000 could be several 100millions it is expected that business-to-business will constitute the larger part ofelectronic commerce.

With the new medium — the Internet –also new ways of doing business are de-veloping. Most of those that capture thepublic attention are consumer-oriented(such as Amazon.com, Tesco). Less public-ity is given to the way the Internet can beused for business-to-business electroniccommerce, although such commerce is areality today (e.g. Cisco, General Electronicprocurement, etc). New forms of electroniccommerce are being piloted in many sec-tors of industry, for business-to-business,business-to-consumer and business-pub-lic administrations relationships. Advancedpilot experiments in new business modelsare being supported by the European Com-mission in the ESPRIT and ACTS Euro-pean research, technology developmentand demonstration programmes. This workis part of a more general framework ofpolicy-making and programmes for globalelectronic commerce, which also addressesthe legal and regulatory framework andother factors in the business environment.

AbstractAbstractAbstractAbstractAbstract

Electronic commerce over the Internet maybe either complementary to traditionalbusiness or represent a whole new line ofbusiness. In either case, in view of the newfeatures of the Internet, critical questionsto be answered include:♦ what are the emerging business models;

and related to this,♦ which strategic marketing approaches

are applied, or emerging.

This article addresses the first questionabove by providing a framework for theclassification of Internet electronic com-merce business models. This frameworkhas been developed on the basis of cur-rent commercial Internet business andexperimental work in European R&D pro-grammes.

IntroductionIntroductionIntroductionIntroductionIntroduction

Electronic commerce.i.Electronic com-merce; can be defined loosely as “doingbusiness electronically” (European Com-mission 1997). Electronic commerce in-cludes electronic trading of physical goodsand of intangibles such as information.This encompasses all the trading steps suchas online marketing, ordering, payment,and support for delivery. Electronic com-merce includes the electronic provision ofservices, such as after-sales support oronline legal advice. Finally it also includeselectronic support for collaboration be-tween companies, such as collaborativedesign.

Some forms of electronic commerce existsalready for over 20 years, e.g. electronicdata interchange (EDI), in sectors such asretail and automotive, and CALS (Compu-ter Assisted Lifecycle Support) in sectorssuch as defence and heavy manufacturing.

These forms of electronic commerce havebeen limited in their diffusion and take-up. Recently, however, we see an explo-

*Mr Paul Timmers([email protected]) is currently

head of sector in the EuropeanCommission, Directorate-General III-Industry, in the Information Technolo-gies Directorate. He is charged withelectronic commerce in the context

of the European component ofthe G7 Pilot “A Global Marketplace for

SMEs” and in the IT research anddevelopment programme ESPRIT.

Previous positions in the EuropeanCommission include Assistant to

the Director of Telematics ApplicationsProgramme and project manager intechnology for disabled and elderly

people. Before joining the CommissionMr. Timmers held various positions in

product marketing and softwaredevelopment in the IT industry. He has

co-founded a software company.Mr. Timmers holds in PhD in theoretical

physics and a certificate in businessadministration.

EM – Electronic Markets 4

Classification of business modelsClassification of business modelsClassification of business modelsClassification of business modelsClassification of business models

The literature about Internet electroniccommerce is not consistent in the usageof the term ‘business model’, and, more-over, often authors do not even give adefinition of the term.

Therefore, before embarking upon an ap-proach to construct business models, firsta definition is giving of what is meant bya business model.

Definition of a business model♦ An architecture for the product, serv-

ice and information flows, including adescription of the various business ac-tors and their roles; and

♦ A description of the potential benefitsfor the various business actors; and

♦ A description of the sources of rev-enues.

A business model in itself does not yetprovide understanding of how it will con-tribute to realise the business mission ofany of the companies who is an actorwithin the model. We need to know themarketing strategy of the company in or-der to assess the commercial viability andto answer questions like: how is competi-tive advantage being built, what is thepositioning, what is the marketing mix,which product-market strategy is followed.Therefore it is useful to identify beyondbusiness models also “marketing models”.

Definition of a marketing model♦ A business model; and♦ The marketing strategy of the business

actor under consideration.

The classification developed below is forbusiness models only.

Value chains

and business models

A systematic approach to identifyingarchitectures for business models can bebased on value chain de-construction andre-construction, that is identifying valuechain elements, and identifying possibleways of integrating information along thechain. It also takes into account the pos-

sible creation of electronic markets. Thesecan be fully open, that is, with an arbi-trary number of buyers and sellers, or‘semi-open’ that is with one buyer andmultiple sellers (as in public procurement)or vice-versa. The scheme is as follows:

(i) Value chain de-construction meansidentifying the elements of the valuechain, for example as in Porter (1985)who distinguishes nine value chain el-ements. Namely, as primary elementsinbound logistics, operations, out-bound logistics, marketing & sales,service; and as support activities tech-nology development, procurement,human resource management, corpo-rate infrastructure;

(ii) Interaction patterns, which can be 1-to-1, 1-to-many, many-to-1, many-to-many. In this context ‘1-to-1’ is tobe understood in as enumerating thenumber of parties involved rather thanin the ‘one-to-one marketing’ sense.It is also understood that ‘many’means that information from severalactors is being combined.

(iii) Value chain re-construction, that is in-tegration of information processingacross a number of steps of the valuechain. The combinations are of thevalue chain elements involved in suchintegration. Two sets of value chainelements would be mentioned if weconsider the interaction patterns men-tioned in point (ii) above.

Possible architectures for business mod-els are then constructed by combining in-teraction patterns with value chain inte-gration. For example, an electronic shopis ‘single actor’-to-‘single actor’ market-ing & sales. A basic electronic mall con-sists of N times an e-shop. An electronicmall having a common brand offersmany-to-1 marketing & sales (brand in-formation is common across ‘many’ sup-pliers in the mall). An electronic auction

where multiple buyers are bidding for thesales offer of one supplier brings togethersales of one supplier at a time with theprocurement of multiple buyers, whilecombining the bid information from themultiple buyers.

The a priori feasibility of technical im-plementation of the architecture of anybusiness model depends very much uponthe state-of-the-art of the technology.This holds for the integration dimension,for the realisation of the single functions,and for the support for interaction pat-terns. The commercially viability of anybusiness model is a different matter alto-gether which is the domain of a market-ing model analysis.

We observe, from actual business on theInternet and pilot projects, that:♦ information and communication tech-

nology enables a wide range of busi-ness models;

♦ the capability of the state-of-the-arttechnology is just one criterion inmodel selection;

♦ technology in itself provides no guide-lines for selecting a model in commer-cial terms;

♦ guidance to technology developmentcan come from the definition of newmodels;

♦ many of the conceivable models havenot yet been experimented with com-mercially.

While the systematic approach above leadsto a huge number of potential businessmodels, we observe in practice only a smallnumber of these being implemented. Inthe next section eleven such businessmodels or generalisations of specific busi-ness models are included. Examples of allof these can be found on the Internet to-day. Some of these are still experimentalwhile others are in fully commercial op-eration. The selection of eleven has beenmade on the basis of background and casestudy research1. The more general ap-proach presented above remains useful inorder to identify and experiment with newbusiness models.


1 The inventory of European electronic commerce

related projects (www.ispo.cec.be/ecommerce/

ecomproj.htm) was a particularly useful tool to iden-

tify business models and classify projects accordingly.

5 Vol.8 – No.2 – 1998

Business models

Eleven business models that are currentlyin use or being experimented with arelisted below.

E-shop

This is Web marketing of a company or ashop. In first instance this is done to pro-mote the company and its goods or serv-ices. Increasingly added is the possibilityto order and possibly to pay, often com-bined with traditional marketing channels.Benefits sought for the company are in-creased demand, a low-cost route to glo-bal presence, and cost-reduction of pro-motion and sales. Benefits for thecustomers can be lower prices comparedto the traditional offer, wider choice, bet-ter information, and convenience of se-lecting, buying and delivery, including24-hour availability. Where repeat visitsto the e-shop are done, one-to-one mar-keting can increase those benefits for bothseller and buyer. Seller revenues are fromreduced cost, increased sales, and possi-bly advertising. Most commercial Websites are business-to-consumer electronicshops, selling for example flowers byFleurop (http://www.fleurop.com) or airtickets by Travelocity (http://www.travelocity.com).

E-procurement

This is electronic tendering and procure-ment of goods and services. Large com-panies or public authorities implementsome form of e-procurement on the Web(an example is Japan Airlines at Fehler!Textmarke nicht definiert.). Benefits soughtare to have a wider choice of supplierswhich is expected to lead to lower cost,better quality, improved delivery, reducedcost of procurement (e.g. tendering specsare downloaded by suppliers rather thanmailed by post). Electronic negotiation andcontracting and possibly collaborativework in specification can further enhancetime- and cost saving and convenience.For suppliers the benefits are in more ten-dering opportunities, possibly on a globalscale, lower cost of submitting a tender,and possibly tendering in parts which maybe better suited for smaller enterprises, or

collaborative tendering (if the e-procure-ment site supports forms of collaboration).The main source of income is reductionof cost (automated tender processing, morecost-effective offers).

E-auction

Electronic auctions (on the Internet) offeran electronic implementation of the bid-ding mechanism also known from tradi-tional auctions. This can be accompaniedby multimedia presentation of the goods.Usually they are not restricted to this sin-gle function. They may also offer integra-tion of the bidding process with contract-ing, payments and delivery. The sourcesof income for the auction provider are inselling the technology platform, in trans-

auctions are the ESPRIT project Infomar(for ESPRIT and ACTS projects see www.ispo.cec.be/ecommerce/ecomproj.htm) andFastParts (www.fastparts.com ).

E-mall

An electronic mall, in its basic form, con-sists of a collection of e-shops, usuallyenhanced by a common umbrella, for ex-ample of a well-known brand. It might beenriched by a common — guaranteed —payment method. An example is ElectronicMall Bodensee (www.emb.ch), giving en-try to individual e-shops. When they spe-cialise on a certain market segment suchmalls become more of an industry mar-ketplace, like Industry.Net (www.industry.net), which can add value by virtual com-munity features (FAQ, discussion forums,closed user groups, ...). The e-mall opera-tor may not have an interest in an indi-vidual business that is being hosted. In-stead the operator may seek benefits inenhanced sales of the supporting technolo-gies (e.g. IBM with World Avenue). Alter-natively benefits are sought in services(e.g. Barclays with BarclaySquare), or inadvertising space and/or brand rein-forcement or in collective benefits for thee-shops that are hosted such as increasedtraffic, with the expectation that visitingone shop on the e-mall will lead to visitsto ‘neighbouring’ shops.

Benefits for the customer (real or hopedfor) are the benefits for each individual e-shop (see above) with additional conven-ience of easy access to other e-shops andease of use through a common user inter-face. When a brand name is used to hostthe e-mall, this should lead to more trust,and therefore increased readiness to buy.

Benefits for the e-mall members (the e-shops) are lower cost and complexity tobe on the Web, with sophisticated host-ing facilities such as electronic payments,and additional traffic generated fromother e-shops on the mall, or from theattraction of the hosting brand. Revenuesare from membership fee (which can in-clude a contribution to software/hardwareand set-up cost as well as a service fee),


action fees, and in advertising. Benefitsfor suppliers and buyers are increased ef-ficiency and time-savings, no need forphysical transport until the deal has beenestablished, global sourcing. Because ofthe lower cost it becomes feasible to alsooffer for sale small quantities of low value,e.g. surplus goods. Sources of income forsuppliers are in reduced surplus stock,better utilisation of production capacity,lower sales overheads. Sources of incomefor buyers are in reduced purchasing over-head cost and reduced cost of goods orservices purchased. Examples of electronic

Figure 1 Internet business models — 1

Business Models (1/2)

e-shoppromotion, cost-reduction, additional outlet,

(seeking demand)

e-procurementadditional inlet, (seeking suppliers)

e-auctionelectronic bidding (no need for prior

movement of goods or parties)

3rd party marketplacecommon marketing frontend and transaction

support to multiple business

e-mall(collection of e-shops), aggregators,

industry sector marketplace

!


advertising, and possibly a fee on trans-actions (if the mall provider processespayments).

The commercial viability of the e-mallmodel has been questioned in its currentimplementation and in the current state-of-the-market. IBM World Avenue, forexample, has folded. One of the reasonsmay be that the ‘neighbour’ concept doesnot translate into physical distance incyberspace, where each location is onlyone click away. Therefore, not much ad-ditional convenience in finding shops isdelivered. Furthermore, the sophisticateduser (i.e. the majority of those on the Webtoday!) is able to handle a variety of seller-buyer user interfaces and therefore maybe less attached to a uniform user inter-face. On the other hand, there are also in-dications that an increasing number ofcompanies wish to outsource their Web-operations, which may increase the op-portunity for e-malls or 3rd party mar-ketplaces (see below). Possibly this reflectsthe shift from early adopters to mass-mar-ket use of the Internet amongst businesses.

Third party marketplace

This is an emerging model that is suitablein case companies wish to leave the Webmarketing to a 3rd party (possibly as anadd-on to their other channels). They allhave in common that they offer at least auser interface to the suppliers’ productcatalogues. Several additional features likebranding, payment, logistics, ordering, andultimately the full scale of secure trans-actions are added to 3rd party market-places. An example for business-to-con-sumers is to provide a common marketingaround a special one-off event profiled bywell-known brand names, such as the re-cent e-Christmas experiment. ISPs may beinterested in this model for business-to-business, using their Web builder exper-tise. However, it may equally appeal tobanks or other value chain service pro-viders. Revenues can be generated on thebasis of one-off membership fee, servicefees, transaction fee, or percentage ontransaction value. Examples of 3rd partymarketplace providers are Citius (as de-

scribed by Jellasi and Lai 1996), TradeZone(http://tradezone. onyx.net), and to someextent FedEx VirtualOrder (www.fedex.com).

Virtual communities

The ultimate value of virtual communi-ties is coming from the members (custom-ers or partners), who add their informa-tion onto a basic environment providedby the virtual community company. Themembership fees as well as advertisinggenerate revenues. A virtual communitycan also be an important add-on to othermarketing operations in order to build cus-tomer loyalty and receive customer feed-back, (see Hagel and Armstrong 1997).

listed here (e.g. e-malls, collaborative plat-forms, or 3rd party marketplaces).

Value chain service provider

These specialise on a specific function forthe value chain, such as electronic pay-ments or logistics, with the intention tomake that into their distinct competitiveadvantage. Banks for example have beenpositioning themselves as such since long,but may find new opportunities using net-works. New approaches are also emergingin production/stock management wherethe specialised expertise needed to ana-lyse and fine-tune production is offeredby new intermediaries. A fee- or percent-age based scheme is the basis for revenues.Examples of value chain service provid-ers are the FedEx or UPS (www.ups.com )Web-based package shipping support.

Value chain integrators

These focus on integrating multiple stepsof the value chain, with the potential toexploit the information flow betweenthose steps as further added value. Rev-enues are coming from consultancy feesor possibly transaction fees. An examplevalue chain integrator is the ESPRITproject TRANS2000 in the area of multi-modal transport. Marshall offers its cus-tomers added-value from transaction in-formation, which is provided throughExtranet solutions like PartnerNet andMarshallNet (see Young et al 1996,Mougayar 1997, and G7-10 WG 1997).Some of the 3rd party marketplace pro-viders are moving into the direction ofvalue chain integration.

Collaboration platforms

These provide a set of tools and an infor-mation environment for collaboration be-tween enterprises. This can focus on spe-cific functions, such as collaborativedesign and engineering, or in providingproject support with a virtual team of con-sultants. Business opportunities are inmanaging the platform (membership/us-age fees), and in selling the specialist tools(e.g. for design, workflow, document man-agement). Examples are in the productsand projects spun off from the Global


Virtual communities are already abundantwithin specific market sectors for exam-ple in books such as Amazon.com,apparel/garments (http://apparelex.com/bbs/index.htm), steel industry (www.indconnect.com/steelweb), nanotech-nology (www.nanothinc.com), and manyothers. Firefly provides an interesting caseof virtual community building, addingvalue to the community by building cus-tomer profiles (www.firefly.net). Virtualcommunities are also becoming an addi-tional function to enhance the attractive-ness and opportunities for new servicesof several of the other business models

Figure 2 Internet business models — 2

Business Models (2/2)

Virtual communitiesfocus on added value of communication

between members

Value chain integratoradded-value by integrating multiple steps

of the value chain

Information brokerstrust providers, business information and

consultancy

Value chain service providersupport part of value chain, e.g. logistics,

payments

Collaboration platformse.g. collaborative design


7 Vol.8 – No.2 – 1998


Engineering Network concept (Rethfeldt1994) such as Deutsche Telekom/Globana’sICS and the ESPRIT GENIAL project andin experimental projects for 3D collabo-rative design and simulation2.

Information brokerage, trust

and other services

A whole range of new information servicesare emerging, to add value to the hugeamounts of data available on the open net-works or coming from integrated businessoperations, such as information search, e.g.Yahoo (www.yahoo.com), customer profi-ling, business opportunities brokerage,investment advice, etc. Usually informationand consultancy have to be directly paidfor either through subscription or on a pay-per-use basis, although advertising schemesare also conceivable. A special category istrust services, as provided by certificationauthorities and electronic notaries and othertrusted third parties. Subscription fees com-bined with one-off service fees as well assoftware sales and consultancy are thesources of revenue.

An example of a trust service provider isBelsign (www.belsign.be). Many consul-tancy and market research companies arenow offering commercial business infor-mation services via the Internet. Searchengines are a special category of infor-

mation services, with the public Internetfacility (rather then intranet versions) usu-ally based on advertising as a source ofrevenue. Advanced information brokerageto support negotiation between businessesis being developed by the ESPRIT CASBAand MEMO projects.

Classification of business models

We conclude with a qualitative mappingof the eleven business models along twodimensions. The first dimension gives thedegree of innovation. This ranges fromessentially an electronic version of a tra-ditional way of doing business to moreinnovative ways, for example by exter-nalising via the Internet functions thatpreviously were performed within a com-pany or by offering functions that did notexist before. The second dimension is theextent of integration of functions, rang-ing from single function business models(e.g. e-shops that only provide the mar-keting function over the Internet), to fullyintegrated functionality, e.g. value chainintegration. Figure 3 shows the mapping.

In the lower left-hand corner are basic e-shops, which are electronic version of tra-ditional ways of selling only. On the otherextreme, at the upper right hand corner isvalue chain integration, which cannot bedone at all in a traditional form, is criti-cally dependent upon information tech-

ReferencesReferencesReferencesReferencesReferences

Datamonitor, “Business-to-BusinessElectronic Commerce: Exploiting Market

Opportunities in the Extranet Age”,1997.

European Commission, “European Initiative in Electronic

Commerce”, COM(97) 157, April 1997,chapter 1. Also available at http://

www.cordis.lu/esprit/src/ecomcom.htm.See also related publications atwww.ispo.cec.be/ecommerce/.

Forrester Research report, “Sizing Intercompany Commerce”,

28 July 1997. See alsowww.forrester.com.

G7-10 WG, “Electronic Commerce BetterPractice, case study book of the G7Global Marketplace for SMEs PilotProject”, first edition April 1997. A Web version can be found at

www.ispo.cec.be/ecommerce/bonn.html.

Jelassi, T.; Lai H.-S.,“CitiusNet: The Emergence of

a Global Electronic Market”, Society forInformation Management, 1996,

www.simnet.org. See also www.citius.fr.

Figure 3Classificationof Internetbusiness models

2 See in particular the ESPRIT HPCN projects address-

ing the automotive, aerospace and space sectors.

SingleFunction

MultipleFunctions/Integrated

lower higherDegree of Innovation

FunctionalIntegration

E-Shop

E-Procurement

E-Mall

E-Auction

Value Chain Service Provider

Info Brokerage

Virtual Community

Collaboration Platform

Value Chain Integrator

Third Party Marketplace

Trust Services



nology for letting information flow acrossnetworks, and creates added value fromintegrating these information flows. Inbetween are business models that oftenfind some degree of analogy in non-elec-tronic business. For example, trust serv-ices have been provided since years bypublic notaries or by industry bodies. Theirfunctionality is being re-implemented byelectronic trust services. However, at thesame time new trust functionality is be-ing added, that intrinsically requires ITsupport, such as encryption and public andprivate key management. The same holdsfor value chain service provision, such aselectronic payments support: partially thisis a matter of offering by electronic meansthe same as what is already being offerednon-electronically such as account man-agement. At the same time new function-ality is being provided such as Internetsmart card support, e.g. for purchase cardsin B-to-B trading.

Mougayar, W. “Opening Digital Markets,Advanced Strategies for Internet-driven

Commerce”, CybermanagementPublications, 1997, pp. 201-211.

Porter M.E. and Millar V.E.,“How Information Gives You Competi-

tive Advantage”, Harvard BusinessReview, July-August 1985, p.151.

Rethfeld, U., “Manufacturing and theInformation Highway”, ESPRIT-CIME,

10th Annual Conference,5-7 October 94, Copenhagen.

The Report on Electronic Commerce,Vol.5, No.4, 24 February, 1998.

Young, K.M.; Malhotra, A.;El Sawy O.; and Gosain S. “The Relent-

less Pursuit of “Free. Perfect. Now”:IT-Enabled Value Innovation at Marshall

Industries”; Society for InformationManagement, 1996,

www.simnet.org/public/programs/capital/97paper/paper1.html.

Applying the classificationApplying the classificationApplying the classificationApplying the classificationApplying the classification

Figure 4 summarises the classification ofa number of the examples mentionedabove. There seems to be a trend to gradu-ally move towards increased integrationof information flows3.

SummarySummarySummarySummarySummary

A classification was provided of elevenbusiness models that are currently foundin Internet electronic commerce (business-to-business as well as business-to-con-sumer). Some of these models are essen-tially an electronic re-implementation oftraditional forms of doing business, suchas e-shops. Many others go far beyondtraditional business such as value chainintegration and seek innovative ways toadd value through information manage-ment and a rich functionality. Creatingthese new business models is feasible onlybecause of the openness and connectivityof the Internet.

3 The recent evolution of Industry.Net is a counter-

example to the trend towards more integration. The

new owners of Industry.Net, IHS, have decided to take

it back to its roots as an industry mall. They thereby

do not pursue the re-positioning of Industry.Net as a

third party marketplace, which was initiated by the

previous owner Perot (who was implementing a tight

integration between transactions and marketing).


Figure 4Examplesof business modelsmentionedin the text

SingleFunction

MultipleFunctions/Integrated

Lower HigherDegree of Innovation

FunctionalIntegration

E-Shop

E-Procurement

E-Mall

E-Auction

Value Chain Service Provider

Info Brokerage

Virtual Community

Collaboration Platform

Value Chain Integrator

Third Party Marketplace

Trust Services

FleuropTravelocity

JAL

Industry Net

Yahoo

Belsign

SCS/Infomar

FedEx IntershipMarshall on Internet

MarshallNetPartnerNet

CitiusTradeZone

GEN/ICS

Amazon.com

business modells for electronic markets

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