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Components of a Business ModelComponents of a Business ModelComponents of a Business ModelComponents of a Business Model
Value ClusterValue Cluster
Online OfferingOnline Offering
Resource SystemResource System
Financial ModelFinancial Model
What are the Financial Models What are the Financial Models Available to e-Commerce Available to e-Commerce
Firms?Firms?
What are the Financial Models What are the Financial Models Available to e-Commerce Available to e-Commerce
Firms?Firms?Financial model that follows from the resource
system A review of the revenue models Nine approaches to shareholder value/profit
models Growth models and how to pursue revenue
growth
Revenue vs Shareholder Revenue vs Shareholder Value/ProfitValue/Profit
Revenue vs Shareholder Revenue vs Shareholder Value/ProfitValue/Profit
Revenue Models clearly identify the flow of cash into the organization (the “pipeline”)
Shareholder Value/Profit Models identify how the company will generate cash or ultimately make a profit (the quantity)
1) Types of Revenue Models1) Types of Revenue Models1) Types of Revenue Models1) Types of Revenue ModelsAdvertising (Yahoo)
banners, interstitial, site sponsorships, event underwriting (Yahoo)Product, Service, or Information Sales (Amazon)
Sales of goods on siteTransaction (eBay, e-Trade)
Revenue accrual from charging a fee or taking a portion of the transaction sum for facilitating a customer-seller transaction
Subscription (Consumer Reports, WSJ)Subscriber fees for magazines, newspapers, other information/service businesses
Affiliate (MyPoints)A company steers business to an affiliate and receives a referral fee or
percentage of revenue from resulting sale
2) Types of Shareholder 2) Types of Shareholder Value/Profit ModelsValue/Profit Models
2) Types of Shareholder 2) Types of Shareholder Value/Profit ModelsValue/Profit Models
OfflineOver twenty profit models
Example - “blockbuster” profit model> not movie generating, but franchising, transactional
revenue, licensing, merchandising, and other revenue sources
Example - “base and follow-on” model> primary product is a “loss leader” while real profit from
follow-on products (razor blades, printer cartridges)etc.
2) Types of Shareholder Value/Profit 2) Types of Shareholder Value/Profit Models….Models….
2) Types of Shareholder Value/Profit 2) Types of Shareholder Value/Profit Models….Models….
OnlineNine Profit ModelsDiffer from traditional valuations
Shift from Profit to Shareholder-Value Focus> market capitalization, rather than profit (share price times the
number of shares outstanding)Shift from Supply-Side Language to Demand-Side
Language> Significant finance gain (price of offering or price of of shares)
result of what a company does to a market need> Focus on core benefits a customer is looking for
Introduce New Ways of Creating Value> reflect evolution of eCommerce
Does Profit Matter?Does Profit Matter?Does Profit Matter?Does Profit Matter?
Begin by building profit…….Begin by building user base…..
Point-Counterpoint
Build Profit Build User Base
Basic financial rules will eventually apply Cash flow drives shareholder value Shareholders will become frustrated as time
passes
Standards will ultimately dictate success Standards require huge investments in building
a customer base Once customer base dominates other firms will
concede and eventually large margins will beavailable
Point-Counterpoint: Does Profit Matter? Point-Counterpoint: Does Profit Matter? Build Profit Or Build User Base? Build Profit Or Build User Base?
Point-Counterpoint: Does Profit Matter? Point-Counterpoint: Does Profit Matter? Build Profit Or Build User Base? Build Profit Or Build User Base?
Online Profit ModelsOnline Profit ModelsOnline Profit ModelsOnline Profit Models
Company and User-Derived Value CreationMetamarkets PortalTraditional and Reverse AuctionsCategory-Specific Portal
Company-Derived Value CreationBest InformationWidest AssortmentLowest PricesBroadcast User NetworkBest ExperienceMost Personalized
Company and User-Derived Value Company and User-Derived Value CreationCreation
Company and User-Derived Value Company and User-Derived Value CreationCreation
Metamarkets PortalBuyers and sellers based upon customer activities to achieve goals
(CarPoint)Success Factors
Building and sustaining a large number of buyers and sellersFrequently results in a single, large winner with multiple second-tier players
ThreatA higher level portal with more inclusiveness
Traditional and Reverse AuctionsBidding up - traditional (e-Bay)Bidding down - often business-to-business until no further bids receivedAuction house takes transaction feesSuccess Factors
Often winner-take-all and strong brand nameThreats
Alternative portalsLoose brand credibilityEmergence of pure low-price player
Company and User-Derived Value Company and User-Derived Value Creation...Creation...
Company and User-Derived Value Company and User-Derived Value Creation...Creation...
Category-Specific PortalFocus on one category (Chemdex)More supply-side than demand-side drivenSuccess factors
Leverage network economicsBuilding of customer base, with increasing switching costs
> Locked in due to increasingly useful customer profile, inter-user communications, and experience with the site
ThreatsEmergence of metamarket player who rolls activities into a single site (
eToys)
Niche players chipping away at category (Sony Playstation)Brand name offline may be a challenge (ToysRUs)
Company-Derived Value CreationCompany-Derived Value CreationCompany-Derived Value CreationCompany-Derived Value CreationBest Information
most timely, “freshest,” and most credible information product or service
Forrester.com, salon.com, The Standard, zagat.comrevenue from product as, services, information,
advertising revenueprofit from customer perception that the site is more
accurate, credible, and timely informationSuccess factors
hiring best analysts and staffmost timely and accurate information
ThreatsPerception that others just as timelyPrice sensitivity to freshest information too greatCost for most timely information prohibitive
“Best of class” excellence on a key customer need or benefit
Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...Widest Assortment
breadth of product, service, and information coverage or inventory in the chosen product category
CDNow.com, ArtistDirect.com, SecondSpin.com revenue derived from product sales, with selective premium
pricing on the most desirable products Success Factors
reducing customer uncertainty building a strong brand presence repeating buying and spreading word quality of additional information Inventory must be complemented with value-added services
Threats further specialization in the product category megabrands attempt to aggregate consumers at a higher level
Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...
Lowest Prices promises lowest prices online maybe specific to a product category LowestFare.com, AllBooks4Less.com, buy.com
Success Factors Margins minimal or non-existent, requiring strong back
office systems Leverage scale economies Requires outstanding supply chain management,
procurement, operational excellenceThreats
Emergence of shop bots (mySimon.com) Strong brand players who create uncertainty, creating
niche players
Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...
Broadcast User Network pure demand based model relies on the fast buildup of
the user network ICQ, RealNetworks.com, mercata.com, Mobshop.com
Success factors building of strong customer base, customer's extent of
viral marketing, trademarked software or patentsThreats
emergence of alternative standards fundamental technology shift backward or forward integration of complementary
players
Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...Best Experience
Best experience regardless of price FAOSwartz.com, Ashford.com Revenue expected to originate from products, services, or
information Profit maintained by premium prices across entire range of
productsSuccess factors
Sourcing of best products Outstanding service A shift in customer preferences to brand labels
Threats Emergence of lower priced offerings that have similar
benefits Lack of perceived value in higher priced goods A shift to emergent brand labels, as compared to historic
favorites
Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...Company-Derived Value Creation...
Most personalized Best customization of the consumer experience Reflect.com
Success factors deep customer knowledge ability to continual refresh and mine the customer database consumer’s ability to feel complete ability to customize
experienceThreats
Emergence of new players who offer a newer, richer, more personalized experience
New technologies that displace older technologies that allow other companies to catch up and match the older company’s customer experience
3) Financial Growth Models3) Financial Growth Models3) Financial Growth Models3) Financial Growth ModelsThird component of a financial model is the
firm’s revenue growth strategy or growth model
Revenue growth can come from a deeper penetration in the current market, new product development, new market development, complete new products and markets
Revenue Growth Choices: 1-800-flowersRevenue Growth Choices: 1-800-flowersRevenue Growth Choices: 1-800-flowersRevenue Growth Choices: 1-800-flowers
New
Existing
PR
OD
UC
TS
Existing New Existing New
Plans to branch into a wide variety of product categories
GardenworksGardenworks
Greatfoods.comGreatfoods.com
Home DecorHome DecorPlow & HearthPlow & Hearth
ON-LINE MARKETS OFF-LINE MARKETS
PlantsPlants
Gourmet TreatsGourmet Treats
Greeting CardsGreeting Cards
Corporate Gift Services
Corporate Gift Services
In-Store SeminarsIn-Store Seminars
Point-Counterpoint
Pure Dot-com Start Brick-and-Mortar Start
Not constrained by Old-Economy culture
Not constrained by physical world assets that have no value in digital world
Can operate fast
New rules apply
Great examples - Amazon, Yahoo
Old-economy business culture does apply
Have assets -- brand, channels, people -- that have tremendous value in digital world
Can operate “right”
Old financial rules supercede new rules
Great examples - GE.com, Dellonline.com
Would You Rather Be? A Dot-Com Or Brick-And-Would You Rather Be? A Dot-Com Or Brick-And-Mortar Business?Mortar Business?
Would You Rather Be? A Dot-Com Or Brick-And-Would You Rather Be? A Dot-Com Or Brick-And-Mortar Business?Mortar Business?
2003 Taxonomy of 2003 Taxonomy of eCommerce Business ModelseCommerce Business Models
2003 Taxonomy of 2003 Taxonomy of eCommerce Business ModelseCommerce Business Models
BrokerageAdvertisingInfomediaryMerchantManufacturerAffiliateCommunitySubscriptionUtility
Brokerage ModelBrokerage ModelBrokerage ModelBrokerage Model
Marketmakers – bring buyers and sellers together for a fee on each transaction
Marketplace Exchange (Orbiz.com)Buy/Sell Fulfillment (Carsdirect.com)Demand Collection System (Priceline.com)Auction Broker (eBay.com)Transaction Broker (PayPal.com)Bounty Broker (BountyQuest.com)Distributor (Questlink.com)Search Agent (MySimon.com)Virtual Mall (ChoiceMall.com)
Advertising ModelAdvertising ModelAdvertising ModelAdvertising Model
Free (usually) content mixed with advertising (only works where viewer traffic is large or highly specialized)
Portal (Yahoo.com)Personalized Portal (MyYahoo.com)Niche Portal (iVillage.com)Classifieds (Monster.com)Registered Users (NYTimesDigital.comQuery-based Paid Placements (Google.com)Contextual Advertising (Gator.com)Ultramercials (Salon.com)
Infomediary ModelInfomediary ModelInfomediary ModelInfomediary Model
Assist buyers or sellers to understand a given market
Advertising Networks (DoubleClick.com)Audience Measurement Services (Nielson.com)
Incentive Marketing (MyPoints.com)Metamediary (Edmunds.com)
Merchant ModelMerchant ModelMerchant ModelMerchant Model
Wholesalers or retailers of goods and services
Virtual Merchant (Amazon.com)Catalog Merchant (Frontgate.com)Click & Mortar (Barnes & Noble)Bit Vendor (Eyewire.com)
Manufacturer ModelManufacturer ModelManufacturer ModelManufacturer Model
Direct sales to compress the distribution channels
Brand Integrated Content (bmwfilms.com)
Affiliate ModelAffiliate ModelAffiliate ModelAffiliate Model
Provides purchase Opportunity wherever people may be surfing (pay for performance) (Amazon.com)
Banner ExchangePay per ClickRevenue Sharing
Community ModelCommunity ModelCommunity ModelCommunity Model
Based on user loyalty. Users usually make a significant investment of time and emotion.
Voluntary Contributor Model (WCPE.org)Knowledge Networks (WebMonkey.com)
Subscription ModelSubscription ModelSubscription ModelSubscription Model
Subscription fee for serviceContent Services (Listen.com, Netflix.com)Person-to-Person Networking Services (Classmates.com)
Trust Services (Truste.com)Internet Service Providers (AOL, Earthlink)
Utility ModelUtility ModelUtility ModelUtility Model
On-demand, pay as you go metered services
Metered Subscriptions (Slashdot.com)
Migrating to Profitable Migrating to Profitable eCommerce Business ModelseCommerce Business Models
Migrating to Profitable Migrating to Profitable eCommerce Business ModelseCommerce Business Models
eBusiness is evolutionary rather than disruptive Success=compelling value proposition. Firms learn thru constant
experimentation and feedback eBusiness can both leverage intangible assets such as customer
perceptions, but also exposes associated weaknesses Firms discovering they must build more centralized infrastructure Requires three management imperatives:
IT Governance to insure strategic positioningHuman resource alignmentCustomer connectedness for market experiments
Strategic Partnerships for agile response Firms struggling to find metrics for making sound business
decisions
Jeanne Ross, Michael Vitale, and Peter Weill: FROM PLACE TO SPACE: Migrating to Profitable Electronic Commerce Business Models, MIT Sloan School of Management working Paper No. 4358-01