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Digital Business Models (Module No. 1403) Summer Semester 2024 The second part of the chapter provides a segmentation of digital business models and a framework for analyzing them. II.B...

Digital Business Models (Module No. 1403) Summer Semester 2024 The second part of the chapter provides a segmentation of digital business models and a framework for analyzing them. II.B.0. OUTLINE OF THIS MODULE I. Introduction to Business Models  Concept and characteristics  Value capturing & value creation models II. Digital Business Fundamentals  Key terms and characteristics  Segmentation & framework for analysis III. Basic/ Core Models  Electronic commerce models  Content(-driven) and service models IV. Platform Models  Marketplaces and crowdsourcing  Social networks and aggregator models V. Ecosystems  Consumer-/ End-user-oriented  Business-oriented/ industrial VI. Back-End/ Enabling Models  Cloud computing/ XaaS  Asset managers Source: own work Nils Madeja Page 10  Digital Business Models (Module No. 1403) Summer Semester 2024 The third chapter covers basic or core digital business models, which have been implemented and developed since the mid-90s. III.A.0. OUTLINE OF THIS MODULE I. Introduction to Business Models  Concept and characteristics  Value capturing & value creation models II. Digital Business Fundamentals  Key terms and characteristics  Segmentation & framework for analysis III. Basic/ Core Models  Electronic commerce models  Content(-driven) and service models IV. Platform Models  Marketplaces and crowdsourcing  Social networks and aggregator models V. Ecosystems  Consumer-/ End-user-oriented  Business-oriented/ industrial VI. Back-End/ Enabling Models  Cloud computing/ XaaS  Asset managers Source: own work Nils Madeja Page 20  Digital Business Models (Module No. 1403) Summer Semester 2024 Electronic commerce on the World Wide Web reportedly started in 1994 with the online purchase of a CD. III.A.1. TIDBIT: THE FIRST (LEGITIMATE) WWW-BASED TRANSACTION IN 1994 "At noon yesterday, Phil Brandenberger of For now, Net Market's approach is available Philadelphia went shopping for a compact to the limited number of computer users who audio disk, paid for it with his credit card and have work stations running the Unix made history. […] software operating system and a sophisticated Internet navigational From his work station in Philadelphia, Mr. program called X-Mosaic. […] Brandenburger logged onto the computer in For now, Mr. Brandenberger, despite his Nashua, and used a secret code to send his historic transaction yesterday, will be paying Visa credit card number to pay $12.48, plus with plain old dollars, when he gets his credit shipping costs, for the compact disk "Ten card bill. And sometime today, the Sting CD Summoners' Tales" by the rock musician will arrive by fairly conventional means -- Sting. […] shipped FedEx from the Noteworthy Music warehouse in Nashua." Despite changes in technology the core business model has remained unchanged. Source: [3.1], emphasis added Nils Madeja Page 21  Digital Business Models (Module No. 1403) Summer Semester 2024 Electronic commerce is about selling goods and services online and delivering them in the physical world. III.A.2. E-COMMERCE FROM AN EXTERNAL/ CUSTOMERS' PERSPECTIVE  Selling goods and services online Principle  Using various interfaces (e. g. web site, app) and devices (e. g. PC, phone) ("general  Delivering goods and services offline to/ at customers' site (fulfillment) idea")  Stakeholders: customers, suppliers, delivery companies, mkting. partners  Direct exchange between customer and company, company and suppliers  Company examples: − B2B tools: Würth online; B2B/ B2C tools: contorion, Conrad electronic Examples − High-end fashion: mytheresa; low-end fashion: floryday − International: Asos (UK); Zozo (Japan); Nastygal (US)  Convenience: independence of time and (largely) of location, assortment Value-add  Drawbacks: Search cost and time for fulfillment  Customers pay for product or service (plus shipping and payment) It has become so widely adopted that the concept is clear to (most) everyone. Source: own work Nils Madeja Page 22  Digital Business Models (Module No. 1403) Summer Semester 2024 Same as in offline retail or wholesale, electronic commerce serves as the bridge between producers and customers. III.A.3. SKETCH OF THE ELECTRONIC COMMERCE MODEL Flow of goods or services Affiliate Distrib./ Flow of money Sites/ Wholes./ Value capturing model Value creation model (Comprises flow of information) Sales Sourcing Internal components Platforms Platforms Custo- Online Producers/ mers Merchant/ Service (A., B., C., E-Tailer Providers M., …) Customer data play a key role in the related marketing, sales and service processes. Source: own work Nils Madeja Page 23  Digital Business Models (Module No. 1403) Summer Semester 2024 Over the last three decades a broad range of electronic commerce models has evolved. III.A.4. ELECTRONIC COMMERCE MODELS: MATURITY STAGES Online  E-tailing/ online Shops (e. g. zappos/ zalando, zooplus, …) sales 1.0  Booking sites (e. g. Expedia, GetYourGuide, …)  […] Online  Shopping clubs (e. g. Veepee, Westwing, Secret Escapes, …) sales 2.0  Subscription models (e. g. birch-/ glossybox, HelloFresh, …)  Curated shopping (e. g. Outfittery/ Modomoto, Lyst, …)  […] Online  Omnichannel mgt.: clicks & mortar (e. g. Tesco, Carrefour, …) sales 3.0  […] They have become more complex, and blended with offline models. Source: own work Nils Madeja Page 24  Digital Business Models (Module No. 1403) Summer Semester 2024 In the context of electronic commerce three categories of retailers (or three retailing models) are distinguished. III.A.5. ELECTRONIC COMMERCE: RETAILING MODELS "Bricks-and-mortar" "Bricks-and-clicks" or "Digital pure play" "Clicks-and-mortar"  Traditional retailer with  Mixture of both: offline  Online retailer (e-tailer) physical outlet(s) and online outlets without physical outlet(s)  Selling and customer  Selling and customer  Selling and customer interaction take place interaction take place interaction take place offline offline or online online  Fulfillment takes place  Fulfillment takes place  Fulfillment takes place offline offline offline Digit(ali)zation "Going physical" There is a strong move to the medium category, especially from the left. Source: own work Nils Madeja Page 25  Digital Business Models (Module No. 1403) Summer Semester 2024 We begin today's session by continuing our discussion of electronic commerce models. III.A.0. OUTLINE OF THIS MODULE I. Introduction to Business Models  Concept and characteristics  Value capturing & value creation models II. Digital Business Fundamentals  Key terms and characteristics  Segmentation & framework for analysis III. Basic/ Core Models  Electronic commerce models  Content(-driven) and service models IV. Platform Models  Marketplaces and crowdsourcing  Social networks and aggregator models V. Ecosystems  Consumer-/ End-user-oriented  Business-oriented/ industrial VI. Back-End/ Enabling Models  Cloud computing/ XaaS  Asset managers Source: own work Nils Madeja Page 3  Digital Business Models (Module No. 1403) Summer Semester 2024 An electronic commerce business generates revenues by attrac- ting visitors to its web site and converting them into buyers. III.A.6. ELECTRONIC COMMERCE: FRONT-END CORE PROCESS Marketing Homepage/ Shopping Catalogue Check-out channels landing page cart Online, e. g.:  Start brow-  Put items into  Continue to  Complete  Search sing the cata- shopping check-out? check-out/ engines logue/ pages? cart? payment?  Social OR OR OR OR networks  Leave  Leave site  Abandon  Abort check-  Affiliate sites ("bounce off") after shopping out and aban-  Advertising right away? browsing? cart? don cart? networks Offline, e. g.:  TV  Print ads The challenge is that only a small fraction (a few %) of visitors convert all the way! Source: own work Nils Madeja Page 4  Digital Business Models (Module No. 1403) Summer Semester 2024 Operating costs in electronic commerce are mainly driven by the activities of the fulfillment (back-end) process. III.A.7. ELECTRONIC COMMERCE: BACK-END CORE PROCESS Prepare Ship Evaluate Return Unpack Recover Store  Pick from  Hand Customer:  Hand  Unwrap  Clean  Return storage over to  Check over to box/ goods into  Pack into delivery (and try) delivery parcel AND storage box/ company goods company  Assess (reshelve)  Repair/ parcel  Send to  Decide:  Send state of refurbish  Wrap and customer Keep or back to goods OR finish return? business  Discard The challenge is that customers may return a substantial fraction of the goods! Source: own work Nils Madeja Page 5  Digital Business Models (Module No. 1403) Summer Semester 2024 For any given time period, electronic commerce CACS increase disproportionally with the number of customers acquired. III.A.8. ELECTRONIC COMMERCE: CUSTOMER ACQUISITION COSTS (CACS) Observations Total CACS Individual CAC  Individual CAC increases with every additional customer acquired (incremental CAC)  As a consequence, total CACS increase disproportionally (sum/ "integral" of all individual CACS)  How many customers should be acquired in the given time period? → customer economics Number of customers (to be) acquired That limits businesses' growth dynamics…or increases their capital requirements. Source: own work Nils Madeja Page 6  Digital Business Models (Module No. 1403) Summer Semester 2024 For many (most?) electronic commerce businesses, customers need to make several purchases in order to become profitable. III.A.9. ELECTRONIC COMMERCE: CUSTOMER ECONOMICS Questions Value generated  After how many purchases does a customer become profitable?  How many purchases does a Time customer usually make?  How much time elapses between the (repeat) purchases?  How does the contribution margin develop with purchases?  What is the resulting CLV? Contribution margin  How do these figures change CAC CLV (CM) from purchases across different customer cohorts? That takes time…during which the (temporary) loss must be financed. Source: own work Nils Madeja Page 7  Digital Business Models (Module No. 1403) Summer Semester 2024 Revenues are driven by building a customer base and deve- loping/ cultivating it in order to generate repeat purchases. III.A.10. ELECTRONIC COMMERCE: DRIVERS (DETERMINING FACTORS) Revenue Cost  New customers – acquisition via  Mostly stable – fixed cost: various channels: − Technical platform (shop) − Online or − Employees (shop-/ category-/ − Offline, product management) numbers depend on marketing spend  Main driver – variable cost:  Customer base/ existing customers − Customer acquisition  Purchase behavior/ revenue per − Customer (re-)activation customer: − Fulfillment: shipping and returns − Basket size (cross-/ upselling) (in case of physical goods) − Repeat purchases − Working capital (inventory, − Clubs/ subscriptions (recurring rev.) receivables) Customer acquisition and fulfillment are the main cost drivers. Source: own work Nils Madeja Page 8  Digital Business Models (Module No. 1403) Summer Semester 2024 In summary, business models based on electronic commerce are quite scalable. III.A.11. ELECTRONIC COMMERCE: ASSESSMENT AND EVALUATION  Growth curve: number of customers and development of revenues per customer  Capital required for customer acquisition (marketing) and working capital Scalability  Capital requirement grows disproportionally with revenue growth rate  Organic growth after reaching break even, depending on customer base  Flexible with respect to offering and scale/ size of the business  Low depth/ few stages of value creation Risks  Easily imitable (in principle – in practice depending on available funding)  Independent from certain market environment  Significant change in consumers' shopping behavior over the last 3 decades Implica-  Effects on competition: online-offline-convergence, structural change of German tions cities ("bricks and mortar" retailers disappearing from high street/ downtown)  Large platforms may achieve a dominating position However, their capital requirement increases with revenue growth rate. Source: own work Nils Madeja Page 9  Digital Business Models (Module No. 1403) Summer Semester 2024 As the Zalando example illustrates, it may take more than € 1bn. in funding to build a leading online retailer. III.A.12. ELECTRONIC COMMERCE: ZALANDO CASE STUDY Revenue development Funding  From PE investors: ~ 470 m€  From IPO: ~ 605 m€ The money is needed to cover initial losses and to build fulfillment infrastructure. Sources: Zalando corporate information/ IR, Statista, crunchbase, Handelsblatt Nils Madeja Page 10  Digital Business Models (Module No. 1403) Summer Semester 2024 We conclude our discussion of basic/ core models by analyzing content(-driven) and service models in more detail. III.B.0. OUTLINE OF THIS MODULE I. Introduction to Business Models  Concept and characteristics  Value capturing & value creation models II. Digital Business Fundamentals  Key terms and characteristics  Segmentation & framework for analysis III. Basic/ Core Models  Electronic commerce models  Content(-driven) and service models IV. Platform Models  Marketplaces and crowdsourcing  Social networks and aggregator models V. Ecosystems  Consumer-/ End-user-oriented  Business-oriented/ industrial VI. Back-End/ Enabling Models  Cloud computing/ XaaS  Asset managers Source: own work Nils Madeja Page 12  Digital Business Models (Module No. 1403) Summer Semester 2024 Content(-driven) models are based on making digital media content available and delivering it to users. III.B.1.1. CONTENT MODELS FROM AN EXTERNAL/ CUSTOMERS' PERSPECTIVE  Provision and delivery of digital media content Principle  Different types of media: text, images, audio, video, and combinations ("general  Stakeholders: users, content providers, ad customers, various "partners" idea")  Monetization: users pay directly for accessing the content and/ or ad customers pay for filling the ad space generated by the users  Broad variety within this category of business models, e. g.: − Selling content as subscriptions (streaming) or by the piece (stock content) Examples − (Traditional or born digital) Publishers' online offerings − Web sites based on user-generated content ("web 2.0" applications)  Quick and easy access to media content, independent of time and location Value-add  Large offering (library) of content can be realized  Replacement of physical media products (but end-user device required) A broad variety of content models has been implemented. Source: own work Nils Madeja Page 13  Digital Business Models (Module No. 1403) Summer Semester 2024 One basic pattern of content models is to make own or third- party content available to users and charge them directly. III.B.1.2. CONTENT MODEL VARIATION 1: (RE-)SALE OF CONTENT Flow of goods or services Flow of money Affiliate Content Value capturing model Value creation model (Comprises flow of information) web sites partners Content Users/ providers/ subscri- Business rights bers holders The challenge: Users are often unwilling to pay for content (adequately). Source: own work Nils Madeja Page 14  Digital Business Models (Module No. 1403) Summer Semester 2024 Another basic pattern is to sell ad(vertising) space generated from user interaction or based on user data. III.B.1.3. CONTENT MODEL VARIATION 2: SALE OF AD(VERTISING) SPACE Flow of goods or services Flow of money Value capturing model Value creation model (Comprises flow of information) Users Ad (vertising) Business customers Content Note: providers/ This basic pattern of ad(vertisement)-sponsored rights content can be found in many digital business models. holders There is a great variety of content types and sources! Then users "pay" for the content by receiving ad(vertisement)s or with their data. Source: own work Nils Madeja Page 15  Digital Business Models (Module No. 1403) Summer Semester 2024 Models based on user-generated content can be regarded as a variation of the second basic pattern of content models III.B.1.3. CONTENT MODEL VARIATION 2A: USER-GENERATED CONTENT Flow of goods or services Flow of money Value capturing model Value creation model (Comprises flow of information) Ad Users (vertising) Business ("pro- customers sumers") Note: This basic pattern of ad(vertisement)-sponsored content can be found in many digital business models. There is a great variety of content types and sources! Users are producers and consumers at the same time ( portmanteau "prosumers"). Source: own work Nils Madeja Page 16  Digital Business Models (Module No. 1403) Summer Semester 2024 With respect to content models and media companies, a similar convergence as in electronic commerce can be observed. III.B.1.5. CONTENT MODELS: TYPES OF MEDIA COMPANIES Offline media Hybrid media Digital media companies/ companies companies "digital pure plays"  Traditional players with  Internet/ web site as  Core: online offering established channels additional channel to (web site or app)  E. g. newspaper publi- complement the others  Expanding into content shers, radio/ TV broad- production [generation] casters, movie studios  Diversification: additio-  Moving onto traditional  Often active/ involved in nal digital offerings and devices (e. g. TV, car), content production activities but as an online medium Digit(ali)zation Broadening scope As content is easy to digitize, most media companies have already "gone hybrid". Source: own work Nils Madeja Page 17  Digital Business Models (Module No. 1403) Summer Semester 2024 The number of page impressions (PI) generated often is the key revenue driver for content models. III.B.1.6. CONTENT MODELS: DRIVERS (DETERMINING FACTORS) Revenue Cost  Revenues with users directly:  Mostly stable – fixed cost: − Size of the user base − Technical platform (shop) − One-time revenues: number − Employees (except production) and volume of purchases − Slightly variable: user support − Recurring revenues : no., vol.,  Cost for content production: and duration of subscriptions − Employees (dev. & realization)  Revenues with ad customers: − Project exp. (e. g. for series/ movies) − Size of the user base  Cost for licenses/ rights: − Usage: frequency & intensity of use − Fixed cost: basic fee − Traffic: number of page impres- − Variable cost: usage-dependent sions (PI) generated by humans fees (structure can be complicated!) Cost is largely determined by content sourcing/ acquisition. Source: own work Nils Madeja Page 18  Digital Business Models (Module No. 1403) Summer Semester 2024 Content-driven models are highly scalable, because digital content can be multiplied easily. III.B.1.7. CONTENT MODELS: ASSESSMENT AND EVALUATION  Growth follows user base and (human) usage  Capital mainly required for sourcing/ acquiring content Scalability  Highly scalable, as digital content can be multiplied easily  Challenge: minimum user base vs. minimum content offering  Flexible with respect to offering and scale/ size of the business  Depth of value creation depends on content production and marketing ad space Risks  Imitability is determined by ownership of/ access to exclusive content  Employable content (more or less) restricted by regulation  Consumers' media usage has changed fundamentally: "free lunch"- Implica- mentality and expectation of a broad offering tions  Longtime crisis of established (offline) publishers  digital transformation  Boundary between content production and distribution becomes blurred Therefore, many digital business models are content-driven – at least in part. Source: own work Nils Madeja Page 19  Digital Business Models (Module No. 1403) Summer Semester 2024 Service models are based on working/ interacting with users in order to create some personalized, incorporeal benefit for them. III.B.2.1. SERVICE MODELS FROM AN EXTERNAL/ CUSTOMERS' PERSPECTIVE  Provision and delivery of digital services Principle  Services are based on interaction with user and digital media content ("general  Stakeholders: users, content providers, ad customers, various "partners" idea")  Monetization: users pay directly for consuming the service and/ or ad customers pay for filling the ad space generated by the users  Personal development, training, and coaching: − Language education (e. g. Babbel, Learnship, …) Examples − Virtual sports/ fitness clubs (e. g. Aaptiv, Asana rebel, …) − Weight-loss programs (e. g. WW, Rise, …)  Quick and easy help or instruction, independent of time and location Value-add  Large offering (library) of services can be realized  Replacement of physical contact or other communication channels (e. g. phone) They can – in part – be understood as an interactive variation of content models. Source: own work Nils Madeja Page 20  Digital Business Models (Module No. 1403) Summer Semester 2024 Service models differ in their degree of automation, i. e. to what degree humans need to get involved. III.B.2.2. SERVICE MODELS: ARCHITECTURE AND DELIVERY Human service via Digitally leveraged Digital service digital channel human service  Human renders service  Human renders service  Service is rendered fully (e. g. training, consulting) supported by content or automatically by SW, no on his/ her own workflow (software/ SW) (more) humans in the loop  Internet/ web site/ app used  Internet/ web site/ app con-  Value creation exclusively for human communication tributes to value creation by Internet/ web site/ app  Independence of location  Independence of location,  Independence of location,  Little to no leverage and – in part – of time and of time (nonlinear) (only travel time/ exp.)  Medium leverage  High leverage Partial automation Full automation Employing digital platforms [tech term], humans can leverage their value creation. Source: own work Nils Madeja Page 21  Digital Business Models (Module No. 1403) Summer Semester 2024 The scalability of service models depends on their degree of automation or the leverage of human value creation. III.B.2.3. SERVICE MODELS: ASSESSMENT AND EVALUATION  Growth follows user base and (human) usage  Capital mainly required for building/ developing/ sourcing services Scalability  Scalability depends on degree of automation/ need for human involvement  Challenge: minimum user base vs. minimum service portfolio  Flexible with respect to offering and scale/ size of the business  Depth of value creation depends on service development and marketing ad space Risks  Imitability is determined by ability to render exclusive/ personalized services  Employable content (more or less) restricted by regulation  Consumers increasingly willing to consume automated services (at least Implica- on the low end of the market) tions  Human service providers can extend their reach/ scale their business on the higher end, but may also lose some business on the lower end Designing and implementing digital services is more complex than producing content. Source: own work Nils Madeja Page 22