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Digital Business Models (Module No. 1403) Summer Semester 2024 The next chapter addresses digital business fundamentals, starting with several key terms and important characteristics. I...

Digital Business Models (Module No. 1403) Summer Semester 2024 The next chapter addresses digital business fundamentals, starting with several key terms and important characteristics. II.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 10  Digital Business Models (Module No. 1403) Summer Semester 2024 "Digitization" originally means to transform a continuous signal into a discrete signal, i. e. a sequence of integers (by sampling). II.A.1.1.1. SIGNAL TYPES & DIGITIZATION: ORIGINAL, TECHNICAL DEFINITIONS Analog signal (+ sampling) Digital signal Value Value Time Time  Continuous in time (x) and value (y)  Discrete in time (x) and value (y)  E. g. output signal (voltage) of a  Sequence, e. g. 6, 10, 16, 18, … microphone (audio signal)  Can be processed with binary logic Note: Sampling entails losing information and accuracy ("sampling noise")! Source: own work Nils Madeja Page 11  Digital Business Models (Module No. 1403) Summer Semester 2024 Despite the inherent loss of information during the process of digitization, the advantages of digital technology clearly prevail. II.A.1.1.2. SELECTED ADVANTAGES AND DRAWBACKS OF DIGITAL TECHNOLOGY Drawbacks Advantages  Loss of information during sampling  Signal recovery possible without of analog signal: further losses (error correction) − Omission of information (limited  Easy signal processing with frequency of sampling intervals) computers/ ICT-systems, e. g.: − Loss of accuracy (limited − Transmission resolution of sampler "sampling − Storage and reproduction noise") − Analysis/ modification/ filtering  Effort for signal processing (e. g. − Encryption computing power, time)  Low/ declining prices for HW- and  "Strict" operating limits: "hard" loss SW-components of signal instead of gradual fading Digital signal processing is generally cheaper and yields better signal quality. Source: own work Nils Madeja Page 12  Digital Business Models (Module No. 1403) Summer Semester 2024 In business administration "Digitization" refers to moving documents and processes online/ onto information systems… II.A.1.2. DIGITAL TRANSFORMATION (DT/ DigX): DIMENSIONS AND TOPICS  Blasd  Data as strategic resource or source of competitive advantage Markets  Implications for society and cultural development Digital Trans- Business  Data and information products as source of value creation formation models  … supporting/ facilitating value delivery Organizations  Bridging gaps, connecting silos, ensuring data availability and processes  Flexibilizing work (e. g. virtual teams, online collaboration) Digit(al)ization Human user  New ICT channels (e. g. interfaces and interaction, media)  Change in habits (e. g. duration, intensity, attention span) Technology  Substituting paper (e. g. forms) with electronic files (Artefacts)  Introducing new (IT) systems, tap into new data sources …leading to a broad range of dimensions and topics, the Digital Transformation (DT/ DigX). Source: own work Nils Madeja Page 13  Digital Business Models (Module No. 1403) Summer Semester 2024 Some authors identify a third concept between the two: "Digitali- zation", referring to the information obtained by Digitization… II.A.1.3. DIGITIZATION, DIGITALIZATION, AND THE DIGITAL TRANSFORMATION DIGITALIZATION …and its use in processes. The boundaries between the concepts are not sharp. Source: depiction adopted from [2.6]; also based on [2.3], and [2.5] Nils Madeja Page 14  Digital Business Models (Module No. 1403) Summer Semester 2024 Numerous definitions have been proposed for the concept of "Digital Transformation" (DT). II.A.1.4. DIGITAL TRANSFORMATION (DT): DEFINITIONS Comprehensive constructed definition acc. to Vial [2.8]: "a process that aims to im- prove an entity by triggering significant changes to its properties through combina- tions of ICCC*) technologies" Own working definition: "Remodeling an organiza- tion, so that data and information products in ICT systems become the source of value creation" A common understanding is yet to be established. Source: table and definition adopted from [2.8] *) information, computing, communication, and connectivity Nils Madeja Page 15  Digital Business Models (Module No. 1403) Summer Semester 2024 The concept of "Digital Business" encompasses that of "E-Business", which – in turn – includes "E-Commerce". II.A.1.5. DEFINITIONS: DIGITAL BUSINESS, E-BUSINESS, AND E-COMMERCE "Digital Business comprises the initiation, processing, and fulfillment of economic activities over electronic networks with data and digital information goods playing a prominent (or even central) role." "Electronic/ E-Business "is the initiation as well as the partial or full support, transaction[,] and maintenance of service exchange processes between economic partners through information technology (electronic networks)". "Electronic/ E-Commerce involves the electronic support of activities that are directly related to the purchase and sale of products or services through electronic networks." The definitions vary in their conceptual breadth/ scope and in their focus. Sources: "E-Commerce" – [2.9]; "E-Business" – [0.5]; "Digital Business" – own working def.; emphases added Nils Madeja Page 16  Digital Business Models (Module No. 1403) Summer Semester 2024 Due to their different conceptual breadth/ scope, the three con- cepts cover companies from different levels of digital maturity. II.A.1.6. DIGITAL BUSINESS: CONCEPTS INCLUDED & COMPANIES COVERED "Analog" companies Digit(ali)zed companies Digital companies (i. e. prior to digital (data supports (data forms the core of transformation) value creation) value creation) Digital Business Electronic Business Electronic Commerce Digital Digit(ali)zation Transformation This scheme also reflects the historical evolution of the three concepts. Source: own work Nils Madeja Page 17  Digital Business Models (Module No. 1403) Summer Semester 2024 Digital business models can be differentiated into digit(al)ized and "native" digital models, reflecting two levels of maturity. II.A.1.7. FUNDAMENTAL TYPES OF DIGITAL BUSINESS MODELS Digit(al)ized model "Native" digital models  The provision of "analog" goods (i.  The provision of digital goods (i. e. e. physical objects) or services information objects) or services (i. e. in the real world) constitutes (i. e. in the virtual world) constitutes the core of the model the core of the model  Data is acquired and processed via  Data is acquired and processed via digital channels in order to support digital channels as the raw material, and administer that purpose main input, and basis for value  Electronic commerce and electronic creation ("oil of the 21st century") business models (contained in  Not (necessarily) electronic broad definition of digital business) commerce/ business models The key difference lies in the role data plays in each type of model. Source: own work Nils Madeja Page 18  Digital Business Models (Module No. 1403) Summer Semester 2024 As intangible information goods, digital goods exhibit several characteristics/ specific properties which largely determine… II.A.1.8. CHARACTERISTICS/ SPECIFIC PROPERTIES OF DIGITAL GOODS  If used by one agent, their usefulness for others remains Nonrivalry  I. e. they are not diminished by use/ consumption ( food) Infinite  Can be copied/ multiplied arbitrarily often and quickly expansibility  (Almost) no variable cost for copying ( fixed cost for 1st copy) Discreteness/  Only a whole copy is functional/ useful/ valuable indivisibility  A fractional copy is not  Can be transported at negligible cost Aspatiality  Usage is not tied or limited to a specific location  Cumulative: existing digital goods can be merged to new ones Recombination  Emergent: new digital goods have different features …the mechanisms of digital business and the digital economy as a whole. Source: [2.4] and [2.7] Nils Madeja Page 19  Digital Business Models (Module No. 1403) Summer Semester 2024 Based on digital goods, digital business provides a significant value-add, differentiating it from "analog" business. II.A.1.9. "VALUE-ADD" OF DIGITAL BUSINESS: CHARACTERISTICS  Speed – instantaneous fulfillment if no physical component is involved  Reach – the "long tail" can be addressed and served Effective- − Customer segments of one (with special preferences) ness − Highly specific niche offerings (especially if fully digital)  Independence of time and location (only Internet connection required)  New product and service offerings (i. e. by advanced analytics, AI)  Transaction cost for sales processes near zero  Variable production cost for digital goods and services near zero  Automation enables low-touch customer service (customer self-help) Efficiency  But: additional cost for ensuring data quality (authenticity, integrity etc.)  Disintermediation can lower distribution cost ( direct sales)  Digital goods and services facilitate the disruption of markets That explains the proliferation of digital business models. Source: own work Nils Madeja Page 20  Digital Business Models (Module No. 1403) Summer Semester 2024 The Long Tail refers to the market segment of niche offerings; theory suggests it could grow at the expense of the Short Tail. II.A.1.10. LONG TAIL THEORY Offerings sorted by sales rank/ popularity/ market share  Left side: Short Tail ("hits") – most of the overall market  Right side: Long Tail ("niche products") – traditionally underserved segment Yet, empirical evidence suggests that digital business might lead to the opposite. Source: depiction adopted from [2.2] Nils Madeja Page 21  Digital Business Models (Module No. 1403) Summer Semester 2024 Disintermediation means bypassing stages in the value chain – especially sales channels – i. e. "cutting out the middle man". II.A.1.11. DISINTERMEDIATION Since the early days of E-Commerce this has been causing channel conflicts. Source: depiction adopted from [2.9] Nils Madeja Page 22  Digital Business Models (Module No. 1403) Summer Semester 2024 Disruption happens when a new entrant launches an inferior offering at a low price, then rolls up a market from the low end. II.A.1.12. DISRUPTION/ DISRUPTIVE INNOVATIONS Digital examples:  Photography  Smartphones  VoIP telephony  Open Source Software  Wikipedia  Messaging, e. g. Twitter  YouTube  Audio/ video streaming  […] Disruption does not need to be digital, and not every game changer is "disruptive". Source: depiction adopted from [2.1] Nils Madeja Page 23  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 Wirtz proposes a 4C-Framework for segmentation of digital business models (DBM) in the B2C-space… II.B.1.1. SEGMENTATION OF DBM ACCORDING TO WIRTZ …and a 4S-Framework for the DBM in the B2B-space. Source: [0.5] Nils Madeja Page 11  Digital Business Models (Module No. 1403) Summer Semester 2024 Bock and Wiener take a more general approach, proposing a taxonomy for DBM along five dimensions. II.B.1.2. TAXONOMY OF DBM ACCORDING TO BOCK AND WIENER The instrument employed for this structure is referred to as "morphological box". Sources: [2.10] Nils Madeja Page 12  Digital Business Models (Module No. 1403) Summer Semester 2024 For the purposes of this module DBM are segmented mainly according to their complexity, and also to their visibility. II.B.1.3. SEGMENTATION OF DBM FOR THE PURPOSES OF THIS MODULE Ecosystems are the most complex and may involve multiple groups of users/ participants; various business relationships possible between the groups Platform Models are more complex and depend on attracting and managing communities of users (user base); typ. business relationships: N-to-N or N-to-M Basic/ Core Models represent the least complex and oldest digital busi- ness models; typical business relationships: 1-to-N Back-End/ Enabling Models vary in complexity; often invisible to consumers, they serve as building blocks for other business models, providing technology or service components Note that the boundaries between the segments overlap to a certain extent. Sources: own work Nils Madeja Page 13  Digital Business Models (Module No. 1403) Summer Semester 2024 The analysis of a (digital) business model starts with a descrip- tion of its principle from the external or customers' perspective. II.B.2.1. FRAMEWORK FOR ANALYSIS: EXTERNAL/ CUSTOMERS' PERSPECTIVE  What is the content of the business? What makes up the offering? Principle  Who are the relevant stakeholders – customers, suppliers, and partners? ("general  Roughly speaking, how does the business model "work"? How do goods, idea") services, money, and information flow?  How is value monetized, i. e. what do customers pay for and how?  Which company examples do you know… − Serving different customer segments (e. g. B2A, B2C, B2M, B2X2Y)? Examples − Pursuing different strategies or positioning themselves differently? − From various countries/ geographical markets?  Which new/ additional benefits or cost savings does a model provide? Value-add  How is that value generated and delivered?  What do customers pay for and at which terms? That comprises a discussion of the principle and an explanation of the value-add. Source: own work Nils Madeja Page 14  Digital Business Models (Module No. 1403) Summer Semester 2024 For the sake of clarity, a business model analysis should include a sketch of the relevant entities and their relationships. II.B.2.2. SKETCH OF A BUSINESS MODEL (EXTERNAL VIEW) Flow of goods or services Flow of money Sales Sourcing Value capturing model Value creation model (Comprises flow of information) Partners Partners Internal components Custo- mers' Custo- Business Suppliers Custo- mers mers This can be complemented with a close-up on the internal components. Source: own work Nils Madeja Page 15  Digital Business Models (Module No. 1403) Summer Semester 2024 A subsequent driver analysis reveals the mechanisms for creating and monetizing value. II.B.2.3. FRAMEWORK FOR ANALYSIS: DRIVERS (DETERMINING FACTORS) Revenue Cost  How are customers acquired?  How does fixed cost develop?  How does the customer base − E. g. for physical assets, develop and grow? − Employees/ workforce,  Customer base = user base or − Intellectual property (IP), or several users per customer? − Marketing (e. g. brand building)  What is the customers' individual  … and how does variable cost? usage or purchase behavior? − E. g. for customer acquisition, − How often?/ How many times? − (Re-)activating customers, − How much each time? − Production or purchasing,  How is the revenue per customer − Delivery and service (fulfilment), structured? − Or working capital? Which are the relevant KPIs? How do they act together in quantity structures? Source: own work Nils Madeja Page 16  Digital Business Models (Module No. 1403) Summer Semester 2024 Examining typical customer relationships along their lifecycle can help during the driver analysis. II.B.2.4. ANALYSIS OF CUSTOMER RELATIONSHIPS ALONG THE LIFECYCLE Acquisition Development Termination  Sales Channels:  Basket size: reve-  Customer loyalty: Ways to the cust. nue per transaction customers leaving  Lead generation: (up-/ cross-selling)  De-marketing: Addressing poten-  Repeat purchases: Leaving customers tial customers no. of transactions → Defection rate  Conversion: Turn-  (Re-)Activation: (churn rate) ing Leads into cust. "(Re-)Animating" → Customer lifetime customers → Sales Cycle (CL) → Customer acquisi- → Repeat purch. rate → Customer lifetime tion costs (CACS) → Costs per order value (CLV) (CPO) Estimating the KPIs can reveal major levers – but that requires experience. Source: own work Nils Madeja Page 17  Digital Business Models (Module No. 1403) Summer Semester 2024 In the last step of the analysis the properties of the business model are assessed and evaluated; conclusions are drawn also. II.B.2.5. FRAMEWORK FOR ANALYSIS: ASSESSMENT AND EVALUATION  How does a typical growth trajectory look like? What are the drivers?  What is capital needed for in this business model? To what extent? Scalability  What is the relationship between growth and required capital? → How efficiently can this model grow on capital (esp. after break-even)?  How difficult is it to change the offering or scale of the model?  How much value-add does this business model generate itself? Risks  How easy is it to imitate this business model? Can many people do that?  Does this business model depend on any specific market conditions?  How does this business model influence (change?) customers? Implica-  How does competition change when this business model is introduced? tions  What are the consequences for existing, established business models?  What are the effects on the value chain and its elements? It will take some discussions to find all the answers. Source: own work Nils Madeja Page 18  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 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 26  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 27  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 Individual CAC Total CACS  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 28  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 29  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 30  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 31  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 32