E-Commerce Business Models (CSEN2151) - Module II PDF

E-COMMERCE (CSEN2151) Module II E-COMMERCE BUSINESS MODELS: Key Elements of a Business Model, Major BUSINESS-TO-CONSUMER (B2C) Business Models, Major BUSINESS-TO-BUSINESS (B2B) Business Models, How E-Commerce Changes Business: Strategy, Structure, and Process....

E-COMMERCE (CSEN2151) Module II E-COMMERCE BUSINESS MODELS: Key Elements of a Business Model, Major BUSINESS-TO-CONSUMER (B2C) Business Models, Major BUSINESS-TO-BUSINESS (B2B) Business Models, How E-Commerce Changes Business: Strategy, Structure, and Process.  E-COMMERCE BUSINESS MODELS: A business model is a set of planned activities (sometimes referred to as business processes) designed to result in a profit in a marketplace. A business plan is a document that describes a firm’s business model. A business plan always takes into account the competitive environment. KEY ELEMENTS OF A BUSINESS MODEL: If you hope to develop a successful business model in any arena, not just e-commerce, you must make sure that the model effectively addresses the eight elements listed below 1. value proposition,2. revenue model, 3. market opportunity, 4. competitive environment, 5. competitive advantage, 6. market strategy, 7. organizational development, and 8. management team. 1. Value Proposition: A company’s value proposition is at the very heart of its business model. A value proposition defines how a company’s product or service fulfills the needs of customers. From the consumer point of view, successful e-commerce value propositions include personalization and customization of product offerings, reduction of product search costs, reduction of price discovery costs, and facilitation of transactions by managing product delivery. Ex: Book buying before and after amazon. (Kindle also) Amazon’s primary value propositions are unparalleled selection and convenience.  2. Revenue model: A firm’s revenue model describes how the firm will earn revenue, generate profits, and produce a superior return on invested capital. Profits alone are not sufficient to make a company “successful”. In order to be considered successful, a firm must produce returns greater than alternative investments. Firms that fail this test go out of existence. Major revenue models: advertising, subscription, transaction fee, sales, and affiliate. In the advertising revenue model, a company that offers content, services, and/or products also provides a forum for advertisements and receives fees from advertisers. Companies that are able to attract the greatest viewership or that have a highly specialized, differentiated viewership and are able to retain user attention (“stickiness”) are able to charge higher advertising rates. Yahoo, for instance, derives a significant amount of revenue from display and video advertising. In the subscription revenue model, a company that offers content or services charges a subscription fee for access to some or all of its offerings. Experience with the subscription revenue model indicates that to successfully overcome the disinclination of users to pay for content, the content offered must be perceived as a highvalue- added, premium offering that is not readily available elsewhere nor easily replicated. Ex: Kindle, Netflix, Spotify, Zomato etc.  In a freemium strategy, the companies give away a certain level of product or services for free, but then charge a subscription fee for premium levels of the product or service. In the transaction fee revenue model, a company receives a fee for enabling or executing a transaction. For example, eBay provides an auction marketplace and receives a small transaction fee from a seller if the seller is successful in selling the item. E*Trade, a financial services provider, receives transaction fees each time it executes a stock transaction on behalf of a customer. In the sales revenue model, companies derive revenue by selling goods, content, or services to customers. Companies such as Amazon, Flipkart, and Myntra all have sales revenue models. In the affiliate revenue model, companies that steer business to an “affiliate” receive a referral fee or percentage of the revenue from any resulting sales. Ex: Pay Per Click(PPC), Pay Per Sale(PPS) etc. 3. Market opportunity: The term market opportunity refers to the company’s intended marketspace (i.e., an area of actual or potential commercial value) and the overall potential financial opportunities available to the firm in that marketspace. The market opportunity is usually divided into smaller market niches. The realistic market opportunity is defined by the revenue potential in each of the market niches where you hope to compete.  4. Competitive environment: A firm’s competitive environment refers to the other companies selling similar products and operating in the same marketspace. It also refers to the presence of substitute products and potential new entrants to the market, as well as the power of customers and suppliers over your business. Firms typically have both direct and indirect competitors. Direct competitors are companies that sell very similar products and services into the same market segment. For example, Amazon and Flipkart, are direct competitors because both companies sell identical products. Indirect competitors are companies that may be in different industries but still compete indirectly because their products can substitute for one another. For instance, automobile manufacturers and airline companies operate in different industries, but they still compete indirectly because they offer consumers alternative means of transportation. 5. Competitive Advantage: Firms achieve a competitive advantage when they can produce a superior product and/or bring the product to market at a lower price than most, or all, of their competitors.  An asymmetry exists whenever one participant in a market has more resources— financial backing, knowledge, information, and/or power—than other participants. Asymmetries lead to some firms having an edge over others, permitting them to come to market with better products, faster than competitors, and sometimes at lower cost. A firstmover advantage is a competitive market advantage for a firm that results from being the first into a marketplace with a serviceable product or service. An unfair competitive advantage occurs when one firm develops an advantage based on a factor that other firms cannot purchase (Ex: Brand name) 6. Market Strategy: Everything you do to promote your company’s products and services to potential customers is known as marketing. Market strategy is the plan you put together that details exactly how you intend to enter a new market and attract new customers. 7. Organizational Development: Although many entrepreneurial ventures are started by one visionary individual, it is rare that one person alone can grow an idea into a multi-million-dollar company. In most cases, fast-growth companies—especially e-commerce businesses—need employees and a set of business procedures. In short, all firms—new ones in particular—need an organization to efficiently implement their business plans and strategies.  8. Management Team: The management team responsible for making the model work. A strong management team gives a model instant credibility to outside investors, immediate market-specific knowledge, and experience in implementing business plans. A strong management team may not be able to salvage a weak business model, but the team should be able to change the model and redefine the business as it becomes necessary. Eventually, most companies get to the point of having several senior executives or managers. The challenge is to find people who have both the experience and the ability to apply that experience to new situations.  MAJOR BUSINESS-TO-CONSUMER (B2C) BUSINESS MODELS a) E-TAILER: Online retail stores, often called e-tailers, come in all sizes, from giant Amazon to tiny local stores. customers have to connect to the Internet or use their smartphone to place an order Some e-tailers, which are referred to as “bricks-and-clicks,” are subsidiaries or divisions of existing physical stores and carry the same products. Walmart, Tesco, H&M, and Zara are examples of companies with complementary online stores. Others, however, operate only in the virtual world, without any ties to physical locations. Amazon, Wayfair, and Farfetch are examples of this type of e-tailer. Several other variations of e-tailers—such as online versions of direct mail catalogs, online malls, and manufacturer-direct online sales—also exist. The e-tail revenue model is product-based, with customers paying for the purchase of a particular item. This sector, however, is extremely competitive. Because barriers to entry (the total cost of entering a new marketplace) into the e-tail market are low, tens of thousands of small e- tail shops have sprung up. Becoming profitable and surviving is very difficult, however, for e-tailers with no prior brand name or experience. Keeping expenses low, selection broad, and inventory controlled is key to success in e- tailing, with inventory being the most difficult to gauge.  b) COMMUNITY PROVIDER: Community providers create an online environment where people with similar interests can transact (buy and sell goods); share interests, photos, videos; communicate with like-minded people; receive interest-related information; and even play out fantasies by adopting online personalities called avatars. Facebook, LinkedIn, Twitter, and Pinterest, and hundreds of other smaller, niche social networks all offer users community-building tools and services. The basic value proposition of community providers is to create a fast, convenient, one-stop platform where users can focus on their most important concerns and interests, share the experience with friends, and learn more about their own interests. Community providers typically rely on a hybrid revenue model that includes advertising fees from other firms that are attracted by a tightly focused audience, subscription fees, sales revenues, transaction fees, and affiliate fees. Examples include Kutumb, Uable, Leher, Pepul Kutumb is India’s leading app for large, private communities. It is capable of accommodating an unlimited number of people in a single community and caters to entities like political parties, sangathans, non-profit organisations and associations of all kinds. Uable is a Bangalore based social app only for teens. Here teens can join micro-communities called Clubs based on their interests, connect with like-minded people and build on their passion. Leher is a Bangalore-based social networking app. It is a discussion social network which lets users join live, real-time discussion clubs focused on certain topics. Pepul is a Chennai-based social network with a huge focus on security and safety. It aims to help like-minded people connect online and then create communities offline.  c) CONTENT PROVIDER Content providers distribute information content, such as digital video, music, photos, text, and artwork. Content providers can make money via a variety of different revenue models, including advertising, subscription fees, and sales of digital goods. For instance, in the case of Spotify, a monthly subscription fee provides users with access to millions of music tracks. Other content providers, such as the Financial Times online newspaper, Harvard Business Review, and many others, charge customers for content downloads in addition to, or in place of, a subscription fee. Of course, not all online content providers charge for their information: just look at the websites or mobile apps for ESPN, CIO, CNN, and the online versions of many newspapers and magazines. Users can access news and information without paying a cent, although sometimes they may be required to register as a member. These popular online content providers make money in other ways, such as through advertising and partner promotions. Increasingly, however, “free content” may be limited to headlines and text, whereas premium content—in-depth articles or videos—is sold for a fee. Generally, the key to becoming a successful content provider is owning the content. Some content providers, however, do not own content, but syndicate (aggregate) and then distribute content produced by others. Ex: Gadgets 360, an NDTV venture, is India's leading technology news, reviews and information website  d) PORTAL Portals such as Yahoo, MSN, and AOL offer users powerful search tools as well as an integrated package of content and services, such as news, e-mail, instant messaging, calendars, shopping, music downloads, video streaming, and more, all in one place. Initially, portals sought to be viewed as “gateways” to the Internet. Today, however, the portal business model is to be a destination. They are marketed as places where consumers will hopefully stay a long time to read news, find entertainment, and meet other people (think of destination resorts). Portals do not sell anything directly—or so it seems—and in that sense they can present themselves as unbiased. Portals generate revenue primarily by charging advertisers for ad placement, collecting referral fees for steering customers to other sites, and charging for premium services. Ex: Google, Microsoft’s MSN/Bing, and Verizon Media [Yahoo/AOL] Yahoo, AOL, MSN, and others like them are considered to be horizontal portals because they define their marketspace to include all users of the Internet. Vertical portals (sometimes called vortals) attempt to provide similar services as horizontal portals but are focused around a particular subject matter or market segment.  e) TRANSACTION BROKER Companies that process transactions for consumers normally handled in person, by phone, or by mail are transaction brokers. The largest industries using this model are financial services, travel services, and job placement services. The online transaction broker’s primary value propositions are savings of money and time. In addition, most transaction brokers provide timely information and opinions. Companies such as Monster offer job searchers a global marketplace for their talents and employers a national resource for that talent. Both employers and job seekers are attracted by the convenience and currency of information. Online stockbrokers charge commissions that are considerably less than traditional brokers, with many offering substantial deals, such as cash and a certain number of free trades, to lure new customers. Transaction brokers make money each time a transaction occurs. Each stock trade, for example, nets the company a fee, based on either a flat rate or a sliding scale related to the size of the transaction. Attracting new customers and encouraging them to trade frequently are the keys to generating more revenue for these companies. Travel sites generate commissions from travel bookings and job sites generate listing fees from employers up front, rather than charging a fee when a position is filled.  f) MARKET CREATOR Market creators build a digital environment in which buyers and sellers can meet, display and search for products and services, and establish prices. For example, eBay’s auction business model is to create a digital environment for buyers and sellers to meet, agree on a price, and transact. This is different from transaction brokers who actually carry out the transaction for their customers, acting as agents in larger markets. Uber, Airbnb, and Lyft are another example of the market creator business model (although they could also be categorized as service providers). On-demand service companies (also sometimes called sharing economy companies) are market creators that have developed online platforms that allow people to sell services, such as transportation or spare rooms, in a marketplace that operates in the cloud and relies on the Web or smartphone apps to conduct transactions.  g) SERVICE PROVIDER While e-tailers sell products online, service providers offer services online. There’s been an explosion in online services that is often unrecognized. Photo sharing, video sharing, and user-generated content (in blogs and social networks) are all services provided to customers. Google has led the way in developing online applications such as Google Maps, Google Docs, and Gmail. Service providers use a variety of revenue models. Some charge a fee, or monthly subscriptions, while others generate revenue from other sources, such as through advertising and by collecting personal information that is useful in direct marketing. Many service providers employ a freemium revenue model, in which some basic services are free, but others require the payment of additional charges. The basic value proposition of service providers is that they offer consumers valuable, convenient, time-saving, and low-cost alternatives to traditional service providers or provide services that are truly unique.  MAJOR BUSINESS-TO-BUSINESS (B2B) BUSINESS MODELS a) E-DISTRIBUTOR: online distributers Supplies products /services directly to individual businesses (consumers in this case) Companies that supply products and services directly to individual businesses are e-distributors. E-distributors are owned by one company seeking to serve many customers. One-stop shopping is always preferable to having to visit numerous sites to locate a particular part or product. Examples are Cisco Systems, Fiat Group Automobiles S.p.A. and Eneco Energie. b) E-PROCUREMENT (E-Procurement is a process through which organizations procure/order goods and services electronically. It can save time and money and prevent potential errors or mishaps during the procurement process. Much has changed since the days of paper-based procurement.) e-procurement firms create and sell access to digital markets. B2B service providers make money through transaction fees, fees based on the number of workstations using the service, or annual licensing fees. Example: a large industrial companies need of spare parts, a call for tender can be posted through the e-procurement system c) DIGITAL EXCHANGES An exchange is an independent digital marketplace where hundreds of suppliers meet a smaller number of very large commercial purchasers. Digital exchanges are independently-owned marketplaces that allow multiple suppliers and purchasers to trade in real time. Most operate in vertical markets, and earn commissions on transactions. They are particularly employed for spot-purchasing by large companies in the IT, food and industrial equipment sectors.  Exchanges are owned by independent, usually entrepreneurial startup firms whose business is making a market, and they generate revenue by charging a commission or fee based on the size of the transactions conducted among trading parties. Example : Liquidation.com d) INDUSTRY CONSORTIA Industry consortia are industry-owned vertical marketplaces that serve specific industries, such as the automobile, aerospace, chemical, floral, or logging industries. In contrast, horizontal marketplaces sell specific products and services to a wide range of companies. Vertical marketplaces supply a smaller number of companies with products and services of specific interest to their industry, while horizontal marketplaces supply companies in different industries with a particular type of product and service, such as marketing-related, financial, or computing services. Example : Dairy.com,Exostar etc e) PRIVATE INDUSTRIAL NETWORKS A private industrial network (sometimes referred to as a private trading exchange or PTX) is a digital network designed to coordinate the flow of communications among firms engaged in business together. The network is owned by a single large purchasing firm. Participation is by invitation only to trusted long-term suppliers of direct inputs. Example : Walmart stores Google Services - Example Digital Exchanges - Example Industry Consortia Example Private industrial networks example  HOW E-COMMERCE CHANGES BUSINESS: STRATEGY, STRUCTURE, AND PROCESS Table 2.8 suggests some of the implications of each unique feature for the overall business environment—industry structure, business strategies, and operations. TABLE  Eight Unique Features of E-commerce Technology 1. Ubiquity - Available just about everywhere and at all times A traditional business market is a physical place, access to treatment utilizing document circulation. For example, clothes and shoes are usually directed to encourage customers to go somewhere to buy.  Eight Unique Features of E-commerce Technology 2. Global Reach (the number of user or customers an e- commerce business can obtain. E-commerce allows business transactions on the cross country bound can be more convenient and more effective as compared with traditional commerce. Traditional Commerce base on Television , Radio, Newspaper and Sales force. Using Internet Commercial transactions to cross cultural and national boundaries Examples:  310 million customers | https://www.amazon.com (2023,Warehouses : 185)  3.03 Billion Active facebook users | https://www.facebook.com  More on Statistics visit : https://www.statista.com/  Eight Unique Features of E-commerce Technology 3. Universal Standards (Standards (i.e. INTERNET) shared by all nations around the world) E-commerce technologies are an unusual feature, is the technical standard of the Internet, so to carry out the technical standard of e-commerce is shared by all countries around the world standard.  Eight Unique Features of E-commerce Technology 4. Information richness (Complexity and Content of a message) Advertising and branding are an important part of commerce. E-commerce can deliver video, audio, animation, billboards, signs, etc. However, it’s about as rich as television technology.  Eight Unique Features of E-commerce Technology 5. Interactivity(Communication between the merchant and consumer) Twentieth Century electronic commerce business technology is called interactive, so they allow for two-way communication between businesses and consumers.  Eight Unique Features of E-commerce Technology 6. Information Density-(Total amount and quality of information available to all market participants) Internet and the web vastly increase information density (volume). Ecommerce technologies reduce information collection, storage, processing, and communication costs. Due to E-commerce Technologies information becomes more plentiful, less expensive and of higher quality. Go to Amazon, Ebay or wallmart website(s) you can find verity of products and prices.  Eight Unique Features of E-commerce Technology 7. Personalization(Targeting of marketing messages to specific individuals) and Customization(Changing the delivered product pr service by customer) E-commerce technology allows for Customization. Business can be adjusted for a name, a person’s interests and past purchase message objects and marketing message to a specific individual. The technology also allows for custom. Merchants can change the product or service based on user preferences or previous behavior.  Eight Unique Features of E-commerce Technology 8. Social technology: (User content generation and social networking technologies) When you want to sell a product, you can put the information about your product on a social media site. You just copy and paste the link of the page with the description of the product. But here you need to copy the link to publish it on a social media site. You won’t find a button on the website where you can share a product on a social media site.  a) INDUSTRY STRUCTURE E-commerce changes industry structure, in some industries more than others. Industry structure refers to the nature of the players in an industry and their relative bargaining power. An industry’s structure is characterized by five forces: rivalry among existing competitors, the threat of substitute products, barriers to entry into the industry, the bargaining power of suppliers, and the bargaining power of buyers. E-commerce can affect the structure and dynamics of industries in very different ways. Consider the recorded music industry, an industry that has experienced significant change because of e-commerce. Historically, the major record companies owned the exclusive rights to the recorded music of various artists. With the entrance into the marketplace of substitute providers such as Spotify,Napster and Kazaa, millions of consumers began to use the Internet to bypass traditional music labels and their distributors entirely. In the travel industry, entirely new middlemen such as Makemytrip,Travelocity entered the market to compete with traditional travel agents. Other examples like airline tickets reservation, Wikipedia replacing encyclopedia etc. It is impossible to determine if e-commerce technologies have had an overall positive or negative impact on firm profitability in general. Each industry is unique, so it is necessary to perform a separate analysis for each one.  b) OPERATIONS While an industry structural analysis helps you understand the impact of e-commerce technology on the overall business environment in an industry, a more detailed industry value chain analysis can help identify more precisely just how e-commerce may change business operations at the industry level. One of the basic tools for understanding the impact of information technology on industry and firm operations is the value chain. INDUSTRY VALUE CHAINS: A value chain is the set of activities performed in an industry or in a firm that transforms raw inputs into final products and services. Each of these activities adds economic value to the final product; hence, the term value chain as an interconnected set of value-adding activities. Figure 2.4 illustrates the six generic players in an industry value chain:  Suppliers,  Manufacturers,  Transporters,  Distributors,  Retailers,  And Customers.  A supplier is a person who supplies, sells, offers or exposes for sale, leases, distributes or installs any biological or chemical substance or any plant to be used at a place of employment. Manufacturers can reduce the costs they pay for goods by developing Internet-based B2B exchanges with their suppliers. Manufacturers can develop direct relationships with their customers, bypassing the costs of distributors and retailers. Distributors can develop highly efficient inventory management systems to reduce their costs, and retailers can develop highly efficient customer relationship management systems to strengthen their service to customers. Customers in turn can search for the best quality, fastest delivery, and lowest prices, thereby lowering their transaction costs and reducing prices they pay for final goods. Finally, the operational efficiency of the entire industry can increase, lowering prices and adding value for consumers, and helping the industry to compete with alternative industries. FIRM VALUE CHAINS A firm value chain is the set of activities a firm engages in to create final products from raw inputs. Each step in the process of production adds value to the final product. In addition, firms develop support activities that coordinate the production process and contribute to overall operational efficiency. Figure 2.5 illustrates the key steps and support activities in a firm’s value chain.  E-commerce offers firms many opportunities to increase their operational efficiency and differentiate their products. For instance, firms can use the Internet’s communications efficiency to outsource some primary and secondary activities to specialized, more efficient providers without such outsourcing being visible to the consumer. Inbound logistics: It involves organizing the inbound flow of materials, parts, or finished inventory from suppliers to assemblers, retail, or warehouses. Suppliers constitute a significant part of this stage. Operations: This entails managing the processes that, when combined, change the raw materials, such as labour and energy, to goods and services. Most operation processes are internal to the firm. Outbound logistics: This process helps coordinate the storage and movement of the final product from the manufacturer to the client. Outbound logistics may involve external shipping companies. Marketing and sales: It involves selling the products and services and devising means to deliver and communicate the products that add value to the customers. Most companies use internal sales and marketing teams. After Sales Service: This may include any changes the company makes to the product to keep it functioning well. This may include post-purchase processes such as warranties, service, and support to promote customer loyalty and satisfaction. FIRM VALUE WEBS A value web is a networked business ecosystem that uses e-commerce technology to coordinate the value chains of business partners within an industry, or at the first level, to coordinate the value chains of a group of firms. Figure 2.6 illustrates a value web. 1. A strategic alliance is an arrangement between two companies to undertake a mutually beneficial project while each retains its independence. 2. Direct suppliers include labor, raw materials, and mechanical components. 3. Indirect procurement include software, product licenses, office supplies, and facilities management. BUSINESS STRATEGY A business strategy is therefore a plan for making profits in a competitive environment over the long term. Profit is simply the difference between the price a firm is able to charge for its products and the cost of producing and distributing goods. Profit represents economic value. Economic value is created anytime customers are willing to pay more for a product than it costs to produce. Differentiation refers to all the ways producers can make their products or services unique and distinguish them from those of competitors. The opposite of differentiation is commoditization—a situation where there are no differences among products or services, and the only basis of choosing is price. A strategy of cost competition means a business has discovered some unique set of business processes or resources that other firms cannot obtain in the marketplace. Business processes are the atomic units of the value chain When a firm discovers a new, more efficient set of business processes, it can obtain a cost advantage over competitors. Then it can attract customers by charging a lower price, while still making a handsome profit.  A scope strategy is a strategy to compete in all markets around the globe, rather than merely in local, regional, or national markets. The Internet’s global reach, universal standards, and ubiquity can certainly be leveraged to assist businesses in becoming global competitors. eBay, for instance, along with many of the other top e-commerce companies, has readily attained a global presence. A focus/market niche strategy is a strategy to compete within a narrow market segment or product segment. This is a specialization strategy with the goal of becoming the premier provider in a narrow market. Customer intimacy, which focuses on developing strong ties with customers. Strong linkages with customers increase switching costs (the costs of switching from one product or service to a competing product or service) and thereby enhance a firm’s competitive advantage. For example, Amazon’s one-click shopping that retains customer details and recommendation services based on previous purchases makes it more likely that customers will return to make subsequent purchases.