CHAPTER 10 E-COMMERCE: DIGITAL MARKETS, DIGITAL GOODS AND BUSINESS MODELS. By: S. Sabraz Nawaz Senior Lecturer in Management & IT

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1 CHAPTER 10 E-COMMERCE: DIGITAL MARKETS, DIGITAL GOODS AND BUSINESS MODELS By: S. Sabraz Nawaz Senior Lecturer in Management & IT

2 ELECTRONIC COMMERCE: DEFINITIONS AND CONCEPTS electronic commerce (EC) The process of buying, selling, or exchanging products, services, or information via computer e-business A broader definition of EC that includes not just the buying and selling of goods and services, but also servicing customers, collaborating with business partners, and conducting electronic transactions within an organization CHAPTER 10 BY: S. SABRAZ NAWAZ 2

3 ELECTRONIC COMMERCE: DEFINITIONS AND CONCEPTS CHAPTER 10 BY: S. SABRAZ NAWAZ 3

4 ELECTRONIC COMMERCE: DEFINITIONS AND CONCEPTS Pure Versus Partial EC brick-and-mortar (old economy) organizations Old-economy organizations (corporations) that perform their primary business off-line, selling physical products by means of physical agents virtual (pure-play) organizations Organizations that conduct their business activities solely online click-and-mortar (click-and-brick) organizations Organizations that conduct some e-commerce activities, usually as an additional marketing channel CHAPTER 10 BY: S. SABRAZ NAWAZ 4

5 ELECTRONIC COMMERCE: DEFINITIONS AND CONCEPTS Interorganizational information systems (IOSs) Communications systems that allow routine transaction processing and information flow between two or more organizations Intraorganizational information systems Communication systems that enable e-commerce activities to go on within individual organizations CHAPTER 10 BY: S. SABRAZ NAWAZ 5

6 THE ELECTRONIC COMMERCE FIELD: CLASSIFICATION, CONTENT, AND HISTORY EC IS CLASSIFIED BY THE NATURE AND DIRECTION OF TRANSACTIONS AND INTERACTIONS business-to-business (B2B) E-commerce model in which all of the participants are businesses or other organizations business-to-consumer (B2C) E-commerce model in which businesses sell to individual shoppers e-tailing Online retailing, usually B2C CHAPTER 10 BY: S. SABRAZ NAWAZ 6

7 THE ELECTRONIC COMMERCE FIELD: CLASSIFICATION, CONTENT, AND HISTORY business-to-business-to-consumer (B2B2C) E-commerce model in which a business provides some product or service to a client business that maintains its own customers consumer-to-business (C2B) E-commerce model in which individuals use the Internet to sell products or services to organizations or individuals who seek sellers to bid on products or services they need CHAPTER 10 BY: S. SABRAZ NAWAZ 7

8 THE ELECTRONIC COMMERCE FIELD: CLASSIFICATION, CONTENT, AND HISTORY intrabusiness EC E-commerce category that includes all internal organizational activities that involve the exchange of goods, services, or information among various units and individuals in an organization business-to-employees (B2E) E-commerce model in which an organization delivers services, information, or products to its individual employees CHAPTER 10 BY: S. SABRAZ NAWAZ 8

9 THE ELECTRONIC COMMERCE FIELD: CLASSIFICATION, CONTENT, AND HISTORY consumer-to-consumer (C2C) E-commerce model in which consumers sell directly to other consumers collaborative commerce (c-commerce) E-commerce model in which individuals or groups communicate or collaborate online CHAPTER 10 BY: S. SABRAZ NAWAZ 9

10 THE ELECTRONIC COMMERCE FIELD: CLASSIFICATION, CONTENT, AND HISTORY e-learning The online delivery of information for purposes of training or education e-government E-commerce model in which a government entity buys or provides goods, services, or information from or to businesses or individual citizens CHAPTER 10 BY: S. SABRAZ NAWAZ 10

11 Digital Markets and Digital Goods Digital market effects: Decreased information asymmetry Reduced search costs and transaction costs Increased dynamic pricing Increased price discrimination Stronger network effects More disintermediation 11 CHAPTER 10 BY: S. SABRAZ NAWAZ

12 THE BENEFITS OF DISINTERMEDIATION TO THE CONSUMER The typical distribution channel has several intermediary layers, each of which adds to the final cost of a product, such as a sweater. Removing layers lowers the final cost to the consumer. 12 CHAPTER 10 BY: S. SABRAZ NAWAZ

13 Digital Markets and Digital Goods Digital goods Goods that can be delivered over a digital network E.g. Music tracks, video, software, newspapers, books Cost of producing first unit almost entire cost of product: marginal cost of 2 nd unit is about zero Costs of delivery over the Internet very low Marketing costs remain the same; pricing highly variable Industries with digital goods are undergoing revolutionary changes (publishers, record labels, etc.) 13 CHAPTER 10 BY: S. SABRAZ NAWAZ

14 UNIQUE CHARACTERISTICS OF E-COMMERCE CHAPTER 10 BY: S. SABRAZ NAWAZ Slide 2-14

15 Why e commerce is different 8 unique features 1. Ubiquity Internet/Web technology available everywhere: work, home, etc., anytime. Effect: Marketplace removed from temporal, geographic locations to become marketspace Enhanced customer convenience and reduced shopping costs 15 CHAPTER 10 BY: S. SABRAZ NAWAZ

16 8 unique features (cont.) 2. Global reach The technology reaches across national boundaries, around Earth Effect: Commerce enabled across cultural and national boundaries seamlessly and without modification Marketspace includes, potentially, billions of consumers and millions of businesses worldwide 16 CHAPTER 10 BY: S. SABRAZ NAWAZ

17 8 unique features (cont.) 3. Universal standards One set of technology standards: Internet standards Effect: Different computer systems easily communicate with each other Lower market entry costs costs merchants must pay to bring goods to market Lower consumers search costs effort required to find suitable products 17 CHAPTER 10 BY: S. SABRAZ NAWAZ

18 8 unique features (cont.) 4. Richness Supports video, audio, and text messages Effect: Possible to deliver rich messages with text, audio, and video simultaneously to large numbers of people Video, audio, and text marketing messages can be integrated into single marketing message and consumer experience 18 CHAPTER 10 BY: S. SABRAZ NAWAZ

19 8 unique features (cont.) 5. Interactivity The technology works through interaction with the user Effect: Consumers engaged in dialog that dynamically adjusts experience to the individual Consumer becomes co participant in process of delivering goods to market 19 CHAPTER 10 BY: S. SABRAZ NAWAZ

20 8 unique features (cont.) 6. Information density Large increases in information density the total amount and quality of information available to all market participants Effect: Greater price transparency Greater cost transparency 20 CHAPTER 10 BY: S. SABRAZ NAWAZ

21 8 unique features (cont.) 7. Personalization/Customization Technology permits modification of messages, goods Effect Personalized messages can be sent to individuals as well as groups Products and services can be customized to individual preferences 21 CHAPTER 10 BY: S. SABRAZ NAWAZ

22 8 unique features (cont.) 8. Social technology The technology promotes user content generation and social networking Effect New Internet social and business models enable user content creation and distribution, and support social networks 22 CHAPTER 10 BY: S. SABRAZ NAWAZ

23 CHAPTER 10 BY: S. SABRAZ NAWAZ Slide 2-23

24 BUSINESS MODEL ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 24

25 BUSINESS MODEL A business model is a set of planned activities designed to result in a profit in a marketplace. A plan for the successful operation of a business, identifying sources of revenue, the intended customer base, products, and details of financing. E-commerce business model aims to use and leverage the unique qualities of the Internet and the WWW. ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 25

26 EIGHT KEY ELEMENTS OF A BUSINESS MODEL If you hope to develop a successful business model in any arena you must make sure that the model effectively addresses the eight elements shown here ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 26

27 VALUE PROPOSITION A value proposition defines how a company s product or service fulfills the needs of customers. We need to answer why customers will choose to do business with us instead of another company and what the firm will offer that others can not or do not. Successful value proposition will include Personalization and customization of product offering Reduction of search costs Reduction of price discovery costs Facilitating transaction by managing product delivery Amazon makes it possible for book lovers to shop for virtually any book in print from the comfort of their home or office, 24 hours day, and know immediately whether a book is in stock ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 27

28 REVENUE MODEL Describes how a firm will earn revenue, generate profits, and produce a superior return on invested capital than alternative investments. Many revenue models exist but most companies rely on one or some combination of the following Advertising model Subscription model Transaction fee model Sales model Affiliate model ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 28

29 REVENUE MODEL: ADVERTISING REVENUE MODEL A company provides a forum for advertisements and receives fees from advertisers Yahoo! Derives a significant amount of revenue from display and video advertising Typically, fees are generated from advertisers in exchange for advertisements, which is ultimately the classic principal among the revenue models besides sales. ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 29

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31 REVENUE MODEL: SUBSCRIPTION REVENUE MODEL A business model where a customer must pay a subscription price to have access to the product/service. The model was pioneered by magazines and newspapers, but is now used by many businesses and websites. Companies offer its users content or services and charges a subscription fee for access to some or all of its offerings. To successfully overcome the disinclination of users to pay for content on the Web, the content offered must be perceived as a high-value-added, premium offering that is not readily available elsewhere nor easily replicated. Users are charged a periodic (daily, monthly or annual) fee to subscribe to a service. Many sites combine free content with premium membership, i.e. subscriber- or member-only content. Subscription fees do not depend on transactions. Subscribers use the content as long and often as they want. Publishers and content services, e.g. magazines, - they provide text, audio or video content to users who subscribe for a fee to get access to the service or to download the new issue: New York Times, Lynda.com Special services: Companies offer security and payment services to internet service providers and online retail customers: PayPal, VeriSign ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 31

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33 REVENUE MODEL: TRANSACTION FEE REVENUE MODEL A company receives commissions based on volume for enabling or executing transactions. The revenue is generated through transaction fees by the customer paying a fee for a transaction to the operator of a platform. The company is a market place operator providing the customer with a platform to place his transactions. During this process the customer may be presented as a buyer as well as a seller. To actively participate in this e-market, customers must register, so both parties of a transaction taking place are identified. The amount of the transaction fee can be both fixed and percentage calculated. EBAY, AMAZON ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 33

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35 REVENUE MODEL: SALES REVENUE MODEL Companies derive revenue by selling goods, information, or services. Wholesalers and retailers of goods and services sell their products online. The main benefits for the customer are the convenience, time savings, fast information etc. The prices are often more competitive. nolimit.lk ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 35

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37 REVENUE MODEL: AFFILIATE REVENUE MODEL Company steers business to an affiliate and receives a referral fee or percentage of the revenue from any resulting sales The affiliate program is an online solution which is based on the principle of commission. Merchants advertise and sell their products and services through links to partner-websites. It is a pay-for-performance model: Commissions are only paid for actual revenue or measurable success. An affiliate-link includes a code, which identifies the affiliate. That s how clicks, leads or sales are tracked. The affiliate therefore acts as the interface between merchants and customers. This model leads to a win-win situation: the merchants sell their products or services and the affiliates get their commissions. Variations include banner exchange, pay-per-click and revenue sharing programs. ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 37

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39 MARKET OPPORTUNITY A company s intended marketspace, the area of actual or potential commercial value in which a company intends to operate, and the overall potential financial opportunities available to the firm in that marketspace. A potentially favorable condition in which a business can capitalize on a changing trend or an increasing demand for a product by a demographic group that has yet to be recognized by its competitors. For a market opportunity to exist, a company must be able to identify who its potential customers are, the specific needs that need to be met, the size of the market, and its capacity to capture market share. ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 39

40 COMPETITIVE ENVIRONMENT Refers to the other companies selling similar products and operating in the same marketspace 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. Influenced by how many companies are active, how large their operations are, what the market share of each competitor is, how profitable these firms are, etc. Direct competitors are those that sell products or services that are very similar and into the same market segment. Priceline and Travelocity sell identical products cheap tickets. Indirect competitors are those who may be in different industries but still compete indirectly because their products can substitute for one another. Automobile manufacturers and airline companies; both offer consumers means of transportation. CNN news and ESPN sports. ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 40

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43 COMPETITIVE ADVANTAGE Achieved when a company can produce a superior product and or bring the product to market at a lower price than most, or all, of their competitors; e.g.: being able to obtain differential access to the factors of production that are denied to their competitors. Firms can compete on scope: local or global. Firms that can provide superior products at the lowest cost on a global basis are truly advantaged. First mover advantage: a competitive market advantage for a firm that results from being the first into a marketplace with a product or service. ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 43

44 MARKET STRATEGY Everything a company does to promote its products and services to potential customers is known as market strategy. It is the plan the company puts together that details exactly how it intends to enter a new market and attract new customers. Facebook, Twitter as well as YouTube have social networking marketing strategy that encourages users to put their content on the site for free, build personal profile pages, contact their friends, and build a community; in this case customers are the marketing staff! ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 44

45 ORGANIZATIONAL DEVELOPMENT All firms need an organization to efficiently implement their business plans and strategies. Many e-commerce firms have failed because they lacked the organizational structures and supportive cultural values required to support new forms of commerce. Companies hoping to grow and thrive need to have a plan for organizational development that describes how the company will organize the work that needs to be accomplished. ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 45

46 MANAGEMENT TEAM The single most important element of a business model is the management team responsible for making the model work. Strong management team gives a model instant credibility to outside investors and experience in implementing business plans. ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 46

47 KEY ELEMENTS OF A BUSINESS MODEL ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 47

48 MAJOR BUSINES-TO-CONSUMER (B2C) BUSINESS MODELS ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 48

49 MAJOR BUSINES-TO-CONSUMER (B2C) BUSINESS MODELS Online businesses seek to reach individual consumers. This is the most well-known and familiar type of e-commerce E-tailer Community provider (social network) Content provider Portal Transaction broker Market creator Service provider ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 49

50 E-TAILER These are online retail stores. They come in all sizes varying from giant Amazon to small tiny stores that have web presence. Similar to typical brick-and-mortar storefronts except that customers only have to connect to the Internet to check their inventory and place orders. Some have solely online presence and others have complementary web presence (brick-andclick) Extremely competitive sector since the barrier to entry is very low and tens of thousands of small e-tail shops have sprung up on the web. Revenue model is sale of goods Variations: Virtual merchant Bricks-and-clicks Catalog merchant Manufacturer-direct Amazon.com, Drugstore.com, Dell.com, Walmart.com ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 50

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52 COMMUNITY PROVIDER Sites where individuals with particular interests, hobbies, common experiences, or social networks can come together and meet online, where People with similar interests can transact (buy and sell goods) Share interests, photos, and videos Communicate with like minded people and receive interest related information The social network sites Facebook, LinkedIn, Twitter, and Pinterest, and hundreds of other similar, niche sites all offer users community-building tools and services Revenue model is hybrid including subscription fees, sales revenues, transaction fees, affiliate fees, and advertising fees from other firms that are attracted by tightly focused audience ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 52

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56 CONTENT PROVIDER Information and entertainment providers such as newspapers, sports sites, and other sources that offer customers up-to-date news and special interest howto-guidance and tips and or information sales. Content providers distribute information content, such as digital video, music, photos, text, and artworks, over the Web. Any e-commerce start-up that intends to make money by providing content is likely to face difficulties unless it has a unique information source that others cannot access. Business model: advertising, subscription fees, affiliate referral fees ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 56

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59 PORTAL Offers an integrated package of content, content-search, and social network services: news, , chat, music downloads, video streaming, calendars, etc. and they seek to be a user s home base Business model: advertising, subscription fees, transaction fee Yahoo, AOL, MSN, Facebook ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 59

60 HORIZONTAL PORTAL ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 60

61 VERTICAL PORTAL / VORTAL ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 61

62 TRANSACTION BROKER Processors of online sales transactions, such as stockbrokers and travel agents, that increase customers productivity by helping to get things done faster and more cheaply. E*Trade (etrade.com), Hotels.com, Travelocity.com Business model: transaction fees ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 62

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64 MARKET CREATOR Web-based businesses that use Internet technology to create markets; buyers and sellers can meet, display products, search for products and establish prices. In Priceline.com consumers are allowed to set the price they are willing to pay for various travel accommodations and other products (sometimes called reverse auction) ebay, the online auction site, is utilized by both businesses and consumers. Its model is to create a digital electronic environment for buyers and sellers to meet, agree on a price, and transact. Business model: transaction fees kaymu.lk ebay, Amazon, Priceline ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 64

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66 SERVICE PROVIDER Companies that make money by selling users a service, rather than a product Web 2.0 (the second stage of development of the Internet, characterized especially by the change from static web pages to dynamic or user-generated content and the growth of social media) applications such as photo sharing video sharing, etc. are all services provided to customers. Google delivers online application services such as Google Docs and Gmail visanow.com (immigration service), rocketlawyer.com (online legal service) Business model: sale of service ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 66

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68 MAJOR BUSINESS-TO-BUSINESS (B2B) BUSINESS MODELS ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 68

69 MAJOR BUSINESS-TO-BUSINESS (B2B) BUSINESS MODELS E-Commerce in which businesses sell to other businesses. More than 10 times the size of B2C e-commerce E-distributor E-procurement Exchange Industry consortium Private industrial network ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 69

70 E-DISTRIBUTOR Companies that supply product and services directly to individual businesses E-distributors are owned by one company seeking to serve many customers. The more products and services a company makes available on its site, the more attractive that site is to potential customers. W.W. Grainger, for example, is the largest distributor of maintenance, repair, and operations (MRO) supplies. Business model: sale of goods Grainger.com, Partstore.com ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 70

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72 E-PROCUREMENT Just as e-distributors provide products to other companies, e-procurement firms create and sell access to digital electronic markets. Procurement is the act of buying goods, services or works from an external source E-procurement is the business-to-business purchase and sale of services through the Internet as well as other information and networking systems, such as electronic data interchange. Firms such as Ariba (ariba.com) have created software (eg: Procurement Software Solutions) that helps large firms organize their procumbent process by creating minidigital markets for single firm. It creates custom-integrated online catalogs (where suppliers firms can list their offerings) for purchasing firms. Revenue is for market-making services, supply chain management ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 72

73 EXCHANGES An independent digital electronic marketplace where hundreds of suppliers meet a smaller number of very large commercial purchasers. For buyers, B2B exchanges make it possible to gather information, check out suppliers, collect prices, and keep up to date on the latest happenings all in one place. Sellers benefit from expanded access to buyers. Business model: fees and commissions on transactions. ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 73

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76 IBM S SOLUTION TO CREATE E-MARKETPLACE ON YOUR OWN ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 76

77 PRIVATE INDUSTRIAL NETWORK Also referred to as Private Trading Exchange 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. Eg: Walmart operates one of the largest industrial networks in the world for its suppliers, who on a daily basis use Walmart s network to monitor the sales of their goods, the status of shipments, and the actual inventory level of their goods. Business Model: cost is absorbed by the network owner and recovered through production and distribution efficiencies. ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 77

78 INDUSTRY CONSORTIA Industry-owned vertical marketplaces that serve specific industries such as automobile, aerospace, chemical, etc. Business model: Fees and commissions on transactions Elemica.com, Exostar.com ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 78

79 Exostar is the cloud platform for secure enterprise and supply chain collaboration solutions ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 79

80 Elemica is the leading Supply Chain Operating Network ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 80

81 END OF LESSON ISM ELECTRONIC COMMERCE, BY S. SABRAZ NAWAZ 81