Business Models on Internet

Assoc. prof., dr. Rimantas Gatautis Economics and Management Faculty Kaunas University of Technology

April 22, 2004

MediaWorks

Business models on Internet

Agenda
1. What

is business model? 2. Business models classification. 3. Business models components.

Business models on Internet

What is business model? P.Timmers (1998) An architecture for the products, services and information flows, including a description of the various business actors and their roles; A description of the potential benefits for the various business actors; A description of the sources of revenues.
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Business models on Internet

Business model J.Rayport, B.Jaworski (2000)

Value cluster Marketspace offering Resource system Revenues sources

Business models on Internet

Markets players
Enterprise Enterprise

Government organizations

Customer

Customer

Business models on Internet Business models:

Business-to-business (B2B) refers to the full spectrum of activities that can occur between two organizations. Among other activities, B2B includes purchasing, procurement, supply management, inventory management, channel management, sales activities, payment management, services and support. Chemdex www.chemdex.com FastParts www.fastparts.com FreeMarkets www.freemarkets.com
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Business models on Internet Business-to-Consumer (B2C) refers to exchanges between business and consumers. Amazon www.amazon.com Yahoo www.yahoo.com Schwab www.schwab.com

Business models on Internet

Consumer-to-Consumer (C2C) exchanges involves transaction between and among consumers. These exchanges may or may not include third-party involvement as in the case of the auction exchange eBay. Other activities include classified ads (www.numberoneclassifieds.com), games (www.heat.net), jobs (www.monster.com), web-based communications (www.isq.com) .
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Business models on Internet Government-to-Business. This category involves various transactions between government and business. This includes governments information providing and tax paying (e-tax).

Business models on Internet Government-to-Consumers. This category includes interaction between government and state inhabitants. This category is similar to Government-to-Business category, includes information providing and governments services to inhabitants.
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Business models on Internet Other business models: Consumer-toBusiness, Government-toGovernment, Consumer-toGovernment, Business-toGovernment.

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Business models on Internet

E-shop This is Web marketing of a company or a shop. In first instance this is done to promote the company and its goods or services. Increasingly added is the possibility to order and possibly to pay, often combined with traditional marketing channels. Fleurop (http://www.fleurop.com) Travelocity (http://www.travelocity.com )

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Business models on Internet

E-procurement
This is electronic tendering and procurement of goods and services. Large companies or public authorities implement some form of e-procurement on the Web. Benefits are to have a wider choice of suppliers which is expected to lead to lower cost, better quality, improved delivery, reduced cost of procurement. Electronic negotiation and contracting and possibly collaborative work in specification can further enhance time- and cost saving and convenience.

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Business models on Internet

E-auction
Electronic auctions (on the Internet) offer an electronic implementation of the bidding mechanism also known from traditional auctions. This can be accompanied by multimedia presentation of the goods. Usually they are not restricted to this single function. They may also offer integration of the bidding process with contracting, payments and delivery. eBay www.ebay.com FastParts www.fastparts.com

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Business models on Internet

E-mall
An electronic mall, in its basic form, consists of a collection of e-shops, usually enhanced by a common umbrella, for example of a wellknown brand. It might be enriched by a common guaranteed payment method. Benefits for the customer (real or hoped for) are the benefits for each individual e-shop with additional convenience of easy access to other e-shops and ease of use through a common user inter-face. When a brand name is used to host the e-mall, this should lead to more trust, and therefore increased readiness to buy. Benefits for the e-mall members (the e-shops) are lower cost and complexity to be on the Web, with sophisticated hosting facilities such as electronic payments and additional traffic generated from other e-shops on the mall, or from the attraction of the hosting brand. Electronic Mall Bodensee www.emb.ch Industry.Net www.industry.net

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Business models on Internet

Third party marketplace
The model that is suitable in case companies wish to leave the Web marketing to a 3rd party (possibly as an add-on to their other channels). They all have in common that they offer at least a user interface to the suppliers product catalogues. Several additional features like branding, payment, logistics, ordering, and ultimately the full scale of secure transactions Revenues can be generated on the basis of one-off membership fee, service fees, transaction fee, or percentage on transaction value. TradeZone tradezone.onyx.net

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Business models on Internet

Virtual communities
The ultimate value of virtual communities is coming from the members (customers or partners), who add their information onto a basic environment provided by the virtual community company. The membership fees as well as advertising generate revenues.

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Business models on Internet

Value chain service provider
M.Porter value chain conception
Primary activities: Inbound logistics Operations Outbound logistics Marketing and sales Services Support activities: Technology development Procurement Human resources management Company infrastructure

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Business models on Internet

Value chain service provider
These specialize on a specific function for the value chain, such as electronic payments or logistics, with the intention to make that into their distinct competitive advantage. A fee- or percentage based scheme is the basis for revenues. Examples of value chain service providers are the FedEx or UPS www.ups.com Web-based package shipping support.

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Business models on Internet

Value chain integrators
These focus on integrating multiple steps of the value chain, with the potential to exploit the information flow between those steps as further added value. Revenues are coming from consultancy fees or possibly transaction fees.

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Business models on Internet

Collaboration platforms
These provide a set of tools and an information environment for collaboration between enterprises. This can focus on specific functions, such as collaborative design and engineering, or in providing project support with a virtual team of consultants. Business opportunities are in managing the platform membership/usage fees), and in selling the specialist tools (e.g. for design, workflow, document management).
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Business models on Internet

Information brokerage, trust and other services
A whole range of new information services are emerging, to add value to the huge amounts of data available on the open net-works or coming from integrated business operations, such as information search, e.g. Yahoo www.yahoo.com , customer profiling, business opportunities brokerage, investment advice, etc. Usually information and consultancy have to be directly paid for either through subscription or on a pay-per-use basis, although advertising schemes are also conceivable. A special category is trust services, as provided by certification authorities and electronic notaries and other trusted third parties. Subscription fees combined with one-off service fees as well as software sales and consultancy are the sources of revenue. Search engines are a special category of information services, with the public Internet facility (rather then intranet versions) usually based on advertising as a source of revenue.
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Business models on Internet

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Business models on Internet

Components of business model
J.Rayport, B.Jaworski (2001) Value cluster Marketspace offering Resource system Financial model

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Business models on Internet Value proposition or value cluster for targeted customers
The first step in the articulation of the business models is to clearly specify the value proposition of the business.

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Business models on Internet Value proposition or value cluster for targeted customers
Choice of target segment:
Market analysis and segmentation, market size and growth rates, unmet or insufficiently met customers needs, weak or nonexistent competitors.

Choice of the focal customer benefits:

Quality, low price, additional services, etc

Choice of unique and differentiating capabilities.

Why online firm can provide a single benefit (or multiple benefits) significantly better then competitors?- brand name, skills of organization.
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Business models on Internet

PC Flowers and Gifts serves special occasions segment (target segment) with fresh flowers, complementary gifts, and lover prices (the three key benefits) because of their accumulated online experience and knowledge since 1989 and their unique, broad product line of complimentary gifts (the two key differentiating capabilities) Proflowers serves the price-sensitive and convenience oriented customers with the freshest flowers at a competitive price because of their unique sourcing and FedEx shipping arrangements

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Business models on Internet Marketspace offering How does the firm develop an online offering for customers?

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Business models on Internet

Marketspace offering
Scope of offering; Customer decision process identification; Offerings mapping.

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Business models on Internet

Scope of offering
The scope refers to the number of categories of products and services that are offered in the site. The problem which combination of offers is optimal? Category specific dominance refers to companies that focus exclusively on one product category, such as flowers, candy, gifts. However it is increasingly difficult to isolate firms that are focusing only on one category. Cross-Category dominance. The extension of product offerings from the single category to the additional product categories. The most well known example is Amazons initial domination of the book market and subsequent extension to CDs, videos, toys, auctions.

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Business models on Internet

Customer decision process
Flower purchase example
Problem recognition

Prepurchase

Information search

Evaluation of alternatives

Purchase

Purchase decision

Satisfaction

Postpurchase

Loyalty

Disposal

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Business models on Internet

Offerings mapping

The third step in the construction of the offering involves products and services mapping onto Customers Decisions Process. The idea is that website should walk the customer through the entire purchase decision cycle and should encourage the customer to continually revisit the cycle.

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Business models on Internet

1-800 Flowers.com offering mapping Need recognition Gift reminder service, holiday special, celebrations suggestions, special occasions suggestions Search for ideas and information Ideas: floral, garden, home, gift, recommendation by the budget, best sellers Gift recommendation: gift guru, favourite gifts, etc. Evaluation of alternatives Product price, product picture, description, delivery information Purchase decision Shopping basket, transaction Postsales support and Education on flowers FAQ, Discounts, special events and educational workshops
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Business models on Internet

Resource system The value proposition and offering specification are critical steps in the business model formulation, because they dictate the resource system of the company. The company design the selection of capabilities and activities that uniquely deliver value proposition.
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Business models on Internet

Key issues Shift from the physical world to the Virtual and Physical world; Shift from supply side focus to a demand side focus. Shift from activities to capabilities. Shift from single to Multifirm system.
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Business models on Internet

Specifying the resource system
1. Identify core benefits in the value cluster.

2. Identify capabilities that relate to the each benefit. 3. Link resources to the each capability. 4. Identify to what degree firm can deliver each capability. 5. Identify partners who can complete capabilities.

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Business models on Internet

1-800-Flowers.com
Benefits: broad assortment of gifts, higher quality of flowers, good customer service, widespread, easy access. Capabilities: strong brand name, technology, integrated partners offers, online gift center, strong distribution network, wide reach to customer, multiple contacts points Activities and resources: wide reach to customer: partnering with MSN, AOL, Starmedia multiple contacts points: telephone, online store, catalog, affiliates, franchise store

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Business models on Internet

Criteria to assess the quality of a resource system
Uniqueness of the system
How different are benefits, capabilities and activities relative to competitors?

Links between capabilities and benefits

Does each of the capabilities support the delivery of a customer benefit?

Links among capabilities in the system

How well do the capabilities and activities complement and support one another?

Links among resources

Are the specific resource mutually reinforcing? Are they complimentary? Are the consistent with the various benefits?

Links between virtual world and physical world business systems

Does the online resource system support/conflict with the offline system?

Sustaining advantage
Is the resource system difficult to replicate?
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Business models on Internet Revenue models Advertising Product, service or information sale Transaction Subscription
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Business models on Internet More information:

Affua-Tucci. Internet business models and strategies M.Rappa. Managing digital enterprise: Business Models P.Timers. Business Models for Electronic Markets J.Rayport, B.Jaworski. E-commerce J.Rayport, B.Jaworski. Introduction to E-commerce Eissenman. Business models on Internet

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Business models on Internet

Thank you for your attention!

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