Enumarate the content of marketing plan and the processes the company should use of moving its customer from awareness of it’s product up to purchase to satisfaction

E-

commerce

business model

a set of planned activities designed to result in a profit in a marketplace

business plan

a document that describes a firm’s business model

e-commerce business model
a business model that aims to use and leverage the unique qualities of the Internet, the Web, and the mobile platform

value proposition

defines how a company’s product or service fulfills the needs of customers

he opening case on Canva illustrates the process of turning a good busi- ness idea into a successful business model that produces profits. Successful e-commerce business models leverage the unique qualities of the Internet,

the Web, and the mobile platform to provide customers value and produce profitable business results. E-commerce has become a lifeline for many businesses of necessity. Going forward, understanding e-commerce business models, business concepts, and business strategies, which forms the focus of this chapter, is likely to become even more important than it ever has been in the past.

E-COMMERCE BUSINESS MODELS INTRODUCTION

A business model is a set of planned activities (sometimes referred to as business pro- cesses) designed to result in a profit in a marketplace. A business model is not always the same as a business strategy, although in some cases they are very close insofar as the business model explicitly takes into account the competitive environment (Magretta, 2002). The business model is at the center of the business plan. A business plan is a docu- ment that describes a firm’s business model. A business plan always takes into account the competitive environment. An e-commerce business model aims to use and leverage the unique qualities of the Internet, the Web, and the mobile platform.

EIGHT 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 in Figure 2.1. These elements are value proposition, revenue model, market opportunity, competitive environment, competitive advantage, market strategy, organizational development, and management team. Many writers focus on a firm’s value proposition and revenue model. While these may be the most important and most easily identifi- able aspects of a company’s business model, the other elements are equally important when evaluating business models and plans, or when attempting to understand why a particular company has succeeded or failed (Kim and Mauborgne, 2000). In the follow- ing sections, we describe each of the key business model elements more fully.

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 (Kambil, Ginsberg, and Bloch, 1998). To develop and/or analyze a firm’s value proposition, you need to understand why customers will choose to do business with the firm instead of another company and what the firm provides that other firms do not and cannot. From the con- sumer 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.

E-commerce Business Models 95

A business model has eight key elements. Each element must be addressed if you hope to be successful.

For instance, before Amazon existed, most customers personally traveled to book retailers to place an order. In some cases, the desired book might not be available, and the customer would have to wait several days or weeks, and then return to the bookstore to pick it up. 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 a day, and to know immedi- ately whether a book is in stock. Amazon’s Kindle takes this one step further by making e-books instantly available with no shipping wait. Amazon’s primary value propositions are unparalleled selection and convenience.

Revenue Model

A firm’s revenue model describes how the firm will earn revenue, generate profits, and produce a superior return on invested capital. We use the terms revenue model and finan- cial model interchangeably. The function of business organizations is both to generate profits and to produce returns on invested capital that exceed alternative investments.

revenue model

describes how the
firm will earn revenue, generate profits, and produce a superior return on invested capital

96 CHAPTER 2 E-commerce Business Strategies

advertising revenue model
a company provides a forum for advertisements and receives fees

from advertisers

subscription revenue model
a company offers its users content or services and charges a subscription fee for access to some

or all of its offerings

freemium strategy

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

Profits alone are not sufficient to make a company “successful” (Porter, 1985). In order to be considered successful, a firm must produce returns greater than alternative invest- ments. Firms that fail this test go out of existence.

Although there are many different e-commerce revenue models that have been developed, most companies rely on one, or some combination, of the following 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 special- ized, 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. For instance, the digi- tal version of Consumer Reports, a U.S. Publication, provides access to premium content, such as detailed ratings, reviews, and recommendations, only to subscribers, who have the choice of paying a $6.95 monthly subscription fee or a $35.00 annual fee. Experience with the subscription revenue model indicates that to successfully overcome the disin- clination of users to pay for content, the content offered must be perceived as a high- value-added, premium offering that is not readily available elsewhere nor easily replicated. Companies successfully offering content or services online on a subscription basis include eHarmony (dating services), Ancestry (genealogy research), Microsoft’s Xbox Live (video games), Pandora, Spotify, and Apple Music (music), Scribd and Amazon’s Kindle Unlimited program (e-books), and Netflix and Hulu (television and movies). See Table 2.1 for examples of various subscription services.

Recently, a number of companies have been combining a subscription revenue model with a freemium strategy. In a freemium strategy, the companies give away a certain level of product or services for free, but then charge a subscription fee for pre- mium levels of the product or service.

TABLE 2.1 EXAMPLES OF SUBSCRIPTION SERVICES NAME DESCRIPTION

EHarmony.Co.Uk (dating)

• Free: Create profile and view profiles of matches

• Basic (see photos, send and receive messages): £18.95 a month for 6 months; £9.95 a month for 1 year

• Total Connect (Basic plus additional services): £19.95 a month for 6 months; £12.95 a month for 1 year

• Essentials (key UK census records only): £10.99 for 1 month; £54.99 for 6 months

• Worldwide (UK, Ireland, and all international records): £19.99 for 1 month; £99.99 for 6 months

• Unlimited books for £7.99/month (over 1 million from which to choose)

• Many different permutations, depending on device (mobile, tablet, or desk- top) and plan chosen (Free, Unlimited, or Premium)

Ancestry.Co.Uk (genea- logical research)

Kindle Unlimited UK (e-books)

Spotify (music)

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, L.L.Bean, and Gap all have sales revenue models. A number of companies are also using a subscription-based sales rev- enue model. Birchbox, which offers home delivery of beauty products for a £10 per month or £110 per year plus £2.95 p&p/month is one example. Dollar Shave Club, which sells razor blades by subscription and was acquired by Unilever for $1 billion, is another.

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. For example, MyPoints makes money by connecting companies with potential customers by offering special deals to its members. When they take advantage of an offer and make a purchase, members earn “points” they can redeem for freebies, and MyPoints receives a fee. Community feedback companies typically receive some of their revenue from steering potential customers to websites where they make a purchase.

Table 2.2 summarizes these major revenue models. The Insight on Business case, OpenRice Brings Social Commerce to the Table, examines the business and revenue models of OpenRice, a Hong Kong–based food and restaurant review guide.

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 oppor- tunities 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.

transaction fee revenue model
a company receives
a fee for enabling or executing a transaction

sales revenue model

a company derives revenue by selling goods, information, or services

affiliate revenue model
a company steers busi- ness to an affiliate and receives a referral fee or percentage of the revenue from any resulting sales

market opportunity

refers to the company’s intended marketspace and the overall potential financial opportunities available to the firm

in that marketspace

marketspace

the area of actual or potential commercial value in which a company intends to operate

E-commerce Business Models 97

TABLE 2.2 FIVE PRIMARY REVENUE MODELS

REVENUE
MODEL EXAMPLES REVENUE SOURCE

Advertising

Yahoo Facebook

eHarmony
The Economist Netflix

eBay E*Trade

Amazon ASOS Birchbox iTunes

MyPoints

Fees from advertisers in exchange for advertisements

Subscription

Fees from subscribers in exchange for access to content or services

Transaction Fee

Fees (commissions) for enabling or executing a transaction

Sales

Sales of goods, information, or services

Affiliate

Fees for business referrals

98 CHAPTER 2 E-commerce Business Strategies

E-commerce Business Models 99

suggested by the app or contributed by other members. The interaction and engagement with its over 5 million members not only improves the user experience but also creates steady traffic to the main site. And thanks to the increased visi- tor flow, OpenRice is able to attract more online advertisements from its non-F&B clients, such as banks, airlines, and shopping malls.

The growth in consumer reliance on smart- phones marked a turning point for OpenRice. In recent years, the company has witnessed accelerated revenue growth, with its mobile ad revenue quickly eclipsing desktop-based adver- tisements. Besides social commerce, another way of securing a strong mobile presence and generating steady revenues is through coop- eration with other platforms, such as through reward programs and partnerships with credit card companies. For example, a luxury shopping arcade in Hong Kong launched its membership app with a scan-to-order function powered by OpenRice that allows club members to remotely place an order at any restaurant in the arcade. OpenRice also provides a feature enabled by an application programming interface (API) through which members can earn reward points on the interfaces of the apps of its partners, which include banks, airlines, shopping malls, e-payment solution providers, and online travel agencies. Banks participating in JETCO APIX (Hong Kong’s first open API exchange platform) can send their clients e-vouchers of restaurants from OpenRice.

In 2019, OpenRice launched OpenRice Takeaway, a service through which members pre-order, pre-pay, and pick up meals them- selves. Participating eateries are charged a service fee of 6% of the total transaction value. Demand for this service skyrocketed in 2020

as Covid-19 broke out, but OpenRice waived all takeaway-related fees from Feb- ruary to June 2020 to help the beleaguered F&B industry survive the first two waves of the pandemic.

Big data has created new revenue sources for OpenRice. As of January 2021, OpenRice hosted more than 3 million reviews and over 22 million photos of about a million eateries located in 60 cities. The database enables OpenRice to compile reports that clients can access by pay- ing a fee, such as market insights on everything from dining trends to the average restaurant lifespan by cuisine. Existing eateries may order bespoke reports analyzing comments from OpenRice members to improve their overall quality and reputation. Restaurants that intend to expand their operations may order reports summarizing the distribution of restaurants by district and by cuisine before making deci- sions on the opening of new branches. Clients such as food courts, shopping malls, and food brands can use the database to cost-effectively maximize their exposure among the right target audience.

Clients may even recruit staff through OpenRice by paying a service charge. Open- Rice’s websites and its companion job-matching app disseminate information regarding vacan- cies in companies within the F&B industry and even accept job applications on behalf of employers.

OpenRice also provides its clients with conventional and creative marketing services, like creating promotional posts on Facebook, posting advertorials, and producing high-qual- ity original multimedia content on OpenRice’s Video Channel.

SOURCES: “Food Easy Club and Food Easy Card,” Archive.Org, accessed January 17, 2021; OpenRice.Com, accessed January 17, 2021; “Navigating Covid-19: A Food Tech Platform,” by Charlotte Man, Hktydc.Com, December 21, 2020; “13 Banks Sign On to Hong Kong’s First Open API Exchange Platform,” Fintechnews.Hk, December 13, 2018; “OpenRice Spills the Beans on Its Mobile Makeover,” Marketing-interactive.Com, October 15, 2015; “OpenRice Founder: Ray Chung’s 5 Ingredients of Success,” Moneyhero.Com.Hk, August 31, 2015; “Why Chief of Restaurant Review Site OpenRice Has a Lot on His Plate,” by Amy Nip, Scmp.Com, June 13, 2003.

Case contributed by Joyce Chan, City University of Hong Kong

100 CHAPTER 2 E-commerce Business Strategies

competitive environment
refers to the other companies operating in the same marketspace selling similar products

For instance, let’s assume you are analyzing a software training company that cre- ates online software-learning systems for sale to businesses. The overall size of the soft- ware training market for all market segments is approximately $70 billion. The overall market can be broken down, however, into two major market segments: instructor-led training products, which comprise about 70% of the market ($49 billion in revenue), and online training, which accounts for 30% ($21 billion). There are further market niches within each of those major market segments, such as the Fortune 500 online training market and the small business online training market. Because the firm is a start-up firm, it cannot compete effectively in the large business online training market (about $15 billion). Large brand-name training firms dominate this niche. The startup firm’s real market opportunity is to sell to the thousands of small business firms that spend about $6 billion on online software training. This is the size of the firm’s realistic market opportunity (see Figure 2.2).

Competitive Environment

A firm’s competitive environment refers to the other companies selling similar prod- ucts 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. We discuss the firm’s environment later in the chapter. The competitive environment for a company is influenced by several factors: how many competitors are active, how large their operations are, what the market share of each competitor is, how profitable these firms are, and how they price their products.

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, Priceline and Travelocity, both of whom sell discount airline tickets online, are direct competitors because both companies sell identical products—inexpensive tickets. Indirect competitors are companies that may be in different industries but still

FIGURE 2.2

Marketspaces are composed of many market segments. Your realistic market opportunity will typically focus on one or a few market segments.

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 trans- portation. CNN, a news outlet, is an indirect competitor of ESPN, not because they sell identical products, but because they both compete for consumers’ time online.

The existence of a large number of competitors in any one segment may be a sign that the market is saturated and that it may be difficult to become profitable. On the other hand, a lack of competitors could signal either an untapped market niche ripe for the picking, or a market that has already been tried without success because there is no money to be made. Analysis of the competitive environment can help you decide which it is.

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 (Porter, 1985). Firms also compete on scope. Some firms can develop global markets, while other firms can develop only a national or regional market. Firms that can provide superior products at the lowest cost on a global basis are truly advantaged.

Firms achieve competitive advantages because they have somehow been able to obtain differential access to the factors of production that are denied to their competitors—at least in the short term (Barney, 1991). Perhaps the firm has been able to obtain very favorable terms from suppliers, shippers, or sources of labor. Or perhaps the firm has more experienced, knowledgeable, and loyal employees than any competi- tors. Maybe the firm has a patent on a product that others cannot imitate, or access to investment capital through a network of former business colleagues, or a brand name and popular image that other firms cannot duplicate. An asymmetry exists whenever one participant in a market has more resources—financial backing, knowledge, infor- mation, 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.

For instance, when Apple announced iTunes, a service offering legal, downloadable individual song tracks for 99 cents a track that would be playable on any digital device with iTunes software, the company had better-than-average odds of success simply because of Apple’s prior success with innovative hardware designs, and the large stable of music firms that Apple had meticulously lined up to support its online music catalog. Few competitors could match the combination of inexpensive, legal songs and powerful hardware to play them on.

One rather unique competitive advantage derives from being a first mover. A first- mover advantage is a competitive market advantage for a firm that results from being the first into a marketplace with a serviceable product or service. If first movers develop a loyal following or a unique interface that is difficult to imitate, they can sustain their first-mover advantage for long periods (Arthur, 1996). Amazon provides a good example. However, in the history of technology-driven business innovation, most first movers often lack the complementary resources needed to sustain their advantages and often, follower firms reap the largest rewards (Rigdon, 2000; Teece, 1986). Indeed, many of the success stories we discuss in this book are those of companies that were slow

competitive advantage
achieved by a firm when it can produce a superior product and/or bring the product to market at a lower price than most, or all, of its competitors

asymmetry

exists whenever one participant in a market has more resources than other participants

first-mover advantage

a competitive market advantage for a firm that results from being the first into a marketplace with a serviceable product or service

complementary resources
resources and assets
not directly involved in
the production of the product but required for success, such as marketing, management, financial assets, and reputation

E-commerce Business Models 101

102 CHAPTER 2 E-commerce Business Strategies

unfair competitive advantage
occurs when one
firm develops an advantage based on a factor that other firms cannot purchase

perfect market

a market in which there are no competitive advantages or asymmetries because all firms have equal access to all the factors of production

leverage

when a company uses its competitive advantages to achieve more advantage in surrounding markets

market strategy

the plan you put together that details exactly how you intend to enter a new market and attract new customers

followers—businesses that gained knowledge from the failure of pioneering firms and entered into the market late.

Some competitive advantages are called “unfair.” An unfair competitive advantage occurs when one firm develops an advantage based on a factor that other firms cannot purchase (Barney, 1991). For instance, a brand name cannot be purchased and is in that sense an “unfair” advantage. Brands are built upon loyalty, trust, reliability, and quality. Once obtained, they are difficult to copy or imitate, and they permit firms to charge premium prices for their products.

In perfect markets, there are no competitive advantages or asymmetries because all firms have access to all the factors of production (including information and knowl- edge) equally. However, real markets are imperfect, and asymmetries leading to com- petitive advantages do exist, at least in the short term. Most competitive advantages are short term, although some can be sustained for very long periods. But not forever. In fact, many respected brands fail every year.

Companies are said to leverage their competitive assets when they use their com- petitive advantages to achieve more advantage in surrounding markets. For instance, Amazon’s move into the online grocery business leverages the company’s huge customer database and years of e-commerce experience.

Market Strategy

No matter how tremendous a firm’s qualities, its marketing strategy and execution are often just as important. The best business concept, or idea, will fail if it is not properly marketed to potential customers.

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.

For instance, Twitter, YouTube, and Pinterest have a social network marketing strat- egy that encourages users to post their content for free, build personal profile pages, contact their friends, and build a community. In these cases, the customer becomes part of the marketing staff!

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 employ- ees 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. Many e-commerce firms and many traditional firms that attempt an e-commerce strategy have failed because they lacked the organizational structures and supportive cultural values required to support new forms of commerce (Kanter, 2001).

Companies that hope to grow and thrive need to have a plan for organizational devel- opment that describes how the company will organize the work that needs to be accom- plished. Typically, work is divided into functional departments, such as production, shipping, marketing, customer support, and finance. Jobs within these functional areas are defined, and then recruitment begins for specific job titles and responsibilities. Typically, in the beginning, generalists who can perform multiple tasks are hired. As the company

organizational development
plan that describes how the company will organize the work that needs
to be accomplished

grows, recruiting becomes more specialized. For instance, at the outset, a business may have one marketing manager. But after two or three years of steady growth, that one mar- keting position may be broken down into seven separate jobs done by seven individuals.

For instance, according to some sources, Pierre Omidyar started eBay to help his girl- friend trade Pez dispensers with other collectors, but within a few months the volume of business had far exceeded what he alone could handle. So he began hiring people with more business experience to help out. Soon the company had many employees, departments, and managers who were responsible for overseeing the various aspects of the organization.

Management Team

Arguably, the single most important element of a business model is 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. How skilled managers are, however, can be a source of competitive advantage or disadvantage. The challenge is to find people who have both the experience and the ability to apply that experience to new situations.

To be able to identify good managers for a business startup, first consider the kinds of experiences that would be helpful to a manager joining your company. What kind of technical background is desirable? What kind of supervisory experience is necessary? How many years in a particular function should be required? What job functions should be fulfilled first: marketing, production, finance, or operations? Especially in situations where financing will be needed to get a company off the ground, do prospective senior managers have experience and contacts for raising financing from outside investors?

Table 2.3 summarizes the eight key elements of a business model and the key ques- tions that must be answered in order to successfully develop each element.

Why should the customer buy from you?

How will you earn money?

What marketspace do you intend to serve, and what is its size?

Who else occupies your intended marketspace?

What special advantages does your firm bring to the marketspace?

How do you plan to promote your products or services to attract your target audience?

What types of organizational structures within the firm are neces- sary to carry out the business plan?

What kinds of experiences and background are important for the company’s leaders to have?

management team

employees of the company responsible for making the business model work

E-commerce Business Models 103

104 CHAPTER 2 E-commerce Business Strategies RAISING CAPITAL

seed capital

typically, an entrepreneur’s personal funds derived from savings, credit
card advances, home equity loans, or from family and friends

elevator pitch

short two-to-three- minute presentation aimed at convincing investors to invest

incubators

typically provide a small amount of funding and also an array of services to startup companies

angel investors

typically wealthy individuals or a group of individuals who invest their own money in exchange for an equity share in
the stock of a business; often are the first outside investors in a startup

Raising capital is one of the most important functions for a founder of a startup business and its management team. Not having enough capital to operate effectively is a primary reason why so many startup businesses fail. Many entrepreneurs initially “bootstrap” to get a business off the ground, using personal funds derived from savings, credit card advances, home equity loans, or from family and friends. Funds of this type are often referred to as seed capital. Once such funds are exhausted, if the company is not gen- erating enough revenue to cover operating costs, additional capital will be needed. Traditional sources of capital include incubators, commercial banks, angel investors, venture capital firms, and strategic partners. One of the most important aspects of rais- ing capital is the ability to boil down the elements of the company’s business plan into an elevator pitch, a short two-to-three minute (about the length of an elevator ride, giving rise to its name) presentation aimed at convincing investors to invest. Table 2.4 lists the key elements of an elevator pitch.

Incubators (sometimes also referred to as accelerators) typically provide a small amount of funding, but more importantly, also provide an array of services to startup companies that they select to participate in their programs, such as business, technical, and marketing assistance, as well as introductions to other sources of capital. Well- known incubator programs include INiTs (Austria), Accelerace (Denmark), Numa (France), and SeedRocket (Spain).

Obtaining a loan from a commercial bank is often difficult for a startup company without much revenue, but it may be worthwhile to investigate programs offered by governmental agencies. The advantage of obtaining capital in the form of a loan (debt) is that, although it must be repaid, it does not require an entrepreneur to give up any ownership of the company. Angel investors are typically wealthy individuals (or a group of individuals) who invest their own money in an exchange for an equity share in the stock in the business. In general, angel investors make smaller

Your name and position; your company’s name, and a tagline in which you compare what your company does to a well-known company. Example: “My name is X, I am the founder of Y, and we are the Uber/Amazon of Z.”

The origin of your idea and the problem you are trying to solve. Brief facts about the (hopefully very large) size of the market.

Insight into your company’s revenue model and results thus far, how fast it is growing, and early adopters, if there are any.

The amount of funds you are seeking and what it will help you achieve.

How your investors will achieve a return on their investment.

investments (typically $1 million or less) than venture capital firms, are interested in helping a company grow and succeed, and invest on relatively favorable terms compared to later-stage investors. The first round of external investment in a com- pany is sometimes referred to as Series A financing.

Venture capital investors typically become more interested in a startup company once it has begun attracting a large audience and generating some revenue, even if it is not profitable. Venture capital investors invest funds they manage for other inves- tors such as investment banks, pension funds, insurance companies, or other busi- nesses, and usually want to obtain a larger stake in the business and exercise more control over the operation of the business. Venture capital investors also typically want a well-defined “exit strategy,” such as a plan for an initial public offering (IPO) or acqui- sition of the company by a more established business within a relatively short period of time (typically three to seven years), that will enable them to obtain an adequate return on their investment. Venture capital investment often ultimately means that the founder(s) and initial investors will no longer control the company at some point in the future.

Crowdfunding involves using the Internet to enable individuals to collectively contribute money to support a project. There are several different types of crowd- funding. Donor-based crowdfunding is epitomized by sites such as GoFundMe, where people make contributions to others with no expectation of any return. Rewards- based crowdfunding was popularized by Kickstarter and Indiegogo. These sites, and others like them, involve a creator looking to raise money to support a project. Backers often receive some type of reward, often corresponding to the size of their contribution to the project. The sites take a small commission, usually about 5%, on completed projects. Crowdfunding of this sort has become a mainstay in the develop- ment of movies, video games, art installations, and many other types of projects. Initially, this sort of crowdfunding could not be used for equity investments in for- profit companies due to various securities laws and regulations. However, this is changing. For example, in the United States, the JOBS Act and associated regulations issued by the U.S. Securities and Exchange Commission ushered in equity crowdfund- ing (sometimes also referred to as regulation crowdfunding), which enables companies to use the Internet to solicit investors to invest in small and early-stage startups in exchange for stock. In Europe, the European Parliament approved new rules in Octo- ber 2020 that will enable crowdfunding platforms to easily provide services across the EU, widening the pool of potential investors for startups, as well as ensuring better protection for investors. The rules take effect in 2021 (European Parliament, 2020). A different form of fundraising, using virtual currency such as Bitcoin or Ethereum tokens, has also been developed. Sometimes referred to as an initial coin offering (ICO), such offerings enable startups to raise capital without having to comply with securities regulations, and as such, present significant risk to investors. Although initially popular, they have met resistance with regulators, and interest in them has fallen (Popov, 2019; Aitken, 2017). See the Insight on Society case, Crowdfunding Takes Off, for a further look at the issues surrounding crowdfunding and how startups are turning to crowdfunding to raise funds.

venture capital investors
typically invest funds they manage for other investors; usually later-stage investors

crowdfunding

involves using the Internet to enable individuals to collectively contribute money to support a project

E-commerce Business Models 105

106 CHAPTER 2 E-commerce Business Strategies

INSIGHT ON SOCIETY

CROWDFUNDING TAKES OFF

Think you have the next big idea but lack the resources to make it hap- pen? Crowdfunding sites might be your best shot. Sites such as Kick-

starter, Indiegogo, and RocketHub have led the growth of what has come to be known as rewards-based crowd- funding. The Internet is the ideal medium for crowdfunding because it allows individuals and organizations in need of funds and potential backers to find one another around the globe. For instance, Kickstarter is available for projects in 17 European countries, as well as the United States, Canada, Mexico, Australia, New Zealand, Singapore, Hong Kong, and Japan. Indiegogo is also focusing on international growth, with campaigns having been started in 235 different countries and territories to date. One of the big- gest advantages of crowdfunding is the positive impact that it can have in funding projects in the developing world. According to the World Bank, the developing world has the potential to deploy up to $96 billion a year by 2025 in crowdfunding

investments.
How do sites like Kickstarter and Indiegogo

work? The idea is simple—an inventor, artist, or activist looking to raise money for a project uses the site to create a page for that project. The sites take a small commission, usually about 5%, on completed projects. Backers often receive some type of reward, often cor- responding to the size of their contribution to the project.

Crowdfunding has become a resource for the development of films and videos, games, music, comics, art, and technology. For instance, in the United Kingdom, one of the top projects funded is a board game called Dark Souls, created by Steamforged Games Ltd., that raised almost £3.8 million from over 31,000 backers.

Successful crowdfunding projects typically share some common elements. One of the most important is a clear and concise presenta- tion of the idea, especially through the use of video. The crowdfunding campaign is in many ways similar to presenting a business plan and should touch on the same eight elements of a business model, such as the project’s value proposition and its target market.

Not every crowdfunding project gets off the ground—Kickstarter reports that as of Febru- ary 2021, only about 38% of its approximately 513,000 projects thus far have reached their funding goals. Sometimes projects that do get off the ground simply flame out, disappointing their backers. For instance, one of the UK’s big- gest Kickstarter project, for the development of the Zano, an autonomous, intelligent, swarming nano drone, went bankrupt before ever com- pleting its product despite raising about £2.34 million from over 12,000 backers. Kickstarter now requires fundraisers to disclose the risks associated with their project, including photos of prototype products (instead of simply draw- ings, simulations, or renderings) for inventions. Both Kickstarter and Indiegogo now offer proj- ect creators access to experts in design and manufacturing to help them better understand their costs and the feasibility of their products. But backers still have no real recourse with respect to projects that never get off the ground or have unresponsive founders.

A new use of crowdfunding is to provide seed capital for startup companies in return for equity (shares) in the company, known as equity crowdfunding. The United States has been a global pioneer in the development of equity crowdfunding. Under the JOBS Act passed by the U.S. Congress in 2012, a com- pany can crowdfund up to $1 million over a 12-month period, and in 2016, the rules

E-commerce Business Models 107

requiring potential investors to be accredited (having a net worth of at least $1 million dol- lars) were relaxed to allow smaller investors to purchase equity stakes of $2,000 or more. However, equity crowdfunding requires exten- sive compliance from businesses, with steep penalties for any irregularities, and potential investors are still subject to the usual risks involved in investing.

In Europe, the situation is more compli- cated. National laws in countries throughout Europe varied widely, with various countries each taking their own unique approaches, hampering the development of crowdfund- ing platforms and cross-border funding. As a result, the European Parliament developed new regulations that will enable crowdfunding plat- forms operating in more than one EU country to only have to comply with a single set of basic rules. The new rules will take effect in Novem- ber 2021. The rules cover both loan-based crowdfunding (also referred to as peer-to-peer (P2P) lending) and equity crowdfunding, and they apply to all crowdfunding projects of up to €5 million. Reward-based crowdfunding simi- lar to that offered by Kickstarter and Indiegogo and donor-based crowdfunding are specifically excluded. The rule requires that crowdfunding platforms provide investors with a key invest- ment information sheet on each project as well as clear information about the potential finan- cial risks of the project. However, although the new regulations are intended to create a harmonized regulatory environment, specific

EU member-states may still impose additional regulations. For instance, in Germany, regulation of commercial lending activity is much more stringent than in other EU member states and will likely continue to be so.

Outside of the EU, there are a number of different regulatory approaches. In the United Kingdom, for instance, crowdfunding is regu- lated by the Financial Conduct Authority (FCA). Unlike in the United States, where legislation specifically enabling crowdfunding has been enacted, in the United Kingdom the FCA has relied on amending rules under the Financial Services and Markets Act 2000 to facilitate the development of crowdfunding. These rules went into effect in 2014. In December 2019, after the high-profile failure of Lindy, one P2P platform, the FCA implemented more stringent regulations designed to make sure consumers are better protected and that the P2P crowdfunding market is able to operate in a sustainable fashion. Three top UK equity crowdfunding platforms are Seedrs (the first platform to gain FCA approval), Crowdcube, and SyndicateRoom.

Australia has also enacted legislation that allows businesses to raise funds through crowdfunding with less stringent disclosure and reporting requirements than its regular securities regulation. Singapore has also eased the regulatory requirements on crowdfunding platforms, resulting in an increase in the num- ber of crowdfunding platforms available.

SOURCES: Kickstarter.Com, accessed February 8, 2021; Indiegogo.Com, accessed February 8, 2021; “EU Crowdfunding Regulation and Directive- Preparing for November 2021 and 2022,” Dentons.Com, December 22, 2020; “New Rules to Facilitate EU Crowdfunding,” Europarl.Europa.Eu, October 7, 2020; “Crowdfunding: One of the Decade’s Success Stories,” by Cary Springfield, Internationalbanker.Com, February 20, 2020; “Best Crowdfunding Websites for Small Businesses,” Techadvisor.Co.Uk, July 27, 2020; “Thrive with the Crowd,” by Pallavi Chakravorty, Timesofindia.Indiatimes.Com, April 23, 2020; “Crowd- funding UK Small Business: Everything You Need to Know,” by Rob Murray Brown, Growthbusiness.Co.Uk, July 18, 2019; “UK Tightens Rules on P2P Lenders,” by Pymnts, Payments.Com, June 4, 2019; “The 5th UK Alternative Finance Industry Report,” by Bryan Zhang et al., Cambridge Centre for Alternative Finance, University of Cambridge Judge Business School, November 2018; “Commission Proposal for a Regulation on European Crowdfunding Service Providers,” Ec.Europa.Eu, March 8, 2018; “Crowdfunding Platforms Crack Down on Risky Campaigns,” by Mark Harris, Backchannel.Com, May 18, 2017; “Regulation of Crowdfunding in Selected Places,” Research Office Legislative Council Secretariat, Legco.Gov.Hk, July 21, 2017; ”Crowdfunding in Europe,” Europarl.Europa. Eu, January 2017; “New Crowdfunding Rules Let the Small Fry Swim with Sharks,” by Stacy Cowley, New York Times, May 14, 2016; “Zano: The Rise and Fall of Kickstarter’s Mini-Drone,” by Rory Cellan-Jones, Bbc.Com, January 20, 2016; “S.E.C. Gives Small Investors Access to Equity Crowdfunding,” by Stacy Cowley, New York Times, October 30, 2015.

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CATEGORIZING E-COMMERCE BUSINESS MODELS: SOME DIFFICULTIES

There are many e-commerce business models, and more are being invented every day. The number of such models is limited only by the human imagination, and our list of different business models is certainly not exhaustive. However, despite the abundance of potential models, it is possible to identify the major generic types (and subtle variations) of business models that have been developed for the e-commerce arena and describe their key features. It is important to realize, however, that there is no one correct way to categorize these business models.

Our approach is to categorize business models according to the different major e-commerce sectors—B2C and B2B—in which they are utilized. You will note, how- ever, that fundamentally similar business models may appear in more than one sec- tor. For example, the business models of online retailers (often called e-tailers) and e-distributors are quite similar. However, they are distinguished by the market focus of the sector in which they are used. In the case of e-tailers in the B2C sector, the business model focuses on sales to the individual consumer, while in the case of the e-distributor, the business model focuses on sales to another business. Many companies use a variety of different business models as they attempt to extend into as many areas of e-commerce as possible. We look at B2C business models in Section 2.2 and B2B business models in Section 2.3.

A business’s technology platform is sometimes confused with its business model. For instance, “mobile e-commerce” refers to the use of mobile devices and cellular and wide area networks to support a variety of business models. Commentators sometimes confuse matters by referring to mobile e-commerce as a distinct business model, which it is not. All of the basic business models we discuss can be implemented on both the traditional Internet/Web and mobile platforms. Likewise, although they are sometimes referred to as such, social e-commerce and local e-commerce are not business models in and of themselves, but rather subsectors of B2C and B2B e-commerce in which different business models can operate.

You will also note that some companies use multiple business models. For instance, Amazon has multiple business models: it is an e-retailer, content provider, market cre- ator, e-commerce infrastructure provider, and more. EBay is a market creator in the B2C and C2C e-commerce sectors, using both the traditional Internet/Web and mobile platforms, as well as an e-commerce infrastructure provider. Firms often seek out mul- tiple business models as a way to leverage their brands, infrastructure investments, and assets developed with one business model into new business models.

Finally, no discussion of e-commerce business models would be complete without mention of a group of companies whose business model is focused on providing the infrastructure necessary for e-commerce companies to exist, grow, and prosper. These are the e-commerce enablers. They provide the hardware, operating system software, networks and communications technology, applications software, web design, consult- ing services, and other tools required for e-commerce (see Table 2.5). While these firms may not be conducting e-commerce per se (although in many instances, e-commerce in its traditional sense is in fact one of their sales channels), as a group they have perhaps profited the most from the development of e-commerce. We discuss many of these play- ers in the following chapters.

E-commerce Business Models 109

HP • Dell • Lenovo
Microsoft • IBM/Red Hat • Oracle

AmazonWebServices • MicrosoftAzure • IBMCloud • GoogleCloud Platform

Liquid Web • WebIntellects • 1&1 Ionos • HostGator • Hostway GoDaddy • Network Solutions • Dotster
Akamai • Limelight Networks • Amazon CloudFront
Weebly • Wix • Squarespace • Jimdo

Shopify • BigCommerce • YoKart

Magento (Adobe) • IBM • Oracle • Salesforce • SAP • Intershop Apple • Samsung • LG
Mobify • PredictSpring • Usablenet • GPShopper (Synchrony Financial) Adobe • Apple • Webcollage

VeriSign • Check Point • GeoTrust • Entrust Datacard • Thawte PayPal • Authorize.Net • Square • Cybersource
Neustar • SmartBear • Dynatrace • Solarwinds
ChannelAdvisor • CommerceHub • Tinuiti

Oracle • SAP • Salesforce • Microsoft Dynamics 365 BlueYonder • JaggedPeak • Monsoon
BlueYonder • JaggedPeak • CommerceHub
Buffer • HootSuite • SocialFlow

iProspect • ChannelAdvisor • Merkle
Constant Contact • Cheetah Digital • Bronto Software • MailChimp CJAffiliate • RakutenLinkShare
Bazaarvoice • PowerReviews • BizRate
LivePerson • Bold360 • Oracle
GoogleAnalytics • AdobeAnalytics • IBMDigitalAnalytics • Webtrends

110 CHAPTER 2 E-commerce Business Strategies

2.2 MAJOR BUSINESS-TO-CONSUMER (B2C)

E-tailer

online retail store

BUSINESS MODELS

Business-to-consumer (B2C) e-commerce, in which online businesses seek to reach indi- vidual consumers, is the most well-known and familiar type of e-commerce. Table 2.6 illustrates the major business models utilized in the B2C arena.

E-TAILER

Online retail stores, often called e-tailers, come in all sizes, from giant Amazon to tiny local stores. E-tailers are similar to the typical bricks-and-mortar storefront, except that customers only 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. Ama- zon, 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 market opportunity for e-tailers is very large, and even more so in the wake of the Covid-19 pandemic. Every Internet and smartphone user is a potential customer. Customers who feel time-starved are even better prospects, because they want shopping solutions that will eliminate the need to drive to the mall or store (Bellman, Lohse, and Johnson, 1999). 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. The e-tailer’s challenge is differentiating its business from existing competitors.

Companies that try to reach every online consumer are likely to deplete their resources quickly. Those that develop a niche strategy, clearly identifying their target market and its needs, are best prepared to make a profit. Keeping expenses low, selection broad, and inventory controlled is key to success in e-tailing, with inventory being the most difficult to gauge. Online retail is covered in more depth in Chapter 9.

COMMUNITY PROVIDER

Although community providers are not a new phenomenon, the Internet has made such sites for like-minded individuals to meet and converse much easier, without the limita- tions of geography and time to hinder participation. 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 personali- ties called avatars. Facebook, LinkedIn, Twitter, and Pinterest, and hundreds of other smaller, niche social networks all offer users community-building tools and services.

barriers to entry

the total cost of entering a new marketplace

community provider

creates an online environment 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

Major Business-to-Consumer (B2C) Business Models 111

TABLE 2.6 B2C BUSINESS MODELS

BUSINESS REVENUE MODEL VARIATIONS EXAMPLES DESCRIPTION MODELS

E-tailer

Virtual Merchant

Bricks-and-Clicks Catalog Merchant

Manufacturer- Direct

Horizontal/ General

Vertical/ Specialized (Vortal)

Search

Amazon Wayfair Farfetch

Online version of retail store, where customers can shop at any hour of the day or night without leaving their home or office

Online distribution channel for a company that also has physical stores

Online version of direct mail catalog

Manufacturer uses online channel to sell direct to customer

Sites where individuals with particular interests, hobbies, common experiences, or social networks can come together and “meet” online

Offers customers newspapers, magazines, books, film, television, music, games, and other forms of online content

Offers an integrated package of content, search, and social network services: news, e-mail, chat, music downloads, video streaming, calendars, etc. Seeks to be a user’s home base

Focuses on a particular subject matter or market segment

Focuses primarily on offering search services

Processors of online transactions, such
as stockbrokers and travel agents, that increase customers’ productivity by help- ing them get things done faster and more cheaply

Businesses that use Internet technology to create markets that bring buyers and sell- ers together

Companies that make money by selling users a service, rather than a product

Sales of goods

Walmart Zara

Sales of goods

Grattan OTTO

Sales of goods

Nike HelloBody SleepyCat

Sales of goods

Community Provider

Facebook LinkedIn Twitter Pinterest

Advertising, subscription, affiliate referral fees

Content Provider

Financial Times Netflix
Spotify

Advertising, subscription fees, sales of digital goods

Portal

Yahoo AOL MSN Facebook

Advertising, subscription fees, transac- tion fees

Sailnet

Advertising, subscription fees, transac- tion fees

Google Baidu

Advertising, affiliate referral

Transaction Broker

IG
Expedia Monster Skyscanner Wotfi

Transaction fees

Market Creator

EBay Alibaba Uber Airbnb

Transaction fees

Service Provider

Crunch.Co.Uk Lawbite.Co.Uk Envoy Global

Sales of services

112 CHAPTER 2 E-commerce Business Strategies

content provider

distributes information content, such as
digital news, music, photos, video, and artwork

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 inter- ests, 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.

Some of the oldest online communities are The Well, which provides a forum for technology and Internet-related discussions, and The Motley Fool, which provides finan- cial advice, news, and opinions. The Well offers various membership plans ranging from $10 to $15 a month. The Motley Fool supports itself through ads and selling products that start out “free” but turn into annual subscriptions.

Consumers’ interest in communities is mushrooming and participation in commu- nities is one of the fastest growing online activities. While some community providers have had a difficult time becoming profitable, many have succeeded over time, with advertising as their main source of revenue. Both the very large social networks such as Facebook, Twitter, Pinterest, and LinkedIn, as well as niche social networks with smaller dedicated audiences, are ideal marketing and advertising territories. Traditional online communities such as The Motley Fool and WebMD (which provides medical information to members) find that the breadth and depth of knowledge offered is an important fac- tor. Community members frequently request knowledge, guidance, and advice. Lack of experienced personnel can severely hamper the growth of a community, which needs facilitators and managers to keep discussions on course and relevant. For the commu- nity social networks, the most important ingredients of success appear to be ease and flexibility of use, and a strong customer value proposition. For instance, Facebook leap- frogged over its rival MySpace by encouraging the development of third-party revenue- producing applications.

Online communities benefit significantly from offline word-of-mouth, viral mar- keting. Online communities tend to reflect offline relationships. When your friends say they have a profile on Facebook, and ask you to “friend” them, you are encouraged to build your own online profile.

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.

Major Business-to-Consumer (B2C) Business Models 113

Generally, the key to becoming a successful content provider is owning the con- tent. Traditional owners of copyrighted content—publishers of books and newspapers, broadcasters of radio and television content, music publishers, and movie studios—have powerful advantages over newcomers who simply offer distribution channels and must pay for content, often at very high prices.

Some content providers, however, do not own content, but syndicate (aggregate) and then distribute content produced by others. Syndication is a major variation of the standard content provider model. Aggregators, who collect information from a wide variety of sources and then add value to that information through post-aggregation services, are another variation. For instance, Shopzilla collects information on the prices of thousands of goods online, analyzes the information, and presents users with tables showing the range of prices and links to the sites where the products can be purchased. Shopzilla adds value to content it aggregates and resells this value to advertisers.

Any e-commerce startup that intends to make money by providing content is likely to face difficulties unless it has a unique information source that others cannot access. For the most part, this business category is dominated by traditional content providers. The Insight on Technology case, Connected Cars and the Future of E-commerce, discusses how changes in Internet technology are driving the development of new business mod- els in the online content market.

Online content is discussed in further depth in Chapter 10.

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 consum- ers 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.

Although there are numerous portals/search engines, the top three in the United States (Google, Microsoft’s MSN/Bing, and Verizon Media [Yahoo/AOL]) gather more than 95% of U.S. Search engine traffic because of their superior brand recognition. In China, Baidu is the dominant search engine. Many of the top portal/search engines were among the first to appear on the Web and therefore had first-mover advantages. Being first confers an advantage because customers come to trust a reliable provider and expe- rience switching costs if they change to late arrivals in the market. By garnering a large chunk of the marketplace, first movers—just like a single telephone network—can offer customers access to commonly shared ideas, standards, and experiences (something called network externalities, which we describe in later chapters). The traditional portals have company: Facebook and other social networks are now the initial start or home page (portal) for millions of Internet users in the United States.

portal

offers users powerful search tools as well as an integrated package of content and services all in one place

114 CHAPTER 2 E-commerce Business Strategies

INSIGHT ON TECHNOLOGY

CONNECTED CARS AND THE FUTURE OF E-COMMERCE

Get ready! Within the next few years, your car is likely to become a major platform for e-commerce. You will be able to browse the Web, shop online, and consume online content, all from the comfort of your car. Beyond that are many new services only dimly recognized now, but technically possible. What will make this all possible is a confluence of forces and interests. Major players include automobile manufactur- ers, big tech companies, and telecommunica- tions companies who are all seeking to leverage the Internet of Things (IoT), artificial intelligence software, autonomous self-driving, and other related technology developments to both extend

and create new markets for their services. Today, most new cars sold in the United States are already “connected cars” in the sense that they come with built-in Internet access. Analysts estimate that the U.S.-installed base of connected cars will almost double, to 95 million, by 2023, up from about 50 million in 2019. This installed base will generate an enormous amount of data, with each individual car producing over 25 Gb of data an hour. “Smart cars” build on this connected car foundation by embedding technologies that per- form driving functions such as parking assistance, collision avoidance, lane-centering steering, and adaptive cruise control. The ultimate goal is a “self-driving” vehicle: fully autonomous operation. This will free up driving time for more e-commerce

marketing and services for providers.
There are four basic categories of business

models based on connected/smart cars: mobil- ity services (car pooling, on-demand ride ser- vices, and vehicle sharing or renting); customer experience (entertainment, loyalty programs, concierge service, games and other apps); car services (vehicle customized settings, predictive

maintenance, usage-based insurance, mobile payments, and shopping/purchasing); and safety (driver condition monitoring, video surveil- lance, road side sign recognition, driver coach- ing, anti-theft tracing, and emergency calling). The ability to monetize the data produced by cars is likely to become an important part of the revenue model for some of these new services.

The potential impact for e-commerce is enormous. McKinsey predicts that by 2030, 45% of new-car sales worldwide will have technology that enables preference-based personalization, allowing all car occupants to have personalized controls and their own infotainment content. For content distributors, connected cars provide a potentially huge mar- ket. Cars are already the main source of radio revenues in the United States, but cars might eventually provide passengers with access to all of the same types of media that they have when they’re at home. As cars become more and more automated and drivers are able to shift from driving to watching video content, industry analysts project that in-car entertain- ment revenue may skyrocket.

Marketers are already thinking about how they can use the data generated by connected cars to promote products and services. For example, Waze, a mobile app owned by Google, recently worked with McDonald’s on a project involving more than 300 digital billboards. Waze users that came within proximity of the billboards were served full-screen mobile ads with directions to the nearest McDonald’s. Over an eight-week period, the pro- motion generated 6.4 million mobile impressions, reached 1.9 million unique users, and prompted 8,400 customers to navigate to a McDonald’s. Google and Facebook hope to be the dominant players in this expanded marketing platform.

Major Business-to-Consumer (B2C) Business Models 115

Tech companies such as Apple, Google, Microsoft, and Amazon also believe that smart connected cars offer them the opportunity to extend their technology platforms and expand their influence by becoming the operating sys- tem of the car’s content platform, and possibly the entire car. Apple’s CarPlay and Google’s Android Auto are already being placed in cars, providing familiar interfaces, along with voice- activated Siri and Google Assistant capabilities. For instance, GM plans to integrate Google Assistant into its vehicles beginning in 2021 as part of a move to design its infotainment systems around the Google Automotive OS. Amazon has also entered the fray, with deals with a variety of car manufacturers to integrate its Alexa intel- ligent voice assistant into their vehicles. E-mail, voice-activated texting, music, videos, stream- ing music, and social networking can easily be deployed to consumers who already know how the software interfaces look, feel, and work. The integration of Siri, Google Assistant, and Alexa also creates additional options for in-car market- ing and advertising, with many companies now attempting to optimize their online assets for voice search as well as developing voice applica- tions for use in connected cars.

But simply providing a platform for apps is not enough. Tech companies have greater ambitions and are developing large-scale cloud platforms that combine cloud infrastructure, edge technology, AI, and IoT services that enable manufacturers to build customized solutions for infotainment, navigation, and predictive services. These platforms can also facilitate in-vehicle Internet access and leverage subscription-based services from partner companies, such as vehicle maintenance, streaming entertainment, emergency communications, in-car commerce, financial services, and energy management.

Examples of such platforms are Amazon’s Connected Vehicle Solution (which runs on Amazon AWS), Microsoft’s Connected Vehi- cle Platform (Microsoft Azure), and Google’s Connected Car Cloud Platform (Google Cloud).

Some car manufacturers still have their own plans for capturing this new e-commerce plat- form. The market leverage of automakers is that they make the cars and can decide with whom to share the rewards. For instance, Ford hired 400 engineers from Blackberry to help it develop new in-car digital features. It has also patented a driverless car windshield entertainment system that could be the basis for advertising as well as consuming traditional video content. Volk- swagen has also struck out on its own. Keeping control over the data generated by their vehicles’ onboard electronics is one reason the company developed Vw.Os, its own car operating system, with its own online store of apps and services, for its new series of electric cars.

The future of connected smart cars is not all rosy, and many of the services offered may come with a price tag in the form of additional monthly subscriptions that many consumers will not accept. Questions about the safety, reliability, privacy, and security of smart cars abound. For instance, a recent survey found that over 50% of recent car buyers had concerns about the secu- rity and use of their personal data and almost 20% said those concerns might stop them from buying a connected car. But if past experience is a guide, there seems to be an insatiable demand on the part of this Internet generation to stay connected and to consume content, purchase online, and socialize with their friends. The con- nected smart car will likely be a new venue for these activities.

SOURCES: “Connected Cars 2020,” by Victoria Petrock, eMarketer, Inc., February 3, 2020; “The Future of Mobility Is at Our Doorstep,” McKinsey.Com, December 19, 2019; “Making Money from Connected Cars,” by Richard Fouts, Medium.Com, June 15, 2019; “The Battle for the Last Unconquered Screen—The One in Your Car,” by Tim Higgins and William Boston, Wall Street Journal, April 6, 2019; “From Buzz to Bucks: Automotive Players on the Highway to Car Data Monetization,” McKinsey.Com, March 2018; “The Re-imagined Car: Shared, Autonomous, and Electric,” by Boston Consulting Group, December 17, 2017; “Data Driven Business Models in Connected Cars and Beyond,” by Dr. Gabriel Seiberth, Accenture Digital, December 15, 2017; “Connected Cars Bring New Business Models and New Disruption,” by Crystal Valentine, RTinsights.Com, October 19, 2017; “Business Models Will Drive the Future of Autonomous Vehicles,” by Sivaramakrishnan Somasegar and Daniel Li, Techcrunch.Com, August 25, 2017.

116 CHAPTER 2 E-commerce Business Strategies

transaction broker

processes transactions for consumers that are nor- mally handled in person, by phone, or by mail

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 por- tals (sometimes called vortals) attempt to provide similar services as horizontal portals but are focused around a particular subject matter or market segment. For instance, Sailnet focuses on the world’s sailing community, and provides sailing news, articles, discussion groups, free e-mail, and a retail store. Although the total number of vortal users may be much lower than the number of portal users, if the market segment is attractive enough, advertisers are willing to pay a premium in order to reach a targeted audience. Also, visitors to specialized niche vortals spend more money than the average Yahoo visitor. Google can also be considered a portal of a sort but focuses primarily on offering search and advertising services. Google generates revenues primarily from search engine advertising sales and also from affiliate referral fees.

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.

Given rising consumer interest in financial planning and the stock market, the market opportunity for online transaction brokers appears to be large. However, while millions of customers have shifted to online brokers, some are still wary about switching from their traditional broker who provides personal advice and a brand name. Fears of privacy invasion and the loss of control over personal financial information also contribute to market resistance. Consequently, the challenge for online brokers is to overcome consumer fears by emphasizing the security and privacy measures in place, and, like physical banks and brokerage firms, providing a broad range of financial ser- vices and not just stock trading. This industry is covered in greater depth in Chapter 9.

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.

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. Prior to the Internet and the Web, market creators relied on physical places to establish a market. Beginning with the medieval marketplace and extending to today’s New York Stock Exchange, a market has meant a physical space for transacting business. There were few private digital network

market creator

builds a digital environment where buyers and sellers can meet, display products, search for products, and establish a price for products

Major Business-to-Consumer (B2C) Business Models 117

marketplaces prior to the Web. The Web changed this by making it possible to separate markets from physical space. Prime examples are Priceline, which allows consumers to set the price they are willing to pay for various travel accommodations and other products (sometimes referred to as a reverse auction), and eBay, the online auction platform uti- lized by both businesses and consumers. Market creators make money by either charging a percentage of every transaction made, or charging merchants for access to the market.

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 transac- tion brokers who actually carry out the transaction for their customers, acting as agents in larger markets. At eBay, the buyers and sellers are their own agents. Each sale on eBay nets the company a commission based on the percentage of the item’s sales price, in addition to a listing fee. EBay is one of the few e-commerce companies that has been profitable virtually from the beginning. Why? One answer is that eBay has no inventory or production costs. It is simply a middleman.

The market opportunity for market creators is potentially vast, but only if the firm has the financial resources and marketing plan to attract sufficient sellers and buyers to the marketplace. In 2020, eBay had 174 million active buyers, and this makes for an efficient market (eBay Inc., 2020). There are many sellers and buyers for each type of product, sometimes for the same product, for example, laptop computer models. Many other digital auctions have sprung up in smaller, more specialized vertical market seg- ments such as jewelry and automobiles.

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 trans- portation or spare rooms, in a marketplace that operates in the cloud and relies on the Web or smartphone apps to conduct transactions. It is important to note that, although referred to as sharing economy or mesh economy companies, these companies do not in fact share resources. Users of these services are either selling something or buying something, and the companies produce revenue by extracting fees for each transac- tion. However, they do unlock the economic value in spare resources (personal cars and rooms) that might otherwise have been lost. In the process they have created huge online markets. For instance, Uber (founded in 2009) currently operates in over 900 cities in 69 countries around the world. Airbnb, founded in 2008, operates in more than 220 countries and over 100,000 cities, lists over 7 million listings available, and has hadover 750 million people use its services.

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. Other personal services such as online medical bill management, financial and pension planning, and travel recommendation are showing strong growth.

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

service provider

offers services online

118 CHAPTER 2 E-commerce Business Strategies

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. Much like retailers who trade prod- ucts for cash, service providers trade knowledge, expertise, and capabilities for revenue.

Obviously, some services cannot be provided online. For example, dentistry, plumb- ing, and car repair cannot be completed via the Internet. However, online arrangements can be made for these services. Online service providers may offer computer services, such as data storage (Dropbox and Carbonite), provide legal services (RocketLawyer), or accounting or bookkeeping services (Wave, Bench). Grocery shopping sites such as UK- based Ocado and Waitrose are also providing services.1 To complicate matters a bit, most financial transaction brokers (described previously) provide services such as college tuition and pension planning. Travel brokers also provide vacation-planning services, not just transactions with airlines and hotels. Indeed, mixing services with your products is a powerful business strategy pursued by many hard-goods companies (for example, warranties are services).

The basic value proposition of service providers is that they offer consumers valu- able, convenient, time-saving, and low-cost alternatives to traditional service provid- ers or provide services that are truly unique. Where else can you search billions of web pages, or share photos with as many people instantly? Research has found, for instance, that a major factor in predicting online buying behavior is time starvation. Time-starved people tend to be busy professionals who work long hours and simply do not have the time to pick up packages, buy groceries, send photos, or visit with financial planners (Bellman, Lohse, and Johnson, 1999). The market opportunity for service providers is as large as the variety of services that can be provided and potentially is much larger than the market opportunity for physical goods. We live in a service-based economy and society; witness the growth of fast-food restaurants, package delivery services, and wire- less cellular phone services. Consumers’ increasing demand for convenience products and services bodes well for current and future online service providers.

Marketing of service providers must allay consumer fears about hiring a vendor online, as well as build confidence and familiarity among current and potential custom- ers. Building confidence and trust is critical for service providers just as it is for retail product merchants.

MAJOR BUSINESS-TO-BUSINESS (B2B)

BUSINESS MODELS

In Chapter 1, we noted that U.S. Business-to-business (B2B) e-commerce, in which busi- nesses sell to other businesses, is more than six times the size of B2C e-commerce, even though most of the public attention has focused on B2C. For instance, it is estimated that revenues for all types of B2B e-commerce worldwide totaled around $27 trillion in 2020, compared to about $5.1 trillion for all types of retail and travel-related B2C

1 Ocado, Waitrose, and other similar e-commerce businesses can also be classified as online retailers insofar as they warehouse commonly purchased items and make a profit based on the spread between their buy and sell prices.

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e-commerce. Clearly, most of the revenues in e-commerce involve B2B e-commerce. Much of this activity is unseen and unknown to the average consumer. Table 2.7 lists the major business models utilized in the B2B arena.