Chapter 10
E-COMMERCE: DIGITAL MARKETS, DIGITAL
GOODS AND BUSINESS MODELS
Mrs.S.M.Murshitha
Senior Lecturer in MIT
Department of Management and Information Technology
Faculty of Management and Commerce
South Eastern University of Sri Lanka
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Learning Objectives
10.1 What are the unique features of e-commerce, digital markets, and digital goods?
10.2 What are the principal e-commerce business and revenue models?
10.3 How has e-commerce transformed marketing?
10.4 How has e-commerce affected business-to-business transactions?
10.5 What is the role of m-commerce in business, and what are the most important m-commerce
applications?
10.6 What issues must be addressed when building an e-commerce presence?
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Types of E-Commerce
• Three major types
• Business-to-Consumer (B2C)
• Example: Barnes and Noble.com
• Business-to-Business (B2B)
• Example: ChemConnect
• Consumer-to-Consumer (C2C)
• Example: e Bay
• E-commerce can be categorized by platform
• Mobile commerce (m-commerce)
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Business Model
• A business model is a set of planned activities designed to result in a
profit in a marketplace.
• A plan for the successful operation of a business, identifying
Sources of revenue
The intended customer base,
Products, and
Details of financing.
• E-commerce business model aims to use and leverage the unique
qualities of the Internet and the WWW.
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Key Elements of a Business Model
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Value Proposition
• A value proposition defines how a company’s product or service fulfills
the needs of customers.
• We need to answer why customers will choose to do business with us
instead of another company and what the firm will offer that others can
not or do not.
• Successful value proposition will include
• Personalization and customization of product offering
• Reduction of search costs
• Reduction of price discovery costs
• Facilitating transaction by managing product delivery
• Amazon makes it possible for book lovers to shop for virtually any book in print
from the comfort of their home or office, 24 hours day, and know immediately
whether a book is in stock
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Revenue Model
• Describes how a firm will earn revenue, generate profits, and
produce a superior return on invested capital than alternative
investments.
• Many revenue model exist but most companies rely on one or
some combination of the following
• Advertising model - Yahoo
• Subscription model – Wall Street Journal
• Transaction fee model –eTrade
• Free/Premium model - Flckrs
• Sales model- Amazon
• Affiliate model -Amazon, MyPoints
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Revenue Model:
Advertising Revenue Model
• A company provides a forum for advertisements and receives
fees from advertisers
• Yahoo! Derives a significant amount of revenue from display
and video advertising
• Typically, fees are generated from advertisers in exchange for
advertisements, which is ultimately the classic principal among
the revenue models besides sales.
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Revenue Model:
Sales Revenue Model
• Companies derive revenue by selling goods, information, or services.
Wholesalers and retailers of goods and services sell their products
online.
• The main benefits for the customer are the convenience, time
savings, fast information etc.
• The prices are often more competitive.
• AMAZON.COM
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Revenue Model:
Subscription Revenue Model
• A business model where a customer must pay a subscription price to have access to
the product/service.
• Companies offer its users content or services and charges a subscription fee for
access to some or all of its offerings.
• The content offered must be perceived as a high-value-added, premium offering that
is not readily available elsewhere nor easily replicated.
• Users are charged a periodic (daily, monthly or annual) fee to subscribe to a service.
• Many sites combine free content with premium membership, i.e. subscriber- or
member-only content.
• Subscription fees do not depend on transactions. Subscribers use the content as long
and often as they want.
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Revenue Model:
Free / Premium Revenue Model
• In this revenue model, firms offer basic services or content for free, while
charging a premium for advanced or special features. For example,
• Google offers free applications, but charges for premium services.
• Pandora, the subscription radio service, offers a free service with limited
play time, and a premium service with unlimited play.
• The Flickr photo-sharing service offers free basic services for sharing photos
with friends and family, and also sells a $24.95 “premium” package that
provides users unlimited storage, high-definition video storage and
playback, and freedom from display advertising.
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Revenue Model:
Affiliate Revenue Model
• Company steers/directs business to an affiliate and receives a referral fee or
percentage of the revenue from any resulting sales.
• Merchants advertise and sell their products and services through links to partner-
websites.
• It is a pay-for-performance model: Commissions are only paid for actual revenue or
measurable success.
• Variations include banner exchange, pay-per-click and revenue sharing programs.
• Amazon uses affiliates who steer business to the Amazon Web site by placing the
Amazon logo on their blogs.
• MYPOINTS.COM earns by connecting companies with potential customers by
offering special deals to its members.
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Revenue Model:
Transaction Fee Revenue Model
• In the transaction fee revenue model, a company receives a fee for enabling or
executing a transaction.
• For example, eBay provides an online auction marketplace and receives a small
transaction fee from a seller if the seller is successful in selling an item.
• E*Trade, an online stockbroker, receives transaction fees each time it executes a
stock transaction on behalf of a customer.
• During this process the customer may be presented as a buyer as well as a
seller.
• To actively participate in this e-market, customers must register, so both
parties of a transaction taking place are identified.
• The amount of the transaction fee can be both – fixed and percentage
calculated.
• EBAY, AMAZON 13
Market Opportunity
• A company’s intended marketspace, the area of actual or
potential commercial value in which a company intends to
operate, and the overall potential financial opportunities
available to the firm in that marketspace.
• For a market opportunity to exist, a company must be able to
identify;
✔ Who its potential customers are
✔ The specific needs that need to be met
✔ The size of the market, and
✔ Its capacity to capture market share.
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Competitive Environment
• Refers to the other companies selling similar products and
operating in the same market space
• Also refers to the presence of substitute products and potential
new entrants to the market.
• Influenced by how many companies are active, how large their
operations are, what the market share of each competitor is, how
profitable these firms are, etc.
• Direct competitors are those that sell products or services that are very similar
and into the same market segment. Priceline and Travelocity sell identical
products – cheap tickets.
• Indirect competitors are those who may be in different industries but still
compete indirectly because their products can substitute for one another.
Example: CNN news and ESPN sports.
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Competitive Advantage
• Achieved when a company can produce a superior product and
or bring the product to market at a lower price than most, or all,
of their competitors; e.g.: being able to obtain differential
access to the factors of production that are denied to their
competitors.
• Firms can compete on scope: local or global. Firms that can
provide superior products at the lowest cost on a global basis
are truly advantaged.
• First mover advantage: a competitive market advantage for a
firm that results from being the first into a marketplace with a
product or service.
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Market Strategy
• Everything a company does to promote its products and
services to potential customers is known as market strategy.
• It is the plan the company puts together that details exactly
how it intends to enter a new market and attract new
customers.
• Facebook, Twitter as well as YouTube have social
networking marketing strategy that encourages users to
put their content on the site for free, build personal profile
pages, contact their friends, and build a community; in this
case customers are the marketing staff!
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Organizational Development
• All firms need an organization to efficiently implement their
business plans and strategies.
• Companies hoping to grow and thrive need to have a plan for
organizational development that describes how the company
will organize the work that needs to be accomplished.
• Many e-commerce firms have failed because they lacked the
organizational structures and supportive cultural values
required to support new forms of commerce.
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Management Team
• The single most important element of a business
model is the management team responsible for
making the model work.
• Strong management team gives a
• Model
• Instant credibility to outside investors and
• Experience in implementing business plans.
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Key Elements of a Business Model
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MAJOR BUSINESS-TO-CONSUMER (B2C)
BUSINESS MODELS
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MAJOR BUSINES-TO-CONSUMER (B2C)
BUSINESS MODELS
Online businesses seek to reach individual consumers. This is the most well-
known and familiar type of e-commerce
• Portal
• E-tailer
• Content provider
• Transaction broker
• Market creator
• Service provider
• Community provider
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Portal
• Portals such as Google, Bing, Yahoo, MSN, and AOL offer powerful Web
search tools as well as an integrated package of content and services,
such as news, e-mail, instant messaging, maps, calendars, shopping,
music downloads, video streaming, and more, all in one place.
• Initially, portals were primarily “gateways” to the Internet.
• Today, however, the portal business model provides a destination site
where users start their Web searching and linger to read news, find
entertainment, and meet other people, and be exposed to advertising.
• Portals generate revenue primarily by attracting very large audiences,
charging advertisers for ad placement, collecting referral fees for steering
customers to other sites, and charging for premium services.
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E-Tailer
• These are online retail stores. They come in all sizes varying from
giant Amazon to small tiny stores that have web presence.
• Similar to typical brick-and-mortar storefronts except that customers
only have to connect to the Internet to check the inventory and place
orders.
• Some have solely online presence and others have complementary
web presence (brick-and-click)
• Extremely competitive sector, since the barrier to entry is very low
and hundreds of thousands of small e-tail shops have sprung/
jumped up on the web.
• Revenue model is?
• Amazon.com, Drugstore.com, Dell.com, Walmart.com
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Content Provider
• Information and entertainment providers such as newspapers,
sports sites, and other sources that offer customers up-to-date
news and special interest how-to guidance and tips and or
information sales.
• Content providers distribute information content, such as digital
video, music, photos, text, and artworks, over the Web.
• Any e-commerce start-up that intends to make money by
providing content is likely to face difficulties unless it has a
unique information source that others cannot access.
• Business model: advertising, subscription fees, affiliate referral
fees.
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Transaction Broker
• Processors of online sales transactions, such as stockbrokers
and travel agents, that increase customers’ productivity by
helping to get things done faster and more cheaply.
• Hotels.com, Travelocity.com
• Business model: transaction fees
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Market Creator
• Web-based businesses that use Internet technology to create
markets where buyers and sellers can meet, display products, search
for products and establish prices.
• eBay, the online auction site, is utilized by both businesses and
consumers. Its model is to create a digital electronic environment for
buyers and sellers to meet, agree on a price, and transact.
• In Priceline.com consumers are allowed to set the price they are
willing to pay for various travel accommodations and other products
(sometimes called reverse auction)
• Business model: transaction fees
• eBay, Amazon, Priceline
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Service Provider
• Companies that make money by selling users a service, rather
than a product
• Web 2.0 applications such as photo sharing video sharing, etc.
are all services provided to customers.
• Google delivers online application services such as Google Docs
and Gmail
• visanow.com (immigration service), rocketlawyer.com (online
legal service)
• Business model: sale of service
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Community Provider
• Sites where individuals with particular interests, hobbies, common
experiences, or social networks can come together and “meet”
online, where
• People with similar interests can transact (buy and sell goods)
• Share interests, photos, and videos
• Communicate with like minded people and receive interest related
information
• The social network sites Facebook, LinkedIn, Twitter, and Pinterest,
and hundreds of other similar, niche sites all offer users community-
building tools and services
• Revenue model is hybrid including subscription fees, sales revenues,
transaction fees, affiliate fees, and advertising fees from other firms
that are attracted by tightly focused audience
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NEW WAYS OF BUSINESS-TO-BUSINESS
(B2B) BUSINESS BUYING AND SELLING
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New Ways of B2B Buying and Selling
• Private industrial networks
• Private exchanges
• Large firm using a secure website to link to suppliers and
partners
• Net marketplaces (e-hubs)
• Single digital marketplace for many buyers and sellers
• May focus on direct or indirect goods
• May be vertical or horizontal marketplaces
• Exchanges
• Independently owned third-party Net marketplaces for
spot purchasing
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Private Industrial Network
• Also referred to as Private Trading Exchange is a digital network designed to
coordinate the flow of communications among firms engaged in business
together.
• The network is owned by a single large purchasing firm.
• Participation is by invitation only to trusted long-term suppliers of direct inputs.
• Eg: Walmart operates one of the largest industrial networks in the world for its
suppliers, who on a daily basis use Walmart’s network to monitor the sales of
their goods, the status of shipments, and the actual inventory level of their
goods.
• Business Model: cost is absorbed by the network owner and recovered through
production and distribution efficiencies.
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Figure 10.7 A Private Industrial
Network
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Figure 10.8 A Net Marketplace
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Exchanges
• An independent digital electronic marketplace where hundreds of
suppliers meet a smaller number of very large commercial
purchasers.
• For buyers, B2B exchanges make it possible to gather information,
check out suppliers, collect prices, and keep up to date on the
latest happenings all in one place.
• Sellers benefit from expanded access to buyers.
• Business model: fees and commissions on transactions.
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What is the Role of M-Commerce in Business, and What
are the Most Important M-Commerce Applications?
• M-commerce in 2017 is 35 percent of all e-commerce
• Fastest growing form of e-commerce
• Growing at 20 percent or more per year
• Main areas of growth
• Mass market retailing (Amazon, eBay, etc.)
• Sales of digital content (music, T V, etc.)
• In-app sales to mobile devices
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Location-Based Services and
Applications
• Used by 74 percent of smartphone owners
• Based on G P S map services
• Geosocial services
• Where friends are
• Geo advertising
• What shops are nearby
• Geo information services
• Price of house you are passing
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Other Mobile Commerce Services
• Financial account management apps
• Banks, credit card companies
• Mobile advertising market
• Google and Facebook are largest markets
• Ads embedded in games, videos, and mobile apps
• 55 percent of online retailers have m-commerce websites
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What Issues Must Be Addressed When
Building an E-Commerce Presence?
• Most important management challenges
• Developing clear understanding of business objectives
• Knowing how to choose the right technology to achieve those
objectives
• Develop an e-commerce presence map
• Four areas: websites, e-mail, social media, offline media
• Develop a timeline: milestones
• Breaking a project into discrete phases
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Figure 10.10 E-Commerce
Presence Map
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