E-commerce Models

 

E-commerce systems are built around sets of business transactions that involve legal persons, business processes and data.

 

E-commerce applications bring people (users) using computer systems (tools) that manipulate data, information, knowledge and wisdom (content) in order to accomplish a set of purposes (tasks).

 

A description of an E-Commerce application should identify each of the different components that may be significant in its success.

Analyzing important details of these components will form the basis for requirements analysis.

 

Most typical E-Commerce applications:

The most typical types of E-commerce applications interface an organization with external individuals and/or organizations. They generally involve the buying, selling, trading, and/or promoting of products and/or services. They include:

Ø       e-Business (electronic storefronts)

Ø       e-brokerages

Ø       Information utilities

Ø       Customized marketing

Ø       Custom manufacturing

Ø       On-line procurement

Ø       Supplier-customer system integration

Ø       Logistical management of commodity suppliers

Ø       Human recourse planning and management

Ø       Support for non-profit organizations

There is a considerable overlap between these types of E-commerce applications.

 

E-business (electronic storefronts) involve setting up web sites that provide the main interface between an organization and its clients.

They provide a full range of services both to the customers and to employees of the e-business.

Serve the whole business including traditional aspects of marketing, sales and support.

Identify what type of products/ services they provide and what type of clients they serve.

Most successful if they focus on a specific type of business in a particular industry. Some examples include:

Main users:

Main tasks:

 

E-Brokerages

They are a specialized type of E-business, where the main business function of the organization is to bring buyers and sellers together. Some traditional businesses that are based on brokering include:

There are number of techniques that are currently being used:

Users:

Main tasks:

 

Information Utilities: include the obtaining, trading, selling and giving away of information (including advertising)

Some examples:

Users:

Main tasks:

 

 

E-COMMERCE BUSINESS MODELS

Adopted from Prof. Michael Rappa, North Carolina State University in Raleigh

 

Business models are perhaps the most discussed and least understood aspect of the web. There is so much talk about how the web changes traditional business models. But there is little clear-cut evidence of exactly what this means. In the most basic sense, a business model is the method of doing business by which a company can sustain itself -- that is, generate revenue. The business model spells-out how a company makes money by specifying where it is positioned in the value chain. Some models are quite simple. A company produces a good or service and sells it to customers. If all goes well, the revenues from sales exceed the cost of operation and the company realizes a profit. Other models can be more intricately woven. Radio and television broadcasting is a good example. With all the talk about "free" business models on the web, it is easy to forget that radio, and later television, programming has been broadcast over the airwaves free to anyone with a receiver for much of the past century. The broadcaster is part of a complex network of distributors, content creators, advertisers (and their agencies), and listeners or viewers. Who makes money and how much is not always clear at the outset. The bottom line depends on many competing factors. E-commerce will give rise to new kinds of business models. That much is certain. But the web is also likely to reinvent tried-and-true models. Auctions are a perfect example. One of the oldest business models, auctions have been widely used throughout the world to set prices for such items as agricultural commodities, financial instruments, and unique items like fine art and antiquities. Companies like eBay have popularized the auction model and broadened its application on the web to a wide array of goods and services (we will have more to say about auctions later in the course).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brokerage model:

q       Brokers are market-makers: they bring buyers and sellers together and facilitate transactions.

q       B2B, B2C, or C2C markets.

q       A broker makes its money by charging a fee for each transaction it enables.

·         Buy/Sell Fulfillment – This can be an online financial brokerage, like eTrade, where customers place buy and sell orders for transacting financial instruments. Also, travel agents fit into this category. In this the broker charges the buyer and/or seller a transaction fee. Some models work on volume and low overhead to deliver the best negotiated prices, for example, CarsDirect.

·         Market Exchange -- increasingly common model in B2B markets. Good examples are MetalSite or ChemConnect's World Chemical Exchange. In the exchange model, the broker typically charges the seller a transaction fee based on the value of the sale. The pricing mechanism can be a simple offer/buy, offer/negotiated buy, or an auction offer/bid approach.

·         Business Trading Community -- or "vertical web community," a concept pioneered by VerticalNet. It is as a site that acts as an "essential, comprehensive source of information and dialogue for a particular vertical market." VerticalNet's communities contain product information in buyers' guides, supplier and product directories, daily industry news and articles, job listings and classifieds. In addition, VerticalNet's sites enable B2B exchanges of information, supplementing existing trade shows and trade association activities. [see also: Buzzsaw.com]

·         Buyer Aggregator -- Model pioneered by Accompany, which describes buyer aggregation as the process of bringing together individual purchasers from across the Internet to transact as a group so they can receive the same values traditionally afforded to organizations who purchase in volume. Sellers pay a small percentage of each sale on a per-transaction basis. [see also: Mobshop, Volumebuy, and Etrana]

·         Distributor -- A catalog-type operation that connects a large number of product manufacturers with volume and retail buyers. B2B models are increasingly common. Broker facilitates business transactions between franchised distributors and their trading partners. For buyers, it enables faster time to market and time to volume as well as reducing the cost of procurement. By providing the buyer with a means of retrieving quotes from preferred distributors -- showing buyer-specific prices, lead-time, and recommended substitutions -- transaction are more efficient. For distributors, it decreases the cost of sales by performing quoting, order processing, tracking order status, and changes more quickly and with less labor. [ex: NECX]

·         Virtual Mall -- A site that hosts many online merchants. The Mall typically charges setup, monthly listing, and/or per transaction fees [see, for example Yahoo! Store's terms. The virtual mall model may be most effectively realized when combined with a generalized portal. Also, more sophisticated malls will provide automated transaction services and relationship marketing opportunities [ex: Yahoo! Stores, ChoiceMall, iMall, Women.com's Shopping Network]

·         Metamediary -- a business that brings buyers and online merchants together and provides transaction services such as financial settlement and quality assurance. It is a virtual mall, but one that will process the transaction, track orders, and provide billing and collection services. The metamediary protects consumers by assuring satisfaction with merchants. The metamediary charges a setup fee and a fee per transaction. Expect to see virtual malls move more in this direction. [ex: HotDispatch, Amazon 's zShops].

·         Auction Broker -- A site that conducts auctions for sellers (individuals or merchants). Broker charges the seller a fee, which is typically scaled with the value of the transaction. Seller takes highest bid(s) from buyers above a minimum. Auctions can vary in terms of the offering and bidding rules. [ex: eBay, AuctionNet, Onsale]

·         Reverse Auction -- The "name-your-price" business model, also called "demand collection" and "shopping by request". Prospective buyer makes a final (sometimes binding) bid for a specified good or service, and the broker seeks fulfillment. In some models, the broker's fee is the spread between the bid and fulfillment price and perhaps a processing charge. Frequently aimed at high-priced items like automobiles or airline tickets. [ex: Priceline, Respond.com, eWanted, MyGeek.com]

·         Classifieds -- A listing of items for sale or wanted for purchase, typically run by local news content providers. Price may or may not be specified. Listing charges are incurred regardless of whether a transaction occurs.

·         Search Agent -- An agent (i.e., an intelligent software agent or "robot") used to search-out the best price for a good or service specified by the buyer, or to locate hard to find information. [Ex: DealTime, MySimon, RoboShopper, R U Sure, ShopFind] An employment agency can act as a search agent broker, finding work for job-seekers or finding people to fill open positions listed by an employer. [CareerCentral]

·         Bounty Broker -- The offer of a reward (usually a significant monetary sum) for finding a person, thing, idea, or other desired, but hard to find item. The broker may list items for a flat fee and a percent of the reward, if the item is successfully found. [Ex: BountyQuest which lists reward offers for uncovering prior art related to patents.]

Adverising model:

q       The web advertising model is an extension of the traditional media broadcasting model.

q       The broadcaster, in this case, a web site, provides content (usually, but not necessarily, for free) and services (like e-mail, chat, forums) mixed with advertising messages in the form of banner ads.

q       The banner ads may be the major or sole source of revenue for the broadcaster.

q       The broadcaster may be a content creator or a distributor of content created elsewhere.

q       Only works when the volume of viewer traffic is large or highly specialized.

·         Generalized Portal -- high-volume traffic -- typically tens of millions of visits per month (see chart at right) -- driven by generic or diversified content or services (ex: search engines and directories like Excite, AltaVista and Yahoo! or content driven sites like AOL). The high volume makes advertising profitable and permits further diversification of site services. Competition for volume has led to the packaging of free content and services, such as e-mail, stock portfolio, message boards, chat, news, and local information.

·         Personalized Portal -- The generic nature of a generalized portal undermines user loyalty. This has led to the creation of portals (ex: My.Yahoo!, My.Netscape) that allow customization of the interface and content. This increases loyalty through the user's own time investment in personalizing the site. The profitability of this portal in based on volume and possibly the value of information derived from user choices. Personalization can support a "specialized portal" model.

·         Specialized Portal -- Also called a "vortal" (i.e., vertical portal). Here volume is less important than a well-defined user base (perhaps 0.5-5 million visits per month). For example, a site that attracts only golfers, or home buyers, or new parents, can be highly sought after as a venue for certain advertisers who are willing to pay a premium to reach that particular audience.

·         Attention / Incentive Marketing -- the "pay for attention" model -- pays visitors for viewing content and completing forms, or sweepstakes, or frequent flyer-type point schemes. The attention marketing approach has the most appeal to companies with very complex product messages, which might otherwise find it hard to sustain customer interest. The concept was pioneered by CyberGold, with its "earn and spend community" that brings together advertisers interested in incentives-based marketing with consumers looking to save. To facilitate transactions, the company developed and patented a micropayment system. Other loyalty-based relationship marketing approaches are Netcentives, or MyPoints.

·         Free Model -- Give users something for free: site hosting [ex: FreeMerchant], web services, Internet access, free hardware, electronic greeting cards [BlueMountain]. Freebies create a high volume site for advertising opportunities. Viability is hardest when based purely on advertising revenue. Opportunity to blend with infomediary model.

·         Bargain Discounter -- the most notable example is Buy.com, which sells its goods typically at or below cost, and seeks to make a profit largely through advertising.

Infomediary model:

q       Data about consumers and their buying habits are extremely valuable.

q       Especially when that information is carefully analyzed and used to target marketing campaigns.

q       Some firms are able to function as infomediaries by collecting and selling information to other businesses.

q       An infomediary may offer users free Internet access [NetZero] or free hardware [eMachines.com] in exchange for detailed information about their surfing and purchasing habits.

q       This is more likely to succeed than the pure advertising model.

q       The infomediary model can also work in the other direction: providing consumers with useful information about the web sites in a market segment that compete for their dollar.

 

·         Recommender System -- is a site that allows users to exchange information with each other about the quality of products and services -- or the sellers with whom they have had a purchase experience (good or bad) [See: Deja.com, ePinions]. ClickTheButton takes the concept a step further by integrating the recommender system into the web browser. Such agents monitor a user's habits, thereby increasing the relevance of its recommendations to the users needs -- and the value of the data to the collector. Recommender systems can take advantage of the affiliate model offered by merchants to augment revenue from the sale of consumer information.

·         Registration Model -- Content-based sites that are free to view but require users simply to register (other information may or may not be collected). Registration allows inter-session tracking of users' site usage patterns and thereby generates data of greater potential value in targeted advertising campaigns. This is the most basic form of infomediary model. [ex: NYTimes.com]

Merchant models:

q       Classic wholesalers and retailers of goods and services (increasingly referred to as "e-tailers").

q       Sales may be made based on list prices or through auction.

q       In some cases, the goods and services may be unique to the web and not have a traditional "brick-and-mortar" storefront.

·         Virtual Merchant -- a business that operates only over the web and offers either traditional or web-specific goods or services (a.k.a., pure-play e-tailers). The method of selling may be list price or auction. An example of a service merchant is Facetime, which calls itself an "application service provider". It offers live customer support for e-commerce web sites. [ex: Amazon, OnSale]

·         Catalog Merchant -- the migration of mail-order to a web-based order business. [ex: Levenger]

·         Surf-and-Turf -- traditional brick-and-mortar establishment with web storefront. The model has the potential for channel conflict. Physical stores can prove to be an asset if cleverly integrated into web operations. Also known as "bricks-and-clicks". [ex: Gap, Lands End, B&N]

·         Bit Vendor -- a merchant that deals strictly in digital products and services and, in its purest form, conducts both sales and distribution over the web. [ex: Eyewire]

Manufacturer model:

q       This model is predicated on the power of the web to allow manufacturers to reach buyers directly and thereby compress the distribution channel (i.e., eliminate wholesalers and retailers).

q       Can be based on efficiency (cost-savings that may or may not be passed on to consumers), improved customer service, and a better understanding of customer preferences.

q       Perishable products that benefit from fast distribution, like fresh flowers [ex: Flowerbud], may prove advantageous by eliminating middlemen.

q       The model has the potential for channel conflict with a manufacturer's established supply chain. [ex: Intel, Apple]

 

Affiliate model:

q       In contrast to the generalized portal, which seeks to drive a high volume of traffic to one site, the affiliate model, provides purchase opportunities wherever people may be surfing.

q       It does this by offering financial incentives (in the form of a percentage of revenue) to affiliated partner sites.

q       The affiliates provide purchase-point click-through to the merchant.

q       It is a pay-for-performance model -- AffiliateWorld.]

 

Community models:

q       The viability of the community model is based on user loyalty (as opposed to high traffic volume).

q       Users have a high investment in both time and emotion in the site.

q       In some cases, users are regular contributors of content and/or money.

q       Having users who visit continually offers advertising, infomediary or specialized portal opportunities.

q       The community model may also run on a subscription fee for premium services.

·         Voluntary Contributor Model -- similar to the traditional public broadcasting model -- the listener or viewer contributor method used in not-for-profit radio and television broadcasting. The model is predicated on the creation of a community of users who support the site through voluntary donations. Not-for-profit organizations may also seek funding from charitable foundations and corporate sponsors that support the organization's mission. The web holds great potential as a contributor based model because the user base is more readily apparent. [Ex: National Public Radio]

·         Knowledge Networks -- or expert sites, that provide a source of information based on professional expertise or the experience of other users. Sites are typically run like a forum where persons seeking information can pose questions and receive answers from (presumably) someone knowledgeable about the subject. The experts may be employed staff, a regular cadre of volunteers, or in some cases, simply anyone on the web who wishes to respond. [Deja, ExpertCentral, KnowPost, Xpertsite, Abuzz] Also fee-based model [Ex: Guru, Exp]

Subscribtion model

q       Users pay for access to the site.

q       High value-added content is essential [ex: Wall St. Journal, Consumer Reports].

q       A 1999 survey by Jupiter Communications found that 46 percent of Internet users would not pay to view content on the web.

q       Some businesses have combined free content (to drive volume and ad revenue) with premium content or services for subscribers only.

 

 

Utility model:

q       The utility model is a metered usage or pay as you go approach.

q       Its success may depend on the ability to charge by the byte, including micropayments (that is, those too small to pay by credit card due to processing fees). [ex: FatBrain, SoftLock, Authentica]