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Business Models for E-Commerce
A review of the different online business models made available through e-commerce is of relevance to existing companies, but in particular, start-up companies and online intermediaries. Venkatram (2000) points out that existing businesses need to use the Internet to build on current business models, while at the same time experimenting with new business models. New business models may be important to gain a competitive advantage over existing competitors, while at the same time heading off similar business models created by new entrants. More commonly, they may simply offer a different revenue stream through advertising or charging for services in a new way. For Internet start-ups the viability of a business model and in particular their sources of revenue will be crucial to funding from venture capitalists. But what is a business model? Timmers (1999) defines a ‘business model’ as:
“An architecture for product, service and information flows, including a description of the various business actors and their roles; and a description of the potential benefits for the various business actors; and a description of the sources of revenue.”
The business model for e-commerce requires consideration of a company and its position in which relate to structure of the micro-environment. Investors will require eight key elements of the business model to be defined which will summarize the organization’s e-business strategy:
- Value proposition. Which products and or services will the company offer? This is supplemented by the added value defined using the online value proposition, Customization, Community, Convenience, Choice and Cost Reduction.
- Market or audience. Which audience will the company serve and target with its communications? For example, business-to-business, business-to-consumer or not-for-profit? Within these categories are there particular audience segments that will be targeted. The scope of geographical markets such as countries, regions or towns need to be defined. A communications plan will detail how the audience will be reached and influenced using online communications on other sites and offline communications such as advertising and public relations.
- Revenue models and cost base. What are the specific revenue models that will generate different income streams? What are the main costs of the business forming its budget? How are these forecast to change through time?
- Competitive environment. Who are the direct and indirect competitors for the service and which range of business models do they possess?
- Value chain and marketplace positioning. How is the company and its services positioned in the value chain between customers and suppliers and in comparison, with direct and indirect competitors?
- Representation in the physical and virtual world. What is its relative representation in the physical and virtual world, e.g. high-street presence, online only, intermediary, mixture? How will the company influence its audience through the buying process through multichannel marketing? For example, how important will be personal interactions such as phone and chat which attract high service costs, but often have higher conversion rates?
- Organizational structure. How will the organization be internally structured to create, deliver and promote its service? How will it partner with other companies to provide services, for example through outsourcing?
- Management. What experience in similar markets and companies do the managers have? What is their profile which can be helpful to attract publicity?
Timmers (1999) identifies no less than eleven different types of business model that can be facilitated by the web. These are described mainly in terms of their revenue models and value chain or marketplace positioning. You will notice that many of these are in common with the intermediary types identified by Sarkar listed below.
- E-shop – marketing of a company or shop via the web;
- E-procurement – electronic tendering and procurement of goods and services;
- E-auctions – eBay (ebay.com) is the best-known example and offers both B2B and B2C offerings;
- Virtual communities – these can be B2C communities such as the major social networks or B2B communities such as built around trade publishers; these are important for their potential in e-marketing.
- Collaboration platforms – these enable collaboration between businesses or individuals, e.g. E-groups, now part of Yahoo! (yahoo.com) services;
- Third-party marketplaces.
- Value-chain integrators – offer a range of services across the value chain;
- Value-chain service providers – specialize in providing functions for a specific part of the value chain, such as the logistics company UPS (ups.com);
- Information brokerage – provide information for consumers and businesses, often to assist in making the buying decision or for business operations or leisure;
- Trust and other services – examples of trust services include Internet Shopping is Safe (ISIS) (www.imrg.org/isis) or TRUSTe (truste.org) which authenticate the quality of service provided by companies trading on the web.
- E-malls – a collection of e-shops such as Indigo Square (indigosquare.com);
Pant and Ravichandran (2001) have also produced a similar list of business models. Publishers are a major type of business model that is not clearly represented in the Timmers categories. Riggins and Mitra (2007) have a more recent evaluation of alternative online marketplace players. the important point is that as part of strategy development, organizations should identify relevant partners and develop tactics for working with them appropriately. Finally, Michael Rappa, a professor at North Carolina State University, has a useful compilation of examples of online business models in these and other categories. At a lower level, Rappa identifies utilities providers that provide online services such as the Internet service providers and hosting companies.