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 shown in Figure 2.1. Investors will require eight key elements of the business model to be defined which will summarize the organization’s e-business strategy:

  1. Value proposition. Which products and or services will the company offer? This is supple­mented by the added value defined using the online value proposition described in Chapter 5 under the six headings of Content, Customization, Community, Convenience, Choice and Cost Reduction.
  2. 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 as described in Chapters 8 and 9 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.
  3. 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?
  4. Competitive environment. Who are the direct and indirect competitors for the service and which range of business models do they possess?
  5. 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?
  6. 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?
  7. Organizational structure. How will the organization be internally structured to create, deliver and promote its service (this is covered in Chapter 10)? How will it partner with other companies to provide services, for example through outsourcing?
  8. 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 which we reviewed earlier in the chapter:

  1. E-shop – marketing of a company or shop via the web;
  2. E-procurement – electronic tendering and procurement of goods and services;
  3. E-malls – a collection of e-shops such as Indigo Square (indigosquare.com);
  4. E-auctions – eBay (ebay.com) is the best-known example and offers both B2B and B2C offerings;
  5. 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 and are described in the section on virtual communities in Chapter 9;
  6. Collaboration platforms – these enable collaboration between businesses or individuals, e.g. E-groups, now part of Yahoo! (yahoo.com) services;
  7. Third-party marketplaces – marketplaces are described in Focus on electronic B2B market­places in Chapter 7;
  8. Value-chain integrators – offer a range of services across the value chain;
  9. Value-chain service providers – specialize in providing functions for a specific part of the value chain, such as the logistics company UPS (ups.com);
  10. Information brokerage – provide information for consumers and businesses, often to assist in making the buying decision or for business operations or leisure;
  11. Trust and other services – examples of trust services include Internet Shopping is Safe (ISIS) (imrg.org/isis) or TRUSTe (www.truste.org) which authenticate the quality of service provided by companies trading on the web.

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. We examine the revenue models for these in the next section.

Riggins and Mitra (2007) have a more recent evaluation of alternative online marketplace players which we review in Chapter 7. Regardless of the descriptors used, 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 in the link shown at the end of the chapter. At a lower level, Rappa identifies utilities providers that provide online services such as the Internet service providers and hosting companies we discuss in Chapter 3.

Now complete Activity 2.2 to assess whether it is possible to simplify these business models and read Case Study 2.1 to see examples of new revenue models that can be used by a forward-looking retailer.

  1. Marketplace position perspective. The book publisher here is the manufacturer, Amazon is a retailer and Yahoo! is both a retailer and a marketplace intermediary.
  2. Revenue model perspective (p. 80). The book publisher can use the web to sell direct and Yahoo! and Amazon can take commission-based sales. Yahoo! also has advertising as a revenue model.
  3. Commercial arrangement perspective (p. 69). All three companies offer fixed-price sales, but, in its place as a marketplace intermediary, Yahoo! also offers alternatives.

1. Revenue models

Revenue models specifically describe different techniques for generation of income. For existing companies, revenue models have mainly been based upon the income from sales of products or services. This may be either for selling direct from the manufacturer or supplier of the service or through an intermediary that will take a cut of the selling price. Both of these revenue models are, of course, still crucial in online trading. There may, however, be options for other methods of generating revenue; perhaps a manufacturer may be able to sell advertising space or sell digital services that were not previously possible.

2. Online publisher and intermediary revenue models

For a publisher, there are many options for generating revenue online based around advertising and fees for usage of the online service. These options, particularly the first four in the list below, can also be reviewed by other types of business such as price comparison sites, aggregators, social networks and destination sites which can also carry advertising to supplement revenue. The main types of online revenue model are:

  1. CPM display advertising on site. CPM stands for ‘cost per thousand’ where M denotes ‘mille’. This is the traditional method by which site owners charge a fee for advertising. The site owner such as FT.com charges advertisers a rate card price (for example €50 CPM) according to the number of times ad are served to site visitors. Ads may be served by the site owner’s own ad server or more commonly through a third-party ad network service such as Doubleclick (which is owned by Google).
  2. CPC advertising on site (pay-per-click text ads). CPC stands for ‘cost per click’. Advertisers are charged not simply for the number of times their ads are displayed, but according to the number of times they are clicked upon. These are typically text ads served by a search engine such as Google (google.com) on what is known as its content network. Google has its Adsense (http://adsense.google.com) programme for publishers
    which enables them to offer text- or image-based ads typically on a CPC basis, but option­ally on a CPM basis. Microsoft and Yahoo! have similar, but much smaller networks. Typical costs per click can be surprisingly high, i.e. they are in the range €0.10 to €4, but sometimes up to €20 for some categories such as ‘life insurance’ which have a high value to the advertiser. The revenue for search engines and publishers from these sources can also be significant: Google’s annual reports (http://investor.google.com) show that this is between a quarter and a third of Google’s revenue.
  3. Sponsorship of site sections or content types (typically fixed fee for a period). A company can pay to advertise a site channel or section. For example, the bank HSBC spon­sors the Money section on the Orange broadband provider portal orange.co.uk. This type of deal is often struck for a fixed amount per year. It may also be part of a reciprocal arrangement, sometimes known as a ‘contra-deal’ where neither party pays. Afixed-fee sponsorship approach was famously used in 2005 by Alex Tew, a21-year-old considering going to university in the UK who earned $1,000,000 in 4 months when he set up his Million Dollar Homepage (www.miNiondoNarhomepage.com). His page (Figure 2.14) was divided into 100-pixel blocks (each measuring 10 by 10 pixels) of which there are 10,000, giving 1,000,000 pixels in total. Alex spent £50 on buying the domain name www.miNiondollarhomepage.com and a basic web-hosting package. He designed the site himself but it began as a blank page.
  4. Affiliate revenue (CPA, but could be CPC). Affiliate revenue is commission-based, for example I display Amazon books on my site DaveChaffey.com (davechaffey.com) and receive around 5% of the cover price as a fee from Amazon. Such an arrangement is sometimes known as cost per acquisition (CPA). Increasingly, this approach is replacing CPM or CPC approaches where the advertiser has more negotiating power. For example, in 2005 the manufacturing company Unilever negotiated CPA deals with online publishers where it paid for every e-mail address captured by a campaign rather than a traditional CPM deal. However, it depends on the power of the publisher, who will often receive more revenue overall for CPM deals. After all, the publisher cannot influence the quality of the ad creative or the incentivization to click which will affect the clickthrough rate on the ad and so earnings from the ad.
  5. Transaction fee revenue. A company receives a fee for facilitating a transaction. Examples include eBay and Paypal who charge a percentage of the transaction cost between buyer and seller.
  6. Subscription access to content or services. A range of documents can be accessed from a publisher for a period of a month or typically a year. These are often referred to as premium services on web sites. For example, I subscribe to the FT(ft.com) for access to the digital technology section for around €80 per year.
  7. Pay-per-view access to documents. Here payment occurs for single access to a document, video or music clip which can be downloaded. It may or may not be protected with a pass­word or digital rights management. I pay to access detailed best-practice guides on Internet marketing from Marketing Sherpa (marketingsherpa.com).
  8. Subscriber data access for e-mail marketing. The data a site owner has about its customers are also potentially valuable since it can send different forms of e-mail to its customers if they have given their permission that they are happy to receive e-mail from either the publisher or third parties. The site owner can charge for adverts placed in its newletter or can deliver a separate message on behalf of the advertiser (sometimes known as ‘list rental’). A related approach is to conduct market research with the site customers.

3. Calculating revenue for an online business

Site owners can develop models (Figure 2.13) of potential revenue depending on the mix of revenue-generating techniques from the four main revenue options they use on the site given in the options above.

Consider the capacity of a site owner to maximize revenue or ‘monetize’ their site – which factors will be important? The model will be based on assumptions about the level of traffic and number of pages viewed plus the interaction with different types of ad unit. Their abil­ity to maximize revenue will be based on these factors which can be modelled in the spreadsheet shown in Figure 2.15:

  • Number and size of ad units. This is a delicate balance between the number of ad units in each site section or page – too many obtrusive ad units may present a bad experience for site users, too few will reduce revenue. Figure 2.15 has a parameter for the number of ad units or containers in each ad revenue category. There is a tension with advertisers who know that the awareness and response they generate from their ads is maximized when they are as large as practical and in prominent placements. Many online newspaper sites such as the New York Times (nytimes.com) or London Times (www.timesonline.co.uk) will tend to display ads to the top and right of the screen where they will not interfere too much with reading the articles. A more accurate revenue model would develop revenue for different page types such as the home page and different page categories, e.g. the money or travel sections of a newspaper.
  • Capacity to sell advertising. Figure 2.15 also has a parameter for the percentage of ad inven­tory sold in each category – for example, for the CPM ad display revenue only 40% of inventory may be sold. This is why you may see publisher sites such as FT.com with their own ‘house ads’ – it is a sign they have been unable to sell all their ad space. A benefit of using the Google AdSense publisher programme is that inventory is commonly all used.
  • Fee levels negotiated for different advertising models. These will depend on the market competition or demand for advertising space from advertisers. For ‘pay-per- performance’ advertising options such as the CPC and CPA models, it also depends on the response. In the first case, the site owner only receives revenue when the ad is clicked upon and in the second case, the site owner only receives revenue when the ad is clicked upon and a product is purchased on the destination merchant site.
  • Traffic volumes. More visitors equate to more opportunities to generate revenue through serving more pages (which helps with CPM based advertising) or more clicks to third- party sites (which helps generate revenue from CPC and CPA deals).
  • Visitor engagement. The longer visitors stay on a site (its ‘stickiness’), the more page views that will accumulate, which again gives more opportunities for ad revenue. For a destination site a typical number of page views per visit would be in the range 5 to 10, but for a social network, media site or community the figure could be greater than 30.

Considering all of these approaches to revenue generation together, the site owner will seek to use the best combination of these techniques to maximize the revenue. An illustration of this approach is shown in Figure 2.15.

To assess how effective different pages or sites in their portfolio are at generating revenue using these techniques, they will use two approaches. The first is eCPM, or effective cost per thousand. This looks at the total the advertiser can charge (or cost to advertisers) for each page or site. Through increasing the number of ad units on each page this value will increase. This is why you will see some sites which are cluttered with ads. The other alterna­tive to assess page or site revenue-generating effectiveness is revenue per click (RPC), which is also known as ‘earnings per click’ (EPC). Alternatively, revenue can be calculated as ad rev­enue per 1,000 site visitors. This is particularly important for affiliate marketers who make money through commission when their visitors click through to third-party retail sites such as Amazon, and then purchase there.

Activity 2.4 explores some of the revenue models that are possible.

Source: Dave Chaffey (2010), E-Business and E-Commerce Management: Strategy, Implementation and Practice, Prentice Hall (4th Edition).

2 thoughts on “Business models for e-commerce

  1. zoritoler imol says:

    Those are yours alright! . We at least need to get these people stealing images to start blogging! They probably just did a image search and grabbed them. They look good though!

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