CS37420

1. CS37420 Business Models 2

2. Major B2C Business Models Models where online businesses seek individual customers: • Portal AOL, Yahoo, msn • Content provider BBC, CNN • E-tailer Amazon, Dell, LandsEnd, Debenhams • Transaction broker E-Trade, Expedia • Market creator eBay • Service Provider xDrive • Community Service About, iVillage

3. Portal Originally a gateway to the Internet, now a destination site seeks to be a user’s home base. • offers an integrated package of content and services, e.g. • news • search tools • email • instant messaging, • shopping • videostreaming • music downloading etc. • revenue is from advertising, subscription and transaction fees; • ISPs also fall into this category and their revenue stream is subscription fees.

4. Content Provider • information and entertainment providers e.g. newspapers, sports sites, stockmarket magazines, ‘how to’ guidance etc.; • revenue is generated by advertising, subscription fees, referral fees and download charges; • micropayment systems provide cost-effective methods for processing high volumes of small payments; • key to success is owning the content; • traditional owners like publishers, newspapers , broadcasters have strong advantages over newcomers; • any e-commerce start up, unless it has a unique information source, will find it difficult to make money; • more internet users retrieve information ( 70% ) than purchase products ( 30% ).

5. E -Tailer Many different sizes and shapes but basically a shop in all cases revenue is generated by sales of goods Examples illustrate diversity :- • Amazon - an online version of a retail store – a virtual merchant shopping 24/24 and 7/7 without leaving home or office; • Walmart - online distribution but also physical stores (‘clicks and bricks’ or ‘clicks and mortar’); • LandsEnd - online direct mail catalogue (catalogue merchant); • Dell - online sales directly from manufacturer (manufacturer direct); • “time starved” people are hot prospects.

6. E – Tailer • highly competitive because barriers to entry are very low e.g. someone selling old fashioned sweets from home; • many thousands started – and went bust! • keys to success are :- • keeping expenses low; • offering as broad a selection as possible; • keeping a tight control on inventory - inventory is very difficult to gauge and in fact caused eToys to fail (now relaunchded); • targeting a niche to start with.

7. Transaction Broker • a site offering transactions in stock dealing, travel tickets, hotel reservations, car rentals etc. and job vacancies; • supplants the personal phone, fax or mail; • advantages are :- • faster handling • wider choice • reduced costs • vacancies for seats and hotel – immediately • rapid reaction to stock movements • the largest industries using this model are :- • financial services • travel services • job placement services.

8. Transaction Broker – examples • online stock brokers • E-Trade , Ameritrade , Datek , Schwab • save time and money and give information and advice • revenue stream is from commissions on trades • travel services • originally just airline tickets • now is general travel including hotels, car rentals, tours, packages and theatre tickets • examples are Expedia and lastminute • job placement services • offer both employers and job searchers a market space for talent • revenue comes from fees for placements and increasingly for listings • examples are Monster +Hotjobs and jobs.ac.uk.

9. Market Creator Creates a digital environment where:- • buyers and sellers meet • display products • search for products • establish a price for products • they meet, agree price and transact • revenue for the creator is a fee from each sale in addition to a listing fee • example eBay; • eBay has been profitablealmost from the beginning – because it has no production or inventory costs.

10. Market Creator ..cont • potential opportunity is very big • items being traded are now moving into different areas • eBay started with simple items like VCRs and DVDs • now automobiles have become the largest single sector

11. Service Providers • offer services online • trade knowledge , expertise and effort for revenue • revenue from - subscription fees , one time payments , • commissions and advertising • their service is – valuable , low cost , convenient and • above all time – saving • very valuable to busy people who are ‘time starved’ • large variety of services – • online information storage e.g. $10 per month for 500mb • financial transaction brokers e.g. pension planning • travel brokers - holiday planning • grocery shopping services - Tesco , Netgrocer

12. Community Providers • sites which create a digital online environment where people with similar interests can communicate , transact and receive information of interest • revenue is a hybrid model which includes subscription fees • sales , transaction fees , referral fees and advertising fees • from firms attracted by a very focussed audience

13. Community Providers Examples • About (owned by Primedia) • offers a site with practical tips and guides to a vast array of activities • e.g. About recommends a book from Amazon and receives a fee if the book is bought • Mumsnet • offers advice and tips on bring up a family etc. • gets advertising revenue from banner ads. Perhaps advertorial.

14. Major B2B Business models Businesses sell to other businesses • size of the market is some 4 times that of B2C • value is currently estimated at over $1 trillion • by 2006 it was estimated to be worth $5 trillion • in 2006 it was about 1/3 of total inter-firm processing. Models: • Market place / exchange (B2B hub) • E – distributor • B2B Service provider (ASP) • Matchmaker • Infomediary.

15. Market place / Exchange / B2B hub • vertical – brings buyers and sellers together to reduce procurement costs for a specific industry; • horizontal – as vertical but products and services across industries; • revenue is from transaction fees; • DirectAg (vertical) serves the agricultural market and provides farmers etc with catalogues and news of commodities; • TradeOut (horizontal) helps companies with excess inventory and idle assets to sell these to other companies; • Covesint (vertical) the largest in the motor industry, formed in 2000 (by the big motor manufacturers) has had a chequered existence and was bought by Compuware.

16. E-Distributor Supplies products and services directly to other businesses • revenue is from sales of goods and services • example - Grainger , the largest distributor of MRO (maintenance, repair and operations supplies) • it added an online facility in 1995 which has become very popular

17. Matchmaker Links businesses and takes a fee for any business which occurs. • similar to the B2C transaction broker; • revenue is from transaction or usage fee. Example • iShip was bought by UPS in 2001; • now finds the cheapest shipper for business packages; • lets companies compare rates and conditions from major carriers like Federal Express, Airborne, US postal services etc. • then charges a fee to proceed with the shipment; • its sophisticated software lets a company track its packages throughout their journey.

18. Infomediary Gathers information about consumers and sells it to other businesses • revenue is from sales of information • a new breed of company acting as custodians, agents and brokers of customer information while protecting their privacy. Examples: • Doubleclick (audience broker) develops tools that advertisers , direct marketeers and web publishers use to plan, execute and analyse marketing programmes; • Autobutel (lead generator) operates a network of car dealers to whom web users are referred in return for a fee

19. ASP: Application Service Provider • the second coming of the model ? • an outdated concept ? • the future of software ? • has public opinion changed ? • software companies do they service or do they sell ? • are investors interested ?

20. What is an ASP ? • a behind-the-scenes business model; • simply a way of selling and distributing software & software services; • also called: • “software as a service “ • “on-demand computing “ • “utility computing “ • drastically lowers the cost of software and services; • very economical for small businesses and start-ups; • ASPs in different forms have been in use for centuries.

21. Internet ASPs – common features • an ASP supplies software applications and/or related services over the Internet; • owns and operates a software application; • owns and operates the servers that run the application; • employs the people needed; • makes the application available everywhere; • charges for the application on either by use or on the basis of a monthly or annual fee.

22. Internet ASPs Two generations of Internet ASPs • the first generation was roughly from 1997 to 2001; • it rode the dot.com boom but most of them went bust in the crash; • they often did not own the software which they sold as a service; • they had to employ expensive experts to support their packages; • the software was usually adapted from older packages; • to attract clients, marketing costs became exorbitant; • the few which survived evolved a different business model.

23. Second Generation Internet ASPs • the second generation was from 2001 to now; • second generation ASPs develop a product from scratch to be delivered as a service; • match the functionality of traditional client-server applications; • build up customer bases steadily; • enhance their financial stability; • the subscription-based model is more customer friendly; • now there is a core of proven ASPs with mature products, good service and very competitive pricing.

24. Advantages of using ASPs • low cost of entry; • extremely short set-up time; • pay-as-you-go model significantly less expensive for all but the most frequent users of the package; • eliminates headcount – IT staff are usually specialised and very expensive; • avoids not only the need for the user to support the application but also the need to support the specialised IT infrastructure (e.g. Oracle) required for the application; • enables companies to use complex software that they normally couldn’t afford.

25. Traditional software companies and ASPs • many traditional software vendors have dipped their toes in the ASP pool; • companies like Oracle , Peoplesoft , SAP and Siebel have all tested the waters with varying success • there is a renewed focus on an ASP strategy • initially they have simply hosted legacy applications and made them available on line • now they have to develop an application from ground up.

26. Checklist for a prospective ASP user • how do customers access the software – application or browser? • how are customer service issues resolved? • how secure is the data? • how secure is the connection between the ASP and the user? • how is the application served – dedicated or shared machine? • how does the ASP handle hardware/software problems? • how does the ASP handle a disaster? • how can I move data between existing applications and the ASP? • how can I get the data out if I choose to select a new ASP two years from now?

27. ASP - Salesforce.com • invested in and built an expensive but comprehensive sales force management system; • offers a ‘best of breed’ system which is updated regularly; • it spreads the cost over many users – to date it has signed up some 9,800 companies with some 147,000 subscribers; • Salesforce’s target is the sales management sector of a company; • its software enables the sales people, wherever they are, to access and manage all their information on clients’ accounts and market through a simple web page (made to look a bit like Amazon’s or eBay’s).

28. ASP Salesforce.com (cont ) • all the computing is done on Salesforce’s machines; • firms rent the Salesforce software for $65 per user per month; • however, Salesforce only made its first profit in 2003; • in 2003 it had profits of $3.5 million on sales of $96 million • expenditure on research and development, and marketing caused the earlier losses; • its IPO (June 2004) raised US$110 million; • although still small, Salesforce has caused an upheaval in the CRM industry

29. Other Business Models C2C – consumer to consumer , enables consumers to sell to each other • originally it was to sell used merchandise • now new items too • revenue is from transaction fees Examples: • eBay introduced the online auction idea • Half, unlike eBay, lets sellers fix a price for each item • takes a 15% commission on a sale, • like eBay is doing well.

30. On-line AdvertisingChanging model • Initially ‘cost per thousand’, then ‘paid search’ or ‘pay-per-click’. • Overture (bought by Yahoo for $1.6 bn) invented pay-per-click in 1997. • Google imitated Overture’s business model with spectacular success. • Advertisers bid to have their link displayed next to search results. • Growing fast – US was $2.3 billion in first half of 2005 was up by 27%. Global estimate for 2010 is $20 billion.