Electronic Commerce COMP3210

2. Electronic Commerce COMP3210 Session 7: Making Money on the Web Dr. Paul Walcott Department of Computer Science, Mathematics and PhysicsUniversity of the West Indies, Cave Hill CampusBarbados © 2007 Dr. Paul Walcott The Department of Computer Science Mathematics and Physics, University of the West Indies, Cave Hill Campus, Barbados

3. Session Objectives • The objectives of this session are: • To describe some of the methods of obtaining products to sell on the Web • To describe digital products • To compare and contraast six revenue models used by Web businesses to make money

4. Identifying Products1 • Before a new Web business can sell products on-line they must first identify those product which would yield highest profits http://www.kbcc.cuny.edu/propre/math/Math_13/BITS.JPG

5. Identifying Products Cont’d • Practically any product can be sold on-line • However, that does not mean that it is profitable to sell any product on-line • For example, selling a product with a low value-to-weight ratio to a person who lives in another continent might be impractical due to high shipping costs • Remember that the goal of e-commerce is to make money

6. Identifying Products Cont’d • Some wholesale distributors are willing to ship any products they distribute directly to the customer’s home, after they have paid for it • As an Internet business, if you can find the customers to buy these products then you might be able to make money • This approach is called drop shipping

7. Identifying Products Cont’d • Although drop shipping may seem extremely attractive, it does has problems: • The Internet Business has no way of ensuring the quality of the product (since they never see it) • All wholesale distributors are not legitimate

8. Identifying Products Cont’d • Products which are digital in nature (e.g. software, music, information and computer games) lend themselves well to e-commerce since: • There is very little cost involved in reproducing them • The product can be delivered instantly on-line (after payment)

9. Identifying Products Cont’d • Some of the characteristics of digital products include: • Indestructibility • A digital product maintains its form and quality forever • Transmutability • The content of a digital product can be changed instantly • Reproducibility • Digital products can be reproduced, stored and transferred

10. Identifying Products Cont’d • Theft or pirating of digital products is one of the disadvantages of selling digital products online • Both technology, in the form of encryption, and legislation (e.g. Intellectual property legislation) is used as a deterrent

11. Revenue Models2 • What are revenue models? • This are models used by B2C and B2B e-commerce initiatives to generate revenue http://www.bay13.net/pics/desktop/morepictures/money.jpg

12. Revenue Models Cont’d • In this session you will learn about the: • Web catalog revenue model • Digital content revenue model • Advertising-supported revenue model • Advertising-subscription mixed revenue model • Fee-based revenue models

13. Web Catalog Revenue Model • History • In 1872 Aaron Montgomery-Ward started selling dry goods to farmers using a one-page list • Richard Sears and Alvah Roebuck in 1895 began mailing catalogs to farmers and small residents

14. Web Catalog Revenue Model Cont’d • The prospective buyer selects items for purchase from an on-line catalog and makes the payment on-line, by telephone or by mail • alternative payment options are required since some people are cautious about disclosing credit card information on-line • The type of items sold by this method include: • Computers and consumer electronics (e.g. dell.com) • Books, music and videos (e.g. amazon.com) • Clothing (e.g. myvirtualmodel.com)

15. Digital Content Revenue Model • Digital products received through purchasing or subscriptions are received instantly • Legal research (e.g. lexis.com) • Digital copies of published documents (e.g. ProQuest acquired reproduction rights to digital versions of journals and books) • Also ACM (Associated for Computer Machinery)

16. Advertising Supported Revenue Model • This model is used by network television in the U.S. where the audience is provided with free viewing with advertising messages • The money made from advertising supports the operation of the business • Before the year 2000 this was an extremely popular model (between 1994 and 1998 it grew from US $0 - $2 billion

17. Advertising Supported Revenue Model Cont’d • During 2000-2002 there was no growth in Web advertising • Since 2002, however Web advertising has started to grow again but at a slower rate • Only a few high-traffic sites (e.g. Yahoo.com) can generate significant revenue this way – because of the large number of visitors • Some information only sites are still successfully using this model, e.g. www.about.com and www.howstuffworks.com

18. Web Advertising Problems • Web advertising has been hampered by: 1. Identifying ways to measure and charge for site visitors • Some measurements do exist, e.g. number of visitors, number of unique visitors, and the number of click throughs, however it is difficult to develop a standard • The key is to make a sticky Web site (the ability to attract new and repeat visitors to a Web site) because visitors will be exposed to more ads

19. Web Advertising Problems Cont’d 2. Few Web sites have sufficient visitors to attract large advertisers • Most successful advertising is targeted at specific groups based on demographics, e.g. address, age, gender, income level, type of job, hobbies and religion (due to privacy issues more and more people are unwilling to give this information)

20. Advertising-subscription Mixed Model • Used for many years by newspapers and magazines (subscribers pay a fee and accept some level of advertising) • Subscribers are subjected to less advertising than an Advertising supported Web site • The New York Times and The Wall Street Journal use this model • Both of these newspapers use a separate revenue model for the print and on-line editions

21. Advertising-subscription Mixed Model Cont’d • The New York Times is supported mainly by advertising, but charges a small subscription fee for visitors who want to access crossword puzzles • A searchable archive (dated back to 1996) is also provided • A small fee is charged for articles dated back more than one week

22. Fee-for-Transaction Revenue Model • In this model businesses offer services for which a fee is charged. The fee is based on the number or size of transactions they process. • Transactions can be personalised and executed much cheaper than traditional transaction service providers • An examples is a travel agent: • Before, a commission was paid for every ticket sold. • However, with more low cost flights being offered commissions in many cases have disappeared. • Many travel agents now charge a flat fee for processing a ticket on an airline that has reduced or eliminated the fees it pays to travel agents

23. Fee-for-Service Revenue Model • An increasing number of organisations are charging fees for services provided • These fees are not based on the size or number of transactions processed, but rather on the value of the service provided • e.g. on-line games and entertainment • Sony’s EverQuest adventure game has greater than 400,000 players. Each player purchased a US$40 software pack and pays US$10 monthly

24. Revenue Models In Transition • Many companies have changed their revenue models in order to remain competitive; some examples of changes in revenue models are: • Subscription to Advertising-Supported Model • Advertising-Supported to Advertising-Subscription Mixed Model • Advertising-Supported to Fee-for-Services Model • Advertising-Supported to Subscription Model

25. Subscription to Advertising-Supported Model • Microsoft State magazine started as an upscale news and current events publication • First charged an annual subscription fee (only 27,000 subscribers with $500,000 revenue) which did not cover operational cost • They changed to an advertising-supported site, although it is uncertain whether this new model is profitable. • This Web site however is part of the MSN portal so it probably improves its stickiness

26. Advertising-Supported to Advertising-Subscription Mixed • Salon.com is an upscale online magazine • It started out operating as an advertising-supported site, but now offers an optional subscription version of the site • Subscribers pay US$30 a year to view the Premium version, which is free of advertising and can be downloaded for later reading • Premium subscribers also gain access to additional content (music, e-books and audio books)

27. Advertising-Supported to Fee-for-Services Model • Xdrive Technologies offered in 1999 free disk storage space to on-line to users • Users would see advertising as well as receive targeted e-mails based on personal information • After two years of operation Xdrive realised that it could not meet the cost of the service offered • Xdrive subsequently switched to a subscription-supported model and began selling the service to businesses and individuals (US$10 per month for 500MB, US$1300 for 25GB and up to 100 users)

28. Advertising-Supported to Subscription Model • Northern Light started in 1997 as a search engine which searched the Web as well as its own database • The user was charged for items in their database, but Web items were free • The site was therefore a mix between advertising-supported and a limited fee-based service • In 2002 Northern Light decided to change its revenue model to subscription supported since the revenue it was getting was insufficient

29. References [1] Malta, Chris, “What Should I sell on my Site?”, 2004. Available online at http://www.sensiblesoftware.com/articles/a/What-Should-I-Sell-on-my-Site.html [2] Schneider, Gary, P., “Electronic Commerce: The second wave”, Thomson Course Technology, Fifth Annual Edition, 2004