Electronic Commerce: Business Models, Strategies, and Implementation in the Network Economy

1. Electronic Commerce: Business Models, Strategies, and Implementation in the Network Economy Minder Chen, Ph.D. Professor of Management Information Systems Martin V. Smith School of Business and Economics CSU Channel Islands E-Mail: minder.chen@csuci.edu Course Web site: http://faculty.csuci.edu/minder.chen/mis310/

2. Electronic Commerce: Introduction E-Business E-Commerce Commerce Internet Commerce • Before 1995, the term “E-Commerce” meant Electronic Data Interchange (EDI). • The Internet was commercialized in 1995

3. Travelocity Microsoft Expedia Priceline.com

4. Priceline.com • Priceline (PCLN) was recognized in 2010 for being the single best-performing stock in the S&P 500 over the past five years. • Name your price  Reverse auction, customer-driven e-commerce • Products/services sold are all perishable goods/services • Competitors: Orbitz.com, Kayak.com, Hotwire.com, Expedia, Travelocity, etc. • Dis-intermediation  direct sales from producers to consumers, i.e., Cutting out the middleman, e.g., Apple and Dell • Re-intermediation  Reintroducing the new middleman, e.g., Amazon, eBay

5. Market Capitalization Cap: 9.771B Share: $57 7/16 Who Can Afford Not to Play in the Internet EC Space? Market Cap (4/16/99) $11.6 Billion $ 4.3 Billion $ 2.5 Billion $ 2.5 Billion As 6/28/2011

6. Priceline Tops $1,000 (Sept. 18, 2013) • Between April 1999 ~ Oct. 2000, a period when many dot-com companies failed, Priceline lost 97 percent of its market value. • The dot-com bubble burst, numerically, on March 10, 2000, when the technology heavy NASDAQ Composite index, peaked at 5,048.62. The Nasdaq Composite lost 78% of its value as it fell from 5048.62 to 1114.11.  (March 10, 2000 to Oct. 9, 2002) • Priceline’s gains have been fueled by its surging international business through two units, Amsterdam-based Booking.com (acquired 2005) and Bangkok-based Agoda.com (acquired 2007). • To diversify its business, Priceline also acquired travel search-engine Kayak Software Corp. for $1.8 billion in a deal that closed in May 2013. Kayak lets travelers compare prices and make reservations for hotels, flights, cars and vacations. Priceline Tops $1,000 (Sept. 18, 2013) on Growing Demand for Web Bookings [Ref]

7. The Rise and Fall and Rise of Priceline.com • By October 9, 2002, in the aftermath of 9/11 (2001), Priceline's stock fell from nearly $1,000 to only $6.60 a share, while its market value shrunk from $24.1 billion to $0.25 billion.  “irrational exuberance” Source: The rise and fall and rise of Priceline.com

8. The Low-Friction Market and E-Commerce Opportunities • "[The Internet] will carry us into a new world of low friction, low-overhead capitalism, in which market information will be plentiful and transaction costs low." -- Bill Gates, The Road Ahead • "Where there is a friction, there is opportunity!" -- Net Ready. • “Nearly 100% of Innovation – from business to politics – is inspired not by market analysis, but by people who are supremely pissed off by the way things are."  - Tom Peters

9. EC Business Opportunities • Innovative Ideas, Business models, and Business strategies • Funding • Business and technical talents • Technological enablers New business models and ideas are driving EC initiatives. Internet technologies are enablers.

10. The Cycle of Electronic Commerce Access Searches Surfing Follow-on Sales Online Ads Customers Online Orders Standard Orders Distribution Online: soft goods Delivery: hard goods Electronic Customer Support

11. EC and Business Processes Buyer Seller Dis/Re-intermediation Procurement Process Selling Process Request info Phone, fax, e-mail Send info Provide Info Get customer Provide info Fulfill order Support Identify need Find source Evaluate offerings Purchase Operate, Maintain, Repair Data sheets, catalogs, demos Web surfing Web searches, web ads Web site Newsgroups Net communities Corporate Databases Demos, reviews Web site Credit cards, e-cash P.O.s EDI Deliver soft goods electronically Web site, phone, fax, e-mail, e-mailing list Customer Feedbacks/Reviews

12. Study ZipRealty.com • Findability: Identify needs  Search Criteria • Result list: Sorting attributes, default sorting attribute • Show partial information in the result list. • Questions: • What will be the role of real estate agent in light of emerging real estate web sites such as ZipRealty.Com? • How does ZipRealty make money? • Where does ZipRealty get its data from? Example: http://www.ziprealty.com

13. Changes in the Net Economy • Business environment • Local / Physical  Global /Virtual • Business assets • Tangible  Intangible • Business change • Periodic  Continuous • Business production • Mass Production  Mass Customization Mass Personalization • Customization is under direct user control: the user explicitly selects between certain options such as ticker symbols for the stocks you want to track. • Personalization is driven by the computer which tries to serve up individualized pages to the user based on user's needs. • Source: http://www.useit.com/alertbox/981004.html

14. Mass customization and market making Source: http://www.squidoo.com/zazzle101 Source: Zazzle Marketplace http://www.zazzle.com/sell/more/faq

15. Mass Customization: http://www.zazzle.com/ • The unfulfilled need of a user again was the mother of invention:The two brothers, Bobby and Jeff Beaver, wanted to create a cool t-shirt to advertise a party at their fraternity (in order to "draw in plenty of nice girls"). They realized how difficult it was at that time to get high-quality custom t-shirts without having to order larger quantities at a promotions company or to rely on the low quality of heat-transfer at the local copy store. • Unique digital custom printing technologies • Zazzle is not a technology company – it is a “market maker ” - How to make a profit on Zazzle • “Niching the niche” - a mass customization ecosystem Source: http://mass-customization.blogs.com/mass_customization_open_i/sneaker/

16. Network and Information Economy • Information is costly to produce but cheap to reproduce. • Price information according to its value not its cost. • Managing intellectual property. • Maximize the value of your intellectual property, not the terms and conditions that maximize the protection. • Information as an “experience good” • Consumers must experience it to value it. How does Zappos.com (sells shoes etc.) manage to sell “experience goods”? • Brand and trust building is critical. • The economics of attention • A wealth of information creates a poverty of attention. Source: Information Rules

17. Attention Economy (Eyeball, Stickness) • The attention economy is increasingly one where the consumer product costs nothing to reproduce and the supplier need to add valuable intangibles that cannot be reproduced easily. He identifies these intangibles as: • Immediacy - priority access, immediate delivery • Personalization - tailored just for you • Interpretation - support and guidance • Authenticity - how can you be sure it is the real thing? • Accessibility - wherever, whenever (mobile devices) • Embodiment - books, live music • Patronage - "paying simply because it feels good", • Findability - "When there are millions of books, millions of songs, millions of films, millions of applications, millions of everything requesting our attention — and most of it free — being found is valuable." • Source: http://edge.org/conversation/better-than-free

18. PageRank, Traffic, and Ads • “Attention economy” and “reputation economy” are too fuzzy to measure. • But, because of Google (and other search engines), we can now convert from reputation (PageRank) to attention (traffic) to money (ads). Adapted from: [PDF]why $o.oois the future of business (free) Chris Anderson

19. Popularity Adds Value in a Network Virtuous cycle Positive Network Externality (Network Effects) Value to User • Networks • Real: LAN, Internet, Fax • Virtual: Virtual community, Chat room, Instant messenger, Skype, FaceBook Vicious cycle Number of Compatible User

20. Benefits to the Merchants (Sellers) • Expanded marketing channels and global reach to increase sales of existing products to generate additional revenues • Target marketing: Use the web to target their offers to a niche market • "The store is always open!" • Establish better relationships with customers. • Low distribution cost of product/service information • Increased speed to market

21. Benefits to the Consumers • Convenience: no driving around and no long wait times at checkout counters • Informative and engaging presentation • Value presented upfront: Demo and free download (experience the experience goods) • Easy flow and navigation • Search capabilities • Constant updates Homeplus in Korea (Tesco) http://www.extremetech.com/mobile/99033-virtual-stores-help-shoppers-save-real-time

22. Moving Your Business Online • Companies are motivated by either fear or greed to move to their businesses to the net. To .com your company is becoming an imperative. Companies have to transform their current business models to an innovative business model. • Be aware of internet tax law and (1998Internet Tax Freedom Act & 2013 The Marketplace Fairness Act). • Interstate/international commerce laws Your competitor is just one-click away

23. Showrooming at Retail Stores Source: http://online.wsj.com/article/SB10001424052702304587704577334370670243032.html http://www.cnn.com/2012/06/17/opinion/greene-showrooming/index.html

24. Technology-Fit: Customer and Product High Second Wave Earlier Adopter AA FedExp Microsoft Jenny Craig Chrysler Customer Need for Product Information Compassion about the product (SMM) Second Wave Web Laggards Nike Pepsi Tide Denny's Low Customer Demographics Match Poor High Source: Forrester Research

25. Is EC Appropriate for You? NetFlix: Atoms to Bits [ Video Nicholas Negroponte ] Asset-Light Generation From Hand to Cloud & Back… Rise of the Sharing Economy [ See Internet Trends & eBook, airbnb.com ] Industries who set up virtual storefronts

26. Business Models Based on the Value Chain in the Market Place Raw material producer Exchange • Independent market operators • Consortia Manufacturer Online Procurement Buyer-side EC Model Distributor C2B New Middleman Retailer B2C • Examples: • B2B: alibaba.com • B2C: Amazon.com • C2B: Priceline.com • C2C: eBay.com, craiglist.com C2C Consumer Channel Conflict • Service Providers: • Logistics • Financial B2C

27. Business-to-Business vs. Business-to-Consumer < Business-to-Consumer Business-to-Business • No vendor loyally • No switching costs • Time-insensitive • Short-term • Casual • Many vendors • Products differentiated on price, image • Relationship-based • Very high switching costs • Extremely time-sensitive • Long-term • Mission-critical • Few partners • Partners differentiated on reliability, flexibility

28. Business Channel: Multi-Channel Presence • Brick-and-mortar • Face-to-Face • Mail order • Mail • Printed catalog • Phone order • Telex • Phone • Fax • Electronic commerce • EDI • Email • Web Click and Mortar Seller Buyer Pure Play Multi-channel plays will have extraordinary power if companies elegantly blend and synchronize those channels.

29. The B2C Business Models – Bricks, Clicks, Revolution and Evolution Physical Store Virtual Store/Pure Player Clicks Bricks • Bricks organizations set up separate click organizations to give the required freedom to operate in the fast moving Click environment • or • Clicks organizations were created through VC capital Gap, Safeway, Wallmart eBay, Amazon, Webvan, Wingspan Bank, Yahoo Bricks & Clicks • Mergers or sales of assets to Bricks • Folding bricks ventures into portfolio • Narrow focus of offerings • Sat on the sidelines for the explosion • Evolved to online commerce • Online services are incremental • Not huge differentiators for clients • Source of convenience • Took advantage of lessons learned • Assets CHEAP from Click failures Wells Fargo, Safeway, Barnes and Noble

30. The Long Tail http://en.wikipedia.org/wiki/Long_Tail Source: Chris Anderson, “The Long Tail”, Wired, http://www.wired.com/wired/archive/12.10/tail.html Reference: From Niches to Riches: The Anatomy of the Long Tail (lnk)

31. Niche Gets Richer Online

32. Recommendation System Amazon

33. Changing “Demand Curve” • The total volume of low popularity items exceeds the volume of high popularity items. • Why? Search Cost, Carrying Cost, Niche • Changing demand curve: Recommendation systems • Recommendation System • Amazon: Collaborative filtering • NetFlix: CineMatch Jon Krakauer wrote Into Thin Air Joe Simpson, Touching the Void

34. Product Variety Comparison for Internet and Brick-and-Mortar Channels The unlimited “shelf space” of the Internet. Free:The Future of a Radical Price, Chris Anderson http://www.heinz.cmu.edu/~mds/smr.pdf

35. Long Tail: Pure Players vs. Physical Retailers Profit threshold http://www.wired.com/wired/images.html?issue=12.10&topic=tail&img=1 http://www.wired.com/wired/archive/12.10/tail_pr.html

36. The Real Cost of Music: Physical vs. Digital

38. EC Strategies: 4 Cs Customers Commerce Community Content Case Study: The $250 Neiman Marcus Cookie Recipe Story

39. Customers • Obsess over your customers • Remember that the Web is an infant • What do you have to offer that the physical world cannot in order to attract customers? • If you make one customer unhappy, he won't tell five friends -- he'll tell 5,000 on newsgroups, list servers, and so on. • "Word of mouth" (WOM) factor gets amplified on the Net • The shifts of balance of power away from business and toward customer. • Jeff Bezos

40. Amazon Story • Spring 1994, Jeff Bezos observed that Internet usage was increasing by 2,300 percent a year. • Choose books to start with because …. Bezos reviewed the top 20 mail order businesses methodically, and asked himself which could be conducted more efficiently over the Internet than by traditional means, and …… • Choose Seattle as HQ because ….. • Name it Amazon because ….. • The 4Cs at Amazon.com … Source: http://www.achievement.org/autodoc/page/bez0bio-1 Another Example:

41. WOM and Viral Marketing: Good, Bad, and Ugly • WOM: Words of Mouth • eWOM: Yelp.com, Amazon User Reviews, eBay Buyers and Seller rating. • Watch United Break My Guitar at https://www.youtube.com/watch?v=5YGc4zOqozo and be ready to answer the following questions: • Who benefited (companies, individuals, products) from this video? • Why this video went viral? • How can you create a viral video? • Anger is more influential than other emotions such as joy through social networks. [ref] http://en.wikipedia.org/wiki/United_Breaks_Guitars

42. Self Assessment: Customer Caring What do your customers need? What requests do they make of you? How do you respond to customer’s requests? What kind of information can they get from you? What process do they go through? How do you produce and distribute it to them? What are the steps that your customers have to take to complete a purchase transactions? How do they get shipment status? How are exceptions handled? What do you need from customer? What do you know about customer preferences? What information could you use to better target your product and service offerings? What to build relationships? How can you engage customers in an ongoing dialog? How can you continue to provide information, products, and services to reinforce your ongoing relationships?

43. Virtual Communities • User generated contents • Crowdsourcing Virtual Community • Content • Hard goods • Games • Services • Money • Content • Demographics Providers Users • Advertising Other Websites Advertisers

44. www.parentsoup.com http://www.ivillage.com/pregnancy-parenting/ -- Community Web Site

45. Groupon Business Model: Group Buying

46. Group Buying Sites Source: http://online.wsj.com/article/SB10001424052748704896104575139692395314862.html

47. Revenue Streams • Transaction • Subscription / Listing Fee • Value-added services • Donation and Sponsorship: KhanAcademy.org • Advertising • Google Ad Words • Google Ad Sense Twitter's estimated advertising revenue: 2012: $288.3 million; 2013: $582.8 m. 2014: $950 million; 2015: $1.33 billion Google revenue: 2012: $50.2 billion; 2011: $37.9 billion Facebook revenue: 2012: $5.1 billion; 2011: $3.7 billion Yahoo revenue: 2012: $5 billion; 2011: $5 billion Source: eMarketer Inc. (source: Link, 9/12/2013)

48. Freemium Model and Monetization • Consumers: Everything on the Internet should to be free. • Merchant: How can I make a profit if everything is free. • Monetization is a buzzword for adapting non-revenue-generating assets to generate revenue.  • Examples: • Free web browsers: Netscape Communicator and Internet Explorer • Free email: Juno, mail.yahoo.com, hotmail.com, gmail • Free web hosting: Geocities, Angelfire, Zoom • Free ... All tangible and intangible items that can be copied adhere to the law of inverted pricing and become cheaper as they improve. Anticipate this cheapness in your pricing strategy and product/service development strategy Gilder's Law $250 Cost of a 3-minute Long Distance Call Price $0 Source: http://en.wikipedia.org/wiki/Freemium 1999 1930 Year

49. [PDF]why $o.oois the future of business (free) Chris Anderson [PDF]FREE: The Future of Radical Price

50. Providing Free Services: Is There a Free Lunch? • Facebook/Google and You If you are NOT paying for it, you’re not the customer. You are the product being sold.* *Andrew Lewishttp://www.metafilter.com/95152/Userdriven-discontent#3256046 ** See a counter argument at http://powazek.com/posts/3229