Electronic Commerce Business Models and Strategies

1. Electronic Commerce Business Models andStrategies Minder Chen, Ph.D. Associate Professor of Management Information Systems and Decision Sciences School of Management, George Mason University mchen@gmu.edu

2. Reference • Net Ready, by Amir Hartman and John Sifonis, McGRaw-Hill, 2000. • Now or Never, by Mary Modahl, Harper Business, 2000 • Designing Systems for Internet Commerce by G. Winfield Treese, Lawrence C. Stewart (May 1998) Addison-Wesley Pub Co; ISBN: 0201571676 • Net Results: Web Marketing that Works by Rick E. Bruner (Editor), Cybernautics, Usweb Corporation Hayden Books; ISBN: 1568304145  • E-Business : Roadmap for Success by Ravi Kalakota, Marcia Robinson, Don Tapscott  (June 1999)  Addison-Wesley Pub Co (C); ISBN: 0201604809  • Customers.Com: How to Create a Profitable Business Strategy for the Internet and Beyond by Patricia B. Seybold (Contributor), R. T. Marshak, Ronni Marshak 1 Ed edition (November 1998) Times Books; ISBN: 0812930371 • Net Success : 24 Leaders in Web Commerce Show You How to Put the Web to Work for Your Business by Christina Ford Haylock, Len Muscarella, Ron Schultz, Steve Case  (May 1999) Adams Media Corporation; ISBN: 1580621147  • Creating the Virtual Store: Taking Your Web Site from Browsing to Buying, by Magdalena Yesil, Published by John Wiley & Sons, November 1, 1996 • Understanding Electronic Commerce (Strategic Technology Series), by David R. Kosiur, Published by Microsoft Press, May 1, 1997.

3. Cyber-Seminar Outline  EC Introduction  Introduction  The cycle of electronic commerce  EC and Business Process  EC statistics  EC Strategies  4Cs strategy: Customer, Content, Community, Commerce  Revenue streams  EC development process  EC Business Models  B2C Virtual stores: physical and digital goods and services  Infomediaries: Seller-side  Informediaries: Buyer-side  Infomediaries: B2B marketspace

4. EC Introduction • Introduction • The cycle of electronic commerce • EC and business process • EC statistics

5. Electronic Commerce: Introduction E-Business E-Commerce Commerce Internet Commerce

6. Electronic Commerce • Electronic commerce is broadly as the ability to execute business activities (transactions, contracts, and partnership) over a computer network. The execution of these activities lead to the exchange of goods, services, and money. • Online business activities are changing market dynamics and structures of various industries. • Electronic commerce adds a new dimension "information" to business activities involving information goods, information services, and electronic money.

7. The Low-Friction Market "[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.

8. The Cycle of Electronic Commerce Access Searches Queries Surfing Follow-on Sales Customers Online Ads Online Orders Standard Orders Distribution Online: soft goods Delivery: hard goods Electronic Customer Support Source: Understanding Electronic Commerce (Strategic Technology Series), by David R. Kosiur, Published by Microsoft Press, May 1, 1997.

9. Components of Electronic Commerce Processes Institution • Marketing • Sales • Payment • Fulfillment • Support • Government • Merchants • Manufacturers • Suppliers • Consumers Electronic Commerce Networks • Intranet • Extranet • Internet Source: adapted from David Kosiur, Understanding Electronic Commerce, Microsoft Press, 1997.

10. EC and Business Processes Seller Customer Phone, fax, e-mail Send info Request info Provide Info Get customer Provide info Fulfill order Support Identify need Find source Evaluate offerings Purchase Maintain, Repair, Operate 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 Source: adapted from David Kosiur, Understanding Electronic Commerce, Microsoft Press, 1997.

11. World Wide Internet Commerce Forester Research, Inc. June 1999

12. Business Internet Commerce Trends B2C: Business to Consumer B2B: Business to Business Reference: http://cyberatlas.internet.com/

13. Business-to-Business E-Commerce • International Data Corporation forecasts that business-to-business e-commerce revenue will jump from $80 billion worldwide in 1998 to $1.1 trillion in 2003. Forrester Research believes that number will go even higher to $1.3 trillion by 2003. • Business-to-Business -- Vertical Industries • Computing and Electronics: For this year, businesses will invest $50 billion in computers and other electronic equipment online. Increase to $319 billion by 2002. • Motor vehicles: Companies will spend $9 billion online to purchase fleets of cars and trucks this year. 2002—grow to $114 billion—more than a 1000% increase. • Online utilities: Online trades of $15 billion in 1999 will grow to $110 billion by 2002. • Food and agriculture: Expected to be about $3 billion in 1999--$20 billion by 2002. • Pharmaceutical and medical: Forecasted $1 billion this year. Increase 20-fold by 2002. Source: Business 2.0, March, 1999 re: Forrester Research

14. Statistics • Holiday Season 1998 • 2.1 million households shopped online for the first time • Generated $2.3 billion • Virtually all (98%) of AOL shoppers said they would shop online again in the next 6 months (Source: Jupiter Communications) • By 2003 . . . • Consumers on the Web will spend more than $177 billion worldwide. • There will be an eight-fold increase in Web buyers worldwide to 143 million (International Data Corporation, March 1999) • In Europe, 43 million households will be online. (Source: Nua Internet Surveys 12/98 re: DataMonitor) • In Japan, buyers will spend one trillion Yen online. (Source: Nikkei Multimedia, 12/98) • 1% of 5 million US merchants are able to collect payments via the Internet in 1999. • 10% E-merchants by year 2003.

15. Retailing Trends 1950s 1960s-1970s 1980s 1990s Malls Web Main street Superstores • Home Depot • CompUSA • Barnes and Nobles • Border

16. AOL Findings • Buy brands • Seek convenience • Are increasingly time-starving • Are not solely motivated by price • Require simplicity Source: America Online, 1999

17. Net Economy • 1940s - 1980s • Manufacturing to information economy • Local - regional - national - multinational • Tangible brick-and-mortar assets: offices, shops, service centers, and warehouse • 1990s - 21st Century • Net economy: • Information & Knowledge • Communication and interactions • Global and virtual • Business Focus: Information, channel, flow, customer loyalty, reliable service, relationship • Intangible assets: Knowledge, experiences, relationships

18. Internet Economy Driving Forces • Changing customer demands • Globalization • Internet ubiquity • New technology • New marketplace and intermediacies

19. Selling Points of Virtual Stores • "The Internet is going to become a channel of distribution." -- The president of a major U.S. advertising agency • Another firm advertise its virtual store as "The parking is easy, there are no checkout lines, we are open 24 hours a day, and we deliver right to your door." • The trend toward point-of-sale moving into the home is accelerating.

20. Benefits to the Merchants • Increased sales of existing products to generate additional revenues • Use the web to target their offers to a niche market • "The store is always open!" • Establish better relationships with customers. • Low cost information distribution • Increased speed to market • Expanded delivery channels • Global exposure and reach

21. Benefits to the Consumers • Convenience • Informative • Value presented upfront: Demo and free download • No long wait times • Easy flow and navigation • Search capabilities • Engaging presentation • Constant updates • Easy to buy

22. All 3 Steps in One Medium Give More Information/ Answer Questions Transact/ Service Get Attention Branding Selling Informing • TV Ads • Magazines • Brochures • Sales People • Print/editorial • Store • Telephone • Catalogue • Web and EC allows you to integrate three major steps of markting and sales in one medium.

23. Internet Industry Sports Malls Entertainment Newsfeed Publications Commerce Instruments Portals Commerce Servers Content and Activity Electronic Commerce Infrastructure Client/Server Software Consulting Internet Economy System Integration and Design Browsers Web Server Application Servers Security Tools Backbone Router Access Equipment Server Computers ISP Network Services Internet Equipment Internet Service Consumer Services Carriers

24. EC Strategies • 4Cs Strategy: • Customer • Content • Community • Commerce • Revenue Streams • EC Development Process

25. Most Visited Retailers: 1. Bluemountainarts.com 2. Amazon.com 3. AOL.com 4. Ebay.com 5. Etoys.com 6. Barnesandnoble.com 7. CNet.com (software) 8. Egghead.com 9. CDNow.com 10. Musicblvd.com 11. ColumbiaHouse.com 12. Classifieds2000.com 13. Beyond.com 14. Coolsavings.com 15. Valupage.com New Competition From Surprising Places • Not in Top 25: • Towerrecords.com • Borders.com • Toysrus.com • Target.com • Gap.com • Macys.com • Sears.com • WalMart.com • “BigCompany.com” • YourCompany.com??

26. 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. • They have to obsolete their current business models and work very hard to search a new business model. Your competitor is just one-click away

27. Electronic Commerce Applications and the Cycle of Commerce Seller's Cycle of Commerce Service Sales Billing/Collections Marketing Production/Logistics Time

28. Electronic Commerce Applications and the Cycle of Commerce Buyer's Cycle of Commerce Procurement Operation Receiving/Logistics Shopping/Testing Payment Time

29. EC Strategies: 4 Cs Customers Commerce Community Content

30. 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" factor gets amplified on the Net • The shifts of balance of power away from business and toward customer. - Jeff Bezos

31. 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 can you do 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?

32. 5 Steps to Success in EC • Set strategy • Make it easy for customers to do business with you! • Focus on the end-customer • Identify end-customers and their needs • Distinguish from channel partners • Identify other internal and external stakeholders • Redesign customer-facing business processes • Wire your company for profit and success • Foster customer loyalty • Determine and prioritize objectives • Decide what to measure and how to measure • Measure profitability and other critical success indicators Source: Adapted from Customer.com by Patricia Seybold, 1998

33. Foster Customer Loyalty • The key to profitability in EC • Achieving higher revenues via customer acquisition and customer retention • Acquisition costs • Base profit • Revenue growth • Cost savings • Referrals • Price premium • Benefits: • No-cost acquisition • Experienced customer • Strategies • Increase customer "inventory" • Increase customer "tenure"

34. 8 Critical Success Factors • Target the right customers • Own customer's total experience • Streamline business processes that impact the customer • Provide a 360-degree view of relationships with your customers • Let customers help themselves • Help customers do their jobs • Deliver personalized services • Foster community

35. Target the Right Customers • Know who your customers and prospects are • Find out which customers are profitable • Decide which customers you want to attract (or keep from losing) • Decide which customers influence key purchases • Find out which customers generate referrals • Don't confuse customers, partners, and stakeholders

36. Own the Customer's Total Experience • Deliver a consist and branded experience • Focus on saving customer time and irritation • Offer a peace of mind • Work with partner to deliver consistent service and quality • Respect the customer individuality • Give customers control over their experience

37. Creating Sustainable Value in EC • Develop a brand based on consumer experiences • The brand emerges as the two-way communication on the net and off the net. • Develop superior physical distribution • Physical distribution is a choke point in EC • Leverage customer information • Use personal information to more convenience shopping and customized services • Privacy issue • Ask customer explicitly for such data • Require a more subtle approach • Use collective data • Use it to adjust pricing, product offering, and target market

38. Virtual Communities Virtual Community • Content • Hard goods • Games • Services • Money • Content • Demographics Providers Users • Advertising Other Websites Advertisers

39. Consumers' Needs for Community • Communities of transaction: Facilitate the buying and selling of products and services and deliver information related to those transactions. • Bring in a critical mass of sellers and buyers to facilitate certain types of transactions. • Virtual Vineyards (wine.com) • Communities of Interest: Bring together participants who interact extensively with one another on specific topics. • Higher degree of interpersonal communication. • GardenWeb: www.gardenweb.com • Motley Fool created by David and Tom Gardners on AOL (fool.com) • Parents Place: www.parentsplace.com • Communities of Fantasy • Chat rooms: Red Dragon Inn • Virtual Team competition at ESPNet: espnet.sportszone.com • Communities of Relationship: People come together around certain life experiences that are very intense and can lead to the formation of deep personal connections. • Cancer Forum on CompuServe

40. www.parentsoup.com

41. www.iVillage.com

42. Geocities: www.geocities.com • This collection of themes cyberhoods is populated by a half-million "homesteaders" who get free home pages. http://geocities.yahoo.com/home/

43. Quick Test for Technographics More Men More Women More Educated Less Educated High Income Low Income Have Children No Children Younger Age Older Number of new users Mainstreams Early Adopter Laggards Time Source: Now or Never, 2000

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

45. Challenge • Consumers: Everything on the Internet should to be free. • Merchant: How can I make a profit if everything is free. • Examples: • Free web browsers: Netscape Communicator and Internet Explorer • Free email: Juno, mail.yahoo.com and hotmail.com • Free Internet Access: Freeserve in Britain • Free PC: eMachine and CompuServe; Free-PC • 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 1999 1930 Year

46. Revenue Streams • Advertising / Sponsorship • Transaction • Subscription / Listing Fee • Value-added services

47. Multifaceted Model for Web-Based EC Design • ATTRACT: Hits • Communities of interest • Changing topics for repeat customers • Features that encourage customers to explore • ENGAGE: Leads • Special areas encourage customer to register (i.e. selection of articles customized for visitors interests) • PARTICIPATE: Sales revenue • Free download (video, audio, & software) • Shopping • Chat and News • Subscription • JUMP: Advertising revenue • Other products of interest to customer • Other sites of interest to customer Attract Jump Engage Participate Adapted from Netscape Communications Inc., 1996.

48. EC Companies Transform the Revenue Mix Pricing The mix: Who pays for what and how much. Value Customers New Pricing New Values New Customers Highly interrelated! Source: Now or Never, 2000

49. What To Do Now 1. Define your eBusiness strategy FAST 2. Assess readiness: • customers • products/services • organization • technology • infrastructure Rapid innovation

50. What To Do Now 3. Identify the target: • Business objectives • Customer segment • Application area 4. Build it in less than 6 months -- Flexibility -- Scalability -- Extendibility 5. Keep extending the function -- new products and services, new customer interfaces, enhance performance, security and capability 6. START NOW ! You are never done!