Lecture 02 Introduction to E-Business Models

1. Lecture 02Introduction to E-Business Models Jaeki Song

2. Outlines • Components of an e-Business Model • Price-based e-Business Model • Price competition • Different types of e-business models • Storefront model • Auction model • Portal model • Dynamic-pacing model • Bricks & Clicks

3. Components of e-Business Models • Business Model • Customer value • Scope • Price • Resources • Capabilities • Implementations Internet Performance Environment

4. Price Competition • Price for books and CDs sold on the Internet less than conventional channel • Average 9-16% • Price increments • Price change on the Internet is smaller than conventional channel • Price dispersion • Substantial differences in price across retailers on the Internet • Heterogeneity in consumer awareness • Heterogeneity in retailer branding and trust

5. Driving Factors • Lower buyer search costs • Promote price competition • Low entry costs or low operational costs • Other factors • Tax • Shipping and handling fees

6. Storefront Model • Basic direct interaction model • B2C • Combines transaction processing, security, online payment, and information storage • Needs online catalogs and takes order through websites • Incorporates web-based technologies • Shopping-cart technology

7. Amazon.com • Client/server application • Database • Personalization • Electronic wallet • 1-click system • Security

8. History of Internet Auctions • Web-based commercial auction began in 1995 • Onsale and eBay • Various types of goods sold

9. Primary Business Model • Merchant Sites • Merchandise offers products/services • Acts as retailer • E.g. Onsale • Listing-agent Sites • Acts as an agent for other sellers allowing them to register their items and running the auctions on their behalf • E.g. eBay

10. Important Parameters • Minimum acceptable bid amount • Reserve price • Profitable strategy • Minimum price plus a reserve price • Advanced technologies • Multi-unit pricing display

11. Auction Formats • English Auctions • Dutch Auctions • Sealed-Bid Auctions • Double Auctions

12. English Auctions • The bidders announce their bids until no higher bid is forthcoming • ‘going . . . going . . . gone!’ • Ascending-price auctions • Typically set a closing time in advance • Minimum bid plus a reserve price • Early buyout price

13. Dutch Auctions • Bidding starts at a high price and drops until a bidder accepts the price • Descending price auctions

14. Sealed-Bid Auctions • Bidders submit their bids independently and are usually prohibited from sharing information with each other • First-price sealed-bid auction • The winner pays his amount • Second-price sealed-bid auction • The winner pays one increment over the second-highest bid received

15. Double Auctions • Buyers and sellers submit bids to an auctioneer • The auctioneer matches the seller’s offers to the buyer’s offer • E.g. New York Stock Exchange

16. FRAUD • How does the buyer know she can trust the seller? • Auction sites cooperate with prosecutors • Auction sites use a feedback and rating system that encourage buyers and sellers to rate each other at the close of a transaction • Auction sites encourage users to use third-party service when they fear the possibility off fraud

17. Auction Site Auctions closing per day Revenues per month ($) eBay 340,000 190,000,000 Yahoo! 88,000 19,000,000 Amazon 10,000 2,000,000 Competition Source: Lucking-Reiley, 2000 (JIE)

18. Web Portal Model • Give visitors the change to find almost everything they are looking for in one place • Portals linking consumers to online merchants • Helps users collect information on an item and allows users to browse independently owned storefronts • Yahoo.com, Hotbot.com, About.com, Altavista.com, etc.

19. Yahoo.com

20. Dynamic Pricing Models • Name-Your-Price Model • Comparison-Pricing Model • Demand-Sensitive Pricing Model

21. Name-Your-Price Model • Allows customers to state the price they are willing to pay • Priceline.com • Demand collect systems • Use shopping bot that takes customer’s bid to the Priceline partners to see whether they will accept the prices for the requested products/services • Intelligent agents

22. Comparison-Pricing Model • Allows customers to poll a variety of merchants and find a desired product/service at the lowest price • Mysimon.com • Uses intelligent-agent technology • Offers discussion groups, customer ratings, and comparison shopping

23. Demand-Sensitive Pricing Model • Group purchasing • Individual buyers to shop in large groups to obtain group discount • The more people who buy a product in a single purchase, the lower the cost per person becomes • Mercata.com, mobshop.com, demandline.com • How it works • Buyers create requests for quotes (RFQs) • Purchasing manager monitors all aggregated RFQs • Manager negotiates through suppliers.

24. Demand-Sensitive Pricing Model • Price Discrimination Price D2 R2 Marginal cost D1 R1 P2 P1 Output Q1 Q2 Q

25. Demand-Sensitive Pricing Model • Benefits to Buyers • Reduce product costs • Reduce transaction costs • Benefits to Suppliers • Enhance revenue with a high-volume sales • Reduce sales costs • Improve manufacturing efficiency

26. Bricks & Clicks • Should we integrate our Internet business with our traditional business or should we keep the two separate?

27. Seamless Model: Office Depot • Two reasons • Existing catalog-sales support an Internet store • Existing information systems made it easy to coordinate online stores and physical stores • Customers’ Benefit • Make shopping simple and convenient • Company’s Benefit • Cheaper to reach customers

28. Seamless Model: Office Depot • Added Value • Each customer has its own specialized view of the OfficeDepot.com site • authorization • Provide additional discount for larger customers if they place order on online • Actually increased the traffic at its physical outlet

29. Joint Venture Model: KB Toy • Reasons • Don’t have much experience with catalog retailing • Tend to focus exclusively on their physical stores • KB Toy and Kbkids.com • KB Toy joined with BrainPlay.com to create Kbkids.com • $80 million

30. Joint Venture Model: KB Toy • Operation • Separation • Kbkids headquarter: Denver • KB Toy headquarter: MA • Integration • Share brand: promotion • Customer service • Purchasing function

31. Virtual Partnership • Rite Aid and Drugstore.com • Customer benefit • Customers can pick up their Drugstore.com prescriptions at their local Rite Aid

32. Model Brand Management Operation Seamless Fully integrated Fully integrated Fully integrated A Spectrum of Choices Joint Venture Mostly integrated Slightly integrated Moderately integrated Partnership Separate Slightly integrated Moderately integrated

33. Decision Process Brand Separation Integration Does the brand extend naturally to the Internet? Yes Yes Will we need to price differently? Management Do we have the skills and experience? Yes Will there be major channel conflict? Yes Does the Internet threaten the current business model? Yes

34. Decision Process Operations Separation Integration Do our distribution systems translate well to the Internet? Yes Do our information systems provide a foundation on which to build? Yes Does either systems constitute a significant competitive advantage? Yes