Electronic Commerce Ninth Edition

1. Electronic CommerceNinth Edition Chapter 3Selling on the Web: Revenue Models and Building a Web Presence

2. Electronic Commerce, Ninth Edition 2 Learning Objectives In this chapter, you will learn about: Revenue models How some companies move from one revenue model to another to achieve success Revenue strategy issues that companies face when selling on the Web Creating an effective business presence on the Web Web site usability Communicating effectively with customers on the Web

3. Electronic Commerce, Ninth Edition 3 Revenue Models Web business revenue-generating models Web catalog Digital content Advertising-supported Advertising-subscription mixed Fee-based Can work for both sale types Business-to-consumer (B2C) Business-to-business (B2B) Can use same revenue model for both types of sales

4. Electronic Commerce, Ninth Edition 4 Web Catalog Revenue Models Adapted from mail-order (catalog) model Seller establishes brand image Printed information mailed to prospective buyers Orders placed by mail or toll-free telephone number Expands traditional model Replaces or supplements print catalogs Offers flexibility Orders placed through Web site or telephone Payments made though Web site, telephone, or mail Creates additional sales outlet for existing companies

5. Electronic Commerce, Ninth Edition 5 Web Catalog Revenue Models (cont’d.) Computers and consumer electronics Leading computer manufacturers Sell a full range of products on the Web Dell allows product configuration flexibility Creates value Crutchfield Expanded successful mail-order catalog operations to include Web sites Best Buy, J&R Music World, Radio Shack Web sites sell same products as in stores

6. Web Catalog Revenue Models (cont’d.) Computers and consumer electronics (cont’d.) Marketing channel Pathway to customers Advantage of having several marketing channels Reach more customers at less cost Can combine marketing channels Example: in-store online ordering Example: mail catalogs with reference to retailer’s Web site

8. Electronic Commerce, Ninth Edition 8 Web Catalog Revenue Models (cont’d.) Books, music, and videos Most visible electronic commerce examples Amazon.com Web-only retailer originally sold books Evolved into general retailer Barnes & Noble, Blackwell’s, Books-A-Million, Powell’s Books All adopted Web catalog revenue model CDnow Web-only online music store CD Universe copied CDnow approach Tower Records, Sam Goody retail stores Created Web sites to compete with CDnow

9. Web Catalog Revenue Models (cont’d.) Luxury goods Difficult to sell online Customers want to see product in person or touch Vera Wang and Versace Web sites provide information Shopper purchases at physical store Heavy use of graphics and animation Evian Web site Presents information in a visually stunning way Electronic Commerce, Ninth Edition 9

10. Web Catalog Revenue Models (cont’d.) Clothing retailers Many adapted catalog sales model to Web Display clothing photos categorized by type Prices, sizes, colors, tailoring details Want customers to examine clothing online Place orders through Web site Lands’ End online Web shopping assistance Lands’ End Live (1999) Online text chat and call-back feature Ability to push Web pages to customer’s browser Electronic Commerce, Ninth Edition 10

11. Electronic Commerce, Ninth Edition 11 Web Catalog Revenue Models (cont’d.) Clothing retailers (cont’d.) Lands’ End personal shopper agent (more recent) Learns preferences and makes suggestions My Virtual Model (customers try clothes) Graphic image built from customer measurements Another feature allows: Two shoppers using different computers to simultaneously browse Web site together Only one of the shoppers can purchase items Either shopper can select items to view Selected items appear in both Web browsers

12. Web Catalog Revenue Models (cont’d.) Clothing retailers (cont’d.) Online overstocks stores Reach more people than physical outlet stores Problem: varying computer monitor color settings Solution: send fabric swatch on request Solution: offer generous return policies

13. Electronic Commerce, Ninth Edition 13 Web Catalog Revenue Models (cont’d.) Flowers and gifts (gift retailers) 1-800-Flowers Online extension to successful telephone business Competes with online-only florists Godiva offers business gift plans Hickory Farms and Mrs. Fields Cookies Offer familiar name brands on the Web Harry and David Original Web site for informational purposes Promoted catalog business and added online ordering feature

14. Web Catalog Revenue Models (cont’d.) General discounters Buy.com and Overstock.com Borrowed Wal-Mart and discount club sales model Sell merchandise at extremely low prices Traditional discount retailers (Costco, Kmart, Target, Wal-Mart) Slow to implement online sales on their Web sites Had huge investments in physical stores Did not understand online retailing world Now use the Web catalog revenue model in their successful online sales operations Electronic Commerce, Ninth Edition 14

15. Electronic Commerce, Ninth Edition 15 Digital Content Subscription Revenue Models Firms owning written information or information rights Embrace the Web as a highly efficient distribution mechanism Use the digital content revenue model Sell subscriptions for access to information they own Legal content LexisNexis: offers variety of information services Lexis.com: offers original legal information product

16. Digital Content Subscription Revenue Models (cont’d.) Academic research content ProQuest: digital copies of academic publications Business content Dow Jones newspaper publisher subscriptions Sold digitized newspaper, magazine, and journal content subscriptions Factiva: online content management and integration service Technical content Association for Computer Machinery (ACM): digital library

17. Electronic Commerce, Ninth Edition 17 Advertising-Supported Revenue Models Used by United States broadcast network television Provides free programming and advertising messages Supports network operations sufficiently Problem: measuring and charging site visitor views Stickiness Keeping visitors at site and attracting repeat visitors Exposed to more advertising in a sticky site Problem: obtaining large advertiser interest Requires demographic information collection Characteristics set used to group visitors

18. Electronic Commerce, Ninth Edition 18 Advertising-Supported Revenue Models (cont’d.) Can obtain large advertiser interest by: Using a specialized information Web site Draw a specialized audience certain advertisers want to reach Examples: The Huffington Post and the Drudge Report HowStuffWorks

20. Advertising-Supported Revenue Models (cont’d.) Web portals (portal) Site used as a launching point to enter the Web Almost always includes a Web directory or search engine Often includes other features Web directories Listing of hyperlinks to Web pages Yahoo!: one of the first Presents search term triggered advertising on each page

21. Advertising-Supported Revenue Models (cont’d.) Web portals (cont’d.) Portal sites using general interest strategy AOL, Excite, Google, Bing Portal sites not using general interest strategy Help visitors find information within a specific knowledge domain Advertisers pay more Example: C-NET Travel sites Successful as advertising-supported online businesses Example: Kayak

22. Electronic Commerce, Ninth Edition 22 Advertising-Supported Revenue Models (cont’d.) Newspaper and magazine publishers Sell advertising to cover Web site costs Internet Public Library Online Newspapers page Provides links to worldwide newspaper sites Local shopping news, alternative press newspapers Easier transition to advertising-supported Web revenue model Newspaper’s Web presence Provides greater exposure and advertising audience Diverts sales from the print edition (difficult to measure) Operating costs not covered by advertising revenue

23. Electronic Commerce, Ninth Edition 23 Advertising-Supported Revenue Models (cont’d.) Targeted classified advertising sites Can command higher rates than general advertising Original version Newspaper classified advertising Growth of classified advertising Web sites Very bad for newspapers Example: craigslist Web employment advertising Most successful targeted classified advertising category Examples: CareerBuilder.com, The Ladders and Guru.com, Monster.com

24. Electronic Commerce, Ninth Edition 24 Advertising-Supported Revenue Models (cont’d.) Targeted classified advertising sites (cont’d.) Used vehicle sites AutoTrader.com, CycleTrader.com, BoatTrader.com Accept paid advertising to sell cars, motorcycles, boats Product sites with dedicated following (VetteFinders) Successful by catering to small audiences Potential classified advertising sites Any site selling products useful to buyer after initial use Musicians Buy-Line, ComicLink.com, The Golf Classifieds

25. Electronic Commerce, Ninth Edition 25 Advertising-Subscription Mixed Revenue Models Subscribers pay fee and accept advertising Typically less advertising compared to advertising-supported sites Web sites offer different degrees of success The New York Times (today) Bulk of revenue derived from advertising The Wall Street Journal (mixed model) Subscription revenue weighted more heavily

27. Electronic Commerce, Ninth Edition 27 Advertising-Subscription Mixed Revenue Models (cont’d.) ESPN Leverages brand name from cable television business Sells advertising, offers free information Mixed model includes advertising and subscription revenue (collects Insider subscriber revenue) Consumers Union (ConsumerReports.org) Purely a subscription-supported site Not-for-profit organization with no advertising Free information Attracts subscribers and fulfills mission

28. Electronic Commerce, Ninth Edition 28 Fee-for-Transaction Revenue Models Service fee charged Based on transaction number or size Web site offers visitor transaction information Personal service formerly provided by a human agent Value chain Disintermediation Intermediary (human agent) removed Reintermediation New intermediary (fee-for-transaction Web site) introduced

29. Electronic Commerce, Ninth Edition 29 Fee-for-Transaction Revenue Models (cont’d.) Travel Travel agency revenue model: receive fee for facilitating a transaction Travel agent adds information consolidation and filtering value Computers also good at information consolidation and filtering Travel agents have long used networked computers: Sabre Travel Network Internet provided a new way to do business online

30. Fee-for-Transaction Revenue Models (cont’d.) Travel (cont’d.) Web-based travel agencies were new entrants Examples: Travelocity, Expedia, Hotels.com, Hotel Discount Reservations, Orbitz Generate advertising revenue from ads placed on travel information pages Traditional travel agents: squeezed out Surviving agencies charge a flat fee Smaller travel agents specialize (cruises, hotels) May use a reintermediation strategy (WaveHunters.com)

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32. Electronic Commerce, Ninth Edition 32 Fee-for-Transaction Revenue Models (cont’d.) Automobile sales Web sites implement the fee-for-transaction revenue model differently CarsDirect.com model Customers select specific car, site determines price and finds local dealer Autoweb.com and Autobytel model Locate local dealers, car sells at small premium over dealer’s nominal cost Car salesperson: disintermediated Web site: new intermediary (reintermediation)

33. Electronic Commerce, Ninth Edition 33 Fee-for-Transaction Revenue Models (cont’d.) Stockbrokers Original full-line brokers charged relatively high commissions Provided advice 1970s: deregulation resulted in discount brokers Web-based brokerage firms: E*TRADE and Datek Web allowed investment advice, fast trade execution online

34. Fee-for-Transaction Revenue Models (cont’d.) Stockbrokers (cont’d.) 1990s: discount brokers faced competition from online firms Discount brokers and full-line brokers opened new stock trading and information Web sites Online brokers offer transaction cost reductions Traditional stockbrokers: disintermediated

35. Electronic Commerce, Ninth Edition 35 Fee-for-Transaction Revenue Models (cont’d.) Insurance brokers Quotesmith offered Internet policy price quotes directly to public (1996) Independent insurance agents: disintermediated Insurance policy information, comparisons, sales sites InsWeb, Answer Financial, Insurance.com Progressive Web site Provides quotes for competitors’ products too The General (General Automobile Insurance Services) Web site Offers comfortable, anonymous experience

36. Electronic Commerce, Ninth Edition 36 Fee-for-Transaction Revenue Models (cont’d.) Event tickets Web allows event promoters to sell tickets from one virtual location to customers worldwide Online agencies earn a fee on every ticket sold Ticketmaster, Tickets.com, TicketWeb Web created secondary ticket market (StubHub, TicketsNow) Brokers connecting ticket owners with buyers Earn fees on tickets resold for others, buy ticket blocks Web created easy-to-find central marketplace, facilitating buyer-seller negotiations

37. Electronic Commerce, Ninth Edition 37 Fee-for-Transaction Revenue Models (cont’d.) Real estate and mortgage loans Web sites provide all traditional broker services Coldwell Banker, Prudential National Association of Realtors Web site Realtor.com 2008 financial crisis Dramatically reduced number of mortgage brokers in business Successful online mortgage brokers Ditech and E-LOAN

38. Electronic Commerce, Ninth Edition 38 Fee-for-Transaction Revenue Models (cont’d.) Online banking and financial services No physical product Easy to offer on Web Web financial transactions concerns Trust and reliability of financial institution Solutions Use existing bank’s identification and reputation Start online bank not affiliated with existing bank (First Internet Bank of Indiana) Use different name (Bank One used Wingspan) Approach was not successful

39. Fee-for-Transaction Revenue Models (cont’d.) Online banking and financial services (cont’d.) Additional barriers preventing a more rapid rate of growth Lack of bill presentment features Lack of account aggregation tools By 2012: Industry analysts expect most banks (online and traditional) will offer aggregation services

40. Electronic Commerce, Ninth Edition 40 Fee-for-Transaction Revenue Models (cont’d.) Online music Recording industry: slow to embrace online distribution Feared digital copying Large online music stores Revenue from fee-for-transaction model Some sites offer subscription plans Complicating issues Stores offer limited number of digital music files Stores promote their own music file format Artists and recording companies invoke limits

41. Fee-for-Transaction Revenue Models (cont’d.) Online music (cont’d.) Complicating issues (cont’d.) Buyers required to download and install Digital Rights Management (DRM) software Varying restrictions confusing to consumers Online music market industry failed to embrace the network effect gained by adopting one standard file format

42. Fee-for-Transaction Revenue Models (cont’d.) Online music (cont’d.) Some stores sold audio in a generally compatible file format with no copying restrictions Mondomix MP3 and Smithsonian Folkways Music not produced by major recording companies Solutions Adopt one standard file format, no copying restrictions, DRM-free MP3 format (Amazon in 2007) By 2012: 80 percent of all music will be sold online

43. Electronic Commerce, Ninth Edition 43 Fee-for-Transaction Revenue Models (cont’d.) Online video Issues hampering prior sales Large file size Fear of online sales impairing other sales types Inability to play on variety of devices Overcoming the issues New technologies improving delivery Companies incorporating online distribution into revenue strategy Delivery allowed on multiple devices Through standard Web browser

44. Electronic books Forms of digital audio books CDs (originally) and various types of digital files Audible sells subscriptions Allows monthly download of a certain number of books Pricing is per book Amazon.com Offers books, newspapers, magazines, other digital format items Delivered directly to its line of Kindle readers Fee-for-Transaction Revenue Models (cont’d.)

45. Electronic Commerce, Ninth Edition 45 Fee-for-Service Revenue Models Companies offer Web service Fee based on service value Not a broker service Not based on transactions-processed number or size Online games Sales revenue source Advertising (older concept), pay-to-play for premium games, subscription fees Average game player is 35 years old, playing computer or video games for 12 years

46. Electronic Commerce, Ninth Edition 46 Fee-for-Service Revenue Models (cont’d.) Professional services Limited Web use State laws prohibit extension of practice Patients may set appointments, receive online consultation Major concern Patient privacy Law on the Web site Legal consultations to United Kingdom residents Martindale.com Online version of Martindale-Hubbell lawyer directory

47. Professional services (cont’d.) CPA Directory United States accounting professionals site General health information RealAge, Dr. Andrew Weil’s Self Healing, WebMD Significant barrier Patient diagnosis difficult without physical examination Some physicians beginning to offer online consultations For ongoing, established relationship patients Fee-for-Service Revenue Models (cont’d.)

48. Free for Many, Fee for a Few Economics of manufacturing Different for physical and digital products Unit cost high percentage of physical products Unit cost very small for digital products Leads to a different revenue model Offer basic product to many for free Charge a fee to some for differentiated products Examples: Yahoo e-mail accounts, bakery: free cookies

49. Electronic Commerce, Ninth Edition 49 Revenue Models in Transition Companies must change revenue model To meet needs of new and changing Web users Some companies created e-commerce Web sites Needed many years to grow large enough to become profitable (CNN and ESPN) Some companies changed model or went out of business Due to lengthy unprofitable growth phases

50. Electronic Commerce, Ninth Edition 50 Subscription to Advertising-Supported Model Slate magazine Upscale news and current events Success expectations were high Experienced writers and editors Acclaim for incisive reporting and excellent writing Initial revenue source Annual subscription did not cover operating costs Now an advertising-supported site Part of the Bing portal Value to Microsoft: increase the portal’s stickiness

51. Electronic Commerce, Ninth Edition 51 Advertising-Supported to Advertising-Subscription Mixed Model Salon.com Acclaimed for innovative content Initial revenue source Advertising-supported site Needed additional money to continue operations Now offers optional subscription version Annual fee for Salon premium Free of advertising Additional content Downloadable content

52. Electronic Commerce, Ninth Edition 52 Advertising-Supported to Fee-for-Services Model Xdrive Technologies: offered free disk storage Initial revenue source (1999): advertising-supported Targeted e-mail advertising Did not cover operating costs 2005: bought by AOL Switched to a subscription-supported model Xdrive frequently adjusted its monthly fee downward AOL closed the service in 2009 Successful companies: fee based on storage amount used

53. Electronic Commerce, Ninth Edition 53 Advertising-Supported to Subscription Model Northern Light search engine includes own database Results include Web site links and abstracts of its owned content Initial revenue source Combination of the advertising-supported model plus a fee-based information access service Advertising revenue: insufficient to cover service Converted to a new subscription-supported revenue model Mainly large corporate clients Individual monthly billing option for articles accessed

54. Electronic Commerce, Ninth Edition 54 Multiple Transitions Encyclopedia Britannica Initial Web offerings (1994) Britannica Internet Guide Encyclopedia Britannica Online Initial revenue source Paid subscription site had low subscription sales Converted to free advertiser-supported site (1999) Advertising revenues declined 2001: returned to mixed model with subscription plan and free content Value added: sells reputation and the expertise

55. Electronic Commerce, Ninth Edition 55 Revenue Strategy Issues Topics: Web revenue models implementation issues Dealing with the issues

56. Channel Conflict and Cannibalization Channel conflict (cannibalization) Company Web site sales activities interfere with existing sales outlets Levis Web site and Maytag Web sites no longer sell products Sites now provide product, retail distributor information Eddie Bauer Online purchases returnable at retail stores Required compensation and bonus plans adjustments to support Web site Channel Cooperation made it successful Electronic Commerce, Ninth Edition 56

57. Electronic Commerce, Ninth Edition 57 Strategic Alliances Strategic alliance Two or more companies join forces Undertake activity over long time period Yodlee account aggregation services provider Yodlee concentrates on developing the technology and services Banks provide the customers Amazon.com Joined with Target, CDnow, ToysRUs ToysRUs and Amazon suing each other

58. Electronic Commerce, Ninth Edition 58 Creating an Effective Web Presence Organization’s presence Public image conveyed to stakeholders Usually not important Until growth reaches significant size Stakeholders Customers, suppliers, employees, stockholders, neighbors, general public Effective Web presence Critical even for smallest and newest Web operating firms

59. Identifying Web Presence Goals Business physical space Focus: very specific objectives Not image driven Must satisfy many business needs Often fails to convey a good presence Web business site Intentionally creates distinctive presences Good Web site design provides: Effective image-creation features Effective image-enhancing features Electronic Commerce, Ninth Edition 59

60. Electronic Commerce, Ninth Edition 60 Identifying Web Presence Goals (cont’d.) Web business site objectives: Attracting Web site visitors Keeping visitors to stay and explore Convincing visitors to follow site’s links to obtain information Creating an impression consistent with the organization’s desired image Building a trusting relationship with visitors Reinforcing positive images about the organization Encouraging visitors to return to the site

61. Identifying Web Presence Goals (cont’d.) Making Web presence consistent with brand image Different firms establish different Web presence goals Coca Cola Web site pages Usually include trusted corporate image (Coke bottle) Image: traditional position as a trusted classic Pepsi Web site pages Usually filled with hyperlinks to activities and product-related promotions Image: upstart product favored by younger generation

62. Identifying Web Presence Goals (cont’d.) Matching site design to function Volkswagen of America site Accomplishes important functions for the company Provides links to detailed Volkswagen model information, links to a dealer locator page, links to information about the company, a link to a set of shopping tools Volkswagen’s home page Meets the needs of most visitors quickly and effectively Volkswagen site enhances company image by providing useful information to customers online

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64. Identifying Web Presence Goals (cont’d.) Not-for-profit organizations Web presence effort key goals: Image enhancement and information dissemination Successful site key elements Integrate information dissemination with fund-raising Provide two-way contact channel American Civil Liberties Union (ACLU) Serves many different constituencies Web sites used to stay in touch with existing stakeholders, identify new opportunities for serving them Electronic Commerce, Ninth Edition 64

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66. Electronic Commerce, Ninth Edition 66 Web Site Usability Current Web presences Few businesses accomplish all goals Most fail to provide visitors sufficient interactive contact opportunities Improving Web presence Make site accessible to more people Make site easier to use Make site encourage visitors’ trust Make site develop feelings of loyalty toward the organization

67. How the Web Is Different Simple mid-1990s Web sites Conveyed basic business information No market research conducted Web objectives achievement Failed due to no understanding for Web presence-building media Web sites designed to create an organization’s presence: Contain links to standard information set Success dependent on how this information offered Electronic Commerce, Ninth Edition 67

68. Electronic Commerce, Ninth Edition 68 Meeting the Needs of Web Site Visitors Successful Web businesses: Realize every visitor is a potential customer (partner) Web presence is an important concern Know visitor characteristic variations Understand that the visitor is at the site for a reason Varied motivations of Web site visitors Why visitors arrive at Web sites Learning about company products or services Buying products or services Obtaining warranty, service, repair policy information

69. Electronic Commerce, Ninth Edition 69 Meeting the Needs of Web Site Visitors (cont’d.) Varied motivations of Web site visitors (cont’d.) Why visitors arrive at Web sites (cont’d.) Obtaining general company information Obtaining financial information Identifying people Obtaining contact information Following a link into the site while searching for information about a related product, service, or topic Challenge to meet all motivations Visitors arrive with different needs, experience, and expectation levels

70. Electronic Commerce, Ninth Edition 70 Meeting the Needs of Web Site Visitors (cont’d.) Making Web sites accessible Build interface flexibility options: Frame use Text-only version Selection of smaller graphic images Specification of streaming media connection type Choice among information attributes Controversial Web site design issues Adobe Flash software use Some tasks lend themselves to animated Web pages

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72. Electronic Commerce, Ninth Edition 72 Meeting the Needs of Web Site Visitors (cont’d.) Making Web sites accessible (cont’d.) Offer multiple information formats Consider goals in Web site construction

73. Electronic Commerce, Ninth Edition 73 Trust and Loyalty Creates relationship value Good service leads to seller trust Delivery, order handling, help selecting product, after-sale support Satisfactory service builds customer loyalty Customer service in electronic commerce sites Problem Lack integration between call centers and Web sites Poor e-mail responsiveness

74. Electronic Commerce, Ninth Edition 74 Rating Electronic Commerce Web Sites Companies routinely review electronic commerce Web sites for: Usability, customer service, other factors Sell the gathered information directly to the companies operating the Web sites Include suggestions for improvements BizRate.com posts ratings Provides comparison shopping service Compiles ratings by conducting surveys of sites’ customers

75. Electronic Commerce, Ninth Edition 75 Usability Testing Importance Helps meet Web site goals Avoids Web site frustration Customers leave site without buying anything Simple site usability changes Include telephone contact information Staff a call center Learn about visitor needs by conducting focus groups Usability testing cost Low compared to Web site design costs

76. Electronic Commerce, Ninth Edition 76 Customer-Centric Web Site Design Important part of successful electronic business operation Focus on meeting all site visitors’ needs Customer-centric approach Putting customer at center of all site designs Follow guidelines and recommendations Make visitors’ Web experiences more efficient, effective, memorable Webby Awards site Examples of good Web site design

77. Electronic Commerce, Ninth Edition 77 Connecting with Customers Important element of a corporate Web presence Identify and reach out to customers

78. Electronic Commerce, Ninth Edition 78 The Nature of Communication on the Web Communication modes Personal contact (prospecting) model Employees individually search for, qualify, contact potential customers Mass media Deliver messages by broadcasting Addressable media Advertising efforts directed to known addressee Internet medium Occupies central space in medium choice continuum

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80. Electronic Commerce, Ninth Edition 80 Summary Six main Web revenue models Models work differently Different business types use different models Companies change models as they learn more about: Customers, business environment Channel conflict and cannibalization challenges One approach: channel cooperation Effective Web presence delivers customer value Web site visitors arrive with a variety of expectations, prior knowledge, skill levels, technology Web communication fits in between personal contact and mass media