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eCommerce-Selling New Value

eCommerce-Selling New Value. Creating Business Cases in an Uncertain Environment. Session Objectives. Review the key components of an eCommerce business case Discuss steps needed to build a persuasive analysis

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eCommerce-Selling New Value

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  1. eCommerce-Selling New Value Creating Business Cases in an Uncertain Environment

  2. Session Objectives • Review the key components of an eCommerce business case • Discuss steps needed to build a persuasive analysis • Examine a case that demonstrates the complexities of eCommerce business case development

  3. A business case generally consists of three components. A business strategy specifying the primary approach and rationale for pursuing an eCommerce opportunity Business Model The financial analysis of a proposed business model consisting of baseline projections, revenue and expense estimates and valuations Financial Model Data and Assumptions The data, analysis and assumptions which support the financial model

  4. Several common eCommerce business models exist and new ones emerge continually. Content Provider Portal Security Services Shopping/ Commerce ISP/ Web Host Advertising Consulting Auction Site Software Provider Community

  5. eCommerce financial models rely upon the same components as traditional businesses. Baseline Projections Revenue Estimates Business Model and Logic Expense Estimates Valuations

  6. The data and assumptions that drive eCommerce financial models are the crux of the business case. • Online Population • Households Making Online Purchases • Percentage of Online Purchasers Visiting MakeMeRich.com • Percentage Purchasing from MakeMeRich.com • Average Purchase Amount • Other Revenues • Development Costs • General and Advertising Expenses • Operating Costs Baseline Valuation Income Statement Balance Sheet Cash Position Net Present Value Internal Rate of Return Earnings Multiple Revenue Multiple Payback Period Revenue Expense

  7. Session Objectives • Review the key components of an eCommerce business case • Discuss steps needed to build a persuasive analysis • Examine a case that demonstrates the complexities of eCommerce business case development

  8. Sample Business Case Approaches : 1. Quick & Dirty 2. Stand-alone Web Venture 3. eCommerce initiative for existing businesses 4. ePremium - assessing market valuation impact

  9. Revenue Revenue Revenue Revenue 10mm NPV 10mm NPV 10mm NPV x x x 150mm NPV Costs Costs Costs  Costs Capital Capital Capital Capital The “quick and dirty” approach can be used to qualify multiple opportunities or model competitors. • Approach 1: Quick & Dirty

  10. For a stand-alone web venture, we develop a model of all sources of revenue and expense. • Approach 2: Web Venture Return/Cash Flow User Sponsorship/Advertising • Access Fee Media Placement Services (e.g. Double Click) • Banner Rates • Click Throughs • Leads Branded Advertiser/Sponsor Customer Care • Help Line Fee • Revenue Sharing • Bounty • Interchange • Bounty Rewards Transaction Services Commerce • Advertising Spending • Purchases Transactive Content

  11. eCommerce initiatives for existing businesses focus on cost reduction and revenue enhancement. • Approach 3: Existing Business Value Potential Health Services: CareFirst Example Reduce Non-Care Related Costs ($ x) Reduce Costs Reduce Care Related Costs ($ y) Potential eCommerce Benefits ($ A) Attract/Retain More Members $ p Enhance Revenue Expand Share of Each Customer $ q $ B Is there compelling value? $ B-A

  12. The impact of eCommerce initiatives on shareholder value can be a driving factor. • Approach 4: Valuing the ePremium Market Capitalisation (US$ Bn) $ 132 = Internet based companies Amazon.com posted a net loss of US$(74.4)m for 1998. = Traditional ‘Bricks and mortar’ $ 76 AOL recorded a net loss of US$(0.5)Bn in 1997 and net income of only US$160 m in 1998. $ 24 $ 16 $ 2 $ 9 Amazon.com Barnes & Noble @Home Cablevision AOL Time-Warner $ 34 $ 43 $ 33 $ 23 $ 29 $ 2 eBay Sotheby’s Yahoo CBS eSchwab Merill Lynch Yahoo’s NPAT for FY98 was US$32m. Estimate for FY99 is $104 m. Sources: Mary Meeker (AC), Andersen Consulting analysis.

  13. Capability Development The business case is a living deliverable that evolves with the stage of development. Future Planning Analysis Design Build and Test Deploy • Reasonable assumptions • Directionally correct • Comparable opportunities • Conceptual design complete • Business / tech requirements defined • Development options narrowed • Detailed design complete • Development options selected • Pricing finalized • Operational requirements known • Release schedule known • Issues / risks mitigated Broad ranges, reliable to +/- 40% Reliable to +/- 10 or less Reliable to +/- 25%

  14. Business case development is an iterative process with four basic steps. Develop Business Logic Collect Data Build Spreadsheet Perform Sensitivity Analysis • Structure the analysis • Confirm logic fits client strategy • Define key metrics • Conduct research • Normalize data • Document assumptions • Design workbook • Enter data and documentation • Check data and formulas • Identify key sensitivities • Alter variables within reasonable range • Establish best/worstand most likely cases Client Checkpoints

  15. Investment reports, research firms and publications are the best sources of eCommerce data. Investment Banks: Alex Brown BankBoston Robertson Stephens CSFB Merrill Lynch Research Firms: Forrester Gartner Group IDC Jupiter How fast is the Internet growing in Belgium? What are the demographics of users? How much eCommerce is being conducted? Publications: Business 2.0 International Journal of eCommerce Internet World Red Herring

  16. Estimates and projections differ by source, implying the need for additional analysis. On-Line Banking Projections (US) Millions of Users

  17. eCommerce revenue estimates are generated by analyzing four primary sources of income. Transactions • Commissions on sale of own/other’s products • Bounties • Percentage of transaction (bp) • Referral fees • Transaction processing fees • Wallet-related revenue • Value-added content subscriptions • Equity research • Portfolio management • Services • Advice • Customer profiling • Alerts • Value-added network (ISP) • Other premium services Fees(Annual/Periodic) Sources of Revenue Sponsorships • Advertising • Slotting fees • Preferred provider certification Other • Sale of aggregated user information that does not compromise customer privacy

  18. Estimating eCommerce advertising revenue is a complex task. Advertising and Sponsorship Revenue Assumptions Universal Advertising Assumptions Average page views/user per month Total banner ads per page Non-targeted Advertising Percent of total ad space CPM Inventory sold Highly-targeted Advertising Percent of total ad space CPM Inventory sold Sponsorship Assumptions Sponsorship spaces per page CPM Inventory sold 35 2 80% $30 20% 20% $45 30% 1 $25 50%

  19. eCommerce expense estimates are highly dependent upon the client’s business model. Marketing and Sales • Subscriber/merchant acquisition • Promotional branding • Relationship management Product/Service Development • Content, tools,application • “Normal content” • Expert/celebrity • Aggregation • Web scraping • Site scraping Sources of Expenses Customer Care • Technical support • Customer support • Billing TechnologyInfrastructure • Hardware • Software • Hosting • Integration G&A • Salaries • Occupancy • Equipment • Other

  20. Rough estimates of eCommerce site development costs can be useful for high-level business cases. Future Cost of an eCommerce Site (Circa 2000) $5 million to $20+million $1 million to $5 million $300,000 to $1 million Source: Gartner Group, “Electronic Commerce and Extanet Applications,” May 7, 1999

  21. Best Worst Likely Traffic Volume 700 500 600 % Purchasing 15% 5% 10% Avg. Purchase $75 $25 $50 Revenue $7,875 $625 $3,000 Key Steps Identify key assumptions Establish reasonable ranges Vary each item independently Refine estimates if warranted Communicate critical items Sensitivity analysis helps the team refine the business case and communicate key assumptions.

  22. Business case data is presented using common financial statements and client-specific metrics. Projected Statement of Income 2000 2001 2002 2003 2004 ($mm) Revenues • Advertising & Sponsorships • Transactions $3.8 $15.2 $33.3 $54.1 $71.6 $6.2 $15.1 $31.1 $11.4 $54.1 Expenses • Marketing and Sales • Customer Care • Technology • General and Admin. $22.0 $15.0 $31.5 $24.0 $22.5 $2.1 $8.4 $18.3 $29.7 $39.4 $10.5 $10.5 $10.5 $9.3 $9.3 $1.0 $3.2 $6.7 $11.1 $14.7 Margin ($25.6) ($6.8) ($2.6) $32.2 $55.4 Investment Requirements $31.5 NPV (12% discount rate) $3.2

  23. Project Team: Begin data gathering as early as possible Expect to dedicate a strong resource for the duration Guide spreadsheet organization and design Ensure sufficient self-checks Document excessively Staff the right skills Spread model ownership Client: Leverage sponsor early to get internal contacts and data Get buy-in on model from a senior finance representative Do not show numbers without a detailed internal review Do not try to walk executives through the model Train client to assume ownership of model Several lessons are worth sharing.

  24. Session Objectives • Review the key components of an eCommerce business case • Discuss steps needed to build a persuasive analysis • Examine a case that demonstrates the complexities of eCommerce business case development

  25. A major European bank wanted to explore banking and commerce opportunities via the mobile phone. Applications of Interest: • Banking balance inquiry • Banking transactions • Securities alerts • Securities transactions • Mobile eCommerce • Web content delivery • Chip Card: • Security • Payments • Reload eCash

  26. The existing GSM infrastructure implied the need to partner with a telecommunications company. Proposed Technical Architecture Fixed Network Telco MessageGateway Mobile Phone & Smart Card GSM Network MobileApplications Core BankingSystems Bank Customer Banking Applications

  27. However, new technologies promise to provide direct access to the customer and greater usage. Emerging Mobile Technologies 100% Compact HTML Mobile Service Usage % of mobile subscribers WAP STK 0% 2000 2001 1999 2002 2003 2004 Offering Internet-like services is expected to propel adoption.

  28. The team needed to develop baseline usage data for different launch dates and technical platforms. 1.5 Start with SMS Start with STK Start with WAP Start with CHTML 1.0 1.Mobile Banking Users (millions) Customer gain of starting with STK over starting with WAP 1.0.5 Customer gain of starting with WAP over starting with CHTML 0.0 1997 1998 1999 2000 2001 2002 2004 2003 Earlier introduction of services builds greater user base

  29. The team estimated the start-up costs and revenue streams from each alternative. Start-up Costs Total Benefits/Expenses per Customer(1) (Year 2004) CHF 56 m CHF 1999 2000 2001 Marketing 0.4 2.0 0.0 Hardware 0.5 0.2 0.4 Software 1.8 2.5 5.3 Systems Integration 2.8 1.7 0.0 Total 5.4 6.5 5.7 Other • 620,000 estimated mobile banking users in 2004 • CHF 23.4m additional earnings before taxes in 2004 Savings - mobile CASH downloads Transaction fees CHF 21 Other Annual fee Application maintenance Call center Telco messaging fees Introducing and supporting new platforms is costly.

  30. KEY Cash from Operations Investments After evaluating several partnering options, the team recommended a telco alliance approach. Cash Flow Analysis Rationale: Strategic Telco subsidies Telco technical expertise Financials (m CHF): 5 Year NPV 1.3 10 Year NPV 22.9 Payback Year 2003

  31. Several lessons were learned on this project. • Technical expertise is essential to many business cases • Alliance discussions and data exchange move at different speeds across different industries and cultures • Alliance management knowledge capital helpful to frame negotiations, but expertise required to conduct them • Significant time needed to educate clients on new technologies

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