Lecture 02 Introduction to E-Business Models Jaeki Song.

Lecture 02Lecture 02Introduction to Introduction to

E-Business ModelsE-Business Models

Jaeki SongJaeki Song

OutlinesOutlines

Components of an e-Business ModelComponents of an e-Business Model Price-based e-Business ModelPrice-based e-Business Model

– Price competitionPrice competition– Different types of e-business modelsDifferent types of e-business models

» Storefront modelStorefront model» Auction modelAuction model» Portal modelPortal model» Dynamic-pacing modelDynamic-pacing model

Bricks & ClicksBricks & Clicks

Components of e-Business Components of e-Business ModelsModels

Business Model-Customer value- Scope- Price- Resources- Capabilities- Implementations

Business Model-Customer value- Scope- Price- Resources- Capabilities- Implementations

EnvironmentEnvironment

InternetInternet PerformancePerformance

Price CompetitionPrice Competition

Price for books and CDs sold on the Internet less Price for books and CDs sold on the Internet less than conventional channelthan conventional channel– Average 9-16%Average 9-16%

Price incrementsPrice increments– Price change on the Internet is smaller than Price change on the Internet is smaller than

conventional channelconventional channel Price dispersionPrice dispersion

– Substantial differences in price across retailers on the Substantial differences in price across retailers on the InternetInternet

– Heterogeneity in consumer awarenessHeterogeneity in consumer awareness– Heterogeneity in retailer branding and trustHeterogeneity in retailer branding and trust

Driving FactorsDriving Factors

Lower buyer search costsLower buyer search costs– Promote price competitionPromote price competition

Low entry costs or low operational costsLow entry costs or low operational costs Other factorsOther factors

– TaxTax– Shipping and handling feesShipping and handling fees

Storefront ModelStorefront Model

Basic direct interaction modelBasic direct interaction model– B2CB2C

Combines transaction processing, security, Combines transaction processing, security, online payment, and information storageonline payment, and information storage

Needs online catalogs and takes order Needs online catalogs and takes order through websites through websites

Incorporates web-based technologiesIncorporates web-based technologies– Shopping-cart technologyShopping-cart technology

Amazon.comAmazon.com

Client/server applicationClient/server application– DatabaseDatabase

PersonalizationPersonalization– Electronic walletElectronic wallet– 1-click system1-click system

SecuritySecurity

History of Internet AuctionsHistory of Internet Auctions

Web-based commercial auction began in Web-based commercial auction began in 19951995– Onsale and eBayOnsale and eBay

Various types of goods soldVarious types of goods sold

Primary Business ModelPrimary Business Model

Merchant SitesMerchant Sites– Merchandise offers products/servicesMerchandise offers products/services– Acts as retailerActs as retailer– E.g. OnsaleE.g. Onsale

Listing-agent SitesListing-agent Sites– Acts as an agent for other sellers allowing them Acts as an agent for other sellers allowing them

to register their items and running the auctions to register their items and running the auctions on their behalfon their behalf

– E.g. eBayE.g. eBay

Important ParametersImportant Parameters

Minimum acceptable bid amountMinimum acceptable bid amount Reserve priceReserve price Profitable strategyProfitable strategy

– Minimum price plus a reserve priceMinimum price plus a reserve price Advanced technologiesAdvanced technologies

– Multi-unit pricing displayMulti-unit pricing display

Auction FormatsAuction Formats

English AuctionsEnglish Auctions Dutch AuctionsDutch Auctions Sealed-Bid AuctionsSealed-Bid Auctions Double AuctionsDouble Auctions

English AuctionsEnglish Auctions

The bidders announce their bids until no The bidders announce their bids until no higher bid is forthcominghigher bid is forthcoming– ‘‘going . . . going . . . gone!’going . . . going . . . gone!’– Ascending-price auctionsAscending-price auctions– Typically set a closing time in advanceTypically set a closing time in advance

Minimum bid plus a reserve priceMinimum bid plus a reserve price Early buyout priceEarly buyout price

Dutch AuctionsDutch Auctions

Bidding starts at a high price and drops Bidding starts at a high price and drops until a bidder accepts the priceuntil a bidder accepts the price– Descending price auctionsDescending price auctions

Sealed-Bid AuctionsSealed-Bid Auctions

Bidders submit their bids independently and Bidders submit their bids independently and are usually prohibited from sharing are usually prohibited from sharing information with each otherinformation with each other

First-price sealed-bid auctionFirst-price sealed-bid auction– The winner pays his amountThe winner pays his amount

Second-price sealed-bid auctionSecond-price sealed-bid auction– The winner pays one increment over the The winner pays one increment over the

second-highest bid receivedsecond-highest bid received

Double AuctionsDouble Auctions

Buyers and sellers submit bids to an Buyers and sellers submit bids to an auctioneerauctioneer

The auctioneer matches the seller’s offers to The auctioneer matches the seller’s offers to the buyer’s offerthe buyer’s offer– E.g. New York Stock ExchangeE.g. New York Stock Exchange

FRAUDFRAUD

How does the buyer know she can trust the How does the buyer know she can trust the seller?seller?– Auction sites cooperate with prosecutorsAuction sites cooperate with prosecutors– Auction sites use a feedback and rating system Auction sites use a feedback and rating system

that encourage buyers and sellers to rate each that encourage buyers and sellers to rate each other at the close of a transactionother at the close of a transaction

– Auction sites encourage users to use third-party Auction sites encourage users to use third-party service when they fear the possibility off fraudservice when they fear the possibility off fraud

CompetitionCompetition

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

Source: Lucking-Reiley, 2000 (JIE)

Web Portal ModelWeb Portal Model

Give visitors the change to find almost Give visitors the change to find almost everything they are looking for in one placeeverything they are looking for in one place

Portals linking consumers to online Portals linking consumers to online merchantsmerchants

Helps users collect information on an item Helps users collect information on an item and allows users to browse independently and allows users to browse independently owned storefrontsowned storefronts

Yahoo.com, Hotbot.com, About.com, Yahoo.com, Hotbot.com, About.com, Altavista.com, etc.Altavista.com, etc.

Yahoo.comYahoo.com

Dynamic Pricing ModelsDynamic Pricing Models

Name-Your-Price ModelName-Your-Price Model Comparison-Pricing ModelComparison-Pricing Model Demand-Sensitive Pricing ModelDemand-Sensitive Pricing Model

Name-Your-Price ModelName-Your-Price Model

Allows customers to state the price they are Allows customers to state the price they are willing to paywilling to pay

Priceline.comPriceline.com– Demand collect systemsDemand collect systems

» Use shopping bot that takes customer’s bid to the Use shopping bot that takes customer’s bid to the Priceline partners to see whether they will accept the Priceline partners to see whether they will accept the prices for the requested products/servicesprices for the requested products/services

– Intelligent agentsIntelligent agents

Comparison-Pricing ModelComparison-Pricing Model

Allows customers to poll a variety of Allows customers to poll a variety of merchants and find a desired merchants and find a desired product/service at the lowest priceproduct/service at the lowest price

Mysimon.comMysimon.com– Uses intelligent-agent technology Uses intelligent-agent technology – Offers discussion groups, customer ratings, and Offers discussion groups, customer ratings, and

comparison shoppingcomparison shopping

Demand-Sensitive Pricing ModelDemand-Sensitive Pricing Model

Group purchasingGroup purchasing– Individual buyers to shop in large groups to obtain Individual buyers to shop in large groups to obtain

group discountgroup discount» The more people who buy a product in a single purchase, the The more people who buy a product in a single purchase, the

lower the cost per person becomeslower the cost per person becomes

– Mercata.com, mobshop.com, demandline.comMercata.com, mobshop.com, demandline.com

How it worksHow it works– Buyers create requests for quotes (RFQs)Buyers create requests for quotes (RFQs)

– Purchasing manager monitors all aggregated RFQsPurchasing manager monitors all aggregated RFQs

– Manager negotiates through suppliers.Manager negotiates through suppliers.

Demand-Sensitive Pricing ModelDemand-Sensitive Pricing Model

Price DiscriminationPrice Discrimination

Output

Price

D1R1

Q1

P1

D2R2

Q2 Q

P2

Marginalcost

Demand-Sensitive Pricing ModelDemand-Sensitive Pricing Model

Benefits to BuyersBenefits to Buyers– Reduce product costsReduce product costs– Reduce transaction costsReduce transaction costs

Benefits to SuppliersBenefits to Suppliers– Enhance revenue with a high-volume salesEnhance revenue with a high-volume sales– Reduce sales costsReduce sales costs– Improve manufacturing efficiencyImprove manufacturing efficiency

Bricks & ClicksBricks & Clicks

Should we integrate our Internet business Should we integrate our Internet business with our traditional business or should we with our traditional business or should we keep the two separate?keep the two separate?

Seamless Model: Office DepotSeamless Model: Office Depot

Two reasonsTwo reasons– Existing catalog-sales support an Internet storeExisting catalog-sales support an Internet store– Existing information systems made it easy to Existing information systems made it easy to

coordinate online stores and physical storescoordinate online stores and physical stores Customers’ BenefitCustomers’ Benefit

– Make shopping simple and convenientMake shopping simple and convenient Company’s BenefitCompany’s Benefit

– Cheaper to reach customers Cheaper to reach customers

Seamless Model: Office DepotSeamless Model: Office Depot

Added ValueAdded Value– Each customer has its own specialized view of Each customer has its own specialized view of

the OfficeDepot.com sitethe OfficeDepot.com site» authorizationauthorization

– Provide additional discount for larger Provide additional discount for larger customers if they place order on onlinecustomers if they place order on online

Actually increased the traffic at its physical Actually increased the traffic at its physical outletoutlet

Joint Venture Model: KB ToyJoint Venture Model: KB Toy

ReasonsReasons– Don’t have much experience with catalog Don’t have much experience with catalog

retailingretailing– Tend to focus exclusively on their physical Tend to focus exclusively on their physical

storesstores KB Toy and Kbkids.comKB Toy and Kbkids.com

– KB Toy joined with BrainPlay.com to create KB Toy joined with BrainPlay.com to create Kbkids.comKbkids.com

» $80 million$80 million

Joint Venture Model: KB ToyJoint Venture Model: KB Toy

OperationOperation– SeparationSeparation

» Kbkids headquarter: DenverKbkids headquarter: Denver

» KB Toy headquarter: MAKB Toy headquarter: MA

– IntegrationIntegration» Share brand: promotionShare brand: promotion

» Customer serviceCustomer service

» Purchasing functionPurchasing function

Virtual PartnershipVirtual Partnership

Rite Aid and Drugstore.comRite Aid and Drugstore.com Customer benefitCustomer benefit

– Customers can pick up their Drugstore.com Customers can pick up their Drugstore.com prescriptions at their local Rite Aidprescriptions at their local Rite Aid

A Spectrum of ChoicesA Spectrum of Choices

Model Brand Management Operation

Seamless Fully integrated Fully integrated Fully integrated

Joint VentureMostly

integratedSlightly

integratedModerately integrated

Partnership SeparateSlightly

integratedModerately integrated

Decision ProcessDecision ProcessBrand

Separation Integration

Does the brand extend naturallyto the Internet?

Will we need to price differently?

Management

Do we have the skills and experience?

Will there be major channel conflict?

Does the Internet threaten the currentbusiness model?

Decision ProcessDecision Process

OperationsSeparation Integration

Do our distribution systems translate well to the Internet?

Do our information systems providea foundation on which to build?

Does either systems constitute a significant competitive advantage?