Electronic Commerce

COMP3210

Session 7: Making Money on the Web

Dr. Paul Walcott

Department of Computer Science, Mathematics and Physics University of the West Indies, Cave Hill Campus Barbados
2007 Dr. Paul Walcott The Department of Computer Science Mathematics and Physics, University of the West Indies, Cave Hill Campus, Barbados

Session Objectives

The objectives of this session are:

To describe some of the methods of obtaining products to sell on the Web To describe digital products To compare and contraast six revenue models used by Web businesses to make money

Identifying Products1

Before a new Web business can sell products on-line they must first identify those product which would yield highest profits

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Identifying Products Contd

Practically any product can be sold on-line However, that does not mean that it is profitable to sell any product on-line

For example, selling a product with a low value-to-weight ratio to a person who lives in another continent might be impractical due to high shipping costs

Remember that the goal of e-commerce is to make money

Identifying Products Contd

Some wholesale distributors are willing to ship any products they distribute directly to the customers home, after they have paid for it As an Internet business, if you can find the customers to buy these products then you might be able to make money This approach is called drop shipping

Identifying Products Contd

Although drop shipping may seem extremely attractive, it does has problems:

The Internet Business has no way of ensuring the quality of the product (since they never see it) All wholesale distributors are not legitimate

Identifying Products Contd

Products which are digital in nature (e.g. software, music, information and computer games) lend themselves well to ecommerce since:

There is very little cost involved in reproducing them The product can be delivered instantly on-line (after payment)

Identifying Products Contd

Some of the characteristics of digital products include:

Indestructibility

A digital product maintains its form and quality forever The content of a digital product can be changed instantly Digital products can be reproduced, stored and transferred

Transmutability

Reproducibility

Identifying Products Contd

Theft or pirating of digital products is one of the disadvantages of selling digital products online Both technology, in the form of encryption, and legislation (e.g. Intellectual property legislation) is used as a deterrent

Revenue Models2

What are revenue models?

This are models used by B2C and B2B e-commerce initiatives to generate revenue

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Revenue Models Contd

In this session you will learn about the:

Web catalog revenue model Digital content revenue model Advertising-supported revenue model Advertising-subscription mixed revenue model Fee-based revenue models

Web Catalog Revenue Model

History

In 1872 Aaron Montgomery-Ward started selling dry goods to farmers using a one-page list Richard Sears and Alvah Roebuck in 1895 began mailing catalogs to farmers and small residents

Web Catalog Revenue Model Contd

The prospective buyer selects items for purchase from an on-line catalog and makes the payment on-line, by telephone or by mail

alternative payment options are required since some people are cautious about disclosing credit card information on-line Computers and consumer electronics (e.g. dell.com) Books, music and videos (e.g. amazon.com) Clothing (e.g. myvirtualmodel.com)

The type of items sold by this method include:

Digital Content Revenue Model

Digital products received through purchasing or subscriptions are received instantly

Legal research (e.g. lexis.com) Digital copies of published documents (e.g. ProQuest acquired reproduction rights to digital versions of journals and books)

Also ACM (Associated for Computer Machinery)

Advertising Supported Revenue Model

This model is used by network television in the U.S. where the audience is provided with free viewing with advertising messages The money made from advertising supports the operation of the business Before the year 2000 this was an extremely popular model (between 1994 and 1998 it grew from US $0 - $2 billion

Advertising Supported Revenue Model Contd

During 2000-2002 there was no growth in Web advertising Since 2002, however Web advertising has started to grow again but at a slower rate Only a few high-traffic sites (e.g. Yahoo.com) can generate significant revenue this way because of the large number of visitors Some information only sites are still successfully using this model, e.g. www.about.com and www.howstuffworks.com

Web Advertising Problems

Web advertising has been hampered by:

1. Identifying ways to measure and charge for site visitors
Some measurements do exist, e.g. number of visitors, number of unique visitors, and the number of click throughs, however it is difficult to develop a standard The key is to make a sticky Web site (the ability to attract new and repeat visitors to a Web site) because visitors will be exposed to more ads

Web Advertising Problems Contd

2. Few Web sites have sufficient visitors to attract large advertisers

Most successful advertising is targeted at specific groups based on demographics, e.g. address, age, gender, income level, type of job, hobbies and religion (due to privacy issues more and more people are unwilling to give this information)

Advertising-subscription Mixed Model

Used for many years by newspapers and magazines (subscribers pay a fee and accept some level of advertising) Subscribers are subjected to less advertising than an Advertising supported Web site The New York Times and The Wall Street Journal use this model

Both of these newspapers use a separate revenue model for the print and on-line editions

Advertising-subscription Mixed Model Contd

The New York Times is supported mainly by advertising, but charges a small subscription fee for visitors who want to access crossword puzzles

A searchable archive (dated back to 1996) is also provided A small fee is charged for articles dated back more than one week

Fee-for-Transaction Revenue Model

In this model businesses offer services for which a fee is charged. The fee is based on the number or size of transactions they process.

Transactions can be personalised and executed much cheaper than traditional transaction service providers Before, a commission was paid for every ticket sold. However, with more low cost flights being offered commissions in many cases have disappeared.

An examples is a travel agent:

Many travel agents now charge a flat fee for processing a ticket on an airline that has reduced or eliminated the fees it pays to travel agents

Fee-for-Service Revenue Model

An increasing number of organisations are charging fees for services provided

These fees are not based on the size or number of transactions processed, but rather on the value of the service provided e.g. on-line games and entertainment

Sonys EverQuest adventure game has greater than 400,000 players. Each player purchased a US$40 software pack and pays US$10 monthly

Revenue Models In Transition

Many companies have changed their revenue models in order to remain competitive; some examples of changes in revenue models are:

Subscription to Advertising-Supported Model Advertising-Supported to Advertising-Subscription Mixed Model Advertising-Supported to Fee-for-Services Model Advertising-Supported to Subscription Model

Subscription to AdvertisingSupported Model

Microsoft State magazine started as an upscale news and current events publication First charged an annual subscription fee (only 27,000 subscribers with $500,000 revenue) which did not cover operational cost They changed to an advertising-supported site, although it is uncertain whether this new model is profitable. This Web site however is part of the MSN portal so it probably improves its stickiness

Advertising-Supported to Advertising-Subscription Mixed

Salon.com is an upscale online magazine It started out operating as an advertisingsupported site, but now offers an optional subscription version of the site Subscribers pay US$30 a year to view the Premium version, which is free of advertising and can be downloaded for later reading Premium subscribers also gain access to additional content (music, e-books and audio books)

Advertising-Supported to Feefor-Services Model

Xdrive Technologies offered in 1999 free disk storage space to on-line to users

Users would see advertising as well as receive targeted e-mails based on personal information

After two years of operation Xdrive realised that it could not meet the cost of the service offered Xdrive subsequently switched to a subscriptionsupported model and began selling the service to businesses and individuals (US$10 per month for 500MB, US$1300 for 25GB and up to 100 users)

Advertising-Supported to Subscription Model

Northern Light started in 1997 as a search engine which searched the Web as well as its own database The user was charged for items in their database, but Web items were free The site was therefore a mix between advertisingsupported and a limited fee-based service In 2002 Northern Light decided to change its revenue model to subscription supported since the revenue it was getting was insufficient

References
[1] Malta, Chris, What Should I sell on my Site?, 2004. Available online at http://www.sensiblesoftware.com/articles/a/What-Should-I-Sell-on-my-Site.html [2] Schneider, Gary, P., Electronic Commerce: The second wave, Thomson Course Technology, Fifth Annual Edition, 2004