E- Business Ninth Edition

Chapter 3 E-Business Revenue Models

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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
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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

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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

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Web Catalog Revenue Models (contd.)

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

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Web Catalog Revenue Models (contd.)

Computers and consumer electronics (contd.)
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 retailers Web site

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Web Catalog Revenue Models (contd.)

Books, music, and videos
Most visible electronic commerce examples Amazon.com Web-only retailer originally sold books
Evolved into general retailer

Barnes & Noble, Blackwells, Books-A-Million, Powells 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
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Web Catalog Revenue Models (contd.)

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

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Web Catalog Revenue Models (contd.)

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 customers browser
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Web Catalog Revenue Models (contd.)

Clothing retailers (contd.)
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
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Web Catalog Revenue Models (contd.)

Clothing retailers (contd.)
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

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Web Catalog Revenue Models (contd.)

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
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Web Catalog Revenue Models (contd.)

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
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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

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Digital Content Subscription Revenue Models (contd.)

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
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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
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Advertising-Supported Revenue Models (contd.)

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

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Advertising-Supported Revenue Models (contd.)

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

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Advertising-Supported Revenue Models (contd.)

Web portals (contd.)
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
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Advertising-Supported Revenue Models (contd.)

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

Newspapers Web presence

Provides greater exposure and advertising audience Diverts sales from the print edition (difficult to measure) Operating costs not covered by advertising revenue
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Advertising-Supported Revenue Models (contd.)

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
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Advertising-Supported Revenue Models (contd.)

Targeted classified advertising sites (contd.)
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

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Advertising-Subscription Mixed Revenue Models

Subscribers pay fee and accept advertising
Typically less advertising compared to advertisingsupported 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

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Advertising-Subscription Mixed Revenue Models (contd.)

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
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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
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Fee-for-Transaction Revenue Models (contd.)

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

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Fee-for-Transaction Revenue Models (contd.)

Travel (contd.)
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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Fee-for-Transaction Revenue Models (contd.)

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 dealers nominal cost

Car salesperson: disintermediated Web site: new intermediary (reintermediation)

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Fee-for-Transaction Revenue Models (contd.)

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

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Fee-for-Transaction Revenue Models (contd.)

Stockbrokers (contd.)
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

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Fee-for-Transaction Revenue Models (contd.)

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
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Fee-for-Transaction Revenue Models (contd.)

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

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Fee-for-Transaction Revenue Models (contd.)

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

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Fee-for-Transaction Revenue Models (contd.)

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 banks 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
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Fee-for-Transaction Revenue Models (contd.)

Online banking and financial services (contd.)
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

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Fee-for-Transaction Revenue Models (contd.)

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
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Fee-for-Transaction Revenue Models (contd.)

Online music (contd.)
Complicating issues (contd.)
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

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Fee-for-Transaction Revenue Models (contd.)

Online music (contd.)
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

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Fee-for-Transaction Revenue Models (contd.)

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
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Fee-for-Transaction Revenue Models (contd.)

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
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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
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Fee-for-Service Revenue Models (contd.)

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
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Fee-for-Service Revenue Models (contd.)

Professional services (contd.)
CPA Directory
United States accounting professionals site

General health information

RealAge, Dr. Andrew Weils Self Healing, WebMD

Significant barrier
Patient diagnosis difficult without physical examination

Some physicians beginning to offer online consultations

For ongoing, established relationship patients

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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
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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
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Creating an Effective Web Presence

Organizations 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
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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
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Identifying Web Presence Goals (contd.)

Web business site objectives:
Attracting Web site visitors Keeping visitors to stay and explore Convincing visitors to follow sites links to obtain information Creating an impression consistent with the organizations desired image Building a trusting relationship with visitors Reinforcing positive images about the organization Encouraging visitors to return to the site
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Identifying Web Presence Goals (contd.)

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 productrelated promotions Image: upstart product favored by younger generation

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Identifying Web Presence Goals (contd.)

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

Volkswagens 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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Identifying Web Presence Goals (contd.)

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
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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

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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 presencebuilding media

Web sites designed to create an organizations presence:

Contain links to standard information set Success dependent on how this information offered
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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
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Meeting the Needs of Web Site Visitors (contd.)

Varied motivations of Web site visitors (contd.)
Why visitors arrive at Web sites (contd.)
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
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Meeting the Needs of Web Site Visitors (contd.)

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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Trust and Loyalty

Creates relationship value Good service leads to seller trust
Delivery, order handling, help selecting product, aftersale 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

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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
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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
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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
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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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