E-business by G. Schneider - Chapter 4 (edition 9)

E- BusinessNinth Edition

Chapter 4E-Business Revenue Models

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E- Business, 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


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


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


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

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• 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

6E- Business, Ninth Edition

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FIGURE 4-1 Combining marketing channels: Two retailer examples




• 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


• 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



• 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




• 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

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• 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




• 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


• 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



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 (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



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


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

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FIGURE 4-2 Three strategies for an advertising-supported revenue model


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• 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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• 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




• 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



• 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



• 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


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

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FIGURE 4-3 Revenue models used by online editions of newspapers and magazines



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


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


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

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• 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)



FIGURE 4-4 Orbitz home page



• 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)



• 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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• 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




• 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



• 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



• 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



• 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

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• 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




• 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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• 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


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• 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




• 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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• 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-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


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

• 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.)


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



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


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


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


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


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


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


Revenue Strategy Issues

• Topics:– Web revenue models implementation issues– Dealing with the issues

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



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


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

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



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

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• 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


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• 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



FIGURE 4-5 Volkswagen of America home page


• 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



FIGURE 4-6 ACLU home page


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

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



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


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



• 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


FIGURE 4-7 Lee® Jeans FitFinder Flash animation



• Making Web sites accessible (cont’d.)– Offer multiple information formats– Consider goals in Web site construction

FIGURE 4-8 Goals for business Web sites


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


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


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


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


Connecting with Customers

• Important element of a corporate Web presence

• Identify and reach out to customers


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


FIGURE 4-9 Business communication modes


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

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E-business by G. Schneider - Chapter 4 (edition 9)

Education