eCommerce-Selling New ValueeCommerce-Selling New Value

Creating Business Cases in an Uncertain EnvironmentCreating 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.

Business Model

Financial Model

Data and Assumptions

A business strategy specifying the primary approach and rationale for pursuing an eCommerce opportunity

The financial analysis of a proposed business model consisting of baseline projections, revenue and expense estimates and valuations

The data, analysis and assumptions which support the financial model

4

Several common eCommerce business models exist and new ones emerge continually.

Portal

ContentProvider

Shopping/Commerce

ISP/Web Host

AuctionSite

Community

SoftwareProvider

SecurityServices

ConsultingAdvertising

5

eCommerce financial models rely upon the same components as traditional businesses.

Baseline Projections

Expense Estimates

Revenue Estimates

Valuations

BusinessModel and Logic

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

Revenue

Expense

Valuation

Income StatementBalance SheetCash Position

Net Present ValueInternal Rate of Return

Earnings MultipleRevenue MultiplePayback Period

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 :

2. Stand-alone Web Venture

1. Quick & Dirty

4. ePremium - assessing market valuation impact

3. eCommerce initiative for existing businesses

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Revenue

Capital

Costs

10mmNPV

x

Revenue

Capital

Costs

10mmNPV

x

Revenue

Capital

Costs

10mmNPV

x

Revenue

Capital

Costs

150mmNPV

The “quick and dirty” approach can be used to qualify multiple opportunities or model competitors.

Approach 1: Quick & Dirty

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RewardsTransaction

ServicesCommerce

Media Placement Services

(e.g. Double Click)

Branded Advertiser/

Sponsor

Transactive Content

Sponsorship/Advertising

B

ount

y

In

terc

hang

e

R

even

ue

Sha

ring

B

ount

y

Banner Rates Click Throughs Leads

Purchases Advertising Spending

Return/Cash Flow

User

Access Fee

Help Line Fee

Customer Care

For a stand-alone web venture, we develop a model of all sources of revenue and expense.

Approach 2: Web Venture

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Enhance Revenue

Reduce Costs

Reduce Non-Care Related Costs

Reduce Care Related CostsPotential

eCommerce Benefits

Attract/Retain More Members

Expand Share of Each Customer

($ x)

Value Potential

($ y)

$ p

$ q

($ A)

$ BIs there compelling value? $ B-A

Health Services: CareFirst Example

eCommerce initiatives for existing businesses focus on cost reduction and revenue enhancement.

Approach 3: Existing Business

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Market Capitalisation (US$ Bn)

AOL

$ 132

Time-Warner

$ 76

Amazon.com Barnes & Noble

$ 24$ 2

eSchwab

$ 43

Merill Lynch

$ 29

eBay Sotheby’s

$ 23

$ 2

$ 16$ 9

@Home Cablevision

$ 34 $ 33

Yahoo CBS

= Internet based companies

Sources: Mary Meeker (AC), Andersen Consulting analysis.

Yahoo’s NPAT for FY98 was US$32m. Estimate for FY99 is $104 m.

Amazon.com posted a net loss of US$(74.4)m for 1998.

AOL recorded a net loss of US$(0.5)Bn in 1997 and net income of only US$160 m in 1998.

= Traditional ‘Bricks and mortar’

The impact of eCommerce initiatives on shareholder value can be a driving factor.

Approach 4: Valuing the ePremium

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The business case is a living deliverable that evolves with the stage of development.

Broad ranges, reliable to +/- 40%

Reliable to +/- 25%

Reliable to +/- 10 or less

Future

Capability DevelopmentPlanning

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

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Business case development is an iterative process with four basic steps.

DevelopBusiness

Logic

CollectData

BuildSpreadsheet

PerformSensitivityAnalysis

ClientCheckpoints

• 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

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How fast is the Internet growing in Belgium?What are the demographics of users?

How much eCommerce is being conducted?

Investment reports, research firms and publications are the best sources of eCommerce data.

Research Firms:ForresterGartner GroupIDCJupiter

Investment Banks:Alex BrownBankBoston Robertson StephensCSFBMerrill Lynch

Publications:Business 2.0International Journal of eCommerceInternet WorldRed Herring

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Estimates and projections differ by source, implying the need for additional analysis.

0

2

4

6

8

10

12

14

16

18

1996 1997 1998 1999 2000

PSI

Booz Allen

Tower Group

On-Line Banking Projections (US)

MillionsofUsers

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eCommerce revenue estimates are generated by analyzing four primary sources of income.

Sources of Revenue

Transactions

Fees(Annual/Periodic)

Sponsorships

Other

Advertising Slotting fees Preferred provider certification

Value-added content subscriptions• Equity research• Portfolio management

Services• Advice• Customer profiling• Alerts• Value-added network (ISP)• Other premium services

Commissions on sale of own/other’s products• Bounties• Percentage of transaction (bp)

Referral fees Transaction processing fees Wallet-related revenue

Sale of aggregated user information that does not compromise customer privacy

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Estimating eCommerce advertising revenue is a complex task.

Advertising and Sponsorship Revenue Assumptions

Universal Advertising AssumptionsAverage page views/user per monthTotal banner ads per page

Non-targeted AdvertisingPercent of total ad spaceCPMInventory sold

Highly-targeted AdvertisingPercent of total ad spaceCPMInventory sold

Sponsorship AssumptionsSponsorship spaces per pageCPMInventory sold

352

80%$30

20%

20%$45

30%

1$25

50%

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eCommerce expense estimates are highly dependent upon the client’s business model.

Sources of Expenses

Marketingand Sales

Product/Service Development

Customer Care

TechnologyInfrastructure

Subscriber/merchant acquisition Promotional branding Relationship management

Content, tools,application• “Normal content”• Expert/celebrity

Aggregation• Web scraping• Site scraping

Technical support Customer support Billing

Hardware Software Hosting Integration

G&A

Salaries Occupancy Equipment Other

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Rough estimates of eCommerce site development costs can be useful for high-level business cases.

Get on the Map Run with the Pack MarketDifferentiator

Future Cost of an eCommerce Site (Circa 2000)

Source: Gartner Group, “Electronic Commerce and Extanet Applications,” May 7, 1999

$300,000 to $1 million

$1 million to $5 million

$5 million to $20+million

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Sensitivity analysis helps the team refine the business case and communicate key assumptions.

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

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Business case data is presented using common financial statements and client-specific metrics.

Projected Statement of Income

Revenues

Advertising & Sponsorships

Transactions

Expenses

Marketing and Sales

Customer Care

Technology

General and Admin.

Margin

Investment Requirements

NPV (12% discount rate)

2000

$3.8

($25.6)

$31.5

$3.2

$6.2

$22.0

$2.1

$10.5

$1.0

2001

$15.2

($6.8)

$15.1

$15.0

$8.4

$10.5

$3.2

2002

$33.3

($2.6)

$31.1

$31.5

$18.3

$10.5

$6.7

2003

$54.1

$32.2

$11.4

$24.0

$29.7

$9.3

$11.1

2004

$71.6

$55.4

$54.1

$22.5

$39.4

$9.3

$14.7

($mm)

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Several lessons are worth sharing.

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

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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

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The existing GSM infrastructure implied the need to partner with a telecommunications company.

GSMNetwork

TelcoMessageGateway

Core BankingSystems

MobileApplications

Mobile Phone & Smart Card

FixedNetwork

BankCustomer

BankingApplications

Proposed Technical Architecture

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However, new technologies promise to provide direct access to the customer and greater usage.

Offering Internet-like services is expected to propel adoption.

Emerging Mobile Technologies

Compact HTML

WAP

STK

Mo

bil

e S

erv

ice

Us

ag

e

% o

f m

ob

ile

su

bs

cri

be

rs

100%

0%1999 2000 2001 2002 2003 2004

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The team needed to develop baseline usage data for different launch dates and technical platforms.

Customer gain of starting with STK over starting with WAP

Customer gain of starting with WAP over starting with CHTML

Earlier introduction of services builds greater user base

1.M

ob

ile B

an

kin

g U

sers

(m

illio

ns)

1.5

1.0

1.0.5

0.01997 1998 1999 2000 2001 2002 2003 2004

Start with SMS

Start with STK

Start with WAP

Start with CHTML

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The team estimated the start-up costs and revenue streams from each alternative.

Start-up Costs Total Benefits/Expenses per Customer (1)

(Year 2004)

•620,000 estimated mobile banking users in 2004

•CHF 23.4m additional earnings before taxes in 2004

Annual fee

Transaction fees

Savings - mobile CASH downloads

Telco messaging fees

Call center

Application maintenance

Other

Other

CHF 56

CHF 21

Introducing and supporting new platforms is costly.

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 Integration2.8 1.7 0.0

Total 5.4 6.5 5.7

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After evaluating several partnering options, the team recommended a telco alliance approach.

Cash Flow Analysis

Financials (m CHF):5 Year NPV 1.310 Year NPV 22.9Payback Year 2003

Rationale:StrategicTelco subsidiesTelco technical expertise

KEYCash from Operations

Investments

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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