Business models have been around as long as commerce has existed. Anyone who has cast their eye over a commercial blog or print media marketing publication in the last ten years would be familiar with modern acronyms such as B2B and B2C business models. "B2B" (business to business) and "B2C" (business to consumer) are but two broad models used to describe how the flow of goods and services moves between producers and consumers. The combined effects of internet economics (Network, Attention, Gift and Knowledge) has altered the landscape that commerce operates upon to the extent that innovative and flexible business models and variations of them are almost as prolific as the businesses that employ them. Business models have moved from the traditional business to consumer, closed loop type to direct consumer to consumer varieties where everyone is a producer and consumer, sometimes simultaneously.
Below is an outline of some of the more common models employed in internet commerce today and examples of businesses that use them. Image of online business models (Web 2.0 Business Model Characteristics, n.d.)
Web 2.0 Business Models
(Funk, 2009, p. 80) lists them as:
- Online Retail
- Advertising Supported
- Subscription Model
- Download Fees
- Affiliate Marketing
- Software-as-a-Service
- Brokerage or Intermediary
Online Retail
Also known as “ecommerce”, online or e-retailers sell physical goods online. Dell is a well known example of a manufacturer whose disintermediated business model enables it to provide its products direct to the consumer, via the Web. Web 2.0 has revolutionised the WAY many consumer goods are sold and none more so than in the books, music and movie industries. Since no one supplier can accurately forecast demand and reach outside their local environment without enormous effort and expense the advent of the web has enabled the big guns (Amazon.com, iTunes, Netflix for e.g.) to prosper and swallow up many mid size players.
The Web has also fostered the growth of niche suppliers. Search on line for you favourite consumer good that would normally be found in Myers for example and see how many relatively small suppliers are supplying to the big guys – via the web. For e-retailers the most profound change wrought by the web as been how many potentially customers they can reach without the huge costs associated with offline marketing (printing of catalogues and mailing for example).
The Web has also enabled e-retailers to provide an endless array of goods, it is now possible to simultaneously sell best sellers AND provide niche goods to the Long Tail "The Long Tail Wired" (Anderson, 2009) without having to hold inventory of all items on hand. Just in Time Inventory, drop shipping and affiliate relationships mean an eTailer can offer 'Earth’s Biggest Selection' as Amazon.com does without having to own the physical real estate to hold it all, nor incur the costs associated with the handling of such an inventory, Lower overheads lead to higher profit margins which helps to ensure the longevity and sucess of e-businesses who operate in an everchanging and volitile market space.
Advertising-Supported
Deriving REVENUE from Advertising? But isn’t that meant to be a COST of doing business rather than an income stream? Advertising certainly is part of the marketing cost of any business but the world of Web 2.0 has also provided the opportunity to make money from doing so. Google’s Adsense for example provides any business with a web presence with a way to make extra money. Search engines such as Yahoo and Google offer a portal to targeted advertisments - Google's Adwords program is a classic example of this variety of advertising model. Google has taken this further with its Adsense program. Advertisements are placed strategically and subtly on a business's site and sales generated from click-throughs from that site will result in a percentage of the sale going back to the hosting site. Search engines like Google, Yahoo and MSN syndicate ads originally created for their search engine results pages across many other sites in exchange for a cut of the click through revenue generated by the syndicated ads. Social networking sites and other popular web “hotspots” all derive income from ads placed on their sites.
Amazon.com derives income from behavioural marketing where their sophisticated website archetecture enables them to track consumer preferences and target market items of a similiar content and/or genre "People who purchased x also purchased y".
Other variations on the Advertising model are listed below courtesy of "Managing The Digital Enterprise" (Rappa, 2009).
- Classifieds (Craigslist)
- Intromercials (CBS MarketWatch)
- Ultramercials (Salon/Mercedes-Benz collaboration).
Advertising-as-revenue does work but it is not usually the major source of income (although there are exceptions, Google for example) for it is a supporting business model rather than a stand alone model. Google has leveraged the power of network effects (free search engine to its consumer network subsidised by advertisers who pay) to construct a major revenue stream from advertising.
Subscription Model.
Businesses using a subscription model rely on people paying to view or use content, a tricky proposition in a world where so much is seen to be "free". Typically people go searching online for information because it is FREE. At the same time information is expensive because it is important and hard to gather giving rise to a paradigm that many businesses have tried to engage with, some more successfully than others. Netflix operates with a subscription model. In 2009 it had more than 7 million paid subscribers and generated $1.2 billion in revenue from this model, obviously has a good grasp on how to get people to pay for movies online (Funk, 2009, p. 87).
Many niche providers have also successfully utilised this model e.g. PublishersMarket place.com which provides news on the latest deals to publishing insiders (Funk, 2009, p. 86).
Many more businesses have not been successful with this model the LA Times, The Economist and The Financial Times. It seems the TYPE of information involved has a lot to do with how well a subscription model will work (Funk, 2009, p. 85).
Download Fees
iTunes charges a fee for the privelege of downloading music, Amazon.com charges for the downloading of e-books, Wal-Mart for TV programs. These household names porvide examples of pure e-commerce or digital commerce mopdels where the transaction end to end is digital e.g. iTunes uploads a digital music file, a customer purchases using a credit card and downloads the digital file. There is no cost incurred by either party in shipping and receiving. Although it could be argued that there is still storage costs for both iTunes and purchaser as the digital files have to be stored safely.
Affiliate Marketing
The pre runner of paid search ads. Amazon.com’s affiliate program is one of the best known of this type of model.
Software-as-a-Service (SAAS)
Welcome to “The Cloud”. A software provider gathers customers and establishes an account for them with their own unique log in details. The customers pay a fee possibly monthly or annually to enjoy the use of the software e.g. Reckon Ltd provides an online version of their business accounting software QuickBooks, for annual fee of $275.00 per licence (seat). Wordpress and Blogger are essentially SAAS providers. People manage their own personal website via the service provided by Wordpress which charges for the privilege of an individual having their own domain name.
Software as a Service essentially shifts the software off of the client’s computer and “into the cloud”; it is hosted on the provider’s servers. It reduces the cost of IT infrastructure and maintenance for the client and has the provider has access to cheap storage it reduces the cost of providing the software to the client when compared to the old method of pressing, boxing, stocking and shipping CD’s and User Guides. Other advantages include ease of access across geographical boundaries, the provider becomes responsible for updates and upgrades rather than the client having to do it or employ someone to do it on their behalf. The pay as you go pricing model is usually able to be expenses in the year of purchase rather than traditional software purchases which must be expensed (depreciated) over a number of years despite the fact the version is usually superseded each year.
Brokerage or Intermediary
Think e-bay, the classic online sucess story built from charging a small fee to "broker" transactions between seller of anything from a paper clip to a house to … you think of it and ebay and it has probably been transaction via e-bay. The disintermediation of traditional pipelines caused by the web has changed how many manufacturers provide products to their customers and many “middle man” have gone by the way side as a result. However eBay the star of the internet provides a stellar example of how the middle man can prosper in an online world. eBay provides the virtual auction house for millions upon millions of products. It owns neither warehouses nor showrooms it simply showcases other peoples wares, provides an automated auction system, a space for review and feedback and handles the transaction between vendor and buyer securely.
Think eBay, think Pay Pal. Pay Pal is another example of a Brokerage – it handles monetary transactions on line, for a fee. Brokerage businesses may get their fees from the seller, the buyer or sometimes from both.
Amazon.com’s zShops and Merchant Services is a fine example of a virtual mall or marketplace, a variation of the Brokerage model. It owns and operates the “mall” premises, charging an array of fees to retailers who wish to peddle their wares from an Amazon.com “shopfront”.
Infomediary
Data and Meta data about consumers including their hobbies and interests, personal details, buying habits etc is incredibly valuable to any business wishing to target niche markets, the "Long Tail" "The Long Tail Wired" (Anderson, 2009). Advertising Networks like DoubleClick, Audience Measurement Services such as Nielsen and Metamediary businesses like Edmunds are other examples of businesses making money from an Infomediary business model. "Managing The Digital Enterprise" (Rappa, 2009).
Community Model "Managing The Digital Enterprise" (Rappa, 2009).
Facebook is perhaps the best known community model Web business It provides (for free) a space for like minded people to collaborate and interact. It generates its revenue from selling ancillary products or advertising, premium subscriptions. Amazon.com also has a community as do most Web savy businesses. Consumers like to feel like they are a part of the organisation that they are sourcing their goods and services from.
Utility Model "Managing The Digital Enterprise" (Rappa, 2009)
Offline businesses that utilise this model are your local electricity and gas company. They provide metered usage of energy and you in return pay for the number of units consumed. An online version of this model is employed by many Internet Service Providers although many have hybridised this model to a subscription version where consumers pay for blocks of units rather than by the unit
Hybrid Models
Most businesses conducting commerce via the internet opt for a hybrid model. Amazon.com for example is an e-retailer that offers an affiliate program, a way for other websites to derive money from advertising Amazon.com goods. the e-book enterprise Kindle is twist on SAAS where rather than the book being purchases, a right to read the book via a computer (exclusive to Amazon.com) is sold. Linked in provides a free professional networking service in exchange for having the ability to on sell your meta data, generates income from advertising, subscriptions and from job listings, an Intermediary type model.
Amazon.com as a Business Model
Amazon.com is synonomous with the phrase 'e-commerce', as it was one of the first companies to start doing business on the internet back in 1994 when it was known as Cadabra.com. It has now grown to 24,300 employees and gone beyond selling books, now providing anything from Electronics to MP3 downloads. It ranks 19 on Alexa and is the biggest online retailer in the world. It continued through the dot.com meltdown of the late 90's and soon turned profits eventually (after a few years!) and popularised online shopping as we know it today. It's net income for 2009 was $172 million and it gets somewhere around 65 million customers to its U.S. website per month. It derives around 40% of its sales through affiliate marketing, or 'third party sellers' via links on their personal website, and are, in turn, paid a commission. Amazon maintains its own point of sale systems unlike other online retailers like say, Ebay for instance who rely on Paypal etc. It is known as Amazon Payments and has a varity of options that go under various pseudonyms such as Checkout, SimplePay and Payphrase. Each one offers a different protocol of payment and privacy options and convenience. To entice customers with an incentive, Amazon offers two day shipping with no minimum purchase amount for a flat annual fee, as well as discounted priority shipping rates.
There are three operational strategies that have helped Amazon.com to enhance its competitive advantage, including cost-leadership, customer differentiation and focus strategies (Saunders, 2001, pp.122-123). The first strategy, cost-leadership is pursued by Amazon.com by differentiating itself primarily on the basis of price. Due to this strategy, Amazon.com always makes sure that it offers the same quality products as other companies for a considerably less price. Their second strategy is customer diffentiation. Amazon.com provideed current and prospective customers with differentiation though design, quality or convenience and Amazon.com always selects a differentiator that is different among the competitor. So, Amazon.com consumers can recognise and differentiate its product from competitors (Saunders, 2001, pp.122-123). The last strategy that it uses, is a focus strategy. This strategy takes one of the two earlier strategies and applies it to a niche within the market (Saunders, 2001, pp.122-123). Amazon.com fouses on outstanding customer service as a niche but not the whole market because each niche has its own demand and requirement.
In November 2007, Amazon launched Amazon Kindle, an e-book reader which downloads content over "Whispernet". Kindle does not allow you to view Amazon e-books on another machine, such as an.. iPad!. But later an app was introduced that would allow their e-books to be read on other devices or PCs. Due to Digital Rights Management of the various publishers, once downloaded you do not actually 'own' it, it is still their intellectual property. This 'business model' has been highly criticised. You can browse titles on Amazon using the machine itself or through your PC logged onto the Amazon Kindle website.. where you can just download it directly. When it first began they claimed to have 88,000 digital titles available, which has known apparently grown to 500,000 books available for download. They get profits of around 65% of all e-book sales and authors can upload documents in several formats where they can charge between $0.99 and $200.00 per download. The authors get 35% of revenues, according to Jeff Bezos, Amazon.com CEO.
