Internet Business Models - PowerPoint PPT Presentation


Title: Internet Business Models


1
Internet Business Models
  • B.P.S. Murthi

2
Changes due to Internet
  • Mediating technology - interconnects
  • Universality - enlarges markets and shrinks
    distance
  • Network externality - More users greater value
  • Distribution channel - digital vs non-digital
  • Time moderator - shrinks time of service and
    enlarges time of operation
  • Information asymmetry reducer
  • Infinite virtual capacity
  • Low common cost standard - open standards
  • Creative destroyer - reduces barriers to entry
  • Transaction cost reducer
  • Dis-intermediation - reduces intermediaries ??

3
DNI framework
  • Digital -
  • Speed, and economy
  • digital versus non-digital products
  • Networked
  • dialogue
  • alliances
  • Individuals
  • customization
  • flexibility of time
  • flexibility of programming

4
Digital products
  • Low marginal costs can be copied easily
  • Low distribution costs
  • Amenable to customization
  • Non-destructible
  • High variation in valuation between customers and
    so should be priced based on customer value
  • Have positive and negative externalities

5
Digital
  • Moores law every 18 months speed of processors
    will be doubled.
  • Metcalfes law value of a network rises as the
    square of the number of users
  • Coase theorem -Why do firms exist?
  • Firms exist to reduce transaction costs which
    result in inefficiency.
  • Internet reduces transaction costs - firms need
    to downsize.

6
How do buyers behave differently online?
  • Attention deficit
  • Effect of search engines, product reviews,
    testimonials will increase
  • Need for suggestion, customization
  • Customers can customize the offer and context
    co-production
  • Search is different shop-bots

7
Some research findings
  • Online customers - more loyal
  • Less price sensitive than commonly believed
    depth of information and web interactivity lower
    price sensitivity
  • Brand names are more valuable when products have
    few search attributes (e.g. clothing)

8
Non-digital products
  • Choice is separated from purchase
  • Customers are able to make informed decisions

9
Barriers to e-commerce
  • Newer technologies customers need to change
    behavior
  • Perceived lack of
  • Privacy
  • Security
  • Speed
  • Reliability
  • fulfillment

10
So what can be done?
  • Make it easier and cheaper for customers to
    transact
  • Learn how customers buy - Develop, maintain, and
    use databases
  • Customize billing
  • Show them their history
  • Share your inventory levels
  • Offer easy search tools
  • Make them come back create stickiness build
    communities

11
5 Cs of Internet
  • Commerce
  • B2B - Vertical hubs (e-steel) versus functional
    hubs (iMark)
  • B2C, C2B (Priceline), C2C
  • Intermediary
  • Community
  • Content
  • Communication
  • Coordination among employees, among customers,
    between firms and customers

12
How marketing is affected by internet?
13
Marketing defined
  • Marketing is a process used by sellers and buyers
    to initiate and complete transactions
  • Need
  • Buyers
  • Sellers
  • Each has something of value to offer
  • They can voluntarily complete the transaction

14
Some thoughts
  • Who is in charge of the process?
  • What is the role of the customer?
  • Who is doing the planning and executing?

15
Exchanges
  • Who initiates the exchange?
  • Who controls the exchange?
  • How does information flow?
  • Reduction in Information Asymmetry
  • Move to information democracy

16
Information democracy
  • Customers will post messages
  • Customers will disagree with companys view
  • Customers will expect privacy

17
The new exchange architecture Mohan Sawhney
  • Industrial Age Information Age
  • Marketer initiated Customer initiated
  • Marketer controlled Customer controlled
  • Monologue Conversation
  • One time Ongoing

18
Metaphors we market by
  • Market as jungle
  • Customers as targets
  • Marketers as hunters
  • Products as mousetraps
  • Salespeople as baiters- and- switchers
  • Promotions as campaigns
  • Relationships as conquests and acquisitions
  • Customer visits as eyeballs and traffic
  • The hunter has become the hunted...

19
Towards a new marketing metaphor
  • Marketers as gardeners
  • Customers as plants
  • Loyalty as roots
  • Profits as harvest
  • Marketing as seed, feed, greed, and weed
  • From hunters to settlers...

20
Towards new marketing assumptions
  • The death of the transaction
  • the rise of the relationship
  • The death of the passive consumer
  • the rise of the active co- creator
  • The death of opaqueness
  • the rise of transparency
  • The death of the product
  • the rise of the experience
  • The death of the monologue
  • the rise of the conversation

21
Marketing concept evolution
  • Production concept
  • Selling concept
  • Product / Brand management
  • Customer management

22
Is there pioneering advantage on internet?
  • Unique assets accumulate
  • Number of members, member content
  • Barriers to new allegiances get higher
  • Relationship and trust grows
  • Adapt to technology
  • Factor costs increase
  • shortage of skilled hosts of bulletin boards and
    chat rooms
  • Concentration limits opportunities
  • Increasing returns
  • Economies of scope
  • Acquisition becomes expensive
  • High stock prices and deep pockets

23
First Mover Advantage?
  • CATEGORY -- Pioneer
  • Browser -- NCSA Mosaic
  • Search Directory -- Yahoo
  • Free Email -- Hotmail
  • E-tailing -- ISN
  • Books -- Amazon
  • Music -- CDNow!
  • C2C Auctions -- Ebay
  • B2B MRO -- Ariba
  • B2B Auctions -- FreeMarkets
  • Current Leader
  • Internet Explorer
  • Yahoo
  • Hotmail
  • Amazon
  • Amazon
  • CDNow, Amazon
  • Ebay
  • Ariba
  • FreeMarkets

24
Business Models
  • Different Models B2B,
    B2CBrokerageAdvertisingInfomediaryMerchant
    ManufacturerAffiliateCommunitySubscription
    Utility

25
Business to Business
  • Where the e-commerce action is

26
History
  • Electronic Data Interchange (EDI)
  • Firm to supplier electronic connection
  • Firms could have such links with only a few
    suppliers
  • Limited transaction ability
  • Large buyers and suppliers were using EDI
    excluding other smaller players

27
Internet
Infrastructure/access
Closed/private
Open/ Public
Public/private E-markets
Many to many (Mediated)
Nature of transactions
E-commerce
EDI
One-to one (direct)
28
Vertical hubs
  • Plastics
  • Steel
  • Chemicals
  • Paper
  • Energy
  • Cattle
  • Telecom
  • Flowers

29
Functional hubs
  • Logistics management
  • MRO procurement
  • Capacity management
  • Investment recovery
  • Human resource management
  • Project management
  • Media buying
  • Credit management

30
What went wrong with B2B companies?
  • Liquidity dries up
  • Suppliers fear erosion of margin
  • Many sign ups but few transactions
  • Fear of dis-intermediation
  • Bad business model
  • Exchange fees not much
  • Just machine information not enough
  • Capital market
  • Technology woes
  • Consortia

31
Consortia
  • Buyer sponsored
  • Concentrated buyers, fragmented suppliers,
    multi-layered supply chain
  • Autos, aerospace, hotels, retailing
  • Supplier sponsored
  • Few suppliers
  • Paper, Meat and Poultry, metals, Airlines
  • Intermediary sponsored
  • Fragmented industry, strong few channels
  • Food service, packaged goods, electrical supplies
  • Startup firm
  • Fragmented industry, early mover advantage
  • Steel, chemicals, life sciences

32
Industry consortia
  • New century network Newspapers
  • Integrion Financial network banking
  • Kaleida, Taligent, PowerPC computers
  • Spectrum Electronic bill payment
  • NOISE Netscape, Oracle, IBM, Sun

33
B2C Markets
34
Individual Choice
  • Unlimited choice produces information processing
    overload
  • Need for organization and suggestion to simplify
    task
  • Consumers need selection and suggestion
  • Selection Suggestion Value

35
Selection and suggestionSheth and Sisodia (1997)
  • Selection
  • Greater value consciousness
  • Power shift to consumers
  • Shopping on demand
  • Suggestion - increases loyalty
  • Greater personalization
  • Co-creation
  • Automation of consumption

36
Personalization
  • Collaborative filtering
  • Clustering and segmentation
  • Do it yourself options

37
Similarities
  • Media real lifeReeves and Nash
  • People treat machines and software just like
    people
  • Politeness
  • Personality
  • Gender bias
  • Media quality

38
Differences
  • Lack of social cues
  • Group dynamics
  • Flaming - speak incessantly on relatively
    uninteresting subject or with a patently
    ridiculous attitude
  • Why is there more flaming in email communications
    ?
  • Lack of feedback - harder to judge disapproval
    and confusion
  • Text is not as rich as personal interaction -
    need to use stronger words and images
  • Lack of social cues and anonymity - causes people
    to be braver
  • Implication for customer service

39
Differences
  • Quality cues
  • How to communicate quality
  • Hanson and Putler (96) varied the number of
    downloads
  • Need for independent verification
  • Cognitive difficulty
  • Keyword search or browse or both ?

40
Value of Online CommunitiesHagel and Armstrong
  • Communities of transaction
  • buy, sell, deliver info e.g. Virtual Vineyards
  • Communities of Interest
  • Special topics, high degree of interpersonal
    communication, e.g. GardenWeb, Motley Fool
  • Communities of fantasy
  • Red Dragon Inn, ESPNet
  • Communities of relationship
  • life experiences, cancer forum, divorce
  • Try to provide all four as far as possible -
    travel industry - source of long term first mover
    advantage

41
Online Communities Advantages
  • encourage communication
  • Message boards, chat rooms, instant messaging
  • focus social interaction
  • Members log in for hours a day vs. minutes
  • Businesses are active community builders
  • Improves organizations communication ability
  • Virtual gathering places provide power to
    consumer
  • Online communities can alter the nature of
    marketing

42
Online Communities Disadvantages
  • isolate individuals
  • Typing at a keyboard isnt real socializing
  • lead to psychological problems
  • Depression, loneliness
  • lead to shallow relationships

43
Permission Marketing
  • 92 go to internet to see email.
  • Advantages of email
  • Cost
  • Virtually real time distribution
  • Interactivity direct links to web sites
  • Higher click through rates
  • Email is proactive and better at targeting

44
Viral Marketing
  • Company developed products or services or
    information that are passed on from user to user
  • Examples
  • Mountain Dew offered cheap pagers
  • Hotmail Free e-mail, e-mail recipients also
    were asked to join.
  • Washington Post allows you to e-mail news to
    your friends
  • Universal Studios set up three webcams for
    visitors to take pictures and send to their
    friends.

45
Affiliate marketing
  • A way for retailers to pay-for-performance
  • Referral, Partner, Associate, Affiliate
    Programs
  • A variety of pay scales
  • Commission on sales
  • Pay per click
  • Pay per download or search
  • Multi-level

46
Examples of affiliate programs
  • Amazon.com pays ETrade 5 of converted sales
  • CDNow pays Country.com 7 of converted sales
  • TheSmokeShop.com offers affiliates 7 commissions
    and .07 per clickthrough
  • Lycos pays Tripod members .03 per search

47
Ad metrics
  • Hits
  • Pageviews
  • Visitors
  • Impressions Cost per thousand (CPM)
  • Click through rate (CTR)
  • Leads Cost per action/lead (CPA/CPL)
  • Sales (CPS)

48
CPM
Medium Vehicle Cost Reach CPM
TV 30 sec Network primetime 120,000 10 m Households 12
Mags Page, 4 color cosmopolitan 86,155 2.5 m readers 35
Online Banner Compuserve 10,000 per month 750,000 Visitors 13
Website Banner Infoseek 10,000 per month 500,000 pageviews per month 20
49
The Ad Server
  • Definition of an ad server The software that
  • controls the placement and rotation of
    advertising
  • on a publishers Website.
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Internet Business Models

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Transcript and Presenter's Notes

Title: Internet Business Models


1
Internet Business Models
  • B.P.S. Murthi

2
Changes due to Internet
  • Mediating technology - interconnects
  • Universality - enlarges markets and shrinks
    distance
  • Network externality - More users greater value
  • Distribution channel - digital vs non-digital
  • Time moderator - shrinks time of service and
    enlarges time of operation
  • Information asymmetry reducer
  • Infinite virtual capacity
  • Low common cost standard - open standards
  • Creative destroyer - reduces barriers to entry
  • Transaction cost reducer
  • Dis-intermediation - reduces intermediaries ??

3
DNI framework
  • Digital -
  • Speed, and economy
  • digital versus non-digital products
  • Networked
  • dialogue
  • alliances
  • Individuals
  • customization
  • flexibility of time
  • flexibility of programming

4
Digital products
  • Low marginal costs can be copied easily
  • Low distribution costs
  • Amenable to customization
  • Non-destructible
  • High variation in valuation between customers and
    so should be priced based on customer value
  • Have positive and negative externalities

5
Digital
  • Moores law every 18 months speed of processors
    will be doubled.
  • Metcalfes law value of a network rises as the
    square of the number of users
  • Coase theorem -Why do firms exist?
  • Firms exist to reduce transaction costs which
    result in inefficiency.
  • Internet reduces transaction costs - firms need
    to downsize.

6
How do buyers behave differently online?
  • Attention deficit
  • Effect of search engines, product reviews,
    testimonials will increase
  • Need for suggestion, customization
  • Customers can customize the offer and context
    co-production
  • Search is different shop-bots

7
Some research findings
  • Online customers - more loyal
  • Less price sensitive than commonly believed
    depth of information and web interactivity lower
    price sensitivity
  • Brand names are more valuable when products have
    few search attributes (e.g. clothing)

8
Non-digital products
  • Choice is separated from purchase
  • Customers are able to make informed decisions

9
Barriers to e-commerce
  • Newer technologies customers need to change
    behavior
  • Perceived lack of
  • Privacy
  • Security
  • Speed
  • Reliability
  • fulfillment

10
So what can be done?
  • Make it easier and cheaper for customers to
    transact
  • Learn how customers buy - Develop, maintain, and
    use databases
  • Customize billing
  • Show them their history
  • Share your inventory levels
  • Offer easy search tools
  • Make them come back create stickiness build
    communities

11
5 Cs of Internet
  • Commerce
  • B2B - Vertical hubs (e-steel) versus functional
    hubs (iMark)
  • B2C, C2B (Priceline), C2C
  • Intermediary
  • Community
  • Content
  • Communication
  • Coordination among employees, among customers,
    between firms and customers

12
How marketing is affected by internet?
13
Marketing defined
  • Marketing is a process used by sellers and buyers
    to initiate and complete transactions
  • Need
  • Buyers
  • Sellers
  • Each has something of value to offer
  • They can voluntarily complete the transaction

14
Some thoughts
  • Who is in charge of the process?
  • What is the role of the customer?
  • Who is doing the planning and executing?

15
Exchanges
  • Who initiates the exchange?
  • Who controls the exchange?
  • How does information flow?
  • Reduction in Information Asymmetry
  • Move to information democracy

16
Information democracy
  • Customers will post messages
  • Customers will disagree with companys view
  • Customers will expect privacy

17
The new exchange architecture Mohan Sawhney
  • Industrial Age Information Age
  • Marketer initiated Customer initiated
  • Marketer controlled Customer controlled
  • Monologue Conversation
  • One time Ongoing

18
Metaphors we market by
  • Market as jungle
  • Customers as targets
  • Marketers as hunters
  • Products as mousetraps
  • Salespeople as baiters- and- switchers
  • Promotions as campaigns
  • Relationships as conquests and acquisitions
  • Customer visits as eyeballs and traffic
  • The hunter has become the hunted...

19
Towards a new marketing metaphor
  • Marketers as gardeners
  • Customers as plants
  • Loyalty as roots
  • Profits as harvest
  • Marketing as seed, feed, greed, and weed
  • From hunters to settlers...

20
Towards new marketing assumptions
  • The death of the transaction
  • the rise of the relationship
  • The death of the passive consumer
  • the rise of the active co- creator
  • The death of opaqueness
  • the rise of transparency
  • The death of the product
  • the rise of the experience
  • The death of the monologue
  • the rise of the conversation

21
Marketing concept evolution
  • Production concept
  • Selling concept
  • Product / Brand management
  • Customer management

22
Is there pioneering advantage on internet?
  • Unique assets accumulate
  • Number of members, member content
  • Barriers to new allegiances get higher
  • Relationship and trust grows
  • Adapt to technology
  • Factor costs increase
  • shortage of skilled hosts of bulletin boards and
    chat rooms
  • Concentration limits opportunities
  • Increasing returns
  • Economies of scope
  • Acquisition becomes expensive
  • High stock prices and deep pockets

23
First Mover Advantage?
  • CATEGORY -- Pioneer
  • Browser -- NCSA Mosaic
  • Search Directory -- Yahoo
  • Free Email -- Hotmail
  • E-tailing -- ISN
  • Books -- Amazon
  • Music -- CDNow!
  • C2C Auctions -- Ebay
  • B2B MRO -- Ariba
  • B2B Auctions -- FreeMarkets
  • Current Leader
  • Internet Explorer
  • Yahoo
  • Hotmail
  • Amazon
  • Amazon
  • CDNow, Amazon
  • Ebay
  • Ariba
  • FreeMarkets

24
Business Models
  • Different Models B2B,
    B2CBrokerageAdvertisingInfomediaryMerchant
    ManufacturerAffiliateCommunitySubscription
    Utility

25
Business to Business
  • Where the e-commerce action is

26
History
  • Electronic Data Interchange (EDI)
  • Firm to supplier electronic connection
  • Firms could have such links with only a few
    suppliers
  • Limited transaction ability
  • Large buyers and suppliers were using EDI
    excluding other smaller players

27
Internet
Infrastructure/access
Closed/private
Open/ Public
Public/private E-markets
Many to many (Mediated)
Nature of transactions
E-commerce
EDI
One-to one (direct)
28
Vertical hubs
  • Plastics
  • Steel
  • Chemicals
  • Paper
  • Energy
  • Cattle
  • Telecom
  • Flowers

29
Functional hubs
  • Logistics management
  • MRO procurement
  • Capacity management
  • Investment recovery
  • Human resource management
  • Project management
  • Media buying
  • Credit management

30
What went wrong with B2B companies?
  • Liquidity dries up
  • Suppliers fear erosion of margin
  • Many sign ups but few transactions
  • Fear of dis-intermediation
  • Bad business model
  • Exchange fees not much
  • Just machine information not enough
  • Capital market
  • Technology woes
  • Consortia

31
Consortia
  • Buyer sponsored
  • Concentrated buyers, fragmented suppliers,
    multi-layered supply chain
  • Autos, aerospace, hotels, retailing
  • Supplier sponsored
  • Few suppliers
  • Paper, Meat and Poultry, metals, Airlines
  • Intermediary sponsored
  • Fragmented industry, strong few channels
  • Food service, packaged goods, electrical supplies
  • Startup firm
  • Fragmented industry, early mover advantage
  • Steel, chemicals, life sciences

32
Industry consortia
  • New century network Newspapers
  • Integrion Financial network banking
  • Kaleida, Taligent, PowerPC computers
  • Spectrum Electronic bill payment
  • NOISE Netscape, Oracle, IBM, Sun

33
B2C Markets
34
Individual Choice
  • Unlimited choice produces information processing
    overload
  • Need for organization and suggestion to simplify
    task
  • Consumers need selection and suggestion
  • Selection Suggestion Value

35
Selection and suggestionSheth and Sisodia (1997)
  • Selection
  • Greater value consciousness
  • Power shift to consumers
  • Shopping on demand
  • Suggestion - increases loyalty
  • Greater personalization
  • Co-creation
  • Automation of consumption

36
Personalization
  • Collaborative filtering
  • Clustering and segmentation
  • Do it yourself options

37
Similarities
  • Media real lifeReeves and Nash
  • People treat machines and software just like
    people
  • Politeness
  • Personality
  • Gender bias
  • Media quality

38
Differences
  • Lack of social cues
  • Group dynamics
  • Flaming - speak incessantly on relatively
    uninteresting subject or with a patently
    ridiculous attitude
  • Why is there more flaming in email communications
    ?
  • Lack of feedback - harder to judge disapproval
    and confusion
  • Text is not as rich as personal interaction -
    need to use stronger words and images
  • Lack of social cues and anonymity - causes people
    to be braver
  • Implication for customer service

39
Differences
  • Quality cues
  • How to communicate quality
  • Hanson and Putler (96) varied the number of
    downloads
  • Need for independent verification
  • Cognitive difficulty
  • Keyword search or browse or both ?

40
Value of Online CommunitiesHagel and Armstrong
  • Communities of transaction
  • buy, sell, deliver info e.g. Virtual Vineyards
  • Communities of Interest
  • Special topics, high degree of interpersonal
    communication, e.g. GardenWeb, Motley Fool
  • Communities of fantasy
  • Red Dragon Inn, ESPNet
  • Communities of relationship
  • life experiences, cancer forum, divorce
  • Try to provide all four as far as possible -
    travel industry - source of long term first mover
    advantage

41
Online Communities Advantages
  • encourage communication
  • Message boards, chat rooms, instant messaging
  • focus social interaction
  • Members log in for hours a day vs. minutes
  • Businesses are active community builders
  • Improves organizations communication ability
  • Virtual gathering places provide power to
    consumer
  • Online communities can alter the nature of
    marketing

42
Online Communities Disadvantages
  • isolate individuals
  • Typing at a keyboard isnt real socializing
  • lead to psychological problems
  • Depression, loneliness
  • lead to shallow relationships

43
Permission Marketing
  • 92 go to internet to see email.
  • Advantages of email
  • Cost
  • Virtually real time distribution
  • Interactivity direct links to web sites
  • Higher click through rates
  • Email is proactive and better at targeting

44
Viral Marketing
  • Company developed products or services or
    information that are passed on from user to user
  • Examples
  • Mountain Dew offered cheap pagers
  • Hotmail Free e-mail, e-mail recipients also
    were asked to join.
  • Washington Post allows you to e-mail news to
    your friends
  • Universal Studios set up three webcams for
    visitors to take pictures and send to their
    friends.

45
Affiliate marketing
  • A way for retailers to pay-for-performance
  • Referral, Partner, Associate, Affiliate
    Programs
  • A variety of pay scales
  • Commission on sales
  • Pay per click
  • Pay per download or search
  • Multi-level

46
Examples of affiliate programs
  • Amazon.com pays ETrade 5 of converted sales
  • CDNow pays Country.com 7 of converted sales
  • TheSmokeShop.com offers affiliates 7 commissions
    and .07 per clickthrough
  • Lycos pays Tripod members .03 per search

47
Ad metrics
  • Hits
  • Pageviews
  • Visitors
  • Impressions Cost per thousand (CPM)
  • Click through rate (CTR)
  • Leads Cost per action/lead (CPA/CPL)
  • Sales (CPS)

48
CPM
Medium Vehicle Cost Reach CPM
TV 30 sec Network primetime 120,000 10 m Households 12
Mags Page, 4 color cosmopolitan 86,155 2.5 m readers 35
Online Banner Compuserve 10,000 per month 750,000 Visitors 13
Website Banner Infoseek 10,000 per month 500,000 pageviews per month 20
49
The Ad Server
  • Definition of an ad server The software that
  • controls the placement and rotation of
    advertising
  • on a publishers Website.
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