e-Business Plan: Business Model
A business model is a method of doing business by which a company can generate revenue to sustain itself. The two principal components of the business model are the value proposition what customer need is being fulfilled by the business and the revenue model how a business or EC project intends to generate income.
The purpose of this lesson is to assist you in identifying and describing a business model for your e-business. This is an important exercise because it can help you sort through some critical issues in forming an e-business, including revenue sources and potential competitors. And, of course, presenting a viable business model to potential investors adds credibility to the e-business plan and increases your chances of obtaining funds.The lesson outline is:
What is a Business Model?A short, succinct definition of business model and its two principal components is provided above. Almost every author or professional business planner defines business model in a similar manner, including an emphasis on revenue generation and customer value. For example:
However, despite widespread agreement on a definition, some authors describe the contents of a business model quite broadly, almost to the point of being a business plan. For example, in E-Commerce: Business, Technology, Society Kenneth Laudon and Carol Traver list value proposition, revenue model, market opportunity, competitive environment, competitive advantage, market strategy, organizational development, and management team as the eight ingredients of a business model. Similarly, in Strategic Management of eBusiness, Judy McKay and Peter Marshall include customer management (including value proposition), product and service portfolio, processes and activities, required resources, suppliers and business networks, and financial viability (including revenue sources) as elements of a business model.
Because most of these ingredients/elements are elsewhere in the e-business plan (and this tutorial), the focus in this lesson is on determining the value proposition and revenue model for your e-business and explaining the model in the context of the e-business plan.
Value proposition: As emphasized in the Business Description lesson, the purpose of the value proposition is to answer the why question for the business idea. Specifically, the value proposition describes the benefits that a company's products or services provide to customers and/or the consumer's need that is being fulfilled. In other words, why should a customer buy your product or service?
Since the focus of the value proposition is on the customer, the proposition should be stated from the customer's perspective. Value propositions (with examples) may be based on lowest cost (Buy.com), superior customer service (Amazon.com), reduction in product search (Autobytel) or price discovery (Shopping.com) costs, product customization (Dell), or provision of niche products (Anything Left Handed).
A good resource to use in writing the value proposition is the results of the brainstorming session while writing the mission statement. Review the words or phrases that describe your business or that describe the company's ideal image from a customer's point-of-view. Sort out the most important one or two, and then elaborate on it/them to create your value proposition.
This is also the "first-best" opportunity to tell the reader who are your customers. Complete information about your target markets will be covered in the market analysis section, but here you should identify your primary, secondary, and, if necessary, tertiary target markets.
You now have all you need to write a value proposition, as required in assignment 6 in the Business Description lesson. Complete that assignment, and then return here to continue the development of your business model.
Revenue model: As defined in your textbook, a revenue model identifies how a business will generate review. This seems very straightforward, and it is. Examples of revenue models include sales, transaction fees, subscription fees, advertising fees, affiliate fees, and licensing fees. Consider these options for your business idea and identify a revenue model (or two) you intend to use.
Business Model Taxonomies
A number of researchers and authors have developed taxonomies (i.e., a classification) of business models. Some of the most widely known taxonomies are included here, with links to online examples. Other taxonomies also exist and are listed at the end of this section.
From the following taxonomies, you should be able to find at least one business model that matches the value proposition and revenue model identified earlier. However, you are likely to find it difficult to include all of your business activities in just one business model. For example, Purma Top Gifts' principal business model is a virtual merchant, but it also provides customer benefits and receives revenue from its affiliate business model. Generally, businesses will begin with one or two business models. Over time these models may change, or a third one may be added, but too many models tend to indicate that a business doesn't know what it is about and is focusing on too many activities, perhaps not doing any one of them well.
Rappa: Business Models on the Web
Perhaps the most comprehensive taxonomy of e-commerce business models is Business Models on the Web by Professor Michael Rappa. This taxonomy includes 40 models organized into nine major categories. Two of the advantages of this list being online are that (a) Professor Rappa keeps it up to date, making changes as new models emerge and current models change and (b) the Web site includes links to examples of each business model. Each category is listed below, with a brief description and a list of the models.
Source:Source: Business Models on the Web by Michael Rappa in Managing the Digital Enterprise, 2005.
Applegate: New Models for Managers
In Chapter 3 of Information Technology and the Future Enterprise: New Models for Managers Professor Lynda Applegate proposes a taxonomy of business models that is more extensively described than Business Models on the Web. This taxonomy lists model differentiators, likely revenues, likely costs, examples, and, for each category, trends that will influence the development of these models. Due to space and copyright restrictions, only a fraction of its detail is included here:
Focused Distributor Models: provide products and services related to a specific industry or market niche.
Portal Models: A portal is a gateway or entry and on the Web a portal business model provides a gateway for consumers to gain access to content or services.
Producer Models: Producers design, produce, and distribute products and services that meet customer needs. These are usually brick-and-mortar firms that are integrating the Internet into their core business activities.
Infrastructure Provider Models: Unlike previous business models that use the digital infrastructure of the Internet, these models provide that infrastructure.
Source: "E-Business Models: Making Sense of the Internet Business Landscape" by Lynda M. Applegate in Information Technology and the Future Enterprise: New Models for Managers, edited by Gary W. Dickson and Gerardine DeSanctis; Prentice-Hall, 2001 (pp. 49-94).
Weill and Vitale: Atomic Business Models
In a different approach (and as mentioned in your textbook) Peter Weill and Michael Vitale offer eight "atomic business models." Instead of trying to specify a comprehensive list, as Rappa and Applegate have done, these authors define eight models that can be combined (like atoms combine to form molecules) in multiple ways to represent virtually any kind of business model. The atomic business models are:
Source: Place to Space: Migrating to E-Business Models by Peter Weill and Michael Vitale; Harvard Business Press, 2001, p. 21.
Hartman and Sifonis: Extended E-conomy Business Models
In Chapter 4 of Net Ready, Cisco managers Armir Hartman and John Sifonis identify "five extended business models that are changing the way value is delivered. Successful Net Ready organizations take on one or more of these models" (p. 101). Many business model experts consider their description of the infomediary model to be one of the best available. Their "extended e-conomy business models" are:
Source: Net Ready: Strategies for Success in the E-conomy by Armir Hartman and John Sifonis with John Kador; McGraw-Hill, 2000.
Other Business Model Taxonomies
As noted at the beginning of this section, many taxonomies exist. In addition to the four taxonomies listed above, other taxonomies include:
Business Models for Electronic Markets
Perhaps the earliest attempt to construct a taxonomy of e-commerce business models was Paul Timmers in "Business Models for Electronic Markets" (Electronic Markets, Vol. 8, No. 2, July 1998). In this article Timmers provides brief descriptions, benefits (for businesses, customers, suppliers), and examples of eleven models: e-shop, e-procurement, e-auction, e-mall, third party marketplace, virtual community, value chain service provider, value chain integrator, collaboration platform, information brokerage, and trust services.
Source: "Business Models for Electronic Markets" by Paul Timmers in Electronic Markets, Vol. 8, No. 2, July 1998.
New Business Models for E-Commerce
Another early effort by Dennis Viehland identified three new or emerging business models that are made possible by the Web: Virtual retailer, distributed storefront, and buyer-led pricing.
Source: New Business Models for Electronic Commerce by Dennis Viehland, Proceedings of the 17th Annual International Conference of the Association of Management, August 1999.
E-Commerce Business Models
A slightly approach to classification of business models is taken by Kenneth C. Laudon and Carol Guercio Traver in their e-commerce textbook, E-Commerce: Business. Technology. Society.. They list and describe various models by type or mode of electronic commerce: B2C (portal, e-tailer, content provider, transaction broker, market creator, service provider, community provider), B2B (e-distributor, e-procurement, exchanges, industry consortia, single-firm networks, industry-wide networks), and others (C2C, peer-to-peer, mobile commerce). For each model, the authors include variations ("sub-models"), examples, a description, and revenue model(s).
Source: E-commerce: Business. Technology. Society. by Kenneth C. Laudon and Carol Guercio Traver, Addison-Wesley, 2003, pp. 72, 82, 88.
Typical EC Business Models
Your textbook, Electronic Commerce 2006: A Managerial Perspective, includes a list of 17 typical EC business models. While some models on this list are similar to others listed above, there are some new twists and an emphasis on auction-type models. This list of typical EC business models (with links to example companies) includes online direct marketing (Wal-Mart), electronic tendering systems (General Electric's Global Exchange Services (GXS), name your own price (Priceline), find the best price (E-Loan), affiliate marketing (Amazon.com), viral marketing (Blue Mountain Arts), group purchasing (LetsBuyIt.com), online auctions (e-Bay), product and service customization (Dell), electronic marketplaces and exchanges (GNX), information brokers (Google), bartering (Web-Barter), deep discounting (Half.com), membership (Net Market), value-chain integrators (carpoint.com), value-chain service providers (United Parcel Service), and supply chain improvers (Orbis).
Source: Electronic Commerce 2006: A Managerial Perspective by Efraim Turban, David King, Dennis Viehland, and Jae Lee; Prentice-Hall, 2006, pp. 22-24.
You now have all you need to identify and describe a business model for your e-business plan, as required in assignment 7 in the Business Description lesson.
Navigation Guide for the e-Business Plan
Introduction to the E-Business Plan Tutorial
Top Ten Resources for Writing an e-Business Plan
Fundamentals of e-Business Planning
Writing a "Read Right" Plan
Making an Effective Business Plan Presentation
Appendix: e-Business Plan Tutorial Assignments
This e-Business Plan lesson was last updated on June 7, 2005. Questions, comments, and suggestions for improvement can be sent to Dennis Viehland (email@example.com).