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?
  • Value proposition
  • Revenue model
    • Business Model Taxonomies
  • Rappa: Business Models on the Web
  • Applegate: New Models for Managers
  • Weill and Vitale: Atomic Business Models
  • Hartman and Sifonis: Extended E-conomy Business Models
  • Other Business Model Taxonomies

    • 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.

    Brokerage Model: Brokers are market makers, they bring buyers and sellers together and facilitate transactions in B2C or B2B or C2C markets.
  • Marketplace Exchange
  • Buy/Sell Fulfillment
  • Demand Collection System<
  • Auction Broker
  • Transaction Broker
  • Distributor
  • Search Agent
  • Virtual Marketplace


    • Advertising Model: This model is an extension of the traditional media broadcasting model. This model only works when the volume of viewer traffic is large or highly specialized.
  • Portal
  • Classifieds
  • User Registration
  • Query-based Paid Placement
  • Contextual Advertising
  • ContentTargeted Advertising
  • Intromercials
  • Ultramercials

    Infomediary Model: Data about consumers and their buying habits are extremely valuable, especially when that information is carefully analyzed and used to target marketing campaigns. Independently collected data about products are useful to consumers. Infomediaries provide information to both buyers and sellers.
  • Advertising Networks
  • Audience Measurement Services
  • Incentive Marketing
  • Metamediary


    • Merchant Model: These are classic wholesalers and retailers of goods and services. In other words, "e-tailers."
  • Virtual Merchant
  • Catalog Merchant
  • Click and Mortar
  • Bit Vendor


    • Manufacturer (Direct) Model: This model is predicated on the power of the Web to allow manufacturers to reach buyers directly and thereby compress the distribution channel.
  • Purchase
  • Lease
  • License
  • Brand Integrated Content


    • Affiliate Model: This model provides purchase opportunities from a number of different sites. The affiliate sites provide purchase-point click-through to the merchant.
  • Banner Exchange
  • Pay-Per-Click
  • Revenue Sharing


    • Community Model: Users who have a common interest in an area congregate at community Web sites. The viability of the community model is based on user loyalty.
  • Open Source
  • Public Broadcasting
  • Knowledge Networks


    • Subscription Model: Users are charged a periodic fee to subscribe to a service.
  • Content Services
  • Person-to-Person Networking Services
  • Trust Services
  • Internet Service Providers


    • Utility Model: A metered usage or pay as you go approach.
  • Metered Usage
  • Metered Subscriptions

    • 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:

    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 Tutorial
    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
    Executive Summary
    Business Description
       Mission Statement
       Business Goals
       Project Objectives
        Business Model
    Market Analysis
    Competitor Analysis
    Operations
    Financial Statements
    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 (d.viehland@massey.ac.nz).