E-Business Plan: Business Model

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 does the business fulfill—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 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?

Business Model Taxonomies

What Is a Business Model?

We provide a short, succinct definition of business model and its two principal components 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:

  • Definition of a business model
  • A business model is the method of doing business by which a company can sustain itself—that is, generate revenue. The business model spells out how a company makes money by specifying its position in the value chain.
    Source: Rappa, M. "Business Models on the Web." Managing the Digital Enterprise, May 16, 2007.
  • A business model is a set of planned activities (sometimes referred to as business processes) designed to result in a profit in a marketplace.
    Source: Laudon, K. C., and C. G. Traver. E-Commerce: Business, Technology, Society. Addison Wesley, 2003, p. 61.
  • The e-business model includes the roles and relationships among a firm's customers, allies, and suppliers; the major flows of product, information, and money; and the major benefits to the participants.

    Source: Weill, P., and M. Vitale. Place to Space: Migrating to E-Business Models. Harvard Business Press, 2001, p. 25.

  • 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 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 fulfillment of a consumer's need. In other words, why should a customer buy your product or service?

    Since the focus of the value proposition is on the customer, state the proposition 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 brainstorming session for 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 or them to create your value proposition.

    This is also the "first-best" opportunity to tell the reader who your customers are. The market analysis section will contain complete information about your target markets, 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 revenue. 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. Here, we include some of the most widely known taxonomies with links to online examples. Other taxonomies also exist and we list them 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 your business activities in just one business model. For example, Purma Top Gifts's 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 you may add a third one, 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. Listed below is each category 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, B2B, or C2C markets.

    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.

    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.

    Merchant Model: These are classic wholesalers and retailers of goods and services—in other words, "e-tailers."

    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.

    Affiliate Model: This model provides purchase opportunities from a number of different sites. The affiliate sites provide purchase-point click-through to the merchant.

    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.

    Subscription Model: Users are charged a periodic fee to subscribe to a service.

    Utility Model: A metered usage or pay-as-you-go approach.

    Source: Rappa, M. "Business Models on the Web." Managing the Digital Enterprise, May 16, 2007.

    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 follows:

    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: Applegate, L. M. "E-Business Models: Making Sense of the Internet Business Landscape" Information Technology and the Future Enterprise: New Models for Managers, G. W. Dickson and G. DeSanctis (eds.), Prentice Hall, 2001, pp. 4994.

    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: Reprinted by permission of Harvard Business School Press. From Place to Space: Migrating to E-Business Models by P. Weill, and M. Vitale. Boston, MA p. 21. Copyright 2001 by the Harvard Business School Publishing Corporation; all rights reserved.

    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: Hartman, A., J. Sifonis, and J. Kador. Net Ready: Strategies for Success in the E-Conomy. 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 previously, 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
    Financial Statements
    Making an Effective Business Plan Presentation
    Appendix: e-Business Plan Tutorial Assignments

    This E-Business Plan lesson was last updated on May 29, 2007. You can send questions, comments, and suggestions for improvement to Peter Marshall (Peter.marshall@utas.edu.au).