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BLUENILE.

COM
E-business case study

Shane Henricus
There are many classifications of e-business models from which we could characterize
Blue Nile. We will use the e-business model taxonomies of Tapscott (2000), Timmers
(1999) and Rappa (2004) for this analysis.

The e-business model classifications proposed by Tapscott differentiate along two


primary dimensions: economic control (self-organizing or hierarchical) and value
integration (low or high). The five e-business models identified by Tapscott are Agora,
Aggregation, Alliance, Value Chain and Distributive network (Tapscott 2000). Using
these models, Blue Nile can be characterized as being Aggregation and partially Value
Chain. The aggregate business model coordinates a single point of service for many
suppliers and its main value is selection and convenience. Blue Nile uses an aggregate
business model which utilizes exclusive relationships with multiple diamond and
jewellery suppliers to provide customers a single point of access to more than 60,000
diamonds available at any time (Plourd 2009). In addition Blue Nile provides customers
with convenience and optimisation of selection from their large virtual inventory. The
Blue Nile e-business model can also be characterized as a partial Value Chain due to
the ‘Build You Own’ product customization. Tapscott defines the Value Chain as
integrating related services and products to add significant value to raw material inputs.
Blue Nile’s ‘Build You Own’ product customization allows customers to build their own
rings, earrings and pendants from a broad range of material inputs; diamonds, ring and
pendant settings and designs. The ‘Build Your Own’ service meets a specific set of
customer needs which provides service-enhanced customer solutions, a key success
factor for the Value Chain model (Breuer, Hekman 2007).

Paul Timmers eleven e-business model classifications focus on two dimensions of


functional integration of the value chain and degree of innovation (Torbay 2001). From
the eleven models, Blue Nile can be best characterized as being an e-shop. Timmers
defines an e-shop as being a web marketing of a company or an online shop.
Furthermore, he characterizes an e-shop as the low-cost route to global presence,
having lower prices for customers than traditional bricks and mortar stores, better
information accessibility, wider product range and convenience of selecting, buying and
delivery, including 24-hour availability (Timmers 1999). Using this classification we can
see that Blue Nile integrates all the characteristics of being an e-shop. Blue Nile
provides primary order and payment fulfilment requirements, as well as cost leadership
in its field due to its virtual inventory, provides customers with extensive education and
information services of its products and the convenience of product availability and
selection. Moreover, Blue Nile has low functional integration of the value chain and a
low degree of innovation in its Business-to-Consumer (B2C) model, which is another
characteristic which defines an e-shop by Timmers. Blue Niles innovation lies in how
they deliver diamonds to their consumer in the most cost effective way.

The e-business models classifications identified and conceptualized by Michael Rappa


are from the perspective of revenue generation. The merchant model identified by
Rappa best characterizes Blue Nile. The merchant model as defined by Rappa refers to
online retailers; wholesalers and retailers of goods and services in which sales may be
made based on list prices or through auction (Rappa 2004). Blue Nile can be
characterized as a virtual merchant and to an extent a catalogue merchant. Blue Nile
operates primarily on the web as an e-tailer who provides a single point of access to
multiple suppliers. This is a characteristic of a virtual merchant as identified by Rappa.
As a subsidiary to their online retailing, Blue Nile provides catalogue and mail order
services. These services provided by Blue Nile can be used to characterize Blue Nile as
a catalogue merchant. However, due to Blue Niles revenue coming largely from its
online sales, it is primarily characterized as a virtual merchant.

Traditional brick and mortar jewellery store retailers adopt a classic supply chain in
which they purchase cut and polished diamonds from wholesalers who in turn purchase
these from sight holders (a limited list of diamond polishers with rights to buy rough
diamonds directly from suppliers) who deal directly with manufactures. Blue Nile on the
other hand operates on a supply chain utilizing a virtual inventory by dealing directly
with manufactures and sight holders. Blue Nile and other online jewellery stores
influenced the changing jewellery industry by effectively eliminating the middle man as
sight holders and manufacturers become the future suppliers (Rivlin 2007). With this
operating model they have none of the high inventory carrying costs of normal bricks
and mortar jewellery stores and can thrive on a significantly lower profit margin of 18%.
Blue Nile influence in changing the jewellery industry can be seen by it creating a true
competitive market dynamic that ultimately drives prices down to their minimum
(Weissman). Moreover, Blue Niles cost leadership has had an influence with traditional
jewellers unable to complete at such margins. This has accounted for the loss of more
than 3,000 independent jewellery shops since 1999 which has changed the jewellery
industry. The influence Blue Nile has had on the jewellery industry has been big enough
that many smaller jewellers have been threatening to boycott wholesalers and suppliers
that supply to online retailers (Rivlin 2007). This is a direct result of the exclusivity Blue
Nile has in purchasing power with suppliers.

Blue Nile has had a significant influence in changing the jewellery industry in regards to
customer education. Unlike traditional bricks and mortar stores where sales people
were only empowered with knowledge, Blue Nile pioneered in providing the target
audience with knowledge of the diamonds to the laymen (Anuppa 2009). Through this
initiative Blue Nile has introduced a new breed of informed and well educated jewellery
buyers. Similarly, Blue Nile has influenced the changing jewellery industry by providing
legitimacy to online jewellery stores. Blue Nile influenced the transition for jewellery
purchases from a brick and mortar store to online stores through the certified, quality
and value diamonds provided and extensive customer services. Blue Nile provides
customers with the ability to search and compare tens of thousands of diamonds and
fine jewelleries based on quality and price range in one place. Such rich content
features are changing the industry in allowing customers to make informed purchases
without needing to physically compare items; where this would have once been a
necessity. Furthermore, Blue Nile through its ‘Build Your Own’ and ‘Recently
Purchased’ service has introduced jewellery customization to e-tailing stores. This
initiative has changed the jewellery industry as it recognized that in hard economic
times, many consumers are challenged by monetary constraints, where service-
enhanced customer solutions are required (Anuppa 2009).

The critical success factors of Blue Nile are the offering of high-quality diamonds and
fine jewellery at outstanding prices, excellent customer services and education, ‘Just in
Time’ business model and the targeted customer demographic.

A primary critical success factor of the Blue Nile Company is price. This is not surprising
as Blue Nile claims to offer diamonds at prices 30-40% lower than a typical brick and
mortar retailer prices (Senior). The ability to offer a combination of exceptional quality
and extraordinary value for such low prices on diamonds and fine jewelleries is what
makes Blue Nile correspondingly competitive in the jewellery industry. Blue Nile has a
significant advantage over its competitors in the way it operates with low overhead
costs, no stores, so they can operate on much lower gross margins than conventional
retailers. Similarly, another critical success factor of Blue Nile is that it has established a
now well renowned and respected consumer brand. This is a critical success factor as it
gives customers the confidence to purchase online knowing that they are getting the
Blue Nile certification and quality standards amongst the highest of all jewellers. Blue
Nile has accomplished this through using an informative sales process that gives its
customers more power while offering a broad selection of high quality jewellery at
competitive prices (Casey, Oiseth 2009).

Blue Nile offers excellent customer, consultancy and educational services which is
another critical success factor for the company. As discussed earlier, with online e-
tailing, specifically in the high end markets customers require through information
accessibility on the legitimacy of a retailer before making a purchase. Blue Nile
achieves this by offering online and call centre consultancy services, which have proven
to be helpful for customers in the purchasing process along with the ‘Recently
Purchased’ service. The education service provided by Blue Nile is a prominent critical
success factor as it allows for customer empowerment in jewellery selection which
cannot be offered to such a level at a traditional retailer. Providing education and
product knowledge to its audience is critical to the Blue Nile success of diffusion of its
innovation of selling certified diamonds online (Anuppa 2009). Similarly, the ‘Build Your
Own’ service is another critical success factor for the company, allowing customers to
design products that meet their own needs. This service enhances the purchasing
experience and satisfaction of the customer as well as increasing customer loyalty
(Oiseth, Casey 2009).

The ‘Just in time’ business model that Blue Nile operates is another critical success
factor. Blue Nile can offer customers a plethora of diamond and fine jewellery product
availability, with this very low inventory model. Using a virtual inventory allows Blue Nile
to offer more than 60,000 diamonds at any time without the overhead carrying costs that
traditional retailers would incur. This business model is what allows Blue Nile to have an
advantage over its competitors and put a competitive price on its products. Moreover,
the strengths and benefits of this business model have been one of the critical factors in
Blue Nile surviving and thriving in today’s challenging market conditions (Oiseth, Casey
2009). The ‘Just in time’ business model allows Blue Nile to scale back or increase their
product offerings anytime without taking any financial risks with excess inventory. They
operate on a negative-working-capital where a diamond is bought to satisfy a customer
purchase and two days later the raw diamond is turned into an engagement ring (Plourd
2009).

A large portion of the targeted customer demographic for Blue Nile is internet savvy
males looking to purchase engagement rings. Blue Niles ability to attract this type of
consumer in the jewellery industry is another critical success factor. Blue Nile foresaw
that educated middle class men would flock to a web site that empowered them to make
informed buying decisions about fine jewellery (Acohido 2003). Diamond rings account
for about 70 percent of Blue Nile’s sales, which shows how important these customers
are to the success of Blue Nile. Similarly, another customer demographic which Blue
Nile tends to target is individualistic career women and the need for them to reward
themselves with jewellery, not contingent upon a dependency towards men (Anuppa
2009).

Appendix A shows the performance of Blue Niles stock from May 2004 to present day.
What we can see clearly from the stock performance is that from May 2004 until
January 2007, Blue Nile stocks had some volatility in price but at sat at a median price
of approximately 35. From appendix B we can see that in 2005 and 2006 the net
income for Blue Nile was almost the same sitting at 13.2 and 13.1 million respectively.
Accelerated stock price gains can be seen at the end of each quarter for 2005 and 2006
which can be attributed to seasonal buyers moving from traditional retailers to Blue Nile.
From the stock performance graph we can see that in 2007 Blue Nile reached its peak
stock price of 99.98, a 250% increase from the starting price of 2007. What is also most
prominent of the stock performance is the impact the global financial crisis had on the
stock price. Form the end of 2007 to January 2009, the stock price plummeted to 18.71.
It was Blue Niles business model that ensured the company did not experience the full
impact of the economic downturn. The global financial crisis brought about numerous
consolidation and closures of jewellery online and traditional retailers due to the issues
of excess inventory and scaling back product selection. Blue Niles virtual inventory
allowed the company to hold up when consumer demand began falling in late 2007
(Plourd 2009). From appendix B we can see that the net income for Blue Nile dropped
for 17.5 million in 2007 to 11.6 and 12.8 million in 2008 and 2009 respectively. In 2008,
amid the weaker economy Blue Nile expanded internationally servicing 30 new
countries throughout Europe. The upturn on Blue Nile stock price in early 2009 can be
attributed to the tight economy bringing about a flight to value, where more customers
were being drawn to Blue Nile because of their competitive pricing. Blue Nile was able
to use the economic climate to strengthen their customer relationships and ultimately
come out as a stronger player in the jewellery industry (Plourd 2009). From 2009 to
2010 we can see that the stock price had a steady price increase and seemed on the
recovery. From 2010 the stock prices have taken a number of falls, although caused by
impacts to the stock market and investor confidence due to the economic downturn.
However, it is interesting to note that Blue Nile in 2010 posted record first and second
quarter sales. Blue Niles market share and sales will continue to grow automatically in
the long term due to the consolidation and closures of many competitors after from 2007
to present day.

The success factors which allow Amazon to succeed in selling low to mid level priced
jewellery similar to what Blue Nile has achieved in expensive engagement rings are the
competitive prices, broad product range, global brand recognition and education and
buying services.

Amazon succeeds as an online jewellery retailer primarily because of the competitive


prices it offers customers. These prices are achieved by lower overheads in inventory
holding costs, similar to Blue Nile. Operating on lower profit margins than other online
and brick and mortar retailers allows Amazon to capture a section of the market that
prefers value in price over the brand name of retailers. Amazon also caters for the ‘pre-
owned’ bargain hunters. Amazon provides to an extent an intermediary service in selling
jewellery, acting more of a payment processor/middleman than an online retailer (Alpha
2009). Even though Amazon’s competitive pricing ranges across their whole jewellery
range, due to the company not being a pure-play jewellery e-tailer, customers will not
make heavily invested purchases to the extent of which they would make at Blue Nile.

In addition, Amazon succeeds in the low to mid level jewellery market because of the
broad product range offered to customers. Amazon currently offers over 60,000 rings
across a number of material types in its product inventory. Most competitors of Amazon
do not appeal to every market but just a couple. Tiffany & Co one of the most popular
retailers appeals to the high end target demographic in the jewellery market. Amazon
appeals to most people because they offer a variety of prices from really low quality low
price to extremely fine and expensive jewellery (Oiseth, Casey 2009). Although Amazon
aims to target both ends of the market spectrum, they succeed more in the low to mid
range. The well developed logistics capability of Amazon is one of its critical success
factors of its operation which also helps Amazon to succeed in selling jewellery online.
The logistics capability allows Amazon to scale back or increase their product offerings
anytime without taking any risks as most products are held by subsidiary retail and
wholesalers.

Amazons brand recognition plays a large part in its ability to succeed in online jewellery
sales. Most of the jewellery products on Amazon are sold by subsidiary retail and
wholesale companies. Amazon succeeds in selling low to mid priced jewellery because
the brand name provides enough confidence for customers to make purchases.
Customer reviews of products also help Amazon customer’s confidence in purchasing
decisions. However, it is hard for Amazon to succeed in the high end jewellery market
because although Amazon instils buyer confidence in its brand recognition, smaller
retailers and wholesalers selling through Amazon cannot provide this to customers.
Furthermore, Amazon provides jewellery education and buying guides for customers on
their website. This service aides in Amazons success as it empowers customers and
allows them to be more informed of their purchases. Amazons education and buying
guides are as comprehensive as those contained on pure-play retailers such as Blue
Nile and Diamonds.com.

As the competition between Blue Nile and Amazon continues to increase, there will be a
division in the online jewellery market with Amazon taking a share of the low to mid
quality and priced market away from Blue Nile, whereas Blue Nile will retain the mid to
high end engagement ring market share. Although Blue Nile and Amazon appeal to
most people because they offer a variety of prices from really low quality low price to
extremely fine and expensive jewellery, they each have specific markets based on their
brand recognition. Customers are comfortable buying lower price point items from
Amazon, but it is hard to make a lifetime investment and say "Will you marry me?" from
Amazon.com. This is because Amazon does not have any credibility in the jewellery
space such as Blue Nile or Tiffany & Co (Gardner 2006). Blue Nile offers customers the
buying confidence because they have been a pure-play jewellery e-tailer for more than
ten years specifically targeting the loose diamond and engagement ring market.
Amazon cannot compete with Blue Nile in selling jewellery using its current strategy
because sales of a large variety of products dilute the company’s position in its
traditional markets. If Amazon really wanted to be competitive in the online jewellery
market they would need to create a new company, a subsidiary of Amazon similar to
what they have done with CDWOW.com to create a brand which could be credible in
the jewellery market.

Comparing both companies websites in how each sells jewellery; we can see that Blue
Nile has a competitive edge. Visiting Blue Nile’s website we can see that its design and
user interface is very sleek and projects quality and class. Blue Nile has very refined
and easy to navigate product categories showing a seeming endless inventory. Blue
Niles’s diamond search functionality allows a number of search features such as shape,
carrot, cut, and colour and is easy to use. Amazon in comparison does not differentiate
its jewellery category from its other product categories. Amazon lacks the in depth
search of functionality that Blue Nile has and product navigation is cluttered and
confusing. Blue Nile also offers a more extensive jewellery education and buying guide
to customers then Amazon. However, Amazon’s customer review feature does
compensate marginally for the lack of detailed information and customer services. It is
not surprising that Blue Nile will be more favoured by customers as the competition
increases due to it being a pre-play e-tailer and offering better services to jewellery
buyers than Amazon.

More importantly, Amazon will be unable to compete with Blue Nile because Amazon
lacks Blue Nile's inventory and its phone-based customer service, featuring consultants
trained to answer gemmological questions (O’Neill 2006). Blue Nile offers a much more
extensive diamond inventory than Amazon. This is because of the exclusive
relationships Blue Nile has fostered with multiple diamond and jewellery suppliers.
Amazon does provide education and buying guides, although not as extensive as Blue
Nile’s to its customers but lacks the physical contact centres and phone-based
customer services offered by Blue Nile. This is a key reason to why Amazon is unable
to compete in the high end jewellery market.
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APPENDIX A

APPENDIX B

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