E-Business Ninth Edition

E- Business
Ninth Edition
Chapter 4
E-Business Revenue Models
1
Learning Objectives
In this chapter, you will learn about:
Revenue models
How some companies move from one revenue
model to another to achieve success
Revenue strategy issues that companies face when
selling on the Web
Creating an effective business presence on the Web
Web site usability
Communicating effectively with customers on the
Web
E- Business, Ninth Edition
Revenue Models
Web business revenue-generating models
Web catalog
Digital content
Advertising-supported
Advertising-subscription mixed
Fee-based
Can work for both sale types

Business-to-consumer (B2C)
Business-to-business (B2B)
Can use same revenue model for both types of sales
Web Catalog Revenue Models

Adapted from mail-order (catalog) model
Seller establishes brand image
Printed information mailed to prospective buyers
Orders placed by mail or toll-free telephone number
Expands traditional model

Replaces or supplements print catalogs
Offers flexibility
Orders placed through Web site or telephone
Payments made though Web site, telephone, or mail
Creates additional sales outlet for existing companies

Web Catalog Revenue Models (contd.)

Computers and consumer electronics
Leading computer manufacturers
Sell a full range of products on the Web
Dell allows product configuration flexibility

Creates value
Crutchfield
Expanded successful mail-order catalog operations to
include Web sites
Best Buy, J&R Music World, Radio Shack

Web sites sell same products as in stores

Computers and consumer electronics (contd.)
Marketing channel
Pathway to customers
Advantage of having several marketing channels

Reach more customers at less cost
Can combine marketing channels

Example: in-store online ordering
Example: mail catalogs with reference to retailers Web
site
FIGURE 4-1 Combining marketing channels: Two retailer examples


Books, music, and videos
Most visible electronic commerce examples
Amazon.com Web-only retailer originally sold books
Evolved into general retailer
Barnes & Noble, Blackwells, Books-A-Million,

Powells Books
All adopted Web catalog revenue model
CDnow Web-only online music store

CD Universe copied CDnow approach
Tower Records, Sam Goody retail stores

Created Web sites to compete with CDnow

Luxury goods
Difficult to sell online
Customers want to see product in person or touch
Vera Wang and Versace

Web sites provide information
Shopper purchases at physical store
Heavy use of graphics and animation
Evian Web site

Presents information in a visually stunning way

Clothing retailers
Many adapted catalog sales model to Web
Display clothing photos categorized by type
Prices, sizes, colors, tailoring details
Want customers to examine clothing online

Place orders through Web site
Lands End online Web shopping assistance

Lands End Live (1999)
Online text chat and call-back feature
Ability to push Web pages to customers browser
10

Clothing retailers (contd.)
Lands End personal shopper agent (more recent)
Learns preferences and makes suggestions
My Virtual Model (customers try clothes)

Graphic image built from customer measurements
Another feature allows:

Two shoppers using different computers to
simultaneously browse Web site together
Only one of the shoppers can purchase items
Either shopper can select items to view
Selected items appear in both Web browsers
11

Clothing retailers (contd.)
Online overstocks stores
Reach more people than physical outlet stores
Problem: varying computer monitor color settings

Solution: send fabric swatch on request
Solution: offer generous return policies
12

Flowers and gifts (gift retailers)
1-800-Flowers
Online extension to successful telephone business
Competes with online-only florists
Godiva offers business gift plans

Hickory Farms and Mrs. Fields Cookies
Offer familiar name brands on the Web
Harry and David

Original Web site for informational purposes
Promoted catalog business and added online ordering
feature
13

General discounters
Buy.com and Overstock.com
Borrowed Wal-Mart and discount club sales model
Sell merchandise at extremely low prices
Traditional discount retailers (Costco, Kmart, Target,

Wal-Mart)
Slow to implement online sales on their Web sites

Had huge investments in physical stores
Did not understand online retailing world
Now use the Web catalog revenue model in their
successful online sales operations
14
Digital Content Subscription Revenue

Models
Firms owning written information or information
rights
Embrace the Web as a highly efficient distribution
mechanism
Use the digital content revenue model
Sell subscriptions for access to information they own
Legal content
LexisNexis: offers variety of information services
Lexis.com: offers original legal information product
15
Digital Content Subscription Revenue

Models (contd.)
Academic research content
ProQuest: digital copies of academic publications
Business content
Dow Jones newspaper publisher subscriptions
Sold digitized newspaper, magazine, and journal
content subscriptions
Factiva: online content management and integration
service
Technical content
Association for Computer Machinery (ACM): digital
library
16
Advertising-Supported Revenue
Models
Used by United States broadcast network television
Provides free programming and advertising messages
Supports network operations sufficiently
Problem: measuring and charging site visitor views

Stickiness
Keeping visitors at site and attracting repeat visitors
Exposed to more advertising in a sticky site
Problem: obtaining large advertiser interest

Requires demographic information collection
Characteristics set used to group visitors
17
Models (contd.)
Can obtain large advertiser interest by:
Using a specialized information Web site
Draw a specialized audience certain advertisers want to
reach
Examples:
The Huffington Post and the Drudge Report
HowStuffWorks
18
FIGURE 4-2 Three strategies for an advertising-supported revenue model

19
Models (contd.)
Web portals (portal)
Site used as a launching point to enter the Web
Almost always includes a Web directory or search
engine
Often includes other features
Web directories
Listing of hyperlinks to Web pages
Yahoo!: one of the first

Presents search term triggered advertising on each
page
20
Models (contd.)
Web portals (contd.)
Portal sites using general interest strategy
AOL, Excite, Google, Bing
Portal sites not using general interest strategy

Help visitors find information within a specific
knowledge domain
Advertisers pay more
Example: C-NET
Travel sites
Successful as advertising-supported online businesses
Example: Kayak
21
Models (contd.)
Newspaper and magazine publishers
Sell advertising to cover Web site costs
Internet Public Library Online Newspapers page
Provides links to worldwide newspaper sites
Local shopping news, alternative press newspapers

Easier transition to advertising-supported Web revenue
model
Newspapers Web presence

Provides greater exposure and advertising audience
Diverts sales from the print edition (difficult to measure)
Operating costs not covered by advertising revenue
22
Models (contd.)
Targeted classified advertising sites
Can command higher rates than general advertising
Original version
Newspaper classified advertising
Growth of classified advertising Web sites

Very bad for newspapers
Example: craigslist
Web employment advertising

Most successful targeted classified advertising category
Examples: CareerBuilder.com, The Ladders and
Guru.com, Monster.com
23
Models (contd.)
Targeted classified advertising sites (contd.)
Used vehicle sites
AutoTrader.com, CycleTrader.com, BoatTrader.com
Accept paid advertising to sell cars, motorcycles, boats
Product sites with dedicated following (VetteFinders)

Successful by catering to small audiences
Potential classified advertising sites

Any site selling products useful to buyer after initial use
Musicians Buy-Line, ComicLink.com, The Golf
Classifieds
24
Advertising-Subscription Mixed
Revenue Models
Subscribers pay fee and accept advertising
Typically less advertising compared to advertisingsupported sites
Web sites offer different degrees of success

The New York Times (today)
Bulk of revenue derived from advertising
The Wall Street Journal (mixed model)

Subscription revenue weighted more heavily
25
FIGURE 4-3 Revenue models used by online editions of newspapers and

magazines
26
Advertising-Subscription Mixed
Revenue Models (contd.)
ESPN
Leverages brand name from cable television business
Sells advertising, offers free information
Mixed model includes advertising and subscription
revenue (collects Insider subscriber revenue)
Consumers Union (ConsumerReports.org)

Purely a subscription-supported site
Not-for-profit organization with no advertising
Free information
Attracts subscribers and fulfills mission
27
Fee-for-Transaction Revenue Models

Service fee charged
Based on transaction number or size
Web site offers visitor transaction information

Personal service formerly provided by a human agent
Value chain
Disintermediation
Intermediary (human agent) removed
Reintermediation
New intermediary (fee-for-transaction Web site)
introduced
28

(contd.)
Travel
Travel agency revenue model: receive fee for
facilitating a transaction
Travel agent adds information consolidation and
filtering value
Computers also good at information consolidation and

filtering
Travel agents have long used networked computers:
Sabre Travel Network
Internet provided a new way to do business online
29

(contd.)
Travel (contd.)
Web-based travel agencies were new entrants
Examples: Travelocity, Expedia, Hotels.com, Hotel
Discount Reservations, Orbitz
Generate advertising revenue from ads placed on travel
information pages
Traditional travel agents: squeezed out

Surviving agencies charge a flat fee
Smaller travel agents specialize (cruises, hotels)

May use a reintermediation strategy
(WaveHunters.com)
30
FIGURE 4-4 Orbitz home page

31

(contd.)
Automobile sales
Web sites implement the fee-for-transaction revenue
model differently
CarsDirect.com model
Customers select specific car, site determines price
and finds local dealer
Autoweb.com and Autobytel model

Locate local dealers, car sells at small premium over
dealers nominal cost
Car salesperson: disintermediated

Web site: new intermediary (reintermediation)
32

(contd.)
Stockbrokers
Original full-line brokers charged relatively high
commissions
Provided advice
1970s: deregulation resulted in discount brokers

Web-based brokerage firms: E*TRADE and Datek
Web allowed investment advice, fast trade execution
online
33

(contd.)
Stockbrokers (contd.)
1990s: discount brokers faced competition from
online firms
Discount brokers and full-line brokers opened new
stock trading and information Web sites
Online brokers offer transaction cost reductions

Traditional stockbrokers: disintermediated
34

(contd.)
Insurance brokers
Quotesmith offered Internet policy price quotes
directly to public (1996)
Independent insurance agents: disintermediated
Insurance policy information, comparisons, sales sites

InsWeb, Answer Financial, Insurance.com
Progressive Web site

Provides quotes for competitors products too
The General (General Automobile Insurance

Services) Web site
Offers comfortable, anonymous experience
35

(contd.)
Event tickets
Web allows event promoters to sell tickets from one
virtual location to customers worldwide
Online agencies earn a fee on every ticket sold
Ticketmaster, Tickets.com, TicketWeb
Web created secondary ticket market (StubHub,

TicketsNow)
Brokers connecting ticket owners with buyers
Earn fees on tickets resold for others, buy ticket blocks
Web created easy-to-find central marketplace,

facilitating buyer-seller negotiations
36

(contd.)
Real estate and mortgage loans
Web sites provide all traditional broker services
Coldwell Banker, Prudential
National Association of Realtors Web site

Realtor.com
2008 financial crisis

Dramatically reduced number of mortgage brokers in
business
Successful online mortgage brokers

Ditech and E-LOAN
37

(contd.)
Online banking and financial services
No physical product
Easy to offer on Web
Web financial transactions concerns

Trust and reliability of financial institution
Solutions
Use existing banks identification and reputation
Start online bank not affiliated with existing bank (First
Internet Bank of Indiana)
Use different name (Bank One used Wingspan)
Approach was not successful
38

(contd.)
Online banking and financial services (contd.)
Additional barriers preventing a more rapid rate of
growth
Lack of bill presentment features
Lack of account aggregation tools
By 2012:
Industry analysts expect most banks (online and
traditional) will offer aggregation services
39

(contd.)
Online music
Recording industry: slow to embrace online
distribution
Feared digital copying
Large online music stores

Revenue from fee-for-transaction model
Some sites offer subscription plans
Complicating issues
Stores offer limited number of digital music files
Stores promote their own music file format
Artists and recording companies invoke limits
40

(contd.)
Online music (contd.)
Complicating issues (contd.)
Buyers required to download and install Digital Rights
Management (DRM) software
Varying restrictions confusing to consumers
Online music market industry failed to embrace the

network effect gained by adopting one standard file
format
41

(contd.)
Online music (contd.)
Some stores sold audio in a generally compatible file
format with no copying restrictions
Mondomix MP3 and Smithsonian Folkways
Music not produced by major recording companies
Solutions
Adopt one standard file format, no copying restrictions,
DRM-free MP3 format (Amazon in 2007)
By 2012: 80 percent of all music will be sold online
42

(contd.)
Online video
Issues hampering prior sales
Large file size
Fear of online sales impairing other sales types
Inability to play on variety of devices
Overcoming the issues

New technologies improving delivery
Companies incorporating online distribution into
revenue strategy
Delivery allowed on multiple devices
Through standard Web browser
43

(contd.)
Electronic books
Forms of digital audio books
CDs (originally) and various types of digital files
Audible sells subscriptions

Allows monthly download of a certain number of books
Pricing is per book
Amazon.com
Offers books, newspapers, magazines, other digital
format items
Delivered directly to its line of Kindle readers
44
Fee-for-Service Revenue Models

Companies offer Web service
Fee based on service value
Not a broker service
Not based on transactions-processed number or size
Online games
Sales revenue source
Advertising (older concept), pay-to-play for premium
games, subscription fees
Average game player is 35 years old, playing

computer or video games for 12 years
45

(contd.)
Professional services
Limited Web use
State laws prohibit extension of practice
Patients may set appointments, receive online
consultation
Major concern
Patient privacy
Law on the Web site

Legal consultations to United Kingdom residents
Martindale.com
Online version of Martindale-Hubbell lawyer directory
46

(contd.)
Professional services (contd.)
CPA Directory
United States accounting professionals site
General health information

RealAge, Dr. Andrew Weils Self Healing, WebMD
Significant barrier
Patient diagnosis difficult without physical examination
Some physicians beginning to offer online

consultations
For ongoing, established relationship patients
47
Free for Many, Fee for a Few

Economics of manufacturing
Different for physical and digital products
Unit cost high percentage of physical products
Unit cost very small for digital products
Leads to a different revenue model

Offer basic product to many for free
Charge a fee to some for differentiated products
Examples: Yahoo e-mail accounts, bakery: free cookies
48
Revenue Models in Transition

Companies must change revenue model
To meet needs of new and changing Web users
Some companies created e-commerce Web sites

Needed many years to grow large enough to become
profitable (CNN and ESPN)
Some companies changed model or went out of

business
Due to lengthy unprofitable growth phases
49
Subscription to Advertising-Supported
Model
Slate magazine
Upscale news and current events
Success expectations were high

Experienced writers and editors
Acclaim for incisive reporting and excellent writing
Initial revenue source

Annual subscription did not cover operating costs
Now an advertising-supported site

Part of the Bing portal
Value to Microsoft: increase the portals stickiness
50
Advertising-Supported to AdvertisingSubscription Mixed Model

Salon.com
Acclaimed for innovative content

Advertising-supported site
Needed additional money to continue operations
Now offers optional subscription version

Annual fee for Salon premium
Free of advertising
Additional content
Downloadable content
51
Advertising-Supported to Fee-forServices Model

Xdrive Technologies: offered free disk storage
Initial revenue source (1999): advertising-supported
Targeted e-mail advertising
Did not cover operating costs
2005: bought by AOL

Switched to a subscription-supported model
Xdrive frequently adjusted its monthly fee downward
AOL closed the service in 2009
Successful companies: fee based on storage

amount used
52
Advertising-Supported to Subscription
Model
Northern Light search engine includes own database
Results include Web site links and abstracts of its
owned content
Combination of the advertising-supported model plus a
fee-based information access service
Advertising revenue: insufficient to cover service
Converted to a new subscription-supported revenue

model
Mainly large corporate clients
Individual monthly billing option for articles accessed
53
Multiple Transitions
Encyclopedia Britannica
Initial Web offerings (1994)
Britannica Internet Guide
Encyclopedia Britannica Online

Paid subscription site had low subscription sales
Converted to free advertiser-supported site (1999)

Advertising revenues declined
2001: returned to mixed model with subscription plan

and free content
Value added: sells reputation and the expertise
54
Revenue Strategy Issues

Topics:
Web revenue models implementation issues
Dealing with the issues
55
Channel Conflict and Cannibalization

Channel conflict (cannibalization)
Company Web site sales activities interfere with
existing sales outlets
Levis Web site and Maytag
Web sites no longer sell products
Sites now provide product, retail distributor information
Eddie Bauer
Online purchases returnable at retail stores
Required compensation and bonus plans adjustments
to support Web site
Channel Cooperation made it successful
56
Strategic Alliances
Strategic alliance
Two or more companies join forces
Undertake activity over long time period
Yodlee account aggregation services provider

Yodlee concentrates on developing the technology
and services
Banks provide the customers
Amazon.com
Joined with Target, CDnow, ToysRUs
ToysRUs and Amazon suing each other
57
Creating an Effective Web Presence

Organizations presence
Public image conveyed to stakeholders
Usually not important
Until growth reaches significant size
Stakeholders
Customers, suppliers, employees, stockholders,
neighbors, general public
Effective Web presence

Critical even for smallest and newest Web operating
firms
58
Identifying Web Presence Goals

Business physical space
Focus: very specific objectives
Not image driven
Must satisfy many business needs
Often fails to convey a good presence
Web business site

Intentionally creates distinctive presences
Good Web site design provides:
Effective image-creation features
Effective image-enhancing features
59

(contd.)
Web business site objectives:
Attracting Web site visitors
Keeping visitors to stay and explore
Convincing visitors to follow sites links to obtain
information
Creating an impression consistent with the
organizations desired image
Building a trusting relationship with visitors
Reinforcing positive images about the organization
Encouraging visitors to return to the site
60

(contd.)
Making Web presence consistent with brand image
Different firms establish different Web presence goals
Coca Cola Web site pages
Usually include trusted corporate image (Coke bottle)
Image: traditional position as a trusted classic
Pepsi Web site pages

Usually filled with hyperlinks to activities and productrelated promotions
Image: upstart product favored by younger generation
61

(contd.)
Matching site design to function
Volkswagen of America site
Accomplishes important functions for the company
Provides links to detailed Volkswagen model
information, links to a dealer locator page, links to
information about the company, a link to a set of
shopping tools
Volkswagens home page

Meets the needs of most visitors quickly and effectively
Volkswagen site enhances company image by

providing useful information to customers online
62
FIGURE 4-5 Volkswagen of America home page

63

(contd.)
Not-for-profit organizations
Web presence effort key goals:
Image enhancement and information dissemination
Successful site key elements

Integrate information dissemination with fund-raising
Provide two-way contact channel
American Civil Liberties Union (ACLU)

Serves many different constituencies
Web sites used to stay in touch with existing

stakeholders, identify new opportunities for serving
them
64
FIGURE 4-6 ACLU home page

65
Web Site Usability

Current Web presences
Few businesses accomplish all goals
Most fail to provide visitors sufficient interactive
contact opportunities
Improving Web presence
Make site accessible to more people

Make site easier to use
Make site encourage visitors trust
Make site develop feelings of loyalty toward the
organization
66
How the Web Is Different

Simple mid-1990s Web sites
Conveyed basic business information
No market research conducted
Web objectives achievement

Failed due to no understanding for Web presencebuilding media
Web sites designed to create an organizations

presence:
Contain links to standard information set
Success dependent on how this information offered
67
Meeting the Needs of Web Site Visitors

Successful Web businesses:
Realize every visitor is a potential customer (partner)
Web presence is an important concern

Know visitor characteristic variations
Understand that the visitor is at the site for a reason
Varied motivations of Web site visitors

Why visitors arrive at Web sites
Learning about company products or services
Buying products or services
Obtaining warranty, service, repair policy information
68

(contd.)
Varied motivations of Web site visitors (contd.)
Why visitors arrive at Web sites (contd.)
Obtaining general company information

Obtaining financial information
Identifying people
Obtaining contact information
Following a link into the site while searching for
information about a related product, service, or topic
Challenge to meet all motivations

Visitors arrive with different needs, experience, and
expectation levels
69

(contd.)
Making Web sites accessible
Build interface flexibility options:
Frame use
Text-only version
Selection of smaller graphic images
Specification of streaming media connection type
Choice among information attributes
Controversial Web site design issues

Adobe Flash software use
Some tasks lend themselves to animated Web pages
70
FIGURE 4-7 Lee Jeans FitFinder Flash animation
71

(contd.)
Making Web sites accessible (contd.)
Offer multiple information formats
Consider goals in Web site construction
FIGURE 4-8 Goals for business Web sites
72
Trust and Loyalty

Creates relationship value
Good service leads to seller trust
Delivery, order handling, help selecting product, aftersale support
Satisfactory service builds customer loyalty

Customer service in electronic commerce sites
Problem
Lack integration between call centers and Web sites
Poor e-mail responsiveness
73
Rating Electronic Commerce Web Sites

Companies routinely review electronic commerce
Web sites for:
Usability, customer service, other factors
Sell the gathered information directly to the
companies operating the Web sites
Include suggestions for improvements
BizRate.com posts ratings

Provides comparison shopping service
Compiles ratings by conducting surveys of sites
customers
74
Usability Testing
Importance
Helps meet Web site goals
Avoids Web site frustration
Customers leave site without buying anything
Simple site usability changes

Include telephone contact information
Staff a call center
Learn about visitor needs by conducting focus groups

Usability testing cost
Low compared to Web site design costs
75
Customer-Centric Web Site Design

Important part of successful electronic business
operation
Focus on meeting all site visitors needs
Customer-centric approach
Putting customer at center of all site designs
Follow guidelines and recommendations
Make visitors Web experiences more efficient,
effective, memorable
Webby Awards site

Examples of good Web site design
76
Connecting with Customers

Important element of a corporate Web presence
Identify and reach out to customers
77
The Nature of Communication on the

Web
Communication modes
Personal contact (prospecting) model
Employees individually search for, qualify, contact
potential customers
Mass media
Deliver messages by broadcasting
Addressable media
Advertising efforts directed to known addressee
Internet medium
Occupies central space in medium choice continuum
78
FIGURE 4-9 Business communication modes

79
Summary
Six main Web revenue models
Models work differently
Different business types use different models
Companies change models as they learn more about:
Customers, business environment
Channel conflict and cannibalization challenges

One approach: channel cooperation
Effective Web presence delivers customer value

Web site visitors arrive with a variety of expectations,
prior knowledge, skill levels, technology
Web communication fits in between personal contact

and mass media
80

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E- Business

Can work for both sale types

E- Business, Ninth Edition

Web Catalog Revenue Models

Expands traditional model

Creates additional sales outlet for existing companies

Web Catalog Revenue Models (contd.)

Dell allows product configuration flexibility

Best Buy, J&R Music World, Radio Shack

Web Catalog Revenue Models (contd.)

Advantage of having several marketing channels

Can combine marketing channels

E- Business, Ninth Edition

FIGURE 4-1 Combining marketing channels: Two retailer examples

Web Catalog Revenue Models (contd.)

Barnes & Noble, Blackwells, Books-A-Million,

CDnow Web-only online music store

Tower Records, Sam Goody retail stores

Web Catalog Revenue Models (contd.)

Vera Wang and Versace

Evian Web site

E- Business, Ninth Edition

Web Catalog Revenue Models (contd.)

Want customers to examine clothing online

Lands End online Web shopping assistance

Web Catalog Revenue Models (contd.)

My Virtual Model (customers try clothes)

Another feature allows:

Web Catalog Revenue Models (contd.)

Problem: varying computer monitor color settings

E- Business, Ninth Edition

Web Catalog Revenue Models (contd.)

Godiva offers business gift plans

Harry and David

Web Catalog Revenue Models (contd.)

Traditional discount retailers (Costco, Kmart, Target,

Slow to implement online sales on their Web sites

E- Business, Ninth Edition

Digital Content Subscription Revenue

E- Business, Ninth Edition

Digital Content Subscription Revenue

Problem: measuring and charging site visitor views

Problem: obtaining large advertiser interest

E- Business, Ninth Edition

FIGURE 4-2 Three strategies for an advertising-supported revenue model

Yahoo!: one of the first

E- Business, Ninth Edition

Portal sites not using general interest strategy

Local shopping news, alternative press newspapers

Newspapers Web presence

Growth of classified advertising Web sites

Web employment advertising

Product sites with dedicated following (VetteFinders)

Potential classified advertising sites

E- Business, Ninth Edition

Web sites offer different degrees of success

The Wall Street Journal (mixed model)

E- Business, Ninth Edition

FIGURE 4-3 Revenue models used by online editions of newspapers and

E- Business, Ninth Edition

Consumers Union (ConsumerReports.org)

Fee-for-Transaction Revenue Models

Web site offers visitor transaction information