Internet Business Models

1. Internet Business Models B.P.S. Murthi

2. Changes due to Internet • Mediating technology - interconnects • Universality - enlarges markets and shrinks distance • Network externality - More users greater value • Distribution channel - digital vs non-digital • Time moderator - shrinks time of service and enlarges time of operation • Information asymmetry reducer • Infinite virtual capacity • Low common cost standard - open standards • Creative destroyer - reduces barriers to entry • Transaction cost reducer • Dis-intermediation - reduces intermediaries ??

3. DNI framework • Digital - • Speed, and economy • digital versus non-digital products • Networked • dialogue • alliances • Individuals • customization • flexibility of time • flexibility of programming

4. Digital products • Low marginal costs – can be copied easily • Low distribution costs • Amenable to customization • Non-destructible • High variation in valuation between customers and so should be priced based on customer value • Have positive and negative externalities

5. Digital • Moore’s law – every 18 months speed of processors will be doubled. • Metcalfe’s law – value of a network rises as the square of the number of users • Coase theorem -Why do firms exist? • Firms exist to reduce transaction costs which result in inefficiency. • Internet reduces transaction costs - firms need to downsize.

6. How do buyers behave differently online? • Attention deficit • Effect of search engines, product reviews, testimonials will increase • Need for suggestion, customization • Customers can customize the offer and context – co-production • Search is different – shop-bots

7. Some research findings • Online customers - more loyal • Less price sensitive than commonly believed – depth of information and web interactivity lower price sensitivity • Brand names are more valuable when products have few search attributes (e.g. clothing)

8. Non-digital products • Choice is separated from purchase • Customers are able to make informed decisions

9. Barriers to e-commerce • Newer technologies – customers need to change behavior • Perceived lack of • Privacy • Security • Speed • Reliability • fulfillment

10. So what can be done? • Make it easier and cheaper for customers to transact • Learn how customers buy - Develop, maintain, and use databases • Customize billing • Show them their history • Share your inventory levels • Offer easy search tools • Make them come back – create stickiness – build communities

11. 5 Cs of Internet • Commerce – • B2B - Vertical hubs (e-steel) versus functional hubs (iMark) • B2C, C2B (Priceline), C2C • Intermediary • Community • Content • Communication • Coordination – among employees, among customers, between firms and customers

12. How marketing is affected by internet?

13. Marketing defined • Marketing is a process used by sellers and buyers to initiate and complete transactions • Need • Buyers • Sellers • Each has something of value to offer • They can voluntarily complete the transaction

14. Some thoughts… • Who is in charge of the process? • What is the role of the customer? • Who is doing the “planning and executing”?

15. Exchanges • Who initiates the exchange? • Who controls the exchange? • How does information flow? • Reduction in Information Asymmetry • Move to information democracy

16. Information democracy • Customers will post messages • Customers will disagree with company’s view • Customers will expect privacy

17. The new exchange architecture Mohan Sawhney Industrial AgeInformation Age • Marketer initiatedCustomer initiated • Marketer controlled Customer controlled • MonologueConversation • One timeOngoing

18. Metaphors we market by • Market as jungle • Customers as targets • Marketers as hunters • Products as mousetraps • Salespeople as baiters- and- switchers • Promotions as campaigns • Relationships as conquests and acquisitions • Customer visits as eyeballs and traffic • The hunter has become the hunted...

19. Towards a new marketing metaphor • Marketers as gardeners • Customers as plants • Loyalty as roots • Profits as harvest • Marketing as seed, feed, greed, and weed • From hunters to settlers...

20. Towards new marketing assumptions The death of the transaction the rise of the relationship The death of the passive consumer the rise of the active co- creator The death of opaqueness the rise of transparency The death of the product the rise of the experience The death of the monologue the rise of the conversation

21. Marketing concept evolution • Production concept • Selling concept • Product / Brand management • Customer management

22. Is there pioneering advantage on internet? • Unique assets accumulate • Number of members, member content • Barriers to new allegiances get higher • Relationship and trust grows • Adapt to technology • Factor costs increase • shortage of skilled hosts of bulletin boards and chat rooms • Concentration limits opportunities • Increasing returns • Economies of scope • Acquisition becomes expensive • High stock prices and deep pockets

23. CATEGORY -- Pioneer Browser -- NCSA Mosaic Search Directory -- Yahoo Free Email -- Hotmail E-tailing -- ISN Books -- Amazon Music -- CDNow! C2C Auctions -- Ebay B2B MRO -- Ariba B2B Auctions -- FreeMarkets Current Leader Internet Explorer Yahoo Hotmail Amazon Amazon CDNow, Amazon Ebay Ariba FreeMarkets First Mover Advantage?

24. Business Models • Different Models •B2B, B2C•Brokerage•Advertising•Infomediary•Merchant•Manufacturer•Affiliate•Community•Subscription•Utility

25. Business to Business Where the e-commerce action is…

26. History • Electronic Data Interchange (EDI) • Firm to supplier electronic connection • Firms could have such links with only a few suppliers • Limited transaction ability • Large buyers and suppliers were using EDI excluding other smaller players

27. Internet Infrastructure/access Closed/private Open/ Public Public/private E-markets Many to many (Mediated) Nature of transactions E-commerce EDI One-to one (direct)

28. Vertical hubs • Plastics • Steel • Chemicals • Paper • Energy • Cattle • Telecom • Flowers

29. Functional hubs • Logistics management • MRO procurement • Capacity management • Investment recovery • Human resource management • Project management • Media buying • Credit management

30. What went wrong with B2B companies? • Liquidity dries up • Suppliers fear erosion of margin • Many sign ups but few transactions • Fear of dis-intermediation • Bad business model • Exchange fees not much • Just machine information not enough Capital market Technology woes Consortia

31. Consortia • Buyer sponsored • Concentrated buyers, fragmented suppliers, multi-layered supply chain • Autos, aerospace, hotels, retailing • Supplier sponsored • Few suppliers • Paper, Meat and Poultry, metals, Airlines • Intermediary sponsored • Fragmented industry, strong few channels • Food service, packaged goods, electrical supplies • Startup firm • Fragmented industry, early mover advantage • Steel, chemicals, life sciences

32. Industry consortia • New century network – Newspapers • Integrion Financial network – banking • Kaleida, Taligent, PowerPC – computers • Spectrum – Electronic bill payment • NOISE – Netscape, Oracle, IBM, Sun

33. B2C Markets

34. Individual Choice • Unlimited choice produces information processing overload • Need for organization and suggestion to simplify task • Consumers need selection and suggestion • Selection + Suggestion = Value

35. Selection and suggestionSheth and Sisodia (1997) • Selection • Greater value consciousness • Power shift to consumers • Shopping on demand • Suggestion - increases loyalty • Greater personalization • Co-creation • Automation of consumption

36. Personalization • Collaborative filtering • Clustering and segmentation • Do it yourself options

37. Similarities • Media = real lifeReeves and Nash • People treat machines and software just like people • Politeness • Personality • Gender bias • Media quality

38. Differences • Lack of social cues • Group dynamics • Flaming - speak incessantly on relatively uninteresting subject or with a patently ridiculous attitude • Why is there more flaming in email communications ? • Lack of feedback - harder to judge disapproval and confusion • Text is not as rich as personal interaction - need to use stronger words and images • Lack of social cues and anonymity - causes people to be braver • Implication for customer service

39. Differences • Quality cues • How to communicate quality • Hanson and Putler (96) varied the number of downloads • Need for independent verification • Cognitive difficulty • Keyword search or browse or both ?

40. Value of Online CommunitiesHagel and Armstrong • Communities of transaction • buy, sell, deliver info e.g. Virtual Vineyards • Communities of Interest • Special topics, high degree of interpersonal communication, e.g. GardenWeb, Motley Fool • Communities of fantasy • Red Dragon Inn, ESPNet • Communities of relationship • life experiences, cancer forum, divorce • Try to provide all four as far as possible - travel industry - source of long term first mover advantage

41. Online Communities – Advantages • encourage communication • Message boards, chat rooms, instant messaging • focus social interaction • Members log in for hours a day vs. minutes • Businesses are active community builders • Improves organization’s communication ability • Virtual gathering places provide power to consumer • Online communities can alter the nature of marketing

42. Online Communities – Disadvantages • isolate individuals • Typing at a keyboard isn’t real socializing • lead to psychological problems • Depression, loneliness • lead to shallow relationships

43. Permission Marketing • 92% go to internet to see email. Advantages of email • Cost • Virtually real time distribution • Interactivity – direct links to web sites • Higher click through rates • Email is proactive and better at targeting

44. Viral Marketing Company developed products or services or information that are passed on from user to user Examples • Mountain Dew – offered cheap pagers • Hotmail – Free e-mail, e-mail recipients also were asked to join. • Washington Post – allows you to e-mail news to your friends • Universal Studios – set up three webcams for visitors to take pictures and send to their friends.

45. Affiliate marketing • A way for retailers to pay-for-performance • “Referral, Partner, Associate, Affiliate Programs” • A variety of pay scales • Commission on sales • Pay per click • Pay per download or search • Multi-level

46. Examples of affiliate programs • Amazon.com pays E*Trade 5% of converted sales • CDNow pays Country.com 7% of converted sales • TheSmokeShop.com offers affiliates 7% commissions and $.07 per clickthrough • Lycos pays Tripod members $.03 per search

47. Ad metrics • Hits • Pageviews • Visitors • Impressions – Cost per thousand (CPM) • Click through rate (CTR) • Leads – Cost per action/lead (CPA/CPL) • Sales (CPS)

48. CPM

49. Software functionality • Sets the number of impressions an ad should receive over a certain time period. • Then places the ad on the Website at intervals to match this number. The Ad Server • Definition of an ad server: The software that • controls the placement and rotation of advertising • on a publisher’s Website.