There are many different ways to do business on the Web, and there
are also many pitfalls along the way. Danny Bradbury breaks down
the different business models and offers some pointers on how to
maximise the profit potential without deflating your business
The flurry of activity surrounding the e-commerce market has led
to the development of a variety of different business models.
Auctions, reverse auctions, trading hubs and e-tail have all sprung
up as potential ways to make money using the Internet. But how
viable are they?
The recent stock market dive, driven by the collapse of tech
stocks, cast a doubt on the long-term viability of many dotcom
start-ups, and announcements that some dotcom companies were
running out of money did nothing to buoy up people's
enthusiasm.
Rocky Mahajan, an e-business strategist with e-commerce
consultancy Amaze, worked as a strategist for two years at Ernst
& Young, and looks at anything from business strategy for
start-ups to e-commerce game plans for existing clicks-and-mortar
companies. He divides this key business world into two main
sectors, business-to-business (B2B), and business-to-consumer
(B2C).
In the B2C sector, there are some critical success factors that
apply no matter what your business model is, according to Mahajan.
The first is marketing and branding. If you are a start-up company,
getting your name out into the Internet community is vital if you
want to get people onto your site, he explains. bricks-and-clicks
companies that want to establish an e-commerce initiative to
complement an existing business have an advantage, in that they are
able to leverage their existing mindshare.
Michael Walton, chief executive officer of Rubus, an e-business
consultancy, echoes some of Mahajan's ideas in his own laws of
e-business survival. Being early to market is vital if you want to
succeed, he says, while building a robust value chain to handle
back-end transactions and logistics is another linchpin of any good
e-commerce strategy.
Mahajan's definition overlooks the consumer-to-consumer (C2C)
market, which is a domain dominated by the auction companies such
as eBay and QXL. "It's a strong model because it's doing something
that you can't easily do offline," says Walton.
Nevertheless, C2C auctions have experienced problems with the
sale of illegal goods and services - eBay wasn't designed for the
sale of human kidneys, but some enterprising individuals have tried
to use the service for exactly that.
The use of server technology has enabled different auction
models to develop, including reverse auctions, for example. Andrew
Robinson, managing director of the European practice of Diamond
Technology Partners, a consultancy specialising in e-commerce
advice, explains that all of them are simply different ways to
handle price discovery.
While C2C auctions are fraught with the potential for fraud, B2C
auctions may be a more viable concept. One telling figure from a
March 1999 Forrester report on the auction market, Consumers Catch
E-commerce Fever, is that while B2C revenues only made up 30% of
auction revenues in the B2C and C2C space at the time of the
report, they would expand to cover two-thirds of the market by
2002. The prospects for B2C auctioneers become even more attractive
when you consider that the whole consumer-oriented auction market
will expand from $1.3 billion in 1999 to $19 billion in 2003.
Business-to-consumer auctions represent an exciting new way of
buying, but electronic retail is perhaps a more understandable
means of doing business with consumers online, and will appeal to
more members of the general public. Unfortunately, according to
Mahajan, only 5-10% of online retailers will be successful. Some
others will understand that they aren't going to make it, and seek
an early sale. The less clued up among this group won't see failure
until it hits them squarely between the eyes, at which point they
will be forced to sell out at bargain basement prices.
The reason many of them will fail is that they will jump into
the market early, (therefore fulfilling one of Walton's laws of
e-commerce survival), without doing the proper preparation by
making their systems scalable and implementing a coherent set of
logistical processes at the back end. This means that they will
contravene one of Mahajan's key e-commerce principles, and will
crash and burn as a result.
Not everything you sell online has to be physically tangible.
These days, intellectual content can be just as valuable as a
physical product, and providing these services can be a means of
generating cash. With the proliferation of free content on the
Internet, however, many people have turned towards advertising
revenue to recoup cash.
The success of online advertising is questionable, and depends
largely on the criteria you measure it by. Mahajan believes that
whereas many advertisers pay content publishers on a click-through
basis - paying a small amount for every Web surfer that visits
their site by clicking on an ad banner - this often doesn't
generate very good results. Instead, many advertisers are starting
to understand that Web advertising is simply a way of raising brand
awareness,in muchthe sameway asitisin other media.
Consequently, they are starting to pay on a per-view basis,
providingaset amount of cash to the publisher for every 1,000
visitors to the publisher's site, for example.
"Eventually, content will be charged for directly on a
micropayment basis," says Mahajan. Micropayments involve the
deduction of tiny amounts of credit from a customer's account in
return for the viewing of content. This technology has been slow to
develop, but is becoming more feasible. The development of
intellectual property protection mechanisms by such companies as
Contentguard - announced as a joint venture by Microsoft and Xerox
in early May - will make the provision of billable content more
viable.
One business model that hasn't taken off yet is brokering - the
idea of collecting a number of related services together using a
single front end. An example would be a travel agency that offered
a front-end Web interface for which you could define criteria for
selecting holiday-related services including flight booking, car
rental, restaurant reservations and excursion booking.
The service would then poll a number of back-end systems from
different service providers in real time and return the
best-scenario package for consumer to book by clicking one button.
The problems here are the integration of the front-end system with
many different legacy back office environments to provide a
real-time service, which is probably why such business offerings
are rare, if they exist at all.
Many people have argued that the B2B e-commerce world represents
a more lucrative short-term market than B2C sales because of the
higher level of understanding of e-commerce technologies and issues
within the business community. The high level of recent activity in
the e-procurement space certainly bears this out, as many different
electronic marketplaces have developed, enabling different business
partners to trade with each other.
Mary Hope, a senior consultant with market research company
Ovum, explains that the general model here has been
commission-based, meaning that the owner of the hub takes a cut on
each sale. The major division in this market is between those sites
run by a single company or consortium of companies with an existing
presence in a vertical market, and those sites run by independent
third parties.
Mahajan explains that one potential problem for those sites run
by existing players in a particular market is that they are open to
allegations of unfair trading and anti-competitive practices. "I
think that the vertical marketplaces will be very difficult to
implement unless they are independent," he says. "The question of
transparency is tricky." If you are a major automotive manufacturer
running an electronic marketplace with one of your competitors,
then you need to make sure that the information you are exchanging
with your suppliers over that network is not visible to your
competitive business partner.
With horizontal markets, where companies buy goods such as
office supplies, overalls and computer equipment, the key issue is
making sure that your horizontal electronic marketplace has enough
market share. As the number of trading hubs increases, the smaller
marketplaces with less mindshare will find themselves becoming less
attractive to both suppliers and customers on their networks.
Consequently, as this market matures (and it still has a lot of
growing up to do), we will likely see a large number of
acquisitions, accompanied by a few business closures.
Ovum's Hope explains that B2B auctions are emerging as an
offshoot of the online B2B marketplace. "IBM's Web Commerce Suite
is a tool for building marketplaces, and it will include the
ability to produce RFCs," she says. "If tools come with ready-made
support for such things, then they will be ubiquitous." Certainly,
companies such as Commerce One have begun moving into the online
auction space, providing companies with the ability to request
tenders for contracts in a reverse auction scenario.
It's definitely possible to make money on the Internet, whether
you're dealing in consumer-oriented goods, or B2B products and
services.
Those people that will make their fortunes in this exciting new
media will be those who plan their strategy properly, avoiding the
mistakes made by companies such as Toys R Us, which threw money
into marketing its e-commerce site, but neglected the performance
and scalability issues that are so vital to any e-commerce
operation.
Business to business e-commerce is particularly attractive
because of the potentially high value of individual sales, but in
this context, the ownership of the marketplace is a crucial issue.
Business to consumer models are much more established on the
Internet, but the failures outweigh the success stories.
Wap
More a channel to market than a particular business model, the
wireless application protocol (Wap) represents a way to catch
people on the move. Rubus's Walton suggests that the levels of
revenue per customer from such services will be small, and
restricted largely to content-based services such as news updates.
Such services are likely to be charged as part of a multi-content
service provided by the telecoms carrier. BT Cellnet's Genie
service, for example, aggregates content from multiple providers
and charges customers for access on a per minute basis.
Models for e-business
| Business
Model | What the pundits
say |
| Business-to-business
trading hub(owned by market player) | "All of these
companies are hesitant about throwing their potential advantage
into the arms of their competitors" - HOPE |
| Business-to-trading
hub (horizontal market, owned by independent third
party) | "Can they get enough
scale?" - Mahajan |
| Business-to-business
auction | "The biggest problem
is that it's not about price - it's when you turn to non-commodity
products that you have problems. People like to modify their
overall product and make it better for specific customers. You lose
that tight link with your suppliers" - Mahajan |
| Business-to-consumer
auction | "The mass companies
will be C2C and B2C-based" - Walton |
| Business-to-consumer
auction | Market will be dwarfed
by the B2C auction arena - forrester report |
| Online
retail | "The issue is that you
should own your back-end product fulfilment process so that you can
guarantee delivery to the customer" - Mahajan |
| Content provision -
microbilling | ".001 cents per
customer can be a serious form of revenue when a million people
click on a piece of content" - Mahajan |
| Content provision -
ads revenue | "Ads revenues are
disappearing and they will decline further and further -
Mahajan |
| Service/product
brokering | "Tying together
back-office systems is no small task" -
Mahajan |
Life after IT directors AD (after dotcom)