A brave new online world

What are Internet business models and how are they different from traditional models? Are we seeing a sea change in business...

Mention business models for e-business and the mind jumps to conclude that we must be talking about some form of e-commerce, or other transactions over the Web. But for most savvy organisations there is more to it than that. They are not simply talking about increasing revenues, or creating another business channel for the Web. Although it is tempting to think that there must be an obvious business model for Web-based operations, such as increasing sales, this isn't always the case. While e-business may be about making money from transactions, advertisements, subscriptions, or micropayments, making money may not be the sole motivation. According to Mela Ralph, former online marketing director at Reuters, who has set up her own marketing firm, business models for e-business are driven by exactly what the company's business needs are - and not everyone's are the same. It may not be simply be about generating cash, but also about issues such as cost reduction, customer satisfaction, customer retention, revenue protection, or safeguarding the existing business. Put simply, it depends on the nature of the business. Ralph, who appeared with two e-business exponents, Dirk Kronemeyer, director of e-product development at Dutch airline KLM, and Jo Mosaku, former advertising and sponsorship director of Zoom, at a recent roundtable at Richmond Events' E-Forum, also suggests, perhaps controversially, that in many ways there really are no new models emerging for business over the Web. "How many of the supposed 'emerging business models' are actually new ideas? Not many, they're all adaptations of what's been done before, in traditional marketing. The old stuff still makes sense," says Ralph. Mosaku believes many companies moving into the e-business space simply fail to ask themselves: "What is our core offering as a business?" or "What are our business objectives?" From there it is possible to think of what the business model might be. But in the dotcom world - and perhaps also to some extent among bricks and mortar companies - some simply lost the plot. Says Mosaku: "If, for example, you are selling commerce via the Web - say fashion items - why would you try to be a newspaper as well? There are plenty of other sites offering that sort of up-to-date news content, so why try to copy them? You must ask, 'what is my objective for an online business?'" Or, if your content is special, do you value it so much that you're prepared to charge for it, and make it a prime revenue generator for the business? The Wall Street Journal obviously thinks its content has maximum value, and so do others, because the WSJ has hundreds of thousands of subscribers. But publishing prime content is its business model. Advertising as a business model has already come under scrutiny, with question-marks over the effectiveness of banner ads, their appeal and usefulness to consumers, and the emergence of the cost-per-click model. Advertising, and its effectiveness, was a prime issue in the dotcom frenzy, where millions of pounds were spent on advertising and marketing in a vain attempt to attract eyeballs. Mosaku believes that too many companies in the dotcom era simply forgot how to do their maths. "If you are looking for investment, you have to do the mathematics of how the business can recoup its investment. For example, if you were making an investment in organisations like Boo, you could simply have asked how many items would you have had to sell, to recoup an investment of $100m? And could you realistically cover your investment, and eventually be profitable? Probably not." Incredibly, few bothered to follow the same simple rule espoused by Mosaku. "Remember the basic rules of business: you buy, then you sell, whether its information, products, or whatever." For the third member of the panel, Dirk Kronemeyer of KLM, his biggest e-business driver was coping with the effects of disintermediation. KLM's business was already threatened by the low-cost airlines. For Kronemeyer, it meant coming to terms with a model where there is less reliance on travel agents and more direct selling to the customer. That cuts prices, which in turn has an effect on the business model. For example, most airlines have developed and continue to use complex yield management systems, with a vast array of fares, literally hundreds in different price bands. But go direct, as some newcomers have done, and you have only a handful. But going direct, for traditional airlines, has a serious effect on business processes. And while it might make sense in cost terms to simplify those processes, actually doing the de-complexing is no easy task - it is likely to have serious implications in human terms, both within the airline and on its agents. However, the emergence of airlines such as Easyjet, which has benefited from a simple direct sell, no frills message, has spelt out to the national carriers the way they must go. The demise of Swissair and Sabena has only reinforced the story. Kronemeyer explained the difficulties at E-Forum after coming up with an imaginary new business model for a new media company, Smart-Seat, in the travel industry, a move repeated by Ralph and Mosaku for two other companies: Lucci, a small traditional company in the fashion industry; and Noscorps, an old, traditional company in the financial sector, with the intention being to offer credible e-business models for their three respective industries. Kronemeyer's airline would offer only business-class seats, each with a personal entertainment system. All frills would have to be paid for, including pre-boarding lounge, onboard catering, and booking would only be via the Internet. The strengths of the model is that it puts the customer in control for the whole journey: if he or she is hungry, then they can buy a meal. The weakness is that it would face strong competition from traditional airlines' business-class services, and a lot of money would have to be spent on marketing. Ralph's imaginary Noscorps multinational, which sells systems to banks globally, has a 250-year history based in Switzerland, where it originated coin/note manufacture and distribution. As well as the software business, it also has a lottery operation, a subsidiary which is active around the world with a major brand presence. But its online operations are minimal, with only a corporate information website, and the company is generally slow-moving and risk-averse. A dipping of its toes in the water to build an online gaming site proved to be expensive, and has not encouraged more risk taking. So, if the company wants to get on the Web, what would its business model be? And does it even need to have one? Rather than trying to fit its business to the Web, does it have to do so at all? Or is that missing an opportunity? Lucci, Mosaku's small traditional company in the fashion industry, would offer a brand name direct to the consumer over the Web, without the consumer having to go to a store to try on the clothes. The advantage would be the ability to sell direct to regular clients around the world, but at the risks of losing the 'customer experience' of going to the store. All three imaginary models had strengths and weaknesses, replicating the difficulty faced by a large number of traditional companies trying to get real business online. Delegates at the Richmond conference, probably because they were only imaginary business models, comprehensively critiqued the examples. What they did show however, is that there is no easy route to creating an online opportunity - it comes down simply to knowing your market, knowing your customers, partners or suppliers - and being able to fashion an offering that they cannot do without, and which fits in with your business needs, whatever they might be. Long-haul business class-only airline, London-New York first class for £999, No frills, unless you pay for them. Complete online service. Offers what customers want - leg space, attracts both business and leisure customers, customers empowered. High entry barriers, cost-savings relatively low, strong competition from traditional brands. All products developed internally, revenue from business-to-business offline sales, poor communications with suppliers. High switching costs, solid sales worldwide, revenue linked to first purchase and usage. Products costly to manufacture, service in key areas poor, competitors nibbling at services. Sell 'name' direct, regular clients, can buy globally. Familiar brand, Offer CRM/direct marketing to preferred clients. What is the consumer experience? Distribution/cost issues, low barriers to entry. What are Internet business models and how are they different from traditional models? Are we seeing a sea change in business drivers - or just old ideas in new online packaging? David Bicknell reports

Questions to Consider concerning E-Business Models
  • Emerging e-business models are just about making money, aren't they?

  • Can models across one industry be grafted onto another?

  • Have we seen any significant new models over the past 18 months? Or are they just a reinvention of what's gone before?

  • Is there a good content/subscription model to follow?

  • Will cost-per-click advertising work?

  • Given the effects of disintermediation, can companies in traditional industries, such as airlines, really reinvent themselves on the Web, without axing existing business processes?

  • Given Amazon's problems in becoming profitable, does it have a working business model - or not?

  • Does top management "get" business models for online business, or are they still a black art to them?

Three imaginary companies' business models

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