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E-commerce: are you in the right ballpark?

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

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