These notes present pure business models for electronic commerce on the Web. The term "business model" as used here refers to how a Web site generates its revenue. In practice, many Web sites are hybrids that use combinations of these pure models. They generally apply to business-to-consumer e-commerce; business-to-business models may differ.

Some subclassifications are suggested for some models (that’s what the A, B, etc. mean -- these are not evaluation criteria). Evaluation criteria probably should vary from business model to model. What should they be?

Other important questions are: Which models will prove most effective for which kinds of businesses? How can each be pursued most effectively? What combinations of the pure models tend to be particularly effective and which tend to be in conflict?   Some of these questions are taken up later in these notes.

It is understood that each of the business models below applies to a Web site or collection of Web sites under centralized management.

These notes need to evolve further before they will attain the level of utility intended. It will be the entire class’ responsibility to contribute to this evolution via sharpened business model definitions, better examples of each, and all kinds of critique and new content. The focus for much of the necessary evolution will be a dedicated Web-based discussion group accessible from the Course Home Page.

• STOREFRONT MODEL: An organization offers products or services for sale. Many Web sites of this sort also have Customer Service Model features, and if not then probably they should have.

Most articles offering "Top N Websites" and the like mention their evaluation criteria more or less explicitly. These criteria, which are almost always subjective, can help seed a sensible list of evaluation criteria for storefront Web sites. You have an article of this type in your course reader (T. Kerievsky’s "The Top 100 Web Sites" from PC Magazine), and you have received pointers to other similar papers or Web sites.

B. Customers can post opinions or not. The
- yes: amazon.com at www.amazon.com (anyone can "review" any book)
- no: Egghead.Com at www.egghead.com

C. Customers can conduct threaded discussions or not to share opinions.
- yes: Motley Fool at http://boards.fool.com/Folders.asp
- no: amazon.com at www.amazon.com
 

• MALL MODEL: An intermediary offers products or services to consumers from a collection of distinct businesses that retain their individual identities and pay for inclusion in the mall (sometimes called a "gateway" site). They may also pay for special mall advertising or other mall services. Many malls have gone out of business, and that has given this business model a bad name.

• IMAGE-BUILDING MODEL: Establish a Web presence that aims mainly to provide product/service/organizational information and enhance public awareness and/or image for some target group or groups -- consumers, investors, potential employees, or even the public at large -- but that does not sell anything or provide post-sales support.  This includes, but is not limited to, brand-building.  The usual hope is that revenues will increase through regular non-Web channels, or that investors (current or potential) will be influenced favorably, or that superior employees will be attracted, or that the public’s esteem or political favor will increase. Usually a site of this type justifies its budget using the type of arguments traditionally made by Marketing, Public Relations, and Human Resources departments. Content can be blatantly self-promotional or subtle, rational/information-rich or emotional, etc.

• CUSTOMER SERVICE MODEL: Provide post-sales support to current or past customers (e.g., technical support or order-tracking). There may be cost-avoidance savings for the organization, or even revenue generation from "premium" customer services. Works well for business-to-business e-commerce too. Homework 1 is partly intended to explore such sites.

1. On-line account access: view your current billing summary and recent or prior invoices, view and update your account profile. There is a demo of these services.
2. An interactive form to page someone (text or numeric) on any of 7 different services including MCI and SkyTel.
3. Original content relating to the Internet, telecommunications, and international travel. Many demos (most require advanced plug-ins).

 

• AD MODEL: Offer free content or services, and sell advertising aimed at the users attracted.

B. Dominant sponsor (in which case the site might be called "sponsored") or multiple sponsors.

C. Banner ads (presently the dominant type) or other kinds of ads (e.g., inclusion in a directory or searchable database, or inclusion of a logo or link to complement a free listing). There seems to be a trend toward charging on the basis of "clickthroughs" for banner ads rather than impressions.
 

• ACCESS CHARGE MODEL: Offer content or services so good that users are willing to pay an access charge (e.g., hourly charge or monthly subscription fee). Commonly this model is combined with the Ad Model, with basic content for free and premium content for pay. It may also be combined with the Customer Service Model when premium customer services are offered; whether it is best to view such a site as one or the other depends on the site’s primary intention -- customer service or revenue-generation.

B. Pay for actual usage (e.g., pay-per-view) or for unlimited usage per period (e.g., monthly subscription)
- pay-per-view: LA Times at www.latimes.com/HOME/ARCHIVES/
- pay-per-period: Wall Street Journal Interactive Edition at www.wsj.com (annual), NetMarket at www.netmarket.com (looks like a storefront, but makes most of its revenue from membership fees).
 

• COMMISSION MODEL: Offer intermediary services with the opportunity to make transactions, and charge a fee or commission on the transactions actually made. Transactions typically involve purchase of products or services offered by a third party (merchandise at auction, real estate, securities, travel services, etc.).

• USER DATABASE MODEL: Offer content or a service that requires users to register or otherwise provide demographic or psychographic information about themselves. Then sell access to this information database to others, usually but not always with personal identities concealed. Alternatively, data-gathering can be implicit rather than explicit, based on recording salient aspects of user behavior. These sites might be classified based on the nature and amount of the information they obtain about users.

• VIRTUAL COMMUNITY MODEL À LA HAGEL and ARMSTRONG: A themed collection of consumers with strong support for consumer processes. Often a kind of Commission Model or some hybrid thereof. There may not yet exist any examples that fully live up to Hagel and Armstrong’s criteria.

 

• LURE MODEL: Offer content or services free or below cost, with the (sometimes not so) hidden agenda of luring traffic to a commercial site or sites. May ostensibly appear to be a public service site.

• REFERRAL MODEL: Offer content or services that refer visitors to another Web site or sites in return for a referral fee or other expected economic benefits (e.g., sales of a company’s products by the referred-to site). May ostensibly appear to be a public service site.   If there are enough referred-to sites, this model becomes a kind of Mall Model in which the cost of vendor membership is more variable (based on results) than fixed.

An important question is how each business model can be pursued most effectively.  One way to approach this question is to seek the "imperatives" of each model, and that is the topic of this section.  Commentary, especially arguments for additional imperatives, is cordially invited.

Some imperatives are common to all or nearly all business models:

• Build traffic vigorously, especially the kinds of traffic most important to the chosen model(s). Build brand at the same time.  Keep in mind that network externalities tend to destroy small players.
• Plan for global reach.  People will visit your site from around the world.
• Every site offering products, content, or services should make sure that these are of good quality and on the Pareto-optimal frontier with respect to the value they produce and the costs incurred.
• Exploit the opportunities that are inherent in the Internet and available to just about any Web site and its sponsoring organization.  E.g., opportunities
• to use virtuality to reduce costs (capital, transaction, distribution, marketing, sales, service, production after first copy if an information good),
• to use virtuality to shorten cycle times for time to market and various work loops,
• to attract some of the advertising dollars flowing toward the Internet,
• to create new products and services and customize existing ones, and
• to exploit new customer service and one-to-one marketing and sales possibilities.
• Respond to increased Internet-enabled competition within the industry and by those poaching on the industry.  Try to offer features and functionality that are difficult to copy.
• Be a fast-learning organization or you will gradually lose your industry standing.
• Finally, to the extent that a Web site addresses some aspect of business, it must do most of the things that conventional terrestrial businesses do, such as produce product(s) and/or service(s), pick-pack-and-ship if tangible products are involved, set prices rationally, advertise or otherwise stimulate demand, manage customer retention programs, etc.  Contemporary management thought yields imperatives for most of these functions.

Storefront
On the assumption that they are valid, play to the main consumer drivers and exploit the main business drivers listed in the U.S. Dept. of Commerce's report The Emerging Digital Economy (4 and 6 for information goods, 5 and 6 for tangible goods).  See this report for extensive discussion and examples.

Consumer drivers lead to emphasis on providing better selection, better availability, greater ease of research and more purchase-related info, greater convenience for consumer, more individualized services, lower prices, and better quality.

Business drivers lead to emphasis on exploiting opportunities inherent in the Internet, as explained above.

Other imperatives are presented in E. Schwartz's book Webonomics:  go for mindshare in a niche rather than broad marketshare, focus on information-rich products, stress self-service, create your own "currency" to build loyalty, and anchor your site to a solid brand name.

Mall
To the extent that the mall members apply the Storefront model, the mall operator should make it easy for them to follow their storefront imperatives (see above), which will determine their success at the level of traffic the mall induces. It should also promote itself to potential mall members based on the previous idea, among others.  The mall should promote itself to consumers based on the consumer drivers (see Storefront) and exploit the common applicable Internet-based business opportunities mentioned earlier.

Image-Building
The imperatives differ for the target groups of a site: consumers, investors, potential employees, public at large.  For each group, the imperatives -- which remain to be detailed -- may be classified broadly as rational and emotional.  Keep in mind that on-line brand and image are becoming just as real and nearly as important as terrestrial brand and image, and that these are better built on-line by serving the viewer in some way than by glitz or emotional appeal.

Customer Service
Identify what services truly are valued by customers and try to supply those with maximum convenience.  Build intelligence into support/service systems whenever possible.

Advertising
Identify which kinds of businesses might want to advertise on your site, determine what kinds of people they want to reach, develop your site in such a way as to attract those kinds of people in a documentable way, and maximize ad clickthrough or user involvement.

Access Charge
Many Storefront imperatives apply.

Commission
Many Storefront imperatives apply.

User Database
As E. Schwartz suggests, it is necessary to offer some sort of compensation to users who provide information about themselves.  Be very careful about the privacy issues surrounding this model.

Virtual Community
Imperatives for a professionally-oriented virtual community can be found in my notes "My Ideal Virtual Professional Community".

Lure
Many Storefront imperatives apply.  Be very careful about the ethical issues surrounding this model, lest there be a backlash over the hidden agenda.

Referral
Many Storefront imperatives apply.
 
 
What Conflicts Are Inherent in These Models?

It is important to know when the pursuit of one business model may conflict with pursuit of another.  Often such conflicts come to light by considering the imperatives associated with each model (see above).

Storefront
Conflicts with the Mall and Referral models because if you want to sell something yourself then you don't want to turn prospective customers over to someone else.

Mall
Conflicts with the Storefront model because it would sleazy to make a sale yourself that could also be made by a mall member.  Conflicts with the Referral model because it would sleazy to refer a sale to someone else that could also be made by a mall member.

Image-Building
Tends to conflict with the Advertising model, because advertisers may view a self-serving site as an unattractive venue.

Customer Service
In partial conflict with all other models except Virtual Community and possibly Lure (which might give free customer service), because anything that distracts from the service-giving functions of a customer service site may violate customer expectations.  However, there can be links to other friendly sites (or other parts of the same overall Web site) that pursue these other models.

Advertising
To the extent that advertising does not furnish useful information or accompany a useful service, this model tends to conflict with all others because it is distracting at best and objectionable at worst.

Access Charge
Conflicts with all other models to the extent that the access charges diminish traffic.  For example, San Jose Mercury News' decision to drop their subscription fee was largely an acknowledgment that the Advertising model won out there over the Access Charge model.

Commission

User Database
Since personal disclosure tends to frighten people, this model tends to conflict with all others.  But if there is sufficient compensation for disclosure (as recommended by E. Schwartz), then this effect can be neutralized.

Virtual Community
This model can work in harmony with all others.

Lure
Tends to conflict with Storefront, Mall, Access Charge, and Commission since the covert purpose of the Lure model is to direct traffic to other sites.

Referral
Conflicts with the Storefront, Mall, Access Charge, Commission, and Lure models since the purpose of the Referral model is to direct traffic to other sites.