7 Internet business models
7.2 Business models
This is the most ubiquitous form of commerce on the World Wide Web. It involves a company presenting a catalogue of its wares to internet users and providing facilities whereby such customers can purchase these products. Almost invariably such a site will contain facilities for ordering and paying for products by means of credit cards. The sophistication of sites described by this business model range from just the simple presentation of a static catalogue to the presentation of an interactive catalogue, the display of samples of products – for example the use of sound clips in a site selling CDs – the maintenance of mailing lists and the ability for customers to post reviews or customer reactions to specific products. This model is sometimes known as the storefront model.
Sites described by the e-shop model provide global presence, a cheap way to place products in front of an audience and decrease marketing and promotion costs.
This model describes sites which electronically simulate the bidding process in a conventional physical auction. Such sites can range in sophistication from those which present a simple catalogue of items to those which offer multimedia presentations. Most sites which are described by this business model are concerned with selling items to individual consumers. However, there are an increasing number of sites which provide facilities for businesses to auction products to other businesses.
Revenues are raised by this form of site by charging for a transaction and for advertising. Some sites also sell the technology they use to other sites.
‘Procurement’ is the term used to describe the tendering of goods and services: a company decides that it requires some goods, say a fleet of cars for its salesforce. It would then announce this publicly and invite a number of auto companies to bid for the business.
Many companies are now switching to the web for the procurement process. A website devoted to procurement will normally advertise current procurement opportunities, provide forms facilities for companies interested in tendering and provide facilities whereby the progress of a tender can be tracked.
There are a number of advantages in carrying out the procurement process electronically. For suppliers it means that there are often more tendering opportunities, lowered cost of tender submission and collaborative tendering with other companies. For the company offering tenders there is a major reduction in costs.
An electronic mall or e-mall is a collection of e-shops which are often devoted to a specific service or product, for example an e-mall might be devoted to selling goods associated with a leisure activity such as fishing. Usually e-malls are organised by a company which charges the e-shops for administering their presence: maintaining the website, hosting the e-mall, and providing payment and transaction facilities and marketing.
The e-mall operator gains revenue for charging the e-shops; the individual e-shops have the benefits normally associated with e-shops, plus the fact that they are clustered together with other shops which operate in the same market segment and hence attract customers who might be browsing from shop to shop.
7.2.5 Virtual communities
A virtual community is a website which sells some product or service. In this respect there is no difference from an e-shop. The feature which distinguishes a virtual community is that the operator of the website provides facilities whereby the customers for a product or a service interact with each other, for example by pointing out ways a product can be improved. Technologies used for this interaction include mailing lists, bulletin boards and FAQ lists. The theory behind virtual communities is that they build customer loyalty and enable the company running the website to receive large amounts of feedback on the product or service they sell. A typical company that might run a virtual community would be a software supplier. Customers for software products manufactured by the company might post bug reports, bug fixes and work-arounds on a set of FAQ pages. Staff from the company would participate in the bulletin boards and also organise the FAQ lists.
Customers are often attracted to companies associated with virtual communities, particularly those that are maintained by companies that sell complex products, in that they see them as readily accessible stores of experience and unbiased advice.
A company can make profits from virtual communities in a number of ways. They can charge for participation in the community, and they can benefit from increased sales to customers attracted by the knowledge base held by the company and from a reduction in support costs.
The virtual community model is usually associated with another internet business model, for example the Amazon website is primarily an e-shop; however, the fact that it contains facilities for users to submit reviews and questions to authors and artists gives it the fiavour of a virtual community.
7.2.6 Third party marketplaces
A third party marketplace is characterised by websites which offer access to a number of related companies, for example companies that are wholesalers of office stationery. A distinguishing feature of this model is that the companies delegate the marketing and sales of their products to the company that administers the marketplace. Typically a website which operates as a third party marketplace would provide a common interface to the products or services which are being sold, together with facilities for payment and delivery.
A third party marketplace is similar in some ways to the e-mall. The main difference is the fact that the product or service providers within the marketplace are more closely integrated, for example by virtue of the fact that there is a common catalogue interface to the products or services offered.
7.2.7 Information brokerage
Websites described by this business model offer access to information – usually business information. For example, a website which offers the results of surveys of customer satisfaction for a product such as a car would be used by car hire companies, auto companies and consumer organisations. Major providers in this area provide information derived from financial data such as company performance figures, pension fund performance figures and financial market trends such as the growth of different types of mortgage. Companies whose internet presence can be described by this business model usually raise revenues by subscription or by a per-transaction charge.
7.2.8 Trust brokerage
This business model describes those companies or organisations who provide some service connected with security or trust. For example, as you will see later in the book, copyright is a major issue for the internet. A company might develop a sophisticated graphic which could easily be copied by another company that would then claim that they developed the graphic. A trust company might offer the facility for companies to register their work with them and then be able to testify to the date that the work was registered. Other trust brokers are associated with computer security and, for example, certify that a particular website run by a company is in fact associated with that company.
7.2.9 Collaboration platforms
Companies whose internet offerings can be described by this business model provide sites which enable companies to collaborate with each other, usually when the companies are spread over large distances. For example, a company which runs a collaboration platform might provide facilities for companies who wish to come together in order to tender for a complex project in a particular market sector such as aerospace.
A portal is a website which collects catalogues and characterises a huge amount of information. By displaying a large number of hyperlinks such sites provide an entrance (or portal) to the World Wide Web. Search engines originally provided fairly basic searching facilities; however, the past two years has seen them evolve Portals on the nncmci into portals. Portals are categorised as either horizontal portals or vertical portals. A vertical portal offers an entrance to large amount of information into a particular topic area, for example American football. A horizontal portal offers information over a large area.
7.2.11 Dynamic pricing
The dynamic pricing model is one which has a number of different instantiations. Basically, such models treat the price of a product or service (primarily a product) as variable and open to negotiation.
The name-your-price instantiation of this model is where the customer of a site offers the price that he or she thinks is reasonable for a product or service. The administrator of the website will pass on this bid to the provider of the product or service who will decide whether to accept it.
The comparison pricing sub-model encompasses websites which provide an interface to e-shops that sell a specific product. The model provides the facility for the customer to interrogate a database of product catalogues to look for the cheapest price for a particular product such as book or a CD.
The demand sensitive pricing sub-model is based on the fact that suppliers of a product will lower the price of a product if a number of units of that product are included in a single sale. websites which employ this model provide facilities whereby consumers can notify each other of their interest in buying a particular product such as a freezer. The site keeps a database of current products that have attracted a number of buyers with a predicted price and allow users to join the database of buyers who are committed to a sale.
The bartering sub-model allows consumers to barter services or products for other services or products. A site devoted to this form of economic activity will keep a structured database of items for sale and allows a buyer to barter with a seller.
7.2.12 B2B exchanges
A B2B exchange is a website or collection of websites which make the process of carrying out business to business transactions much easier. Under this banner comes sites which enable multiple companies to procure services and products from each other; help businesses form temporary alliances to carry out activities such as joint marketing or project bidding, and enable a marketplace in raw materials to function.
7.2.13 Online trading
This business model encompasses the trading of financial instruments such as bonds and stocks via the internet. Online trading has been a feature of the financial industry for some time. However, it was carried out using internal networks. The internet has enabled the individual user to trade stocks and shares from home and has given rise to the term day trading.
This term is used to describe companies or organisations who offer educational courses via the web. The quality and features found in sites which can be described by this business model can vary. At its simplest such sites offer students the ability to download conventional texts. More complex instantiations of the model offer the students facilities to read individual lessons, try out online multiple choice questions and experience simulations relevant to the topic being taught.
7.2.15 Free products and services
It might seem paradoxical to include sites which provide free products or services under the category of business models. Typical sites which come under this category include gaming sites where users can play computer games using their browser, sites which run free raffles and sites which offer free software.
Such sites do not earn any revenues from the products or services they offer; revenue is earned indirectly, for example by means of banner adverts or by receiving revenue from sites which you have to visit before experiencing a service or buying a product.
One of the largest free product areas is that of free software. Organisations in this area include those who raise revenues and those who do not. An example of a company in the former category is Red Hat. This is a company that provides free versions of the LINUX operating system (LINUX is a free variant of the venerable UNIX operating system). You can download LINUX from the Red Hat website and install it on your computer without paying a penny to the company. Red Hat raise their revenues through support, packaging distributions onto CDs and providing services to companies who employ LINUX for application development. Companies such as Red Hat are the analogue of those companies who sell a razor for little or no cost but make their profit from selling the razor blades.
There are a number of sites in the internet which do not make any money from issuing software. These are sites associated with Open Source development.
The Open Source movement
The Open Source movement is a phenomenon of the 1990s. It is truly a child of the internet because it is only the Net that provides the communicational infrastructure to enable it to succeed. A typical Open Source project involves a number of programmers deciding to collaborate on the development of a useful piece of software. Initially the software might have been developed by one of them with some minimal set of functions. Over time the software is enhanced and undergoes a series of builds. The software is made available to the general programming community at no charge, including its source code. Other developers are free to modify the source code and release it. The Open Source movement has generated some very popular software systems which have gained a large number of adherents. The two most popular are LINUX and the Apache web server.