Electronic Commerce Foundations

E-Commerce Business Models

Kennedy Waweru N.
Department of Information Technology and Computer Science.
St Paul’s University,
Kenya
1. Introduction
A business model is a plan for the successful operation of a business, identifying sources of revenue, the
intended customer base, products, and details of financing.
A business model is different from a business plan. The business model is the mechanism through which
the company generates its profit while the business plan is a document presenting the company's strategy
and expected financial performance in the long term. In simple terms a business plan is a written
description of the future of a business. If the business plan is a road map that describes how much
profit the business intends to make in a given period of time, the business model is the skeleton that
explains how that money will be made. A business model is therefore at the center of a business plan.
An E-commerce business model aims to use and leverage the unique qualities of the Internet, the Web,
and the mobile platform.

2. Elements of a Business Model

A successful business model covers the following eight elements: value proposition, revenue model,
market opportunity, competitive environment, competitive advantage, market strategy, organizational
development, and management team. Most likely, when assessing the success or failure of a specific
company you will discover that it has to do with one or more of the elements listed above. It is therefore
important to consider carefully all the eight elements when developing an e-commerce venture. We
discuss these elements a little more in detail.
2.1. Value Proposition – A company’s value proposition seeks to answer the question “Why should
customers buy from you and not the competitors?”. Value proposition describes how a company’s
product or service fulfills the needs of customers. It is therefore an innovation, service, or feature
intended to make a company or product attractive to customers by creating value. What is it that
the company can provide that the competitors cannot? The answer to this will be foundation of its
value proposition.

Some examples of value proposition would be convenience, wide selection, personalization, low
search costs, reduction of price discovery costs, facilitation of transactions by managing product
delivery and more.

Before [Link] existed, most customers personally traveled to book retailers to place an
order. In some cases, the desired book might not be available and the customer would have to
wait several days or weeks, and then return to the bookstore to pick it up. Amazon made it
possible for book lovers to shop for virtually any book in print from the comfort of their home or
office, 24 hours a day, and to know immediately whether a book is in stock. Amazon’s primary
value propositions are therefore unparalleled selection and convenience.

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[Link] primarily offers customers the freshest perishable food (among other products)
in New York and other regions, direct from the growers and manufacturers, at the lowest prices,
delivered to their homes at night or next day. Although local supermarkets can offer fresh food
also, customers need to spend an hour or two shopping at those stores every week. Convenience
and time saving are very important elements in FreshDirect’s value proposition to customers.
Questions
i. What is the primary value proposition of the following companies?
a. [Link]
b. [Link]
c. [Link]
d. [Link]
ii. What is a Unique Selling Proposition (USP)?
iii. Describe at least one USP of [Link].
iv. Is there a difference between a value proposition and a slogan or a mission statement?

2.2. Revenue/Financial Model - A company’s revenue model seeks to answer the question “how will
the business generate revenue, generate profits and produce a superior return on invested
capital?”. The primary objective of any business is normally to generate profits. These profits
should also be higher compared to other alternative investments that may exist if the business is to
be sustainable.
There are many revenue models that exist and continue to be developed. Firms either rely on one
or more. Below, we discuss a few examples of revenue models used by E-commerce firms
i. Advertising Revenue Model – Many firms, whether offering products, services of content,
can be able to leverage on this model as long as they are attracting viewership to their
website. However, firms that attract high and/or specialized viewership are at a greater
advantage and can generate greater revenue. Website stickiness is the ability of a website to
entice visitors to hang around longer than usual as well as return in the near future. What
makes you glued on your favorite social media platform is its stickiness. This property works
well for advertising revenue model. Most likely than not you have encountered numerous
adverts on the many websites you have visited in the past and present.
ii. Sales Revenue Model – This is where a company generates revenue by selling their services,
products or content. A company such as [Link] generates revenue from selling their
cakes. Others like [Link], [Link], and [Link] also generate revenue
from sale of their products and services.

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iii. Transaction Fee Revenue Model – A company receives a fee for facilitating a transaction.
Good examples are [Link] (formerly [Link]), [Link], [Link] and more.
Visit these websites and learn more.
iv. Subscription Revenue Model – This is mostly used by companies that offer content or
services and therefore charge the consumer a subscription fee for a given time period for
access to some or all the services. [Link], [Link], [Link] offers such kind of
subscription services.
v. Affiliate Revenue Model – This is an E-commerce relationship in which an online merchant
agrees to pay an affiliate in exchange for providing an advertisement and link to the
merchant's site. In other words, you get paid a given percentage every time you direct a client
to a vendor’s product and it converts into a successful sale. [Link], [Link],
[Link], [Link] all have affiliate programs.
vi. Freemium Revenue Model - Whereby a company’s basic services are free, but users must pay
for additional premium features, extensions, functions, etc. One of the biggest companies to
use this model is [Link].
vii. Usage Revenue Model – Also known as pay-per-view, pay-per-use, metered usage or even as
bandwidth billing. Revenue is generated through payment for single access to a document,
video, or music clip which can be downloaded. For example [Link] allows you to pay
only for the number of pages you have read in a book instead of the entire book.
Questions
i. What are some of the ways in which you can increase the stickiness of your website?
ii. Which other Revenue models exist which are not discussed here?
iii. What are the pros and cons of each of the revenue models discussed above?
iv. Analyze the following websites and determine the revenue models that they use
a. [Link]
b. [Link]
c. [Link]
d. [Link]
e. [Link]
2.3. Market Opportunity – This is the projected potential size of your market and sales. This means
you'd need to estimate how many consumers or businesses belong to your target market, as well
as how much potential sales you could make from that market. The question therefore to answer
here is “what market size do you intend to serve and what is its size?”
You cannot assume that what appeals to you will also appeal to everyone. You need to know for
sure that there is a potential customer base for your content, service or product who are willing to
buy in to your idea. To get an accurate estimate of your market size, you need to start by getting a

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good understanding of the characteristics your target customer. You then need to measure that
market size by getting the data from relevant sources like government statistics, social media sites
(for example Facebook audience insights), industry surveys and reports among others. You need
to keep digging deeper so that you can have a very clear picture of your market characteristics so
that you can tailor your strategy for effectiveness.
Question
i. Have you used Facebook audience insights before? If the answer is no, then visit
[Link] and familiarize yourself with the process
of creating an advert for your business.

2.4. Competitive Environment – Who else occupies the market you intend to enter? The competitive
environment refers to the other companies selling similar products and operating in the same
market space. This also includes indirect competitors in form of companies offering substitute
products as well as the potential for new entrants to the market. Consumer power as well suppliers
power over your business is considered at this stage.
Several factors influence the competitive environment which include
i. Number of active competitors
ii. The size of their operations
iii. The market share of each competitor
iv. The profitability of the competitors
v. How they price their products/services.
Analysis of the competitive environment is critical in understanding the dynamics of the market
space. For example the presence of a large number of competitors in any one segment may be a
sign of something. Is it market saturation? Is it market opportunity? On the other hand, a lack of
competitors could also mean something.

2.5. Competitive Advantage – This refers to factors that allow a company to produce goods or
services better or more cheaply than its rivals. What special advantages does your firm have over
its competition that allows it to produce a superior product/service? In perfect markets there are
no competitive advantages since all firms have access to the same factors of production. However,
real markets are not perfect. Competitive advantage may include
i. First mover advantage is whereby the firm is the first in that market segment and therefore has
an opportunity to entrench itself before competition comes in which will play catch-up.
ii. Follower advantage comes from the flip side of first mover advantage in that followers
normally have access to complementary resources that the first mover did not. They also learn
from the failures of the pioneering firms.
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iii. Access to capital that competitors cannot access
iv. A brand name that competitors cannot duplicate.
v. Firms can also leverage on their existing advantages accrued from other ventures. For
example, a brick and mortar supermarket store can leverage on its existing customer database
when it ventures online.
vi. Availability of a patent or product that others cannot use or imitate.
vii. Favorable terms with suppliers, sources of labour or logistic firms.
viii. Availability of more knowledgeable, more experienced or loyal employees than competitors.

Question
i. Visit [Link] and use it to identify the top 50 sites in Kenya. Identify the first three local
sites and discuss their competitive advantage, if any.

2.6. Market Strategy – Without a proper marketing strategy even the best idea will fail. So, how do
you plan to promote your product/service in order to attract your customer? A marketing
strategy refers to a business's overall game plan for reaching prospective consumers and turning
them into customers of the products or services the business provides. There are numerous
marketing strategies that can be used, only limited by lack of imagination. A few include
i. Search Engine Optimization (SEO) – since most people discover websites through a
search engine, SEO seeks to ensure you are ranked as high as possible when your potential
clients search for products/services which you offer.
ii. Social media marketing
iii. Influencer marketing
iv. Email marketing
v. Google AdWords
vi. Retargeting
vii. Content marketing
Questions
i. Identify at least two e-commerce start ups which generated a lot of hype at the beginning
but died out due to lack of a sound marketing strategy or poor business model.
ii. Why is it important not to rely on a single channel of marketing? Read a brief on this from
the case study of Tutorspree from one of the founders Aaron Harris here
[Link]
tutorspree. As you read this article, pick up any technical terms you come across and
research them.

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2.7. Organization Development – It is possible to start an e-commerce firm as an individual but
impossible to sustain significant growth all alone. You will eventually need a set of employees as
well as business procedures to efficiently implement the firm’s strategies and plans. A firm will
fail if it is not supported by proper organizational structures and cultural values. Planning for the
organization development is to answer the question “what types of organizational structures
within the firm are necessary to carry out the business plan?”
Functional departments need to be identified and the tasks within each defined. Plan for staffing
of these functional departments need to be put in place. What departments will you need and
when? What qualifications for staffing and on what contractual terms?

2.8. Management Team - What kinds of experiences and background are important for the
company’s leaders to have? The management team may arguably be the single most important
element that is responsible to make the business model to work. A good management team can
make a poor business model to work by being proactive and innovative while a bad management
team can cause a good business model to fail. Skilled and knowledgeable management teams can
also a source of competitive advantage. It is therefore desirable to plan for the qualifications and
experiences that the management team for the firm would be required to have for the various
functional departments and in which sequence they should ideally be filled.

Question
1. Write an 800 word analysis of why [Link] failed.

Note: Why most e-commerce start-ups fail

According to a number of sources (Forbes, Huff Post etc) 90% of e-commerce start-
up businesses end in failure within the first 120 days. This is mostly because of poor
marketing strategy and lack of search engine visibility. Recent surveys show the
following as contributing factors to their failure
Poor online marketing - 37%
Lack of online search visibility - 35%
Little to no market for their products or services - 35%
Running out of cash - 32%
Price and costing issues - 29%
Got outcompeted - 23%
Retail giants dominating a large share of the market - 19%
Lack customer service - 16%
Poor team around them - 14%
Product mistiming - 11%

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3. Classification of E-commerce Business Models
There are numerous categories of e-commerce business models with differing approaches on how to
categorize them. There continues to be more business models mushrooming with time. The most
common approach to categorize business models is based on different major e-commerce sectors like
Business to Business (B2B), Business to Consumer (B2C) and Consumer to Consumer (C2C). It should
be noted however that some businesses utilize more than one business model in their approach.

3.1. B2C E-commerce Models

Several business models fall under this category including: e-tailer (direct sellers), content provider,
portal, community provider, transaction broker, market creator, service provider among others.
3.1.1. Direct Sellers (e-tailer or storefront) – This is an online version of a retail shop where
customers can shop 24/7 at the comfort of their homes. Versions of e-tailer model include
brick to click, virtual merchant (), online mall ([Link], [Link]), manufacturer
direct ([Link]). The primary revenue model is direct sales. Every Internet user is a potential
customer. However, trying to succeed in selling to everyone will most likely lead to failure
and therefore companies which create a niche are more likely to succeed. Other keys to
success here include keeping expenses and inventory low and offering broad selection.
3.1.2. Content provider – is a website or organization that handles the distribution of
online content such as blogs, videos, music, photos, artwork, e-books, newspapers or files.
Content providers make money by charging a subscription fee (for example Netflix) or
through other methods like advertising ([Link]), affiliate, pay-per-
download etc.
3.1.3. Portal – provide entry to content or services on the Internet. Search engines (Google, Yahoo,
and Duckduckgo) are portal business models that include many kinds of content and services.
They are profitable for advertisers because they draw a large amount of user traffic. Portal
models give the visitors the chance to find almost everything they are looking for in one place.
They often offer news, sports, and weather information, email, chat, calendars, shopping,
video streaming as well as the ability to search the web.
3.1.4. Community provider – This is a social network (Facebook, Twitter, LinkedIn, etc) that brings
together people with the same interests and allows sharing content like photos and videos,
transact, communication etc. The revenue is generated through advertising, subscription, sales
revenues, transaction fees and/or affiliate fees.

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3.1.5. Transaction broker – Also known as the brokerage model, a transaction broker process online
sales transactions on behalf of a customer and generates a fee for each transaction. Financial
services, travel services ([Link]), and job placement services
([Link]) are some of the industries that use this model. The value proposition
here is convenience in terms of time saving and money.
3.1.6. Market creator – This is a mimic of the physical market places where buyers and sellers meet
whereby a firm uses Internet technology to create markets that bring buyers and sellers
together. [Link] is a good example as it allows consumers to set the price they are
willing to pay for travel accommodations (reverse auction). [Link] is another
example of a market creator which connects farmers with buyers and also gives buyers the
opportunity to post their requests for reverse auction. Revenue model for market creators is
either charging a percentage of every transaction made, charging merchants for access to the
market or advertising etc.
3.1.7. Service provider – provide services online examples being video conferencing, email services,
office automation services, information storage, legal services etc. The value proposition is
convenience, low cost alternative and time saving services. Revenue models can range from
subscriptions, advertising, fees etc. Examples of service provider firms include Google,
[Link],

Questions
1. Are you aware of any Kenyan/African community provider firm? Do a critical analysis of its
performance so far.
2. How did Facebook manage to leapfrog [Link]?

3.2. B2B E-commerce Models

Several business models fall under this category including: E-distributor, digital exchanges,
industrial consortia, E-procurement.
3.2.1. E-distributor – This is a company that supplies products and/or services directly to individual
businesses. E-distributors are owned by one company seeking to serve many customers. In e-
distributors the more products and services a company makes available on its site, the more
attractive that site is to potential customers.
3.2.2. Exchanges – are owned by independent, usually entrepreneurial startup firms whose business
is making a market, and they generate revenue by charging a commission or fee based on the
size of the transactions conducted among trading parties. Exchanges make it significantly less
expensive and time consuming to identify potential suppliers, customers, and partners, and to
do business with each other.
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3.2.3. Industrial Consortia – are industry-owned vertical marketplaces that serve specific industries,
such as the automobile, aerospace, chemical, floral, or logging industries. For example,
Exostar is an online trading exchange for the aerospace and defense industry, founded by
BAE Systems, Boeing, Lockheed Martin, Raytheon, and Rolls-Royce in 2000.
3.2.4. E-procurement - firms create and sell access to digital electronic markets. The revenue model
of E-procurement is fees for market making services; supply chain management and
fulfillment services. Example; [Link].
Chapter Application Questions (Group Work)
1. Select an e-commerce company. Visit its Web site and describe its business model based on
the information you find there. Identify its customer value proposition, its revenue model, the
market space it operates in, who its main competitors are, any comparative advantages you
believe the company possesses, and what its market strategy appears to be. Also try to locate
information about the company’s management team and organizational structure.
2. During the early days of e-commerce, first-mover advantage was touted as one way to
success. On the other hand, some suggest that being a market follower can yield rewards as
well. Which approach has proven to be more successful - first mover or follower? Choose two
e-commerce companies that prove your point, and prepare a brief presentation to explain your
analysis and position.

Resources
1. [Link] - A good resource to draw lessons from failed startups.
2. [Link] - Directory listing of Kenyan manufacturers under Kenya
Association of Manufacturers

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