Defining components and taxonomy of e-commerce business models.

ABSTRACT

In this paper, a comprehensive set of components to develop new and improve existing e-commerce business models has been introduced and explained. These components include: value proposition, value-added e-commerce offerings, supporting resources, revenue and cost models, and value creation. Also, a new taxonomy of e-commerce business models has been introduced. The taxonomy is based on clustering e-commerce models into four classification groups depending on their association with customers and suppliers, and also on their service/support role in e-commerce.

1. INTRODUCTION

E-commerce became an important factor of modern business development. According to estimates, by the end of 2005 almost 30% of all business-to-business revenues will be generated through e-commerce transactions (Jupiter, 2002). At the same time, 12% of business-to-consumer sales will be done using the online channels by 2010 (Bednarz, 2004), which is three times more than that in 2004. E-commerce applications are used by companies to increase and sustain their competitive advantage and as a way to generate more profits/revenues and reduce cost (Mullaney, 2004).

Generating successful results through e-commerce is based on a company's ability to develop an efficient e-commerce business model. A well-established business model can facilitate the company's competitive advantage and influence its monetary results. Thriving e-commerce business models, like those of Yahoo, eBay, IBM, Apple, and many others have triggered interest in understanding components of e-commerce business models. However, there are still a variety of views in terms of what an e-commerce model means, how many of these models exist today and how they are clustered. According to Rappa (2005)," Business models are perhaps the most discussed and least understood aspect of the web. There is so much talk about how the web changes traditional business models. But there is little clear-cut evidence of exactly what this means."

The main goals of this paper were to:

* Define and present a comprehensive set of components used in developing and/or improving any e-commerce business model in order to provide sustainable competitive advantage and successful value creation through e-commerce

* Identify and present a new taxonomy of e-commerce business models based on the set of components and predetermined classification criteria.

2. ANALYSIS OF COMPONENTS AND TAXONOMY OF E-COMMERCE BUSINESS MODELS

Analysis of academic sources allowed to find out that the term "business model" is commonly defined as a tool/method by which a company would like to generate revenue/profit and serve the customer needs (Turban at al, 2004; Afuah and Tucci, 2003; Laudon and Traver, 2003; Timmers, 1999; Wikipedia, 2005). A typical definition would be close to the following: "A business model is a set of planned activities (sometimes referred to as business processes) designed to result in a profit in a marketplace" (Laudon and Traver, 2003). Another similar definition states that "A business model is the method of doing business by which a company can sustain itself--that is, generate revenue. The business model spells out how a company makes money by specifying where it is positioned in the value chain" (Rappa, 2005). These definitions are correct in terms of considering revenue/profit generation ad a part of an e-commerce business model. However, the described definitions are limited in their emphasis on just revenue/profit creation. They do not reflect the fact that an e-commerce business model may be used to create and/or sustain companies' competitive advantage. Also, these definitions do not consider cost reduction as an important factor, along with revenue, in generating companies' profitability and cost effectiveness. Finally, the described cluster of definitions does not address the issue of e-commerce products and processes associated with the business model, as well as how this model affects customer satisfaction and overall company results.

Analysis of literature sources allowed to identify a variety of ways that e-commerce business models are being clustered (Turban at al, 2004; Canzer, 2005). Despite of a relatively big number of the classification groups, the underlying classification criteria used to define the groups are not explained. Thus, it is hard to understand why specific groups were selected. Similar issues in terms of classification criteria are present in other academic sources that attempted to classify e-commerce business models (Rappa 2005; Rayport and Jaworski 2004; Applegate 2000; Afuah and Tucci 2003).

Besides clustering e-commerce business models, a variety of authors attempted to identify and explain general elements (components) of e-commerce business models (Porter, 2001; Amit and Zott's, 2001; Laudon and Traver, 2003). Rayport and Jaworski (2004) presented four main components of e-commerce business models:

* Value proposition--market segments, customer benefits and unique resources

* Online offering--ordering scope, products, processes, and their mapping

* Resource system--select and align company resources

* Revenue models--a variety of ways to earn money in e-commerce solutions.

These components are well-supported by their detail description and associated case studies (Rayport and Jaworski, 2004). However, detailed analysis of the four components also revealed their limitations. First, the construction of the four components fits well for the B2C e-commerce models, but would not be sufficient to describe the B2B models, specifically related to suppliers. This is due to the fact that the components lack description of supply-related processes associated, for example, with reverse auction or e-procurement. Second, the described components do not address the cost model, which is a critical factor of profitability in both demand-side and supply-side e-commerce models. Finally, the four components do not include description of value creation--a very important element of showing potential results in developing or improving e-commerce business models.

3. DEFINING AND CLUSTERING E-COMMERCE BUSINESS MODELS

To overcome the issues in defining and grouping e-commerce business models, we have introduced a comprehensive set of components (Table 1) that may be employed to develop any e-commerce business model for any type (sector) of e-commerce, i.e., B2B, B2C, and C2C, and others. These components should be used to create efficient e-commerce business models that fulfill customer needs, provide successful performance results, and sustain and improve competitive advantage.

This set in Table1 incorporates the four components described by Rayport and Jaworski (2004). We also substantially improved them by adding two new components, i.e., cost model and value creation, to make the e-commerce model development more comprehensive and embrace all types (sectors) of e-commerce. We also, enhanced some components by incorporating, for example, supplier processes in value-added e-commerce offerings. The components in Table 1 are logically connected with each other in a sequence that defines their position in the set.

The development and/or improvement of e-commerce business models start with identifying the need of developing an e-commerce model--value proposition (Table 1). The value proposition describes two main elements: (1) target market (market segment) that will be using these e-commerce solutions and (2) core customer benefits. The target market may be represented by end consumers (convenience segment, low-price segment, etc.) and business customers in demand-side models or suppliers in supply-side e-commerce models. Core customer benefits are multiple benefits associated with target markets, for example, ability to choose the best quality products and services; less expensive products and services and more deep discounts; easy access to products, services and information; more choices of products, services and information; customization and personalization; and others.

Value-added e-commerce offerings (see Table 1) or simply value-added activities represent a set of e-commerce products/services, processes and their relationships required to fulfill the value proposition (market segments and core customer benefits) of an e-commerce model. The value-added offerings include the three main elements: (1) product/service offerings, (2) e-commerce processes, and (3) relationships between products/services and processes. For product/service offerings, a model presented by Alter (2002) is used to describe these offerings utilizing three dimensions: degree of digitization, degree of tangibility, and degree of customization. The product description in a three dimensional space clearly explains the impact of e-commerce on the value proposition. For example, e-commerce enables the companies to create compelling customer value by offering additional services that can be delivered through digital products or services. Also, e-commerce may create value by facilitating customization of product offerings. An e-commerce process is a related group of online activities that use information and other resources to deliver value to customers (end consumers, business customers, or suppliers). The value-added e-commerce processes may consist of customer processes, supplier processes and intraorganizational processes.

The third component required to develop or improve an e-commerce business model is a set of resources that should support the e-commerce model's value proposition and online offerings (see Table 1). A company should also consider identifying unique resources that would add value to e-commerce development and differentiate the company from competitors. These unique resources could be: e-commerce technology, brand name, quality of products and services, distribution network, supplier network, buyers' and sellers' base, personnel, integrated software ERP system, outsourcing, and other resources. The quality and appropriateness of e-commerce resources are based upon their ability to be unique in providing: competitive advantage, strong links between resources and value proposition, and strong links (complementation and support) among the resources in the system.

The fourth component is revenue and cost models (see Table 2). The revenue model describes how a company will generate revenue/profit through e-commerce to build and sustain competitive advantage. The cost model emphasizes ways that a company will employ to reduce cost through an e-commerce business model. It is important to point out that for demand-side e-commerce (e-tailing, auctions, etc.), both revenue and cost models are relevant. However for supply-side e-commerce (e-procurement, reverse auctions, etc.), the revenue generation may not be feasible, because companies do not usually generate revenues through outsourcing. In this case, the cost model becomes the only model for supply-side e-commerce.

The fifth and final component of the e-commerce business model is value creation. It represents potential/expected monetary and non-monetary results of utilizing an e-commerce business model. The main monetary results include:

* Revenue enhancement through volume growth and price differentiation

* Cost reduction related to cost of goods sold and operating costs

* Asset intensity reduction through reducing the cost of working capital and/or fixed assets.

The non-monetary value creation may incorporate a variety of tangible and intangible results relevant to e-commerce development:

* Improved quality of products and services

* Faster delivery schedules

* Improved customer satisfaction

* Global outreach of products, services, and information

* Permanent access to information

The described set of components provides a comprehensive solution for developing a new or improving existing e-commerce business model. However, our research would not be complete if we did not present taxonomy of e-commerce business models. We introduced a new taxonomy based upon clustering e-commerce models into four classification groups depending on their association with customers and suppliers, and also on their service/support role in e-commerce (Figure 1). These four groups of models are based upon the following classification criteria: demand-side e-commerce models, supply-side e-commerce models, collaborative commerce (c-commerce) models, and e-service models (see Figure 1). A brief description of each model is provided in Table 3.

[FIGURE 1 OMITTED]

4. CONCLUSION

In this paper, we introduced and explained in details a comprehensive set of components to develop new and improve existing e-commerce business models. These components include: value proposition, value-added e-commerce offerings, supporting resources, revenue and cost models, and value creation. The introduced set of components should be used to create efficient e-commerce business models that fulfill customer needs, provide successful performance results, and sustain and improve competitive advantage through e-commerce. We also provided a new taxonomy of e-commerce business models (see Figure 1) based on predetermined classification criteria. The taxonomy is based on clustering e-commerce models into four classification groups depending on their association with customers and suppliers, and also on their service/support role in e-commerce. The four groups of models are based upon the following classification criteria: demand-side e-commerce models, supply-side e-commerce models, collaborative commerce (c-commerce) models, and e-service models. These e-commerce business models may serve as an effective base for developing e-commerce applications, their implementation and future improvement.

REFERENCES:

Afuah, A and Tucci, C.L., Internet Business Models and Strategies, McGraw Hill/Irwin, New York, 2003.

Alter, S., Information Systems: The Foundation of E-Business, Prentice Hall, 2002.

Amit, R. and C. Zott, "Value Creation in E-Business", Strategic Management Journal, Vol. 22, 2001, 493-520.

Applegate, L.M., "E-commerce Models", in Information Technology for the Future Enterprise: New Models for Managers, Prentice Hall, Upper Saddle River, 2000.

Bednarz, A., "Analyst Firm Predicts E-business Upswing", Network World, September 1, 2004.

Canzer, B., e-Business: Strategic Thinking, Houghton Mifflin Co., Boston, 2005. Juniper Media Metrix, "The Forecast for Business-to-Business E-commerce", DM Review, Jan. 17, 2002, www.DMreview.com

Laudon, K. and Traver, C.G., E-commerce: Business Technology, Society, Pearson/Addison Wesley, Boston, 2003.

Lewis, D., "Pressure Mounts to Gauge E-Biz ROI", InternetWeek, No.835, 2000, 147-148.

Mullaney, T., "E-Biz Strikes Again", Business Week, May 10, 2004, www.businessweek.com/magazine.

Porter, M. E., "Strategy and the Internet", Harvard Business Review, March-April 2001.

Rappa, M., "Business Models on the Web", Digital Enterprise, May 10, 2005, http.//digitalenterprise.org/models/models.html.

Rayport, J. & Jaworski, B., Introduction to e-Commerce, McGraw-Hill/Irwin, New York, 2004.

Timmers, P., "Business Models for Electronic Markets", Electronic Markets, Vol.2, No. 2, 1998.

Turban, E. at al, Electronic Commerce: A Managerial Perspective, Prentice Hall, Upper Saddle River 2004.

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Wikipedia, "Business Model", Internet Wikipedia, 2005, www.wikipedia.org

Zinovy Radovilsky, California State University, East Bay, Hayward, California, USA

Dr. Zinovy Radovilsky earned his Ph.D. at the Scientific Research Institute of Labor, Moscow in 1984. Currently he is a professor of management at California State University, East Bay and Managing Editor of Journal of International Business and Economics (JIBE).

TABLE 1. COMPONENTS OF E-COMMERCE BUSINESS MODEL

       COMPONENT                          KEY QUESTIONS

  Value Proposition      Who are the customers and what will be their
                         benefits?

Value-added E-commerce   What value-added offerings (value-added
       Offerings         activities) including e-commerce products/
                         services and e-commerce processes are involved
                         to fulfill the value proposition?

 Supporting Resources    What are resources that support the value
                         proposition, e-commerce products/services and
                         processes?

Revenue and Cost Models  How the company generates revenue and reduces
                         cost through e-commerce model?

    Value Creation       What monetary and non-monetary value (results)
                         is created though e-commerce business model?

TABLE 2. REVENUE AND COST MODELS

      REVENUE/COST MODEL                      DESCRIPTION

         Revenue Model
Product, Service, or Info Sales  Sales through retail, wholesale sites
                                 or pay-per-use information

       Transaction Fees          Charging a fee or taking a percentage
                                 of the transaction sum for
                                 facilitating a customer-seller
                                 transaction

       Subscription Fees         Subscriber fees for magazines,
                                 newspapers or other information/
                                 service businesses

          Advertising            Charging fees for selling adds,
                                 sponsoring links and sponsoring sites

        Affiliate Fees           Companies receive commissions for
                                 referring customers to other sites

        Licensing Fees           Fees generated from the licensing of
                                 content (software applications)

          Cost Model
      Direct or Indirect         Reduction of direct/indirect material
    Material/Resource Cost       costs through lower unit price, less
                                 inventory stock, on-time delivery,
                                 etc.

Cost Due to Paperl Environment   Reduction or elimination of paper
                                 transactions

    Administrative Expenses      Reduction of human resources due to
                                 e-commerce solutions

         Quality Cost            Reduction or elimination of cost
                                 associated with incorrect design,
                                 rework repair, excessive warranty
                                 payments, etc.

TABLE 3. DESCRIPTION OF &COMMERCE BUSINESS MODELS

GROUPS             MODELS                 BRIEF DESCRIPTION

Demand-side      Storefront     A seller opens an electronic
E-commerce                      marketplace to sell its products/
                                services to the business customers or
                                end consumers

               Forward Auction  A seller opens a seller-centric
                                auction online to sell overstocked,
                                obsolete products or hard to move
                                commodities

                Infomediary/    Selling aggregated information on
                  Affiliate     products, services and research
                                reports/papers online.

Supply-side    Reverse Auction  A buyer opens an electronic
E-commerce                      marketplace and invites potential
                                suppliers to bid on the announced
                                request for quotation RFQ

                E-procurement   A buyer utilizes an electronic
                with Catalog    marketplace to do purchasing/
                                outsourcing online using electronic
                                catalogs

                 E-sourcing     Strategic sourcing online; locating
                                and selecting appropriate suppliers,
                                negotiating contracts with them

                  Exchange      An electronic intermediary company
                                runs an electronic marketplace where
                                buyers and sellers can meet for
                                trading

Collaborative     E-design/     E-design/Collaborative Product
commerce             CPC        Commerce (CPC)--Provides online
                                capabilities for design partners to
                                sharing information, drawing, and
                                other data on new product design

                    CPFR        Collaborative Planning, Forecasting,
                                and Replenishment (CPFR)--Suppliers
                                and retailers collaborate in their
                                planning and demand forecasting to
                                optimize supply chain flow

E-services       Web Portal     A web site that provides a starting
                                point (gateway) to other resources on
                                the Internet or an intranet

               Mobile Service   Provides wireless service to do an
                                type of e-commerce

                  E-payment     Allows to make payments and money
                                transactions using any e-commerce
                                business model

                 E-logistics    Provides logistics/transportation
                                capabilities for online businesses

                    ISP/        Internet Service Provider (ISP)
                 Web Hosting    provides companies with access to the
                                Internet. They also do web hosting--a
                                service that provides Internet users
                                with online systems for storing

                     EDI        Electronic Data Interchange
                                (EDI)--Third parties provide EDI
                                services that enable organizations
                                with different equipment to connect
                                for business transactions