E- Business

Chapter 4 : E-Business Revenue Models

Dr. Samim Al Azad (SAA2)

Post-doc (LU), PhD (SNU), MBA and BBA (DU)

Assistant Professor, Department of Management, NSU

1
 Learning Objectives

• Revenue model and its Categories

• How some companies move from one revenue
model to another to achieve success
• Revenue strategy issues that companies face
when selling on the Web
• Creating an effective business presence on the
Web

E- Business, 10th Edition 2

 1. Revenue Models
• Web business revenue-generating models
– Web catalog (sales revenue model)
– Digital content (subscription revenue model)
– Advertising-supported
– Advertising-subscription mixed
– Fee-based (transactions and services)
– Free for Many, Fee for a Few

• Can work for both sale types

– Business-to-consumer (B2C)
– Business-to-business (B2B)
• Can use same revenue model for both types of sales

E- Business, 10th edition 3

 1.1 Web Catalog Revenue Models
(Sales Revenue Model)

• Adapted from mail-order (catalog) model

– Seller establishes brand image
– And, then uses the strength of that image to sell through
printed information mailed to prospective buyers
• Orders placed by mail or toll-free telephone number

• Expands traditional model to the online world by

replacing the print catalogs with information
– Offers flexibility
• Orders placed through Web site or telephone
• Payments made though Web site, telephone, or mail
– Creates additional sales outlet for existing companies

E- Business, 10th Edition 4

 1.1 Web Catalog Revenue Models
(cont’d.)
• Computers and consumer electronics
• Sell a full range of products on the Web (Dell)
• Books, music, and videos
– Amazon.com, Barnes & Noble, Blackwell’s, Powell’s Books
• Clothing retailers
– Display clothing photos categorized by type Prices, sizes, colors
• Flowers and gifts (gift retailers)
• Online extension to successful telephone business
• General discounters
– Traditional discount retailers (Costco, Kmart, Target, Wal-Mart)

E- Business, 10th Edition 5

 1.2 Digital Content Revenue Models
(Subscription Revenue Model)

• Company sells right (subscriptions) to the

customers to access the information they own
• Academic research content
– ProQuest: digital copies of academic publications
• Business content
– Newspaper publisher subscriptions
• Sold digitized newspaper, magazine, and journal
content subscriptions
• Technical content : Association for Computer Machinery (ACM):
digital library
• Others: ???

E- Business, 10th Edition 6

 1.3 Advertising as a Revenue Models
• Instead of charging a fee or subscription for content,
many online businesses display advertising on their
web site.
– To support the operation of the web site, or development or
purchase the contents
• Online advertising is now well established
– Some sites rely entirely on advertising for their revenue
– Others use it only to provide part of their revenue
• 2 types:
– Advertising-supported revenue model
– Advertising-subscription mixed model

E- Business, 10th Edition 7

1.3.1 Advertising-Supported Revenue Models

• Revenue comes from sole advertisement

• Used by broadcast network television
– Provides free programming with advertising messages
• But display advertising to supports network operations sufficiently
• 2 challenges for sole revenue sources web sites:
1. measuring and charging site visitor views
• Keeping visitors at site and attracting repeat visitors
2. obtaining large advertiser interest

• Solution: Using a specialized information Web site

E- Business, 10th Edition 8

 FIGURE Three strategies for an advertising-supported revenue model
E- Business, 10th Edition 9
 1.3.2 Advertising-Subscription Mixed
Revenue Models
• Subscribers pay a fee but also accept some level of
advertising
– Typically less advertising compared to advertising-supported sites
– Example: traditional newspaper

• Web sites offer different degrees of success

– The New York Times (today)
• Bulk of revenue derived from advertising
– The Wall Street Journal (mixed model)
• Subscription revenue weighted more heavily

E- Business, 10th Edition 10

 FIGURE Revenue models used by online editions of newspapers and
magazines

E- Business, 10th Edition 11

 1.4.1 Fee-for-Transaction Revenue
Models
• Service fee charged based on transaction number
or size
• Previously, service information formerly provided by a human
agent
– However, currently web site offers visitor transaction information they
need about the transaction
• Value chain
– Disintermediation: Intermediary removed
– Reintermediation: New intermediary (fee-for-transaction Web
site) introduced

E- Business, 10th Edition 12

 1.4.1 Fee-for-Transaction Revenue
Models (cont’d.)
Examples
• Online travel agents
• Online banking and financial service
• Stockbrokers and Insurance brokers
• Event tickets: online agencies earn a fee on every ticket sold
• Shohoz.com, Ticketmaster, Tickets.com,
• Real estate and mortgage loans
– Web sites provide all traditional broker services

E- Business, 10th Edition 13

 1.4.2 Fee-for-Service Revenue Models

• Companies offer Web services for which they

charge a fee
– These fees are neither broker services nor services based on
transactions number or size (value of the service)

• Professional services
– Medical, legal and other professional practices allow clients/
patients to make appointment (consultation services) online
• Consultancy
• Online games

E- Business, 10th Edition 14

 1.6 Free for Many, Fee for a Few

• Offer a product or service to a large number of

customers for free and then charge a small number of
customers.
• Leads to a different revenue model
– Offer basic product to many for free
– Charge a fee to some for differentiated products
• Example:
– Any software (student version and professional version)
– Yahoo e-mail accounts, bakery: free cookies

E- Business, 10th Edition 15

 2. Revenue Models in Transition
• Some companies created e-commerce Web sites
– Needed many years to grow large enough to become profitable
(CNN and ESPN)
Reasons-
• Companies must change revenue model
– to meet needs of new and changing Web users
• Some companies change model because of lengthy unprofitable
growth phases
• To cover/maintain the operating cost
• To increase revenue
• To lead/capture the market

E- Business, 10th Edition 16

 2.1 Subscription to Advertising-
Supported Model
• Slate magazine (Microsoft) publishes upscale news and
current events
• Success expectations were high
– Experienced writers and editors
• Initial revenue source
– Annual subscription did not cover operating costs
– Was unable to draw a sufficient number of paid subscriber
(competitors used ad. Revenue model)
• Now an advertising-supported site

E- Business, 10th Edition 17

 2.2 Advertising-Supported to
Advertising-Subscription Mixed Model
• Salon.com (online magazine)
– Acclaimed for innovative content
• Initial revenue source
– Advertising-supported site
– Needed additional money to continue operations
• Now offers optional subscription version
– Annual fee for Salon premium
• Free of advertising
• Additional content
• Downloadable content (for offline reading)

E- Business, 10th Edition 18

 2.3 Advertising-Supported to Fee-for-
Services Model
• Xdrive Technologies: offered free disk storage
• Initial revenue source (1999): advertising-supported
– Users had to provide personal information
– Xdrive sent targeted e-mail advertising to them (users)
• Did not cover operating costs
• 2005: bought by AOL
– Switched to a subscription-supported model (B and C)
– Xdrive frequently adjusted its monthly fee downward
– AOL closed the service in 2009
• Successful company: dropbox

E- Business, 10th Edition 19

 3. Revenue Strategy Issues

• Issues arise when companies implement those

revenue models-
– Channel conflict and cannibalization
– Strategic alliances
– Luxury goods strategies
– Overstock sales strategies
– Identifying web presence goals

E- Business, 10th Edition 20

 3.1 Channel Conflict and Cannibalization

• Channel conflict (cannibalization)

– Company Web site sales activities interfere with
existing sales outlets
Example:
– Levi Strauss & Company sells through DS & RS
– Began selling products through levi’s website (1998)
• Retail stores complained to Levi’s
– Levis Web site
• Stopped selling products (2000)
• Sites now provide product, retail distributor information

E- Business, 10th Edition 21

 3.2 Strategic Alliances

• Strategic alliance
– Two or more companies join forces to undertake activity
over long time period
• Purpose: To sell on the web (lavis and retail stores)
• Example:
– Yodlee (IT developing firms) and its’ client bank
– Amazon.com
• Joined with Target, CDnow, ToysRUs

E- Business, 10th Edition 22

 3.3 Luxury Goods Strategies

• Difficult to sell online

– Expensive luxury goods, and high-fashion clothing items
• Why?
– Consumer generally want to see in person or touch

• Usually many luxury brand hesitate to offer in online

– fearing of alienating the upscale physical stores (Lilly Pulitzer)

• Solution:
– Limiting the range of online offering (Calvin Klein)

E- Business, 10th Edition 23

 3.4 Overstock Sales Strategies

• Problem of overstocks
– Products that did not sell as well as hoped
• Outlet store for selling overstocks (widely used)
• Overstock web page also worked well (Lands’ End)
– Many websites include a link to separate sections for
overstock or clearance sales of end season
merchandise

E- Business, 10th Edition 24

3.5. Creating an Effective Web Presence

• Organization’s web presence

– Public image conveyed to stakeholders
– Usually not important until growth reaches significant size

• Effective Web presence

– Critical even for smallest and newest Web operating firms

• Many customers know the company only through the

web presence (any example?)

E- Business, 10th Edition 25

 Identifying Web Presence Goals
• Web business site objectives
– Attracting Web site visitors
– Keeping visitors to stay and explore
– Convincing visitors to follow site’s links to obtain
information (liked sns pages /subscription)
– Creating an impression consistent with the
organization’s desired image
– Building a trusting relationship with visitors
– Reinforcing positive images about the organization
– Encouraging visitors to return to the site (retain
customer)

E- Business, 10th Edition 26

 Making Web presence consistent with
brand image
– Different firms establish different Web presence goals
1. Coca Cola Web site pages
– Usually include trusted corporate image (Coke bottle)
– Image: traditional position as a trusted classic
2. Pepsi Web site pages
– Usually filled with hyperlinks to activities and product-
related promotions
– Image: upstart product favored by younger generation

What about your company's’ web presence goal?

E- Business, 10th Edition 27