Internet Business Models

From Isopedia

1 Definition and Overview
2 Merchant Business Model
3 Manufacturer Business Model
4 Subscription Model
5 Brokerage Model
6 Advertising Business Model
7 References
8 Team Members

Definition and Overview

An Internet Business Model can be defined as a business method on the internet in which a company can make a profit or carry on its business. Internet Business Models can be either very simple of very complicated. In order for an Internet business to continue to expand and be profitable, the business’ revenues must exceed its costs. Some examples of internet business models are: brokerage, advertising, infomediary, merchant, manufacturer, affiliate, community, subscription, and utility. Firms may use one or combine two or many of these business models to create a thriving business on the web. Some of the most successful companies on the web use a combination of almost all of the business models. Some examples of the top e-businesses on the web that use most, if not all of these models are: EBay, Homestore.com, Oracle, CISCO, Amazon.com, Doubleclick.com, and YAHOO!

In order for a business or firm to be successful on the web, a firm must be able to attract a customer’s attention. Listed below are several examples of what an e-commerce business should do to become or continue to be successful. The business should be able to integrate its business models so that they blend smoothly. Next, a business must be able to build a vertically cohesive community and offer entertainment, such as an interesting website. The online business must also be able to stop irritating pop-ups and stream the entire online economy. The company should work with flexible pricing to keep the customers happy and make sure they have wireless access at all times. A very important point for internet businesses to remember also is to make sure that they target every person that they possibly can on the internet to get the most business possible and not just have a limited selection of people.

Merchant Business Model

Types of Merchant Models One of the primary Internet business models involves the selling of goods and services by wholesalers and retailers over the World Wide Web. Merchant business models can be classified as a virtual merchant, catalogue merchant, brick and mortar merchant, or bit vendor merchant. A virtual merchant is an “e-retailer” or business that sells its goods or services solely over the World Wide Web, like Amazon.com, a popular auction website. A catalogue merchant utilizes the Web to advertise and/or sell goods but also utilizes phone and mail services to reach customers, like Land’s End. Banana Republic, Free People, and J. Crew are all brick and mortar merchants who display their catalogues online as well as sustain store locations. A bit vendor sells only digital merchandise and services using the Web for sales and distribution. The wholesale and retail industry has been immensely affected by the onset of the Internet, forcing many companies to add a virtual component to their businesses to remain competitive.

Benefits and Limitations Both benefits and limitations are associated with the sale of goods and services over the Internet. Some business models rely entirely on the Web, such as Amazon. The Internet gives Amazon and other Internet businesses the ability to reach potential customers all across the globe efficiently and cheaply. Virtual merchants have extremely low overhead. They do not have to pay rental and utility costs nor property taxes.

However, many consumers feel the need to physically see and touch a product prior to purchasing the merchandise. Clothing stores such as Banana Republic and J. Crew encounter the issue of clothing sizes and fits. Woman, especially, can be dissuaded by online clothing purchases because of the likelihood that the garment may not fit or look flattering once tried on. Brick and mortar merchants have an advantage as compared to virtual merchants because storefronts can offer the opportunity to return clothes with a full refund and no added shipping costs to a local store location.

Another added consequence of Internet sales involves the shipping and handling fees required to for the product to reach the buyer. The company may have to pay the shipping costs as customers may reflect negatively on the added shipping and handling fees as too expensive or cumbersome. A major limitation of Internet merchandizing is that low speed Internet connections and overly complicated websites can often frustrate potential customers. In order to maintain a competitive Internet merchant business, website creation and maintenance is extremely important as to not deter potential customers.

Despite the plethora of limitations to Internet businesses, many businesses boast that the ability to reach a large customer base without largely increasing overhead overshadows the majority of limitations.

Internet Fraud Shopping on virtual auction sites such as eBay and Amazon where goods are paid for prior to acquisition increase the risk of fraud. Although, auction sites often contain user ratings, good criminals often find ways to have strong user ratings to attract and decieve potential buyers. Law suits against Internet buisnesses such as eBay regarding fraud are mostly ruled in favor of the business. eBay spokesperson Catherine England claims, “that only approximately .01 percent of its listings were confirmed cases of fraud” (ecommercetimes).However, business managers must continue to work to avoid creating breeding grounds for fraud while consumers must be coscious of the many failibilities of virtual shopping. Internt merchants must constantly work to ensure the privacy of their customers’ financial information in order to gain strong customer relationships.

Manufacturer Business Model

The manufacturer business model involves the manufacturer to directly reach the customer without going through a middleman. In this way, the distribution channel is condensed. The manufacturing model can lead to greater efficiency, better customer service, and a greater understanding of a customer’s needs and desires. The direct manufacturing model can include purchases, leases, licenses, and brand integrated content. A purchase is when the rightful ownership of a product is transferred from one person to another or from a seller to a buyer. A lease is a situation in which a buyer may borrow the product and use it under the “terms of use agreement,” but must return the product after a certain amount of time. A license involves only the transfer of the usage rights to the person who is buying the product. There is also a “terms of use agreement” with a license because the manufacturer still owns the rights to the product that is sold. The brand-integrated content is created by the manufacturer for the main purpose of product placement.

A good example of a manufacturer business model would be Dell. Dell creates its products specifically for the customer when the customer orders them. The products are specifically designed to meet the customers’ exact preferences. For example, each computer that is built is built only after the customer has put in his/her request. The customer may choose exactly what type of computer they want and what types of programs they would like on their computer. Dell believes that by having the most up to date technology, as well as, the availability of all its resources, that the company is more successful that a normal e-commerce firm online. Dell gives its customers almost unlimited access and resources to create whatever kind of product they would like.

Some of the benefits of manufacturing business models are that customers can get the things they want directly from the manufacturer without having to go through wholesalers or retailers. Online manufacturing businesses give customers many benefits that they would not normally get if the customers had to go into a store. Also, customers can benefit from the lower prices. If a customer is ordering directly from a manufacturer, then the customer may be more likely to get a product personalized, such as with Dell. Manufacturer business models online also allow the customers to pick out or order their products online without having to go to a store. In this instance, customers can order products form across the country without having to leave their living rooms.

Subscription Model

What is the subscription model? The subscription model has been around long before the internet came about. It was actually first used by newspapers and magazines. However, it is now used more commonly by websites and business. The subscription model is used when users/customers subscribe to a service. People who subscribe are charged a fee that is paid either: annually, monthly, or seasonally. This model is convenient because, instead of selling products individually, a customer can pay their subscription fee and use the product or service as they please. Some websites offer users free content and premium content. The free content can be used or viewed by anyone who uses the website. On the other hand, premium content can only be used or viewed by subscribers to that particular website. The subscription model can be very helpful in building brand loyalty, and is often combined with the advertising model. There are many advantages that this type of model offers users. It can save time and money, and customers can have unlimited use to the service.

Subscription Types

Content Services

Users subscribe to this type of service to view content such as audio, text or video. Example: The Wall Street Journal

Internet Services

This type of service allows subscribers to connect to a network. Example: America Online

Trust Services

In this type of subscription service members must follow a precise code of conduct. Example: Truste

Person-to-Person Networking Services

This subscription service dispenses user submitted information.

       Example:  Classmates (Service that allows people to search for former classmates)

Brokerage Model

The Brokerage Model is very different than the other types of Internet business models. The brokerage model is very similar to the actual model used in the real world except it is easier for the user to use and is more convenient. A broker is defined as a third party that bridges the gap between buyers and sellers. Examples of brokers are real estate agents, travel agents and stock brokers. The internet not only allows brokers the opportunity to carry out the services they perform for customers in person, but additional services as well. Internet brokers can match buyers and sellers based on the needs and wants of both parties. This matching process can be business-to-business, consumer-to-consumer, or business-to-consumer. Most broker websites charge the buyer, seller, or both a fee or commission for completing the business transactions.
The kinds of internet brokerage models are:
• Marketplace Exchange
• Buy/Sell Fulfillment
• Demand Collection System
• Auction Broker
• Transaction Broker
• Virtual Marketplace

Marketplace Exchange Model
The Marketplace Exchange model provides customers with a simple way to utilize the services offered by a broker. These services include the broker handling the transaction process, covering negotiations between the parties involved, and the market assessment. An example of an Internet business using the Marketplace Exchange model is Orbitz.com. Orbitz.com is a collection of information regarding basic traveling needs ranging from airfare prices, hotel accommodations, and car rentals. Instead of going to a travel agent, it is much easier to make travel plans through this website that connects travelers to companies providing these services or products.

Buy/Sell Fulfillment Model
The Buy/Sell Fulfillment model allows consumers to research and purchase desired products and services and also allows the sellers to record their business transactions. The information recorded in these business transactions includes the price of the product or service purchased and the delivery date of that product or service. Websites that utilize this model act as a broker between the buyer and seller. Examples of these websites include Carsdirect.com and Respond.com. Carsdirect.com allows consumers to search listings of new and used cars and then provides the consumer with the seller's contact information. Respond.com offers a similar service to consumers acting as a virtual yellow pages by connecting consumers to any business they may need.

Demand Collection System Model
The Demand Collection System model is an unconventional method of doing business by allowing the consumer to choose the price they would be willing to pay for a product or service. The broker website then locates a company willing to accept the bid placed. The consumer is the contractually bound to the purchase the product or service at the agreed upon price. Priceline.com is an example of this business model and utilizes it with their “Name Your Own Price” service that aids in finding low priced airfare.

Auction Broker Model
The Auction Broker model is similar to an actual auction except it is conducted online. The broker website lists sellers’ products and services and then allows individual buyers to continuously bid against one another for the products and services for the disclosed time period. The most widely known example of this brokerage model is Ebay.com. Ebay.com is one of the first auction sites on the internet and connects millions of sellers and buyers around the world.

Transaction Broker Model
The Transaction Broker model is used by a third party that complete transactions between buyers and sellers. Websites like these provide a guarantee to the seller that they will receive the money the buyer owes them. It also protects the buyer by securing the transaction. Paypal is a company that provides this service to buyers and is utilized by auction websites like Ebay.com that involves buyers and sellers communicating directly with one another.

Virtual Marketplace Model
The Virtual Marketplace model is a website that acts as a virtual mall. This site offers anyone the chance to sell their products, whether new or used, through the use of a personal account on a website with a high volume of traffic. Many merchants use this model to sell their products to consumers. Amazon.com is an example of this virtual marketplace that connects consumers to independent sellers.

Advertising Business Model

The Advertising Internet Business Models utilize many different types and tactics of marketing and advertising in order to generate interest and create revenue from their websites.

There are seven different advertising classifications of Internet businesses and websites: • Portal • Classifieds • User Registration • Query Based Paid Placement • Contextual Marketing / Advertising • Behavior Marketing / Advertising • Content Targeted Advertising

Portal The classification of an internet business model as a “Portal” indicates that there is a high volume of website visitors and website traffic. Internet business models classified as “Portals” are usually websites like search engines that offer a large amount of information and services to the public. Two types of Portals that are commonly used by Internet Business Models are Personalized Portals and Niche Portals. Personalized Portals offer the user the ability to customize, or “personalize”, the interface and content they are searching for. Niche Portals utilize the users’ demographic in order to aid in the customization of their searches. Businesses that use the “Portal” advertising model are: • Yahoo! • Google • Ask.com (formerly Ask Jeeves) • MSN.com

Classifieds Internet Business Models that use the “Classifieds” advertising model are companies that list products and services that are desired for consumption or products and services that are offered for sale. These businesses generate revenue by charging the sellers a fee or requiring a commission from the sale of the products or services they advertised on the website. The businesses also create revenue from the purchasers (omit apostrophe) by requiring membership in order to access the website and charging membership fees. Businesses that use the “Classifieds” advertising model are: • Monster.com • Craigslist • Match.com • Eharmony

User Registration The “User Registration” advertising model is utilized by Internet Business Models that are free to access but restrict access to detailed articles, information, or increased features. Users must register and provide the website with demographic data. This information helps businesses track the web browsing traits of individual users. This helps the businesses streamline their advertising to satisfy the needs, wants, and interests of individual users better than their competitors. The use of target marketing helps companies efficiently allocate advertising expenses and reduce their advertising costs.

Query Based Paid Placement The “Query Based Paid Placement” advertising model is used by Internet Business Models that auction off their advertising space based on the relevance of the advertisements to the user’s search content. When users utilize specific key words such as “car” or “shoes, advertisements or links pertaining to cars or shoes will be viewed by the user. Companies that utilize this advertising model hold auctions in which advertisers submit a bid for the advertising space and based on the amount the ad’s are accepted. Some of these auctions may be “silent”, such as the ones held by Google, during which advertisers competing for advertising space do not have knowledge of their competitors’ bids. The highest bid is awarded the best advertising space and or the sponsored link located at the top of the webpage followed by the second highest, and so on. Companies that utilize the Query Based Paid Placement advertising model tend to be websites that are viewed frequently by users such as search engines. Google, Overture, and Yahoo all utilize the Query Based Paid Placement advertising model and it is the main source of their revenue, aside from the revenue generated from being listed as publicly traded companies.

Contextual Marketing / Advertising Contextual advertising is defined as a marketing strategy in which marketers advertise to web users based on the type and content of the website being viewed. An example of contextual advertising is viewing advertisements for car insurance when visiting the department of motor vehicles website or viewing advertisements for prescription drugs when viewing a website such as WebMD.com. Companies like Google and Overture offer contextual ad placement software that they bundle with their free services. Google offers AdSense and Overture offers ContentMatch and they aid advertisers and Internet business models in placing advertisements on web pages that are relevant.

Behavioral Marketing / Advertising Behavioral Marketing or Advertising is frequently mistaken for Contextual Marketing or Advertising. As said previously, Contextual Marketing is based on the content of the web pages viewed by the user. Behavioral Marketing is defined as marketers targeting new customers based on their overall website viewing behavior. In order to do this marketers segment users by utilizing data they have acquired through what is known as “clickstream data analysis” and also through the users IP information. Clickstream data analysis is the examination of the web patterns of website users. The pages that users visit, the number of mouse clicks the user has made, and the order in which the websites were visited are recorded in what is known as a “clickstream”. There two segments of clickstream data analysis: traffic analysis and e-commerce analysis. Traffic analysis refers to the segment of clickstream data analysis during which only data pertaining to the users navigation patterns is analyzed. The data collected during this process consists of the number of pages that are utilized by the user, the loading time of these pages, how often the user has to refresh the page, and how much information is transferred between the user and the server. The E-commerce segment is based around the use of the clickstream data towards assessing the effectiveness of the website. Information about time spent on certain web pages and the information on those pages is analyzed. The overall purchasing behavior – what items are purchased, what are considered for purchase, what items are searched - of the user is also utilized by marketers in order to asses the overall effectiveness of the advertisements on the websites.