Evaluating E-Business Market Models

The Internet and other electronic channels have changed the way virtually every business operates. Most companies understand that they must adapt to the world of e-business—or risk losing ground in the marketplace.

As companies re-evaluate their strategies concerning customers, end users, products, channels, and fulfillment and supply chain systems, they must also consider which e-business market model to adopt. When embarking on an e-business initiative, they must base their decisions on the market models that will further their overall strategic goals. The market model or models chosen should complement the company's overall business strategy, as well as the value proposition for both customers and vendors.

Choosing a market model has far-reaching effects on virtually every aspect of a company's business. A market model represents a company's strategic choices in the value proposition offered, the transaction mechanism employed, and the revenues generated. The market model impacts internal cost structures, investment requirements, and financial risk level. Often, it contributes significantly to success or failure.

Market Models: Surveying the Options
Maximizing Shareholder Value
Supporting Strategic Objectives
Building Customer Relationships: Content Provider Models
Procuring and Selling Goods: Marketplace Models
Selling Direct: The Web-Based Retail Model
Finding the Right Fit
Five Market Model Trends

Market Models: Surveying the Options

Manufacturers, wholesalers, and retailers have a number of market models to choose from—each with advantages and disadvantages.

GMT has identified 10 e-business market models in three broad categories—many of which have a corresponding component in the offline world. While these models are discussed individually here, many companies use some hybrid of two or more models to accomplish diverse objectives.

Content Providers

	Free content—Through these information-rich Web sites, companies provide news, entertainment, and other intellectual property free of charge to consumers. Revenue is generated through advertising fees.
	Subscription—These sites provide intellectual property to consumers, but charge a subscription fee. In addition to this fee, a subscription site can earn money from advertisers.
	Pay per use—Similarly, some companies have established fee-based Web sites that charge consumers every time they use the site's content or software.

Electronic Marketplaces

	Online malls and aggregators—This market model mirrors its offline equivalent by aggregating retailers into one virtual "space." Revenue is generated through rent, store setup fees, a percentage of transactions, and advertising fees.
	Auctions—Buyers compete by naming the highest price they are willing to pay for a product or service. Revenue can be generated through listing fees, as a percentage of each sale, and via transaction fees.
	Reverse auctions—In a reverse auction model, the potential buyer specifies a maximum price, and the seller determines whether that price is acceptable. Companies using this model can earn revenues from the margin earned on sales, or from transaction fees.
	"Haggling"—The online equivalent of "haggling" allows for offers and counteroffers in real time. Companies earn revenues based on product profit margins.
	Group buying sites—At these Internet sites, consumers use the power of high-volume ordering to purchase products at lower costs. Group buying site hosts earn a margin on the products sold, or a sales commission.
	Exchanges—Similar to stock exchanges, these sites promote market liquidity, price discovery, and rapid and efficient matching of supply and demand. Exchanges can charge membership fees, demand a percentage of every sale, or charge transaction fees.

Web-Based Retail

Online retailers of products or services—Some of these Web sites are retail stores that have been converted to their electronic equivalent—while others, like amazon.com, exist only as a "virtual" store. However, like brick-and-mortar stores, online retailers generate revenues based on profit margins or transaction fees.

While this list of market models is not exhaustive, it represents the vast majority of models currently adopted by manufacturers, wholesalers, and retailers.

When it comes to choosing the right market model for their business, executives need to answer two questions:

	Which market models will enhance shareholder value?
	Which models will support strategic goals?

Maximizing Shareholder Value

To help answer the first question, GMT has analyzed 55 Internet companies in the following categories: product retailers, service retailers, marketplaces, free content providers, and subscription services. GMT compared these companies' market models based on sales and growth, market premiums, relative profitability, and efficiency. Because few Internet companies are currently making a profit—and most will take several years to actually make money—traditional shareholder value tools, such as historical ROI and ROE, are not yet applicable.

GMT's analysis shows that Internet marketplaces are the most successful current market models, while online product retailers—which represented an extremely popular model choice at the beginning of the Internet Revolution—are the least successful.

The success of Internet marketplaces can be attributed to their high growth rates and even higher potential growth. These online "one-stop shops" are also highly efficient, with the potential to be very profitable. As a result, investors and analysts have given online marketplaces high market capitalizations and market premiums.

Online product retailers, on the other hand, suffer from somewhat lower revenue growth, poor profitability, high asset intensity, and low customer and employee efficiency. As a result, these retailers have lower market capitalizations and market premiums.

GMT's analysis also reveals that shareholder value will be increasingly driven through business-to-business market models, which are expected to continue growing 30 percent faster than business-to-consumer companies—and are considerably more profitable. As a result, these businesses have very high market premiums.

Supporting Strategic Objectives

Just as they can enhance shareholder value, different market models can facilitate a variety of business objectives. But not every model is right for each objective. The graphic below shows different models' strengths and weaknesses in achieving specific strategic goals. As shown below, different market models help to facilitate different objectives. But, whatever a company's unique e-business goals, the primary value of the Internet generally falls into two categories:

	Improving relationships with customers—especially end-use consumers. The true power of the Internet lies in communication, whether used for building brand power, listening to consumer concerns, or distributing product information.
	Facilitating procurement and sales. With business-to-business applications increasing, virtually any company can save money in both procurement and sales transactions over the Internet—though direct consumer sales may carry significant risks for retailers, wholesalers, and manufacturers.

To maximize value in these two areas, the three major market model categories offer very different advantages.

Building Customer Relationships: Content Provider Models

Businesses of all types need to consider the power of the Internet to build their brands, gather customer and consumer data, assist in product selection, and demonstrate their expertise in products or application. Content provider market models—based on offering information for public consumption—can help these companies to create robust Web sites that achieve these objectives.

Companies unwilling to invest in developing their own content-rich Web sites can sponsor other Internet sites aimed at growing the overall size of the market—which indirectly promotes their own products.

Procuring and Selling Goods: Marketplace Models

Because of the opportunity to reduce costs, businesses are increasingly exploring procurement via the Internet. For example, online industrial auctioneer FreeMarkets (www.freemarkets.com) claims to save buyers up to 25 percent on their historic procurement costs.

Manufacturers can also leverage horizontal and vertical marketplaces to liquidate excess, obsolete, or second-quality inventory. And, as appropriate, they can also use marketplaces to reach new customers and sell first-quality products. This can be problematic, however, since distribution and channel conflict can be significant issues.

In choosing a marketplace, companies must ensure that the exchange or auction they are participating in is compatible with their ERP systems, has adequate liquidity, and has sufficient participation among vendors or customers.

Selling Direct: The Web-Based Retail Model

For certain industries and product categories—for example, those with high value relative to weight and size, as well as more flexible fulfillment requirements—Web-based retail can be an appropriate model. However, retailers face significant obstacles in creating Web sites that replace or complement their brick-and-mortar stores—including the logistics demands of shipping small orders directly to consumers.

But manufacturers and wholesalers exploring direct Internet sales must address the same logistics issues—as well as the more complex problem of managing conflict with their traditional channels. These manufacturers and wholesalers also face substantial sales and marketing costs.

Finding the Right Fit

While no two companies are alike, few organizations can escape the dramatic changes being caused by the Internet Revolution. Manufacturers, wholesalers, and retailers that want to emerge as leaders in this new era must re-evaluate all of their strategies and consider which market model—or blend of several models—is the most appropriate.

Without the right value proposition in mind from the outset, virtually all market models—and all e-business initiatives—are destined to fail. It is critical to select a market model that supports key strategic objectives—and also creates a value proposition for customers and suppliers that is significantly better than what is available in the offline world in terms of costs, efficiency, convenience, and service.