Topic 3

• Revenue model

  How companies generate revenue from their online business
• Revenue models


  • Web catalog
  • Digital content
  • Advertising-supported
  • Advertising-subscription mixed
  • Fee-based
• The same revenue model can work for both business-to-consumer (B2C) and business-to-business (B2B) sales types
• Web catalog revenue model

  Adapted from mail-order (catalog) model, seller establishes brand image, orders placed through Web site, creates additional sales outlet for existing companies
• Discount retailers using Web catalog revenue model

  • Buy.com (now Rakuten)
  • Costco
  • Kmart
  • Walmart
• Using multiple marketing channels

  Allows more customers to be reached at a lower cost, examples: physical stores, Web sites, mailed catalogs or newspaper insert
• Many companies adapted the catalog sales model to the Web, displaying clothing photos categorized by type, with prices, sizes, colors, and tailoring details
• Personal shopper

  Intelligent agent program that learns preferences and makes suggestions
• Virtual model


  Graphic image built from customer measurements that allows customers to try clothes
• Using virtual fitting rooms increased sales and decreased returns for companies
• Fee-for-content revenue model


  Firms owning written information or information rights sell access to that content online
• Firms using fee-for-content revenue model

  • LexisNexis
  • Academic information aggregation services
  • Electronic book providers
• Digital Rights Management (DRM)


  Software intended to curtail music piracy
• The music industry reported increased sales in 2013 for the first time in 14 years, partly due to the Amazon MP3 store offering DRM-free MP3 format
• Advertising-supported revenue model


  Provides free programming and advertising messages to support network operations
• Challenges of advertising-supported revenue model

  • Difficulty measuring and charging site visitor views
  • Keeping visitors at site and attracting repeat visitors (stickiness) to expose them to more advertising
  • Obtaining large advertiser interest
  • Requires demographic information collection
• Web portal


  A site used as a launching point to enter the Web, almost always includes a Web directory or search engine and often includes other features
• Web directory


  A list of hyperlinks to Web pages
• Strategies for advertising-supported revenue model

  • General interest strategy (e.g. Yahoo!, Google, Bing)
  • Specific knowledge domain strategy (e.g. C-NET, Kayak)
• Advertising-subscription mixed revenue model

  Subscribers pay a fee and accept limited advertising
• Companies using advertising-subscription mixed revenue model

  • Wall Street Journal
  • New York Times
  • ESPN
  • Consumers Union (ConsumerReports.org)
• Supported Online Classified Ad Sites

  • Wall Street Journal
  • New York Times
  • ESPN
• Subscribers pay fee and accept limited advertising

  Varying levels of success
• ESPN leverages brand name from cable TV

  Sells advertising; offers free information and also collects subscription revenue for its Insider service
• Consumers Union (ConsumerReports.org)


  • Subscription-supported site with no advertising
  • Provides some free information to attract subscribers and fulfill mission
• Advertising-Subscription Mixed Revenue Models
• FIGURE 3-3 Revenue models used by online editions of newspapers and magazines
• Service fee charged based on transaction number or size

  Web site offers visitor transaction information and services formerly provided by a human agent
• Disintermediation


  Occurs when an intermediary (human agent) is removed from the value chain
• Reintermediation


  The introduction of a new intermediary (fee-for-transaction Web site) into a value chain
• Original full-line brokers charged relatively high commissions and provided free advice


  1. 1970s: Deregulation resulted in discount brokers

  2. Fast trades, low commissions, no advice

  3. 1990s: New online firms took business from discount brokers

  4. Firms such as Etrade offered advice and fast, low cost trade execution

  5. Brokerage firms that survived the 2008 financial crisis and remain today do most of their business online
• Quotesmith


  • Began business in 1984 as a policy-quoting service for independent brokers
  • Begin offering Internet policy price quotes directly to public (1996) and disintermediated independent insurance agents
• The General (General Automobile Insurance Services)


  • Web site provides options for those who have trouble getting insured
  • Successful in this niche of the market
  • Most major companies offer information and policies for sale on their websites
• Event Tickets


  • Web allows event promoters to sell tickets from one virtual location to customers worldwide
  • Established agencies like Ticketmaster earn a fee on every ticket sold
  • Web created secondary ticket market (StubHub)
  • Brokers connecting ticket owners with buyers
  • Earn fees on tickets resold for others, buy ticket blocks
  • Easy-to-find central marketplace, facilitating buyer-seller negotiations
• Online Banking and Financial Services

  • No physical product so easy to offer on Web
  • Slow to take off due to concerns about security
  • Trust has increased and 84% of U.S. households use online banking services
  • Existing banks started offering services online and new online banks started that had no bank affiliation
  • Less costly to provide services online
  • Features offered online: Bill presentment service, Account aggregation tools
• Travel

  • Traditional travel agency revenue model was receive fee for facilitating a transaction
  • Online travel sites generate revenue through Commissions, buying and selling airline seats and hotel rooms, and advertising
  • Traditional travel agents squeezed out
  • Surviving smaller travel agency strategies: Specialize in cruises with very successful websites, Reintermediation strategy focuses on specific groups of travelers
• Automobile Sales


  • Firms such as Edmunds.com provide information service to car buyers
  • Customer selects specific car, site determines price and finds local dealer willing to sell OR Firm locates local dealers willing to sell car at a small premium over dealer's nominal cost
  • Buyer purchases car without negotiating with salesperson
  • Firms are disintermediating individual salespeople and reducing transaction cots
  • Web site: new intermediary (reintermediation)
• Real Estate and Mortgage Loans


  • Brokerage firms and individual real estate brokers use Web sites to solicit business
  • Most real estate brokers have strong online presence including information on properties
  • National Association of Realtors site (Realtor.com)
  • No online transactions but joins buyers with sellers
  • 2008 financial crisis dramatically reduced number of mortgage brokers in business
  • Several continue to do business online
  • Industry is resistant to disintermediation caused by online technologies
• Fee-for-Service Revenue Models


  • Increasing variety of fee-based Web services
  • Fee based on service value and range from games and entertainment to financial advice and professional services
  • Growing number of online game sites that relied on advertising in the past now have premium games
  • Sold and downloaded or subscription fee
  • "Hook and pay" strategy offers limited game for free and small fee for additional game play
  • Fastest growing segment is development of games to be played as apps on mobile devices
• Fee-for-Service Revenue Models - Professional Services


  • State laws prohibit some practices on the Web
  • Patients or clients may set appointments online and some professionals do online consultations
  • Patient/client privacy concerns
  • Law on the Web offers legal consultations to United Kingdom residents
  • CPA and lawyer directories available online in U.S.
  • Many Websites provide general health information and some now offer online mental health services
  • Some conditions easier to treat online