Business models:
According to a web definition ’a business model is a conceptual tool that contains a set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams’ (http://business-model-design.blogspot.com/2005/11/what-is-business-model.html).
In order to describe a business model, we must go through nine main points, listed below:
-The value proposition which demonstrates what is offered in the market
-The target customer segments addressed by the value proposition of the business
-The communication and distribution channels to reach the targeted customers and offer them the value proposition
-The relationships established with company’s customers
-The core capabilities which are needed in order to make the business model feasible
-The configuration of activities to implement the business model
-The partners and their aspirations and motivations of coming together to make a business model come to reality
-The revenue streams generated by the business model constituting the revenue model
-The cost structure resulting from the company’s the business model
(‘’ adapted from http://business-model-design.blogspot.com)
Business models in general ‘convert new technology into economic value‘.(http://www.quickmba.com/entre/business-model/) According to Michael Rappa, the ‘business model spells out how a company makes money by specifying where it is positioned in the value chain’. However since the introduction of the internet to businesses, traditional business models changed according to web circumstances. Internet commerce in particular, has given a chance to new business models to evolve, but also has used tried and successful business models such as auctions. This form of brokering allows intermediary, the e-business corporation to yield profits as transactions among buyers and suppliers are being made. Through the internet, such companies e.g. eBay and Amazon.com, have made auction popular and have highly broadened their horizons in a big variety of products and services.
Many researchers have defined and categorized business models in various ways. According to Michael Rappa, there are nine categories of business models on the web and are the following:
Each model is implemented in various ways by the online businesses, whereas some of them may combine two or more business models in their benefit.
As professor Michael Rappa defines, ‘brokers are market-makers: they bring buyers and sellers together and facilitate transactions. Brokers play a frequent role in business-to-business (B2B), business-to-consumer (B2C), or consumer-to-consumer (C2C) markets. Usually a broker charges a fee or commission for each transaction it enables. The formula for fees can vary’. Following Rappa’s business model, eBay belongs to the brokerage category, in particular it is an auction broker who ‘conducts auctions for sellers(individuals or merchants)’.
Figure 1: Summary of transactions alternatives between businesses and customers
Source: E-Business Models www.soc.napier.ac.uk/module
According to the above graph, eBay belongs to the C2C category as it is an online market place run from customers (sellers) to customers (buyers).
Another approach was given by Alt and Zimmermann presenting six generic elements of business model found in most definitions implicitly or explicitly. Alt and Zimmermann’s elements are the following:
Mission: High-level understanding of the corporation’s overall vision, its value proposition and its strategic goals. As Stepanek mentioned ‘what distinguishes many of the most Web-savvy companies is not their technical prowess, but their imagination. In the case of eBay, it was created entirely new transactions that did not exist even in the offline world (Vickers 2000, p.59).
Structure of the organisation demonstrates which roles and actors constitute a Business Community, the customers and its products and the focus of the industry.
Processes demonstrates a further and more detailed description on the structure and mission of the business model, including eMarket and eBusiness processes.
Revenues of the company, I.e. sources of revenue and investments necessary to be made should carefully be examined, not only in the short term but long term as well.
Complementary dimensions
Legal issues need to be taken into consideration as an overall aspect of the business model. They can influence the decision on structures of value creation systems, revenue models and processes of value creation I.e. privacy laws.
Technology is can act simultaneously as an enabler and a constraint for information technology based business models. Decision makers have to take into account the technological developments evolving and their impact on the design of the business model.
Figure 2: Generic elements of business model
Source: Business Models by Alt & Zimmermann
This case study will follow the Alt & Zimmermann approach for business models, where the mission, structure, processes, revenues, legal issues and technology of eBay will be examined in a more detailed way. The above figure outlines the main issues of the six elements of Alt & Zimmermann’s business model which will be used in this case study.
Mission
The value proposition of eBay is to provide a virtual world-wide market for sellers and buyers so that profit will be made through transactions as they take place. As mention earlier, eBay relies on its customers (buyers and sellers), as the customers are the product-development team, merchandise and security department and sales and marketing experts.
Structure
Employees in eBay are around 5,000 of which half are in customer support and one fifth in technology section. In eBay a key role is held by category managers, who direct the major and subcategories ranging from jet-planes to jewellery and sports gear. The company receives feedback from its customers for free, avoiding what other organisations have to pay for getting this feedback from their customers. Governance in eBay comes from inside and outside the corporation. In the case where someone is trying to sell illegal or commit a fraud then the seller is banned and seller’s sale items are immediately withdrawn. Furthermore, an automatic security control occurs in eBay’s system, where buyers and sellers can rate each other on each transaction, creating rules and regulations for the company.
Processes
Sellers and buyers are registered online to eBay site, creating their account and virtual profile. Sellers must first complete a sell your item form, track their item and then decide and sort the payment and the shipping of their listed item. Buyers from another hand, when they register to the site, they have the chance to access the various categories of the products, to select the product they are interested for, and place their bid amount. In the case where their bid is the maximum then they are able to buy the product. Sellers are responsible for promoting and marketing their products, so as to attract as much buyers as possible.
Revenues
In eBay revenues come from transactions among buyers and sellers. Every time a transaction has been made, eBay receives a commission from 1.25% to 5%, the more expensive the item sold, the more the revenue for eBay will be. Moreover, eBay charges a small fee for listing an item on the site, usually from 30c to 4.00 $. The more items are listed, the more the revenues for eBay company. Sellers add around 3.6 million items every day, making profits on listing extremely high.
Legal Issues
As transactions are being made, legal conflict increases. According to customer reports, four out of ten buyers report that they faced some problems with their transactions although eBay has taken several courses of action to avoid misuse of the site. In 2000, the Federal Trade Commission (FTC) received around 25,000 complaints for auction fraud in online companies. EBay is an online market known for its freedom and its openness to customers, and tries to maintain a balance between this freedom and the safety regulations obliged to made. Some kind of fraud is faced in the case when a person creates a double account on eBay, one as a seller and another as a buyer. When an honest buyer bid an item to a certain price, then the seller logs in from its buyer’s account to bid to a higher price. Furthermore, eBay has also faced with situations of sales of illegal or restricted items such as pirated work of any kind, weapons, drugs and Nazi memorabilia. What eBay does in such situations, is to blacklist those items and to restrict seller’s access, although a negative impact on the site remains to people’s mind.
Technology
An online marketplace, eBay, is ‘built of leading edge technology platform (V3) facilitating interaction over a wide range of product types‘ (eBusiness Lecture 3, Dr. Paul Devadoss, Lancaster University). Moreover, according to Shepherd (2007) eBay is ‘arguable the first web 2.0 company‘. Technology for IT-based business models is both a constraint and an enabler. Here, we have to take into account the technological developments and their impact on eBay’s business model.
Strategic choices and collaborations
The collaboration of eBay with Skype was a big step at a cost of 900 million $ to come to reality. Buyers and sellers can communicate online through Skype to talk live about further details perhaps they would like to know. This makes communication more trustful and gives a feeling of further security of transactions. According to eBay’s management team, they ‘saw great potential in using Skype's peer-to-peer voice over IP technology to connect buyers and sellers in the eBay marketplace‘.
In fact there were plans from eBay’s side to integrate their PayPal payment system with Skype’s VOIP network. However, most of the people using Skype make calls from Skype-to-Skype which are free. This fact didn’t satisfy eBay compared with the amount eBay have spent for this collaboration.
In addition to eBay’s collaboration with Skype, eBay lunched in 2007 a new website which allows investors to invest in improving conditions of the world’s poorest countries by buying securities online (www.micro place.com). The site allows people to give as little as $100 for supporting the website’s aims (Reuters, eBay site lets people finance the world's poor / Online Article).
Strengths of eBay’s Business Model
An online auction business model has many strengths in comparison to other companies’ business models. A traditional auction house has many disadvantages which comprises and describes the strengths of an online auction business such as eBay.
The strategic advantages of eBay’s business model include the following:
a) There are no time barriers for accessing the business. Customers can bid and list their products at any time, any day during the year. This feature increases the convenience offered to customers and popularity rises.
b) Users can access eBay from any place with internet connection as there are no geographical constraints for access. This leads to increasing buyers and sellers daily and it reduces the costs of attending an auction house.
c) The large number of bidders and sellers increases the benefits for both parts. As bidders have a wider variety of items available by a large number of sellers, they can choose those who are suitable for them and affordable. The more buyers existing in the site, the more chance sellers have to sell their products.
d) The large number of buyers existing attracts more sellers, making the business model more valuable through network economies.
e) eBay is considered to be an online community of users interested in buying and selling their products with the auction method. The social interactions involved in the bidding process are similar to those of gambling constituting the advantage of the intensity of users’ social interaction. This strength is very similar to gambling addiction where users choose just to take part in this ‘game’ rather than being interested in buying a particular product (www.wikipedia.org / Online auction business model).
EBay’s Strategic Statement
The activities of eBay are described through the following strategic statement: ‘eBay allows customers to create individual auctions and online stores in order to sell used and new products. This process is facilitated by the ability to create communities of interest, providing secure transaction services, and a peer review process in a global environment’ (Online eBay Case study from page 23).
EBay has always been a community of interest, allowing users to exchange knowledge and expertise regarding the site. In 2006, eBay announces the creation of eBay Wiki (www.ebaywiki.com) an online place hosted by Jotspot where people can exchange their knowledge over eBay, as well as in eBay blogs on the web (www.eBay.com).
Figure 3: Strategic group mapping: eBay
Online source: http://www.slideshare.net/lars.schmidl/strategic-evaluation-of-ebay/
The above graph demonstrates the strongest reputation and brand awareness of eBay in comparison to its competitors, as well as its high number, variety of auctions and product categories. Some of eBay’s competitors are Amazon.com. Amazon auctions, Live auctions and Yahoo auctions. However, eBay possess the largest market share, and strongest reputation and brand awareness.
Conclusion
As shown in this case study, eBay’s business model was its strongest weapon against its competitors. Its business model’s strengths helped eBay gain a competitive advantage over other online market places such as Amazon.com and Yahoo auctions. As a net enabled e-business that anyone can access anytime, eBay bring a new idea in the business world, filling a market‘s open gap, as no one could offer before what eBay offers since 1995. Strategic choices of eBay’s management team after its foundation and the strategic capabilities of its business model, helped the organisation gain the largest market share from its competitors and acquire the strangest reputation in the market as shown in figure 3 above. Many organisations online tried to imitate its business model and rational, some of the followed by success, but none of them in the extend of what eBay have achieved over the years.
References
Alt, R.; and Zimmermann, H.-D. 2001. Preface: Introduction to Special Section – Business Models. Electronic Markets 11(1):3-9.
Chaffey 2002 quoted in Lowson R.H, & Burgess N.J, ‘The building blocks of an operations strategy for e-business’, 2003.
Course: Msci 375, e-Business Lecture 3 by Dr. Paul Devadoss, Lancaster University, Management School.
J.Shepherd 2007. Making eBay Work, Segal Graduate School of Business Simon Fraser University, Canada
Rappa, M. 2000. Business Models on the Web, [Accessed: 10 April 2008]
Stepanek M,(2000) ;Are You Web Smart?’, Business Week E-Biz, September 18, 200, EB 24-EB 26.
Vickers, M(2000) ‘Models from Mars’, Business Week, September 4, 2000, 58-59.