Title: Evaluation of Business Models
1Evaluation of Business Models
- Professor Joshua Livnat, Ph.D., CPA
- 311 Tisch Hall
- New York University
- 40 W. 4th St.
- NY NY 10012
- Tel. (212) 998-0022 Fax (212) 995-4230
- jlivnat_at_stern.nyu.edu
- Web page www.stern.nyu.edu/jlivnat
2Overview
- The underlying logic for an E-Commerce company.
- A five-step process to assess the business model.
- Classifications of E-Commerce companies.
- Various business models.
- Implications of the business model.
- Long-term viability of business models.
3The Underlying Logic
- Old Economy contains market failures or
transaction costs - Examples
- Information is not freely available, and is
costly to gather and process. - Markets may be too fragmented and too dependent
on local population (personal items for sale). - The New Economy company eliminates or reduces
market failure or transaction cost.
4The Underlying Logic
- Note The deficiency in the old economy is
actually the opportunity for the new economy
company. - However, for the opportunity to be profitably
exploited - It should be significant.
- The company should have adequate resources.
- The company should have the ability to generate
revenues from customers. - The company should be able to deter competition,
or differentiate itself from its competitors.
5Sellers Transaction Costs
- Order Taking Costs
- Reduce physical facilities and number of
employees dedicated to process orders by
accepting and processing orders electronically. - Recording Costs
- Avoid the manual data recording process by
connecting the users electronically and allowing
them to enter the data themselves. - Display Costs
- Eliminate stores, employees in these stores, and
paper catalogues, by maintaining a virtual store. - Mailing Costs
- Reduce physical mail sent to customers by sending
E-mail instead. - Marketing costs
- Replace mass marketing channels by direct
marketing to relevant customers only.
6Buyers Transaction Costs
- Transportation Costs
- Avoid waste of time and money spent on travel to
a physical store. - Timing of Transactions
- Buyers do not need to change their schedule
according to the opening hours of the business.
Web access to the entitys virtual site is
available 24 hours a day, seven days a week. - Information Gathering Costs
- Avoid the costly activity of gathering
information, by using information on the Web and
Shopbots. - Information Processing Costs
- Buyers can save time and effort in understanding
and processing information, or by using online
software and tools.
7Other Benefits of E-commerce
- Personalization
- By identifying customers, it is possible to offer
each individual customer a personalized service
and special offerings. - Price Transparency
- The Web allows consumers to compare prices more
efficiently and more effectively, anywhere and at
any time. - Market Making
- The Web allows the creation of efficient new
markets by the ability to aggregate cheaply many
buyers and sellers from different locations and
time zones. - Network Externalities
- The larger is a network the more valuable it may
be to its members, rather than a smaller network.
8The Five-Step Process
- What market failures or transaction costs are
addressed by the business model? - How effective can the E-Commerce firm be in
reducing the market failures or transaction
costs? - Will the E-commerce company be able to
expropriate benefits from customers? - What are the necessary resources to conduct the
business? - Can competitors erode profits?
9Application Egreetings Network, Inc. (EGRT)
- EGRT is in the E-Card business
- Customer selects a card from an online selection
of cards. - Customer personalizes the card.
- Customer specifies a recipient.
- EGRT delivers the card, which can be opened by
the recipient. - EGRT also notifies the customer that the E-Card
was sent. - Compare EGRT to paper card companies.
10EGRT Transaction Costs
- Buyers (customers) save the following transaction
costs - Transportation to a physical store.
- Timing of transaction (24/7).
- Mailing costs.
- EGRT retains recipients address, so there is
lower data-entry costs.
11EGRT Transaction Costs
- EGRT saves the following transaction costs (as
compared to a paper card company) - Display costs (no need for a retailer).
- Order-taking costs (no need to communicate with a
retailer). - Data-entry costs (customer enters the data
directly). - Inventory costs (no need for physical inventory).
- Printing costs (same card can be used by more
than one customer).
12EGRT Transaction Costs
- Marketing costs
- Savings through personalization (customer
tastes). - Complementary products.
- No network externalities.
- No price transparency.
- No creation of a new market.
13EGRT Ability to Generate Revenues
- Customers are willing to pay for paper cards.
They should also be willing to pay for E-Cards. - However, the marginal cost of an E-Card is very
low! - Fixed costs of content and systems are high.
- Competition may drive the price of an E-Card to
zero. - Over 100 E-Card companies!
14EGRT Ability to Generate Revenues
- Revenues
- 1997 505,000
- 1998 317,000
- 1999 3,100,000
- 2000 (6 mon.) 5,900,000
- Converted from fee-paying customers to free
service in November 1998. - Advertising revenues in 1999 and 2000!
- E-commerce sales negligible in 1999.
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16EGRT Traffic and Expenses
- In December 1999, a high traffic month
- 21 million visitors
- 184 million web pages viewed
- 10 million E-Cards sent
- Spent about 50 million through the end of 1999.
- Selling and marketing 20 million 1997-9.
- Operations and development (RD) 15 million in
1997-9.
17EGRT - Content
- Gibson supplied 34 of cards and held 20 of
equity. - In March 2000, Gibson was purchased by American
Greetings, which has its own E-Card business. - NBC owns stock in return for advertising. EGRT
can use NBC shows in content.
18EGRT - Resources
- Raised 60 million through preferred shares in
1999. - Raised 54 million in issuance of common stock in
December 1999. - Had about 58 million cash and liquid assets as
of the most recent public filing (6/30/2000).
19EGRT - Survival
- EGRT generates most of its revenues from
advertising. - Can it survive for the long run on advertising?
- Which companies are likely to generate higher
advertising rates? - Does EGRT have a comparative advantage in
E-commerce?
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21Summary
- Understand well the current business model.
- Assess the opportunities for changes and
transformation in the business model. - Assess long-term revenue sources for the
E-business. - Assess long-term costs to operate the business.
- Is the business viable? Can competitors erode
profits?