Evaluation of Business Models

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Evaluation of Business Models

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Evaluation 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 – PowerPoint PPT presentation

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Title: Evaluation of Business Models


1
Evaluation 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

2
Overview
  • 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.

3
The 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.

4
The 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.

5
Sellers 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.

6
Buyers 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.

7
Other 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.

8
The 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?

9
Application 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.

10
EGRT 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.

11
EGRT 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).

12
EGRT Transaction Costs
  • Marketing costs
  • Savings through personalization (customer
    tastes).
  • Complementary products.
  • No network externalities.
  • No price transparency.
  • No creation of a new market.

13
EGRT 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!

14
EGRT 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.

15
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16
EGRT 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.

17
EGRT - 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.

18
EGRT - 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).

19
EGRT - 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?

20
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21
Summary
  • 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?
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