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. [phone] Fax [phone]
• jlivnat_at_stern.nyu.edu
• Web page www.stern.nyu.edu/jlivnat

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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.

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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.

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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.

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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.

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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.

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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.

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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?

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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.

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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.

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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).

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EGRT Transaction Costs

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

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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!

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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.

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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.

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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.

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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).

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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?

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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?