BUSI 424 Week 2 Discussion Board Forum 2 Example

Discussion Board Forum 2: E-Commerce Business Models and Revenue Models

BUSI 424 E-Commerce, Discussion Board Forum 2 Thread and Replies

Thread by [Student Name]

The forum prompt, the bakery and the three classmates are composites; the textbook and the research cited are real, and the structure follows Liberty's public course guide for BUSI 424.

Thread

Students often describe an e-commerce business model by naming how the company makes money: Netflix is a subscription model, Google is an advertising model. Laudon and Traver (2017) treat the revenue model as only one element of a business model, alongside the value proposition, market opportunity, competitive environment, competitive advantage, market strategy, organizational development and management team. I want to argue that the revenue model should be chosen last, because it follows from how the business creates value.

Amit and Zott (2001) studied e-business firms and identified four interrelated sources of value: novelty, such as new ways of connecting buyers and sellers; lock-in, which keeps customers returning; complementarities, when products or services are worth more together; and efficiency, which lowers transaction costs. A firm whose value comes mainly from efficiency, such as an online seller of standard office supplies, will probably earn money through sales at low margins. A firm whose value comes from novelty and complementarities, such as a marketplace that connects many sellers with many buyers, can charge transaction fees because it creates value neither side could create alone.

Consider a regional bakery deciding how to go online. One option is a merchant model: sell its own breads and cakes through its website for local delivery, earning revenue from sales. The value comes from efficiency and convenience for its existing customers. The other option is a marketplace: host dozens of independent home bakers, handle payments and delivery, and take a fee on each order. That model's value comes from novelty and selection, and its revenue comes from transaction fees. The two options sell similar products but are different businesses, because the marketplace must recruit sellers, set standards and build trust between strangers, while the merchant only has to bake and deliver well.

For most small bakeries, the merchant model fits their capabilities. The marketplace might be more profitable at scale, but only if the bakery can build the seller recruitment and trust systems that marketplaces depend on.

The choice also shapes the revenue model the chapter describes. The merchant would earn sales revenue at a bakery's usual margins, while the marketplace would earn transaction fees and could add advertising from bakers who want better placement. The second model may grow faster, but only after the hardest work, attracting both sides, is done.

Reply to Tyler

Tyler, your argument that every e-commerce company should move toward subscriptions because recurring revenue is predictable is persuasive from a finance point of view. I would test one assumption, though. Subscriptions work when customers need the product on a regular schedule and when switching is inconvenient, which Amit and Zott (2001) would call lock-in. Many products do not fit that pattern. A customer may buy a mattress once in ten years, and forcing a subscription on that customer would drive them away. Even where subscriptions fit, many customers sign up and cancel within a few months, so the predictability depends on retention, not on the model itself. A meal kit company, for example, can attract many trial subscribers with discounts and still lose money if most leave after the promotion ends. I think subscriptions are a great revenue model for the right value proposition, but not a universal answer. Subscriptions can also hurt a brand when canceling is difficult, since customers who feel trapped tend to leave angry reviews and warn others. The best subscription businesses make canceling easy and rely on the product, not friction, to keep customers. Retention, in other words, is the real test of the model. Which products do you think fit best?

Reply to Hannah

Hannah, your example of a local farmers market moving online as a marketplace is a great application of the chapter. I would add the concept of network effects, which explains why marketplaces are hard to start but powerful once they work. Buyers come to a marketplace because there are many sellers, and sellers come because there are many buyers, so each side's value depends on the size of the other. A new online farmers market faces a chicken-and-egg problem: farmers will not list products until there are buyers, and buyers will not visit until there are products. Many marketplaces solve this by subsidizing one side first, for example by waiving fees for farmers in the first year or by guaranteeing to buy some of their produce. Once both sides are large, the network effect becomes a competitive advantage that is hard for a new rival to copy. There is also a quality question unique to marketplaces: the platform's reputation depends on sellers it does not control. An online farmers market would need simple standards, such as photos of actual produce, pickup windows that are honored and a way for buyers to rate each farmer, so that one careless seller does not damage trust in everyone else. How would you get the first farmers to join?

Reply to Marcus

Marcus, I enjoyed your analysis of the streaming service, especially your point about original programming as a competitive advantage. I think one part of your thread mixes two of the chapter's terms, though. You described the company's business model as subscription, but by the textbook's definition the subscription is its revenue model. Its business model also includes its value proposition, which is a large library available on any device without ads, its market strategy, its content investments and its management team. The distinction matters because two companies can share a revenue model and have very different business models. A news site and a software company might both charge subscriptions, yet one creates value through reporting and the other through tools that save time. Your point about original content actually fits under competitive advantage in the business model, which makes your argument stronger than calling it a subscription story. Thinking about the whole business model also helps explain the company's risks. If its value proposition rests on original programming, its biggest risk is the rising cost of producing that content, not the subscription format itself, and a competitor with deeper pockets could outbid it for talent. Do you think the original content or the subscription price matters more to its customers?

References

Amit, R., & Zott, C. (2001). Value creation in e-business. Strategic Management Journal, 22(6-7), 493-520. https://doi.org/10.1002/smj.187

Laudon, K. C., & Traver, C. G. (2017). E-commerce 2016: Business, technology, society (12th ed.). Pearson.