CAP. 2

Question 1

Introduction

Answer 1

Companies can review their presence in the digital marketplace to increase visibility across different customer touchpoints. The path to purchase is now much more complex, Ex: multiscreening. The path to purchase is rarely a linear journey. Most consumers follow a fairly consistent pattern when seeking to purchase an electronic product. Businesses must collect and review insights that help understand this behaviour and improve visibility and communications on different channels to improve this. For b2c organisations such an e-retail destination site, there is the opportunity to market its products through online intermediaries or influencers. Digital communications have facilitated restructuring of the relationships between members of the digital marketplace

Question 2

Digital marketplace analysis

Answer 2

Understanding the online elements of an organisation’s environment is a key part of situation analysis for digital business strategy development. There’s also the need for a process to continually monitor the environment, which is often referred to as environmental scanning and analysis. Knowledge of the opportunities and threats presented by these marketplace changes is essential to those I volved in defining business, marketing and info systems strategy. To inform e-commerce strategy, the most significant influences are those of the immediate marketplace of the micro-environment that is shaped by the needs of customers and how services are provided to them through competitors and intermediaries and via upstream suppliers.

Question 3

Strategic agility

Answer 3

Strategic agility: capacity to respond to environmental opportunities and threats; strongly associated with knowledge management theory and is based on developing a sound process for reviewing marketplace opportunities and threats and then selecting the appropriate strategy options.

Question 4

A process for digital marketplace analysis

Answer 4

Analysis of the digital marketplace is a key part of developing a long-term digital business plan or creating a shorter-term digital mktg campaign; define the main types of online presence that are part of an “online ecosystem”, which describes the customer journeys or flow of online visitors. Prospects and customers in an online marketplace will naturally turn to search engines to find products, services, brands and entertainment. Major online players have developed their own infrastructure which connects websites through data exchange, giving opportunities to enhance the customer experience and extend their reach and influence. Companies have to evaluate the relative importance of these ecosystems and the resources they need to put into integrating their online services with them, to create a plan. Most retailers take either a multichannel or omnichannel strategy approach. Analysing the impact of different ecosystems on online consumer behaviour or customer journeys is as important as observing their physical behaviour in the real world. Main elements of the online marketplace map:
1. Customer segments.
2. Search intermediaries. Share of search can be determined from web analytics reports from the company site.
3. Intermediaries, influencers and media sites. Companies need to assess potential online media and distribution partners in the categories shown in Figure 2.8, such as:
a. Mainstream news media sites or portal;
b. Social networks;
c. Niche or vertical media sites;
d. Price comparison sites (aggregators);
e. Superaffiliates: affiliates;
f. Niche affiliates, influencers or bloggers/vloggers.
4. Destination sites. Online value proposition (OVP).

Question 5

Main elements of the online marketplace map:

Answer 5

1. Customer segments.
2. Search intermediaries. Share of search can be determined from web analytics reports from the company site.
3. Intermediaries, influencers and media sites. Companies need to assess potential online media and distribution partners in the categories shown in Figure 2.8, such as:
   a. Mainstream news media sites or portal;
   b. Social networks;
   c. Niche or vertical media sites;
   d. Price comparison sites (aggregators);
   e. Superaffiliates: affiliates;
   f. Niche affiliates, influencers or bloggers/vloggers.
4. Destination sites. Online value proposition (OVP).

Question 6

Location of trading in the marketplace

Answer 6

An Internet-based market has no physical presence; this has implications for the way in which the relationships between the different actors in the marketplace occur. It has many alternative virtual locations where an organisation needs to position to communicate and sell to its customers. Managers need to understand the relative importance of different types of sites and consumer and business interactions and info flows.

Question 7

Review of marketplace channel structures

Answer 7

Marketplace channel structures describe the way a manufacturer or organisation delivers products and services to its customers. A distribution channel will consist of one or more intermediaries such as wholesalers and retailers. This relationship between a company and its channel partners can be altered by the opportunities afforded by the Internet. This occurs because the Internet offers a means of bypassing some of the channel partners; this process is known as disintermediation or “cutting out the middleman”. Some tech companies that are disrupting traditional business models, and don’t have many physical assets.
Benefits of disintermediation to the produce: remove the sales and infrastructure cost of selling through the channel.
Reintermediation is a more significant phenomenon resulting from digital communications; purchasers of products still need assistance in the selection of products and this led to the creation of new intermediaries.
Implications of reintermediation for the e-commerce manager: make sure that the company, as a supplier, is represented on the sites of relevant new intermediaries operating within the chosen market sector. Need to integrate databases containing price info with those of different intermediaries. Forming partnerships or setting up sponsorship can give better online visibility compared to competitor.
Secondly, monitor the prices of other suppliers within the sector. Thirdly, create your own intermediary. Such tactics to counter or take advantage of reintermediation are sometimes known as countermediation.

Question 8

Location of trading in the marketplace

Answer 8

The position of trading and relative strength between different players within the marketplace.
Berryman et al. (1998) created a framework for this, identifying three different types of location:
- Seller-controlled sites;
- Buyer-controlled sites;
- Neutral sites.
McDonald and Wilson (2002) introduced two additional locations for purchase that are useful, buyer-oriented and seller-oriented.
The most successful procurement intermediaries are often those that are seller-orientated or seller-controlled.
Evans and Wurster (1999): there are 3 aspects of navigation that are key to achieving competitive advantage online: reach, richness, affiliation.

Question 9

The importance of omnichannel marketplace models

Answer 9

Online purchasers typically use a combination of channels as they follow their customer journeys; they don’t use digital channels in isolation: an effective approach to using digital communications is part of an omnichannel marketing strategy. Different mktg channels should integrate and support each other in terms of their proposition development and seamless communications across different channels and devices.
Developing “channels chains” to help us understand omnichannel behaviour is a powerful technique recommended by McDonald and Wilson (2002) for analysing the changes in a marketplace introduced by the Internet. A channel chain shows alternative customer journeys for customers with different channel preferences. It can be used to assess the current and future performance of these different customer journey. Thomas and Sullivan (2005): example of a US omnichannel retailer that used cross-channel tracking of purchases through assigning each customer a unique identifier to calculate channel preferences: 63% bricks and mortar store only, 12,4% Internet-only customers, 11,9% catalogue-only customers, 11,9% dual-channel customers and 1% three-channel customers.
Juaneda-Ayensa et al. (2016) believe that personal innovativeness can positively affect omnichannel purchase intention.

Question 10

Commercial arrangement for transactions

Answer 10

Marketers can be considered from another perspective: that of the type of commercial arrangement used to agree a sale and price between the buyer and supplier.
Each commercial arrangements is similar to traditional arrangements. Although the mechanism can’t be considered to have changed, the relative importance of these different options has changed with the Internet.

Question 11

Different types of online intermediary and influencers

Answer 11

Identifying different types of online intermediary as potential partners to promote an online business is a key part of marketplace analysis.
Sarkar et at. (1996) identified many different types of intermediaries:
* Directories (es: Yahoo!);
* Search engines (es: Google, Yahoo!);
* Shopping aggregators (es: Farfetch);
* Virtual resellers (es: Amazon);
* Financial intermediaries (es: payPal);
* Forums, fan clubs and user group (virtual communities);
* Evaluators (review or comparison of services).

Question 12

Summary of the types of intermediary

Answer 12

Intermediaries vary in scope and services they offer. It’s useful to understand these types since they act as a checklist for how companies can be represented within the different types of intermediaries, online publishers and media owners.

Question 13

The importance of search engines

Answer 13

Search engines are a key type of intermediary for organisations marketing their services online.

Question 14

Business models for e-commerce

Answer 14

Defining a clear online business model is essential for a new start-up online business, but also for existing ones thinking about options to refine their business model or add new services to their offerings in the light of new opportunities made possible by the Internet. The Business Model Canvas (Osterwald and Pigneur, 2010) is a valuable framework for summarising strategy for online businesses; the main sections:
1. Value proposition;
2. Customer segments;
3. Customer relationships;
4. Channels;
5. Key partners;
6. Activities;
7. Resource;
8. Cost structure;
9. Revenue stream. Common online options: ad revenue, subscription fees, sales of physical or virtual goods or affiliate-based commission arrangements, licensing and leasing.
This is a great framework, but it’s arguably missing a method of specifying key performance indicators for evaluating performance of the business model, so it’s better to add them to the relevant sections, in particular for revenue stream, cost structure and key activities. It also doesn’t directly consider the impact of different forms of competitors. It’s useful to think through how the canvas would look for successful companies already active in the market.
Michael Rappa has a useful compilation of examples of online business models; at a lower level, he identifies utilities providers that provide digital services.
alternative perspectives for reviewing different business models: there are 3 different perspectives from which a business model can be viewed; any individual organisation can operate in different categories, but most will focus on a single one for each perspective. Such a categorisation of business models can be used as a tool for formulating digital business strategy; they are:
1. Marketplace position perspective: manufacturer, retailer, retailer and marketplace intermediary;
2. Revenue model perspective: use the web to sell direct, take commission-based sales, also adv as revenue model;
3. Commercial arrangement perspective: offer fixed-price sales, offers alternatives (marketplace intermediary).

Question 15

Main sections of the Business Model Canvas (Osterwald and Pigneur, 2010)

Answer 15

1. Value proposition;
2. Customer segments;
3. Customer relationships;
4. Channels;
5. Key partners;
6. Activities;
7. Resource;
8. Cost structure;
9. Revenue stream

Question 16

3 different perspectives from which a business model can be viewed

Answer 16

1. Marketplace position perspective: manufacturer, retailer, retailer and marketplace intermediary;
2. Revenue model perspective: use the web to sell direct, take commission-based sales, also adv as revenue model;
3. Commercial arrangement perspective: offer fixed-price sales, offers alternatives (marketplace intermediary).

Question 17

Revenue models

Answer 17

Revenue models describe different techniques for generation of income. For existing companies, they have mainly been based upon the income from sales of pdt or services. In online trading there may be options for also other methods of generating revenue.
Online publisher and intermediary revenue models. For a publisher there are many options for generating revenue online based around adv and fees for usage of online services. These options can also be reviewed by other types of business (price comparison sites, aggregators, social networks and destination sites). The main types of online revenue models are:
1. CPM display adv on-site: CPM is “cost-per-thousand”;
2. CPC adv on-site (pay-per-click text ads): CPC is “cost-per-click”. Typical CPC can be surprisingly high (£0.10-5). The revenue for search engines and publishers from these sources can also be significant;
3. Sponsorship of site sections or content types (typically fixed fee for a period);
4. Affiliate revenue (CPA, but could be CPC): is commission-based; cost-per-acquisition (CPA), and it’s replacing CPM or CPC;
5. Transaction fee revenue;
6. Subscription access to content or service;
7. Pay-per-view access to documents. It may or may not be protected with a password or digital rights management;
8. Subscriber data access for email marketing.

Question 18

Calculating revenue for an online business

Answer 18

Site owners can develop models of potential revenue depending on the mix of revenue-generating techniques from the 4 main revenue options they use on the site.
Consider the capacity of a site owner to maximise revenue or monetise their site, which factors will be important? The model will be based on assumptions about the level of traffic and number of pages viewed, plus the interaction with different types of ad unit. Their ability to maximise revenue will be based on these factors:
* Number and size of ad units.
* Capacity to sell adv.
* Fee levels negotiated for different adv models.
* Traffic volumes.
* Visitor engagement.
Considering all of these approaches, the site owner will seek to use the best combination of these techniques to maximise the revenue.
To assess how effective different pages or sites in their portfolio are at generating revenue using these techniques, site owners will use 2 approaches:
- eCPM: effective cost per thousand. This looks at the total the advertiser can charge for each page or site; through increasing the number of ad units on each page, this value will increase. The other alternative to assess page or site revenue-generating effectiveness is revenue per click.
- Ad revenue per 1.000 site visitors. Important for affiliate marketers who make money through commission when their visitors click through to third-party retail sites, and then purchase there.

Question 19

ability to maximise revenue will be based on these factors

Answer 19

• Number and size of ad units.
• Capacity to sell adv.
• Fee levels negotiated for different adv models.
• Traffic volumes.
• Visitor engagement.

Question 20

To assess how effective different pages or sites in their portfolio are at generating revenue using these techniques, site owners will use 2 approaches

Answer 20

• eCPM: effective cost per thousand. This looks at the total the advertiser can charge for each page or site; through increasing the number of ad units on each page, this value will increase. The other alternative to assess page or site revenue-generating effectiveness is revenue per click.
• Ad revenue per 1.000 site visitors. Important for affiliate marketers who make money through commission when their visitors click through to third-party retail sites, and then purchase there.

Question 21

Focus: Digital start-up companies

Answer 21

Digital industries often have lower barriers to entry. Technological change is exponential, and people are using it to disrupt most industries with alternative business models that weren’t possible before.

Question 22

Assessing digital businesses

Answer 22

It’s difficult for investors to assess the long-term sustainability of start-ups. There are a number of approaches that can be used to assess the success and sustainability of these companies. There are many examples where it has been suggested that dot-com companies have been overvalued by investors keen to make a fast return from their investments.

Question 23

Valuing tech start-ups

Answer 23

Hudson (2015): valuation of a pre-revenue company is usually one of the first point of contention between angels and entrepreneurs. 4 valuation models work well for start-ups:
1. Venture capital method, which calculates valuation based on expected rates of return on exit.
2. Berkus model, which attributes a range of monetary values to the progress start-up entrepreneurs have made in the commercialisation of their activities.
3. Scorecard valuation method, which adjusts the median pre-money valuation for seed/start-up deals in a particular geographical area and in the business vertical of the target, based on 7 characteristics of the company: strength of entrepreneur and team, size of opportunity, product/technology, competitive environment, mktg/sales/partnerships, need for additional investment and other factors.
4. Risk factor summation method, which compares 12 characteristics (management, stage of business, legislation/political risk, manufacturing risk, sales and mktg risk, funding/capital risk, competition risk, technology risk, litigation risk, international risk, reputation risk and potential lucrative exit) of the target company to what might be expected in a fundable start-up enterprise.
According to the UK Business Angels Association (UKBAA), if a start-up can tick the box for 5 or more of the considerations below, they’re more likely to attract angel investment:
1. Solving a problem
2. Disruptive
3. Protected
4. Competitive
5. Revenue
6. Scalability
7. Proven model
8. Market
9. Tax relief opportunity
10. Exit
11. Are you prepared to give up shares?
Modelling using these variables indicates that for companies with a similar revenue per customer, contribution margin and adv costs, it’s the churn rate that will govern their long-term success. Given the high costs of customer acquisition for a new company, it’s the ability to retain customers for repeat purchases that governs the long-term success of companies. This then forces online retailers to compete on low prices with low margins to retain customers.
A structured evaluation of the success and sustainability of UK digital start-ups has been undertaken by management consultancy Bain and Company with Management Today and was described in Gwyther (1999). 6 criteria still relevant:
1. Concept: describes the strength of the business model, and includes:
* Potential to generate revenue including the size of the market targeted;
* Superior customer value;
* First-mover advantage.
2. Innovation: it’s not necessarily a problem if applied to a different market or audience, or if the experience is superior and positive WOM/PR is generated. Ultimately, very successful digital start-ups disrupt the marketplace they operate in; this is also known as digital disruption.
Caudron and Peteghem (2016) identified ten business models behind digital disruption:
1. The subscription model: disrupt through lock-in by taking a product or service traditionally purchased on an ad hoc basis, and locking-in repeat custom by charging a subscription fee for continued access.
2. The freemium model: disrupts through digital sampling – users pay for a basis service/pdt with their data or time usage, and then get charged to upgrade to the full offer. It works where marginal cost for extra units and distribution are lower than adv revenue or the sale of personal data.
3. The free model: disrupts with an if-you’re-not-paying-for-the-product-you-are-the-product model that involves selling personal data or adv eyeballs.
4. The marketplace model: disrupts with the provision of a digital marketplace that brings together buyers and sellers directly, in return for a transaction or placement fee or commission.
5. The access-over-ownership model: disrupts by providing temporary access to goods and services traditionally only available through purchase. Includes sharing economy disruptors, which take a commission.
6. The hypermarket model: disrupts by brand bombing using sheer market power and scale to crush competition, often by selling below cost price.
7. The experience model: disrupts by providing a superior experience for people willing to pay.
8. The pyramid model: disrupts by monetising time and selling instant access at a premium.
9. The ecosystem model: disrupts by selling an interlocking and interdependent suite of pdt and services that increase in value as more are purchased, which creates dependency.
10. ???????
3. Execution: a good business model doesn’t guarantee success. Aspects of execution that can be seen to have failed are:
* Gaining market traction – mktg techniques are insufficient to attract sufficient visitors.
* Performance, availability and security – sites have been victims of their own success and haven’t been able to deliver fast access to the sites, or technical problems.
* Fulfilment – the site may be effective, but customer service and brand image will be adversely affected if products aren’t dispatched correctly or promptly.
4. Traffic: in terms of the number of visitors/pages they visit/transactions they make. Page impressions or visits are dependent on the business model. After the viability of the business model, how it will be promoted is arguably the most important aspect for a start-up.
Acquiring new customers for a new start-up unknown is difficult and costly. An important decision is the investment in promotion and how it’s split between online and offline techniques. Growth hacking has become increasingly important in the tech start-up eco system.
5. Financing: ability to attract seed investment/venture capital or other funding to help execute the idea. Important given the cost of promoting these new concepts.
6. Profile: ability to generate favourable publicity/PR and to create awareness within the target market.
These 6 criteria can be compared with the other elements of business and revenue model what we discussed earlier.

Question 24

Hudson (2015): 4 valuation models work well for start-ups

Answer 24

1. Venture capital method, which calculates valuation based on expected rates of return on exit.
2. Berkus model, which attributes a range of monetary values to the progress start-up entrepreneurs have made in the commercialisation of their activities.
3. Scorecard valuation method, which adjusts the median pre-money valuation for seed/start-up deals in a particular geographical area and in the business vertical of the target, based on 7 characteristics of the company: strength of entrepreneur and team, size of opportunity, product/technology, competitive environment, mktg/sales/partnerships, need for additional investment and other factors.
4. Risk factor summation method, which compares 12 characteristics (management, stage of business, legislation/political risk, manufacturing risk, sales and mktg risk, funding/capital risk, competition risk, technology risk, litigation risk, international risk, reputation risk and potential lucrative exit) of the target company to what might be expected in a fundable start-up enterprise.

Question 25

According to the UK Business Angels Association (UKBAA), if a start-up can tick the box for 5 or more of the considerations below, they’re more likely to attract angel investment

Answer 25

1. Solving a problem
2. Disruptive
3. Protected
4. Competitive
5. Revenue
6. Scalability
7. Proven model
8. Market
9. Tax relief opportunity
10. Exit
11. Are you prepared to give up shares?

Question 26

6 criteria still relevant

Answer 26

1. Concept: describes the strength of the business model, and includes:
   * Potential to generate revenue including the size of the market targeted;
   * Superior customer value;
   * First-mover advantage.
2. Innovation: it’s not necessarily a problem if applied to a different market or audience, or if the experience is superior and positive WOM/PR is generated. Ultimately, very successful digital start-ups disrupt the marketplace they operate in; this is also known as digital disruption.
   Caudron and Peteghem (2016) identified ten business models behind digital disruption:
   A. The subscription model: disrupt through lock-in by taking a product or service traditionally purchased on an ad hoc basis, and locking-in repeat custom by charging a subscription fee for continued access.
   B. The freemium model: disrupts through digital sampling – users pay for a basis service/pdt with their data or time usage, and then get charged to upgrade to the full offer. It works where marginal cost for extra units and distribution are lower than adv revenue or the sale of personal data.
   C. The free model: disrupts with an if-you’re-not-paying-for-the-product-you-are-the-product model that involves selling personal data or adv eyeballs.
   D. The marketplace model: disrupts with the provision of a digital marketplace that brings together buyers and sellers directly, in return for a transaction or placement fee or commission.
   E. The access-over-ownership model: disrupts by providing temporary access to goods and services traditionally only available through purchase. Includes sharing economy disruptors, which take a commission.
   F. The hypermarket model: disrupts by brand bombing using sheer market power and scale to crush competition, often by selling below cost price.
   G. The experience model: disrupts by providing a superior experience for people willing to pay.
   H. The pyramid model: disrupts by monetising time and selling instant access at a premium.
   I. The ecosystem model: disrupts by selling an interlocking and interdependent suite of pdt and services that increase in value as more are purchased, which creates dependency.
   J. ???????
3. Execution: a good business model doesn’t guarantee success. Aspects of execution that can be seen to have failed are:
   * Gaining market traction – mktg techniques are insufficient to attract sufficient visitors.
   * Performance, availability and security – sites have been victims of their own success and haven’t been able to deliver fast access to the sites, or technical problems.
   * Fulfilment – the site may be effective, but customer service and brand image will be adversely affected if products aren’t dispatched correctly or promptly.
4. Traffic: in terms of the number of visitors/pages they visit/transactions they make. Page impressions or visits are dependent on the business model. After the viability of the business model, how it will be promoted is arguably the most important aspect for a start-up.
   Acquiring new customers for a new start-up unknown is difficult and costly. An important decision is the investment in promotion and how it’s split between online and offline techniques. Growth hacking has become increasingly important in the tech start-up eco system.
5. Financing: ability to attract seed investment/venture capital or other funding to help execute the idea. Important given the cost of promoting these new concepts.
6. Profile: ability to generate favourable publicity/PR and to create awareness within the target market.