3 E-commerce business models

Due to the power of the internet and the rise of the platform economy – where people and organisations use platforms in their economic activity – more and more business models are being designed and developed specifically for the online marketplace.

In Activity 5 you will look at the impact of digital change on Netflix’s business model design.

Activity 5 The impact of digital change on business model design

Timing: Allow about 10 minutes.

In Video 4, Professor Baden-Fuller discusses how digital change has influenced business model design, using the example of Netflix. Watch the video and note down the impacts of digital change on business model design.

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Transcript: Video 4 Digital change influencing business model design

CHARLES BADEN-FULLER:

I've just explained how we have a competition between solutions business models and product business models in the physical world. I mentioned the example of food in supermarkets and food in restaurants. I mentioned the example of capital goods being rented on a performance basis versus capital goods being sold as a capital good.

What about the digital world? In the digital world, we actually have the possibility of quite extensive engagement with customers. Think about Netflix. You watch movies on Netflix. You pay a premium to watch movies, which you could download for free. Why would you not download a movie for free or nearly free rather than paying a premium for Netflix?

Ask any young person. They will tell you. Netflix provides a far superior experience. The experience is because Netflix senses exactly what kind of device you're using, the bandwidth that you've got, makes sure that the movie appears beautifully on your screen. It remembers how you watch and therefore it amplifies images in a way that you appreciate.

When you stop watching for a moment, it remembers where you turned it off and put it on again. Even if you go away and do something else, it still remembers where you turned it off. And it also provides a lot of other ancillary services like suggesting to you what your friends might be watching, curated collections of what you might watch. These things customers really appreciate. This is a solutions business model in the digital world.

So the digital world, we see solutions business models competing with other kinds of business models. But we also have, in the digital world, the possibility of flexibility. In a purely digital world, you can both offer one kind of business model and the other kind of business model. And the pure digital world is a world where flexibility is also alongside fixed nature. So whilst it's not trivial for a digital company to offer both kinds of business models, it is possible that they can morph from one to the other as a more tactical decision.

So when we think strategically in a digital world, we need to not only design our business models, but remember that other kinds of business models might be possible and might be capable of being added on after the design process rather than before. So there is a difference between the digital world and the physical world in the sense there's a flexibility of choice that you have.

End transcript: Video 4 Digital change influencing business model design

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Video 4 Digital change influencing business model design

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While watching the video, you may have noted that the flexibility of choice for customers and strategic decision makers is critical to business model design in the digital world. It allows for fast adaptation to the unique preferences of customers. It also allows designing business models that can be amended and easily substituted when strategists need to change the way an organisation generates value.

Activity 5 suggests that, in the digital era, business models of many firms rely on e-commerce activities. Laudon and Traver (2014) suggest that such activities involve being an e-tailer, a community provider, a provider of content and portals, a transaction broker, a market creator, and/or a service provider. These activities define seven major business models:

• e-tailer
• community provider
• content provider
• portals
• transaction broker
• market creator
• service provider.

You will look at each of these in turn next.