Internet Business Models in the Consumer Market – a Typological Approach

Excerpts from the article: T. Doligalski, Internet Business Models in the Consumer Market – a Typological Approach, „Marketing i Rynek”, 12/2018.


This paper presents characteristics of business models adopted by Internet companies operating in the consumer market. The typology covers online vendors, e-service providers, content providers, multi-sided platforms, and community providers. The business model types are described here, also with respect to selected economic categories. Additionally, the paper discusses the notion of business models from systemic and typological perspectives and compares this term to the notion of strategy and revenue model.

 

Keywords: business model, Internet, e-commerce, e-business


Introduction

The notion of business model gained in popularity as Internet companies emerged in the late 1990s. They were characterised by an operational logic different from the one pursued by traditional companies. Since then, numerous technological innovations have been introduced as well as consumer behaviours and methods of influencing them by companies have changed. Although the basic business models adopted by Internet companies have remained fairly stable, the latter have acquired new properties along with their development and adaptation to the changing conditions. Therefore, the need to look at the current characteristics of such companies is noticeable. The aim of this paper is to fill the research gap by describing the properties of business models adopted by Internet companies operating in the consumer market.

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The notion of business model with reference to strategy and revenue model

There are numerous definitions of business model. For the purpose of this reasoning, we apply the definition referring to the systemic approach, according to which business model is a simplified image of an company, which presents its essential elements and relations between them (Doligalski, 2014). The look at the company from the perspective of business model, according to R. Amit and Ch. Zott (2010), is characterised by the analysis of how the company creates value rather than what exactly it offers to its customers and where and when it operates. It is based on the holistic approach to the company without focusing on a selected function or resource.

The notion of business model is often compared to business strategy. In management science, strategy is understood in many different ways. The most frequently indicated common features of the definitions of strategy are the specified goal, the method of its pursuit, measurability, timing, and reference to various stakeholders (depending on the type of strategy: customers, competitors, employees, shareholders). In somewhat simplified terms, it can be said that a business model presents what a company is, while a strategy describes what the company wants to achieve and how it intends to do that (Cf. Tab. 1). A disputable issue is the popularity of company attributes such as business model and strategy. It is often declared that a company is seeking its business model (meaning: it has not established the final configuration of its most significant components or a long-term form of its relationships with stakeholders yet). This approach is opposed by Ch. Baden-Fuller and M.S. Morgan (2010), who argue that each and every company has its business model. The aspect of the popularity of strategy application is also interesting. If it is assumed that a strategy is a formalised set of long-term goals and plans, then probably not all entities have it in place. If viewing this term in broader terms, that is as a general concept of operations enabling its context-related interpretation and application (Pindelski, Obłój, 2006), the use of a strategy is more common. However, such a definition of strategy brings it closer to the notion of business model, e.g. as proposed by J. Magretta (2002), according to which the notion of business model is underlain by stories of how companies operate.

 

Table 1. Business model and strategy – summary of differences and similarities

Business model Strategy
describes what a given company is specifies strategic goals and methods of their pursuit
presents a given organisation’s image captured at one point in time has a time dimension and a certain direction of changes
resembles a state resembles a flow
is often oriented towards a company’s inside, the basic logic of its operations, and creation of an economic value is often created with respect to other market players, it points to the issue of positioning and competitive advantage
each company has a business model not all companies have strategies defined as a set of long-term goals and plans in place
concerns the crucial aspects of business operations
rather unchangeable over a short period of time

Source: based on T. Doligalski, Model biznesu z perspektywy ogólnej teorii systemów, [in:] T. Doligalski (ed.), Modele biznesu w Internecie. Teoria i studia przypadków polskich firm, Wydawnictwo Naukowe PWN, Warszawa 2014, p. 22.

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Business models in systemic and typological approaches

The relevant literature distinguishes various approaches to the analysis of business models. This study describes systemic and classification approaches (mainly typological ones). In the former case, it is treated as a complex system composed of correlated elements. The classification perspective, in turn, consists in grouping companies into sets comprising companies with similar characteristics.

The classification perspective resembles the ranks of organisms in biology. It is composed of two major approaches: taxonomy and typology. Taxonomy consists in grouping companies based on a quantitative analysis which takes many factors into consideration. Typology, in turn, is a qualitative deductive approach resulting in identifying ideal types, that is theoretical models with properties typical of a given group of businesses (Lambert, 2015).

In the systemic approach, a business model changes when a modification of at least one of the key elements causes different relations between them. An introduction of a new product might not lead to a change of the business model if it takes place with unchanged elements constituting the business model and the same structure. If, however, it involves a redefinition of the target group, acquiring new competencies, and a different revenue model, the business model changes.

In the typological approach described below, a change of a business model involves a principal change of the operating model or inclusion of a different model in a company’s overall activities. Amazon.com began its operations with selling books and later expanded it by selling other goods. In the typological approach, its business model, that is online vendor, remained the same. The business model changed when the company expanded its operating model by activities related to a multi-sided platform (enabling sale to other entities) and an online service (offering cloud computing services).

The systemic and typological approaches differ also with respect to competing with the use of business models. In the systemic approach, it is presented as strengthening one’s own feedbacks, weakening competitors, and transforming competitors into allies (Casadesus-Masanell, Ricart, 2011). In the typological approach, competing with business models plays a less significant role as companies applying the same business model (e.g. online shops) compete with marketing instruments rather than the with the general concept of operations, which is identical. Although competition can occur between different types of business models, this is much the same as a grocery shop competing with a multi-sided platform, such as a local marketplace.

The differences regarding the postulate of uniqueness of a business model, which is formulated by some researchers, are similar. It can be considered from the systemic point of view but, from the typological perspective, its application is limited since companies are usually characterised by one of the several identified business models. Exceptions are the situations where companies combine several types of business models in their operations.

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Typology of the Internet business models – methodological comments

A variety of classifications of Internet companies, covering both taxonomies and typologies, can be found in the relevant literature. Many of them were developed at the turn of the 21st century in response to the emergence of pure players often operating based on a different logic than that of bricks and mortars. Most of the business models distinguished at that time have still been in use. However, unsuccessful models, that is ones which are no longer applied or are unpopular, can also be identified. They include the e-mall, which was distinguished by P. Timmers in his 1998 typology as a place aggregating online shops (Timmers, 1998). A likely reason for this business model being out of use is the popularity of comparison shopping engines, which offer similar services in a form that is more attractive to the customer. The classifications designed in recent years often concern new types of companies, e.g. ones operating in the fintech sector (Gimpel, Rau, Röglinger, 2017) and entities that have lately gained popularity as objects of research, e.g. multi-sided platforms (Täuscher, Laudien, 2018).

The existing classifications differ in terms of the number of business models. The smallest ones comprise five types of entities, whereas the more expanded ones distinguish twenty or more entities (Nojszewski, 2006). Some taxonomies are created as a list of possible combinations of available components of business models (e.g. five types of revenue models, six types of goods offered, etc.). This approach results in a large number of target taxa. Identification of many business models shows, on the one hand, the diversity of the entities operating in a given sector and, on the other hand, hampers the generalisation of their characteristics and results in their superficial description.

Certain classifications of business models adopted by entities operating online assume a given component of a company as a starting point. It is a controversial approach because an analysis of a company from the angle of a business model means a look at the whole logic of an organisation’s activity rather than at its selected element. This is how Rappa distinguishes the advertising model, where he classifies also companies acting as content providers and e-services (2003). This study treats it as a revenue model which could occur in several business models.

Classifications of business models differ also in terms of the research field. Most probably, they include e-business models, while business models in electronic markets (Timmers, 1998) or companies where the Internet plays a crucial role (Afuah, Tucci, 2018, p. 18) are less frequent. It is a significant issue since the mentioned categories are not identical. Depending on the selected definition of e-business, some pure players may not be taken into account in the classification, e.g. a blog or a small news website, a retailer on an auction platform, or a community website.

This study is an attempt to look at characteristics of Internet companies from a current perspective. It has been 20 years since the first classifications were developed and although many companies still function according to a similar logic today, characteristics of some entities have changed. The research field has been limited to pure players operating in the consumer market, thus excluding bricks and clicks, bricks and mortars, and entities from the business market. The applied approach distinguishes fewer types as it focuses on an attempt to describe their characteristics in more depth with the use of economic categories rather than on a description of examples of companies. A holistic view of a company is applied, which is reflected, among others, in an unambiguous separation of the terms ‘business model’ and ‘revenue model’.

The proposed typology of business models adopted by Internet companies operating in the consumer market comprises: online vendors (online shops and retailers on e-commerce platforms), e-service providers (companies offering an automated service provided via the Internet), content providers (companies creating and publishing content online), multi-sided platforms (Internet intermediaries), and community providers (companies enabling interactions to people with shared interests). This classification coincides with the seven business models adopted by pure players as identified by Kenneth and Jane Laudon (2014, 413-416): e-tailers, transaction brokers, market creators, content providers, community providers, portals, and service providers. These typologies differ, however, in terms of not only number of models but also and foremost description of their properties.

Based on a literature review and findings of our own research on operations of companies on the Internet, which was conducted for a few years, pure (ideal) types were distinguished in the deduction process and their qualitative features were described. This approach is used in creating a typology (Lambert, 2015). The typology is complementary to the taxonomy of Polish Internet companies, which is a classification prepared with the use of questionnaire surveys and statistical analysis. The segmentation procedure enabled identification of five segments of Polish Internet companies: suppliers of unique offerings, specialised newcomers, comprehensive incumbents, productivity enhancers, and run-of-the-mill retailers (Doligalski, Zaborek, Sysko-Romańczuk, 2015).

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Online vendors

These are companies selling products through their shop or an e-commerce platform. Online vendors can be intermediaries offering products manufactured by other enterprises or, less commonly, selling products manufactured by themselves. Online retailers usually offer traditional products, digital products (e.g. e-books) and traditional services (e.g. travel services).

Online sale is characterised by low barriers to entry defined as overall costs which must be incurred to commence an activity. There are numerous solutions being ready-made online shops, where one only needs to place product descriptions and other contents. The fact that it is so easy to enter the sector results, however, in a high competitive pressure. Online vendors often function in conditions similar to perfect competition, which arises from offering homogenous products; a high number of entities operating in the market; problems with standing out; market transparency and a significant role of price as a factor influencing consumer buying behaviours (which is affected by effortless comparison of prices). On the other hand, there are factors that disturb the purity of perfect competition. These include: uniqueness or non-homogeneity of some products; the resulting difficulty in comparing them and making consumer decisions; the necessity for companies to incur expenses for promotion, and distinctive features developed over a long term. The latter can include the achieved economies of scale, recognisable and trusted brand (often outside the Internet or based on positive opinions of customers in reputation systems), integration with traditional entities, or community preparing and publishing product reviews.

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E-service provider

For the purpose of this study, e-service is defined as an automatic service provided remotely via the Internet without any direct involvement of an employee of the service provider, which requires self-service and hence it is customised. Examples of e-services include e-mail, Internet search engines, Internet banking, and network storage. The most common revenue models are sale of services, freemium, and revenue from advertising.

E-services are characterised by non-rival consumption (consumption of a certain good by one person does not reduce the consumption of it by others) and scalability, understood here as the capability of easy serving a greater number of customers. In the case of e-services, barriers to entry might occur. The major initial cost is the development of software but the achievement of critical mass, defined as acquisition of an appropriate number of customers, is not normally required. This is because it is possible to provide e-services on a small scale.

There are many related terms originating from IT. These include SaaS (software as a service), cloud as a service, and infrastructure as a service. Their common feature is that a service is rendered via the Internet based on an application running on the provider’s servers. The latter aspect is extremely important and is at times overlooked in publications on management. An e-book kept on the customer’s terminal is not an e-service but the cloud storage from which the customer downloaded it can be treated as such. By analogy, a book is not a service but the activity pursued by libraries or bookshops consisting in making it available can be considered a service.

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Content provider

It is an entity distributing and sometimes also creating content online. The scope of the content is broad and includes, among others, text, graphics, audio, and video. This type of activity is characterised by high costs of content creation and ease of its publication in various forms and channels. Hence frequent relationships between online content providers and enterprises operating in the media market.

The revenue model adopted by such companies is primarily to display advertisements while offering contents free of charge or, less commonly, to sell contents. Free access to topical contents offered, among others, by online portals reduces however consumer willingness to buy the paid contents, the paper form of which is often delayed with respect to free ones available online.

Earning revenue from advertisements along the offered contents may seem a simple revenue model. Indeed, the solutions available to publishers (here: owners of websites) make it possible to easily join advertising networks or sell side platforms, that is entities managing advertisements displayed on their customers’ websites. Moreover, the increasing popularity of automated sale of advertising space as part of the so-called programmatic advertising systems results in the growing significance of the characteristics of website visitors meeting advertiser expectations, in addition to the website’s property of being a place of advertisement display. In effect, a website with valuable contents competes in the open marketplace with many websites with poorer quality contents, which offer the possibility to reach the target group at a lower expense. Premium publishers are in a slightly better position as they make their spaces available at higher rates to a limited number of advertisers as part of the private marketplace (Dyba, 2016).

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Multi-sided platforms

Multi-sided platforms are intermediaries between various groups of customers, which provide an environment in which transactions or other types of interactions take place. Transactions can be carried out there (e.g. auction platforms, travel platforms) or at least two groups of users can be aggregated there as a result of facilitated interactions (e.g. classified ad platforms, dating services). The revenue models applied by platforms are commission fees on transactions, charges for an account with expanded features, charges for publication or promotion of an advertisement.

Achieving critical mass at the beginning of the operations of a multi-sided platform is a challenge in its management. This means the necessity to acquire a sufficient number of customers from both groups to enable interactions between them. If the initial actions are successful, it is important to establish a balance between the size of both groups of customers.

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Community providers

Community providers are companies offering people with similar ideas, identities, interests or needs various interaction opportunities, such as exchanging or sharing resources, communicating, and at times even cooperating. Hence, communities are based on interactions using the so-called value co-creation oriented towards others, that is contributing a certain workload or sharing a resource, the beneficiary of which will be the community, rather than on interactions directly related to concluding transactions.

Communities based on resource exchange comprise exchanging objects of everyday use or sharing a car during travel. There are also many communities based on communication. These include discussion forums, question and answer websites (e.g. Quora), social networking websites.

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Comparison of the identified business models adopted by Internet companies

It is worth analysing the characteristics of the distinguished business models from the angle of key discriminatory criteria, such as economies of scale, network effect, and rival consumption. It should be remembered that this description concerns archetypical business models, that is pure types, and therefore it does not reflect the full variety and complexity of real companies.

High economies of scale occur in almost all identified business models adopted by Internet companies, which arises from the capability of serving a large number of customers without a considerable increase in variable costs. An exception in this case is online retailers offering tangible products, due to the workload involved in managing each order. It is illustrated by the information about significantly increased employment before Christmas, which results in higher variable costs and hence lower economies of scale (Isidore, 2017).

Network effect is defined in this study as situation where customer value grows as a result of a greater number of customers and interactions between them (Wang, Chen, Xie, 2010; Doligalski, 2010). In the case of online vendors and content providers, it is usually low or medium since interactions between users are normally an addition to the main product (e.g. an article as a non-network element, comments to it as a network element). Interactions between customers, in turn, are the essence of the business model being multi-sided platforms and communities. E-services vary in terms of the network effect; for some, it is non-existent (e.g. a hosting account) or medium (e.g. a cloud storage), while for electronic mail the network effect is significant.

Another aspect is the issue of rival consumption. It is understood as a situation where consumption of a good by one person limits its utility to others. This is the case with traditional products offered by online shops. This type of consumption occurs also as part of multi-sided platforms when traditional products are on offer, which arises from their limited availability. Content, online service and community providers, in turn, are characterised by non-rival consumption. The consumption of the goods offered by such entities does not limit their utility to other customers; it can even increase it at times, which, however, results from the network effect.

 

Table 2. Characteristics of the identified business models adopted by Internet companies operating in the consumer market

Online vendor E-service Content provider Multi-sided platform Community provider
Nature of the undertaking a vendor offering tangible goods or traditional services a vendor offering digital products an automated service provided remotely via the Internet without any direct involvement of an employee of the service provider, which requires self-service an entity creating and distributing contents online an intermediary between various groups of customers, providing environments where transactions or other types of interactions between them take place a company offering people with similar ideas, interests or needs various interaction opportunities of collaborative nature
Example of the offered goods a book, household appliances software a search engine, a cloud storage, electronic mail electronic issues of newspapers, blogs, video on demand interactions with vendors or prospective customers interactions with people with similar interests consisting in discussion, exchange of knowledge
Most common revenue models sale of tangible products and services sale of digital products sale of e-services, freemium revenue from advertising, sale of access to contents intermediation fees advertising, freemium, access fees
Economies of scale rather low high high high high high
Network effect low low undefined low, medium high high
Prevalent nature of consumption rival non-rival non-rival non-rival rival non-rival

Source: own work.


Conclusion

A business model analysis permits a holistic view of business operations. The typological approach applied in this paper additionally enables understanding of the diversity of Internet companies active in the consumer market. The identified business models are pure types, which do not fully reflect either the complexity or the diversity of real companies but they are simplified analogues presenting their essential properties. This paper distinguishes five business models adopted by Internet companies. An area of further research could be their quantitative characteristics as well as subtypes in each of them. Other research fields deserving their own classifications are bricks and clicks as well as the application of the Internet adopted by companies operating in the business market.

 

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[1] The author is thankful to his colleagues and students from the Warsaw School of Economics (SGH) for their critical comments on the ideas presented in this paper at successive stages of their development.

[2] For the purpose of this reasoning, digital products and online services are separated.

[3] The opinion voiced by Professor Charles Baden-Fuller at the Business Model Conference in Venice in 2017

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