Archiwa tagu: business models

Business model and strategy

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

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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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Internet Business Models in the Consumer Market – a Typological Approach (pdf)

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

 

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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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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

Business Models of Internet Companies and Types of Goods Offered (pdf, 2018)


Abstract

The article presents the relations between the business models of internet companies operating in the B2C market and the types of goods they offer (i.e. private, club, common, and public goods). The analysis shows that internet companies provide all four types of goods distinguished in the theory of economics.

Key words

business models, internet, public good

Acknowledgments

The author wishes to thank everyone who submitted critical remarks on the ideas presented in this article, particularly his colleagues and students at Warsaw School of Economics.

Introduction

The purpose of this article is to relate the typology of the business models of internet companies operating in the B2C market to the types of goods they offer, as distinguished in the theory of economics.

By “internet companies” (pure players) the author understands companies whose only (or at least predominant) environment for developing relations with customers is the internet. The remaining companies can be divided into multichannel (brick-and-click) companies, i.e. those which provide value to their customers using a combination of traditional and interactive channels, and brick-and-mortar companies, which operate largely outside of the internet.

The typology of business models of internet companies operating in the B2C market used in this article includes (Doligalski, 2018): online vendors (internet stores and sellers using e-commerce platforms), e-service providers (companies which offer an automated service provided through the internet), content providers (companies which publish content on the internet), multisided platforms (internet intermediaries), and community providers (companies which allow for interactions between people who share common interests). For the purpose of this discussion, the following typology of goods will be used: public goods, common goods, club goods, and private goods.

An analysis of these business models provides a comprehensive overview of the way companies function. The typological approach used in this article additionally reveals differences in the functioning of organizations — in this particular case, internet companies operating in the consumer market. The business models distinguished above are ideal (pure) types which do not fully reflect the complexity or diversity of real-world companies. Nonetheless, as simplified analogues, they embody their most crucial properties. Knowing the ideal types within the range of business models and the types of products these business offer enables us to understand the basic logic according to which real world companies operate, even if their business models and products are hybrids of ideal models.

Typology of business models of companies in the B2C market

Online vendors are companies that deal in the sales of tangible products through an online store or an e-commerce platform. Online vendors can be middlemen who offer products that are manufactured by other companies, or, less commonly, they may sell products which they manufacture themselves. These vendors typically provide physical products, traditional services (e.g. travel packages) or digital products (e.g. software). Online vendors that offer material goods or traditional services sell private goods that are characterised by rival consumption and a feasible exclusion. Rival consumption is understood as the situation in which the consumption of a good by one person diminishes its utility to others. Paid digital products are an instance of club goods, the consumption of which is non-rival, but still remain not available to anyone.

By an e-service we understand a service which is provided remotely over the internet, based on the server of the provider, without any direct involvement of any employee of the provider. An e-service is thus an internet tool, often of an infrastructural nature, which requires self-management from the customer and offers individualized values. Examples of e-services include e-mail, internet search engines, internet banking systems, and network storage. E-Services are characterised by non-rival consumption (consumption of the good by one person does not limit its utility to others) and scalability, understood as the capability to serve a greater number of customers. However, such consumption may become rival when congestion problems occur, limiting the convenience of these internet services.

Content providers are entities that distribute content online. The scope of content provided by this type of business varies widely and includes text, graphics, audio, and video. This type of activity is characterised by the high cost of content creation and the ease of its publication in different forms and through various channels. This explains the relationships that often exists between internet content providers and enterprises in the media industry. Similarly to e-services, content is usually consumed through non-rival consumption, as long as there are no limitations to scalability.

Multi-sided platforms are intermediaries between different groups of customers, and provide an environment in which transactions or other types of interactions take place. They can enable financial transactions (e.g. auction platforms, travel platforms) or at least aggregate two groups of users, facilitating interactions between them (e.g. classified ad platforms, dating services). The product offered by these platforms is interaction with users from the complementary group; it is typically rival in nature and usually leads to a customer obtaining a private good. If — less commonly — a platform brings together consumers and sellers of digital goods, then it usually makes it possible to obtain a club type of good. The character of this interaction is thus dependent to a large degree on the type of good being offered.

Community providers are companies that offer people of similar needs, interests or identities the opportunity to enter into different kinds of interactions, such as the exchange or sharing of resources, communication, and, in some cases, cooperation. Communities are therefore based on interactions, ones that do not directly involve transactions, but instead utilise value co-creation that is oriented towards others in the community, that is the contribution of a certain user-made work or sharing a resource to benefit the community as a whole (Doligalski, 2015). Community providers thus offer non-rival interactions with other users, interactions that lead to the creation and provision of a certain good (e.g. discussions, open source software).

Often in case of multisided platforms and community providers it is difficult to unequivocally assign companies to either of the models, as they usually combine the characteristics of each, i.e. rivalry over scarce goods (e.g. private goods, position within a ranking) and cooperation between users (e.g. sharing opinions about sellers).

The relationship between business models and types of products offered

As mentioned above, online vendors offer private goods (tangible goods or traditional services) or club goods (digital products). E-Service and content providers charge fees to their customers while offering club goods. If they are offered free of charge, should they be distinguished as public goods, or at least as commons?

Public goods are characterised by two values: the impossibility of excluding anyone from consuming the good, and non-rival consumption (Adams & McCormick 2006; Kaul, Grunberg & Stern 1999). On the other hand, if rival consumption occurs, we are dealing with a common good (commons). Typical examples of public goods include lighthouses and the ozone layer, while in the case of commons, it is parks and public roads.

So do free content or e-services bear the characteristics of one of these two types of goods? The question requires us to differentiate between two criteria: the purpose and technological properties of a given good. Both free content and e-services are offered according to the principle of common accessibility. Technically there are many ways in which a person could be denied access to a website. An internet site may not be displayed to users with a particular kind of terminal (desktop or mobile), a specific browser, or a particular IP address, which is associated with the location of the user (geoblocking) or their internet provider.

So does the technical capability to block access to certain content or e-service settle the question of the character of these goods? One might argue that a similar form of denying consumption may occur in the case of a public good such as a television signal, which can theoretically be blocked for users inhabiting a particular area. Public roads are often given as one example of a common good, but in this case, exclusion may take place by limiting access to particular types of vehicles.

These ambiguous criteria make it more difficult to qualify free content and e-services. But if we assume that a search engine or the content of a particular blog is, generally speaking, available to anyone and any potential exclusions are notably rare exceptions, then these goods are of a more public than club character. This approach may seem to contradict the formal definitions of public and common goods, nonetheless these goods are often classified as elements of a continuum or as non-pure public goods (Kaul, Grunberg & Stern 1999).

On the other hand, if content and e-services are offered free of charge over the course of limited-time promotions, after which the customer is required to make a payment (e.g. Netflix), these should be classified as club goods. This situation resembles a club that allows anyone to enter in the afternoon, but charges an admission fee in the evening.

There remains the matter of qualifying goods offered by multi-sided platforms and community providers. Multi-sided platforms usually offer rival interactions with users from the other group. In some cases, access to a platform is restricted by payment (e.g. the dating website eHarmony), and thus its product should be counted as a private good. Provided that access to the platform is free, then its product — rival interaction with users from the other group — bears the characteristics of a common good. This resembles a used car market – in the first case, there is an entry fee, while in the other, there is not. In both cases buyers compete for the best used cars offered by sellers. Community providers, on the other hand, offer non-rival interactions which may lead to the creation of certain goods (discussions, open source software). Some of them are open to everyone (e.g. Twitter, open chat forums) and hence are of a public good character. There are communities with restricted access (e.g. chat groups for classmates), and these offer a club good.

While this discussion is concerned with ideal types, in practice these entities usually combine the properties of both types. Table 1. presents an attempt to associate business models of internet companies in the B2C market with the basic types of goods they offer.

Table 1. Proximal relations between business models of internet companies and the types of goods offered

Feasible exclusion Non-feasible exclusion
Rival consumption Private goods

Online vendors selling tangible products or traditional services

Multi-sided platforms with restricted access

Common goods

Multi-sided platforms with free access

Non-rival consumption Club goods

Online vendors selling digital products

Paid e-service providers

Paid content providers

Providers of communities with restricted access

Public goods

Free e-service providers

Free content providers

Providers of communities with free access


Discussion

This article presents an attempt to relate business models to the types of products offered. It combines internet companies, i.e. entities that have operated for more or less the past 20 years, with an older economic concept, namely, the typology of goods. The analysis shows that internet companies provide all four types of goods distinguished in the theory of economics.

The proposed classification is of a proximal character, as the goods offered by internet companies may not always be qualified unequivocally. Examples of goods that are difficult to categorize include e-services offered using the freemium model. A basic free version of an e-service bears the characteristics of a public good, while the paid premium version is a club good.

The classification of goods based on the criteria of rivalry and feasible exclusion does not account for revenues obtained through other channels. Thus internet content that is offered for free but allows for a display of intrusive advertisements bears the characteristics of a public good. Similarly, websites that offer free e-services, while at the same time selling — or enabling other entities to sell — their customers’ data, are classified as public goods. The definition proposed by Kaul (2001) is a contemporary attempt to approach the problem of the public good by proposing that it is inclusive (public in consumption), based on participatory decision-making and design (public in provision), and that it is just (public in benefits). Under this definition, many companies that provide their content or services free of charge would not be included in the category of public goods, though these would include both Wikipedia and open source software.

The above remarks, as well as the complexity and the hybrid character of products offered by internet companies, indicate the need to formulate a new categorization of goods, one that would better reflect the conditions of the modern economy. Such a categorization could include external effects that accompany consumption, both positive (e.g. interactions between users) and negative (e.g. congestion problems).

References

  1. Adams, Roy & McCormick, Ken (2006) Private Goods, Club Goods, and Public Goods as a Continuum, Review of Social Economy, 45:2, 192-199, DOI: 10.1080/00346768700000025
  2. Doligalski, Tymoteusz (2018) Business Models of Internet Companies: Typological Approach, working paper.
  3. Doligalski, Tymoteusz (2015) Internet-Based Customer Value Management, Springer, Heilderberg.
  4. Kaul, Inge (2001) Public Goods: Taking the Concept to the 21st Century. The Market or the Public Domain, Drache D. (comp.), London & New York: Routledge, p. 255-273.
  5. Kaul, Inge, Grunberg, Isabelle & Stern, Marc A., (1999) “Defining Global Public Goods”, in Kaul, Inge et al., Eds. (1999) Global Public Goods: International Cooperation in the 21st Century, New York: Oxford University Press, p. 2-19.