E-commerce 2021-2022: Business. Technology. Society., Ebook, Global Edition

E-commerce Business Strategies
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LEARNING OBJECTIVES
After reading this chapter, you will be able to:

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  Identify the key components of e-commerce business models.
  
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  Describe the major B2C business models.
  
• 
  Describe the major B2B business models.
  
• 
  Understand key business concepts and strategies applicable to e-commerce.
  

Australia's Canva Grows
from Startup to Super Unicorn
Creating your own business is a
daunting proposition, but a host of companies have been seeking to democratize the process and make it easier for budding entrepreneurs. Social media platforms allow anyone to begin marketing themselves on a shoestring budget. Website creation services like Squarespace, Wix, and Weebly offer drag-and-drop, template-based solutions for business owners with­out the requisite experience in website design. Now,
Australian-based Canva is seeking to do the same with graphic design, which until now has required expertise in complicated software. The user-base for Canva's drag-and-drop online platform is grow­ing like wildfire as people with no graphic design experience at all discover that they, too, can make professional-looking designs of every type, from business cards, to presentations, to high school yearbooks, and everything in between.
In 2007, Canva's founders, Melanie Perkins and her now-husband Cliff Obrecht, began their journey with the launch of Fusion Books, a company specifically focused on high school yearbooks in their native Australia. Headquartered in Perth, Fusion was a web-based platform that allowed schools to design yearbooks online. Perkins had been an instructor at the University of Western Australia, teaching students how to use software like Adobe InDesign and Photoshop, when she realized that there had to be a better way. She began working on the idea of a web-based design platform from her family home, and eventually she and Obrecht took out a loan to hire technical help to build it. Soon, over 400 Australian schools began to use Fusion Books to create their yearbooks. Despite the company's success, Perkins had a bigger vision for the company than her budget could support. However, acquiring venture capital as an Australian tech startup nowhere near Silicon Valley proved difficult. Perkins reported that for every time her pitches received interest, they were rejected hundreds of times more.
Fast forward to the present day, and Canva has raised over $300 million from industry giants such as Sequoia China, General Catalyst, and Bessemer Venture Partners, with the company's most recent round of funding in June 2020 valuing it at $6 billion, well beyond the elusive billion-dollar "unicorn" status that few startups ever achieve. Per­kins and Obrecht's joint stake in the company is now worth at least $1.5 billion. Canva has been profitable in terms of EBITDA (earnings before interest, tax, depreciation and
amortization, a metric often used for startup companies to assess their finances) since 2017, and although the company does not officially reveal its revenues, they were report­edly over $200 million for 2019, and according to the company, it continued to grow in 2020, even as the Covid-19 pandemic spread. In fact, the pandemic may have even spurred sales, as usage of its collaboration and video tools soared.
Meeting investor Bill Tai was a turning point for Perkins. Tai helped by introducing Canva's founders to his wide network of potential venture capitalists, and he also chal­lenged Canva to hire only the highest-level engineers they could find. He also introduced them to Lars Rasmussen, the founder of Google Maps, who vetted their potential engineer­ing hires-finding most to be lacking-and helped advise them on how to build a strong group of engineers. The company patiently waited a full year to make any technical hires. Eventually, Perkins and Obrecht met Cameron Adams, a highly respected former Google employee who had founded another startup in Sydney. After convincing him to join Canva as a co-founder and chief product officer, both talented engineers and venture capital became much easier to acquire, and after assembling their initial engineering team in 2012, Canva officially launched in 2013.
Canva has a tiered revenue model, offering a freemium product to the vast major­ity of its users, but also a professional product with significantly more features and an enterprise version for businesses. Although converting freemium users to paying custom­ers is a challenge for any startup, Canva has some advantages in that regard. Because customers are often used to paying premium prices for similar products from Adobe and other established software companies, Canva's user base is more apt to convert to paying customers than users of other freemium services. It's also exactly the right time for a busi­ness like Canva: businesses have never been more interested in creating and maintaining an elegant, well-designed online presence. Although Canva's 2013 launch proceeded with minimal fanfare, over 50,000 users signed up in its first month of operation, and quickly grew to 600,000 users who made a total of 3.5 million designs in 2014. In 2020, Canva had 1.5 million paid subscribers and 40 million users from 190 countries using the company's freemium version, who together created 3 billion designs.
But it's not just the price that compares favorably to other offerings in this market; Canva's primary selling point is its ease of use. Gone are the days when you would need to take a class like the one Perkins once taught to achieve your graphic design goals. Canva's mission is to allow customers with no design experience at all to create material of any type that looks like it was made by a professional. For most, the freemium version is sufficient, but Canva has generated plenty of interest in its paid versions. Canva's profes­sional version, Canva Pro, costs $119 a year or $12.95 a month, a significant saving over the cost of Adobe's product line. Canva's enterprise version, Canva Enterprise, costs $30 a month per person and is now used by 85% of Fortune 500 companies, who value the abil­ity to maintain more consistent marketing and branding materials across the organization. Canva allows organizations to manage which approved brand assets, fonts, and colors are used by various companies. With Canva, the days when a company used several different logos because employees can't agree or locate a standard version are over.
Canva offers access to a growing array of stock photos. Other features that Canva currently offers or has announced plans to launch include Canva for Education, a part­nership with schools in Australia to provide versions of Canva for student use; Canva Apps, a service allowing developers to build tools that integrate with the Canva platform, which companies like Dropbox, Google, and Instagram have done; and Canva Video, a video editing service that uses the same drag-and-drop principles that Canva hopes will revolutionize video editing the way its flagship service is poised to revolutionize static graphic design.
Although Canva is based in Australia and also boasts a large user base in the United States, the company has grown rapidly worldwide, including in markets that have been difficult historically for many companies to find success, such as China. Canva hired the former head of LinkedIn China to build an office there, and the company developed a China-specific version of its product that uses QR codes, which are popular in China, as well as strong integration with Chinese messaging apps like WeChat. Canva also devel­oped Arabic and Hebrew versions, which are challenging due to complex typography and an interface that reflects the right-to-left orientation of those languages. In Brazil, Canva teamed with Primerio Pay to offer a localized payment solution in support of developing a fully localized presence.
Canva's pathway is not without challenges. Firstly, Adobe is not about to quietly allow Canva to become a powerhouse in its own market. Adobe released its own freemium product called Adobe Spark, with over 20,000 different design assets, and the company reported in 2019 that it had given out 23 million Spark accounts to teachers and students worldwide. Canva has also experienced growing pains: the company that took a full year to hire an engineer has grown rapidly to over 1,000 employees, and each time it hires a new batch of employees, the company's back-end infrastructure is tested, and often needs to be redesigned. Canva recently rewrote the entire front-end interface of its flagship web app, for example. Lastly, in May 2019, Canva experienced a data breach that exposed 139 million usernames and e-mails. Although users' passwords were encrypted and no credit card information was accessed in the attack, the incident was a wake-up call for the company, which now uses two-factor authentication to protect user data.
Canva's user base remained supportive throughout the hacking incident, and indeed Canva's customers are devoted to the service, at a rate of about 80 designs per second. Canva can be used to create e-mail marketing, infographics, Instagram Stories, social media posts, and much more. Perkins believes that Canva is currently achieving about 1% of what she believes the company will be in the future, and that empowering people everywhere to design anything they can imagine is a business model built to last.
The opening case on Canva illustrates the process of turning a good busi­ness idea into a successful business model that produces profits. Successful e-commerce business models leverage the unique qualities of the Internet, the Web, and the mobile platform to provide customers value and produce profitable business results. E-commerce has become a lifeline for many businesses of necessity. Going forward, understanding e-commerce business models, business concepts, and business strategies, which forms the focus of this chapter, is likely to become even more important than it ever has been in the past.

E-COMMERCE BUSINESS MODELS

INTRODUCTION
A business model is a set of planned activities (sometimes referred to as business pro­cesses) designed to result in a profit in a marketplace. A business model is not always the same as a business strategy, although in some cases they are very close insofar as the business model explicitly takes into account the competitive environment (Magretta, 2002). The business model is at the center of the business plan. A business plan is a docu­ment that describes a firm’s business model. A business plan always takes into account the competitive environment. An e-commerce business model aims to use and leverage the unique qualities of the Internet, the Web, and the mobile platform.
EIGHT KEY ELEMENTS OF A BUSINESS MODEL
If you hope to develop a successful business model in any arena, not just e-commerce, you must make sure that the model effectively addresses the eight elements listed in Figure 2.1. These elements are value proposition, revenue model, market opportunity, competitive environment, competitive advantage, market strategy, organizational development, and management team. Many writers focus on a firm’s value proposition and revenue model. While these may be the most important and most easily identifi­able aspects of a company’s business model, the other elements are equally important when evaluating business models and plans, or when attempting to understand why a particular company has succeeded or failed (Kim and Mauborgne, 2000). In the follow­ing sections, we describe each of the key business model elements more fully.
Value Proposition
A company’s value proposition is at the very heart ofits business model. A value proposition defines how a company’s product or service fulfills the needs of customers (Kambil, Ginsberg, and Bloch, 1998). To develop and/or analyze a firm’s value proposition, you need to understand why customers will choose to do business with the firm instead of another company and what the firm provides that other firms do not and cannot. From the con­sumer point of view, successful e-commerce value propositions include personalization and customization of product offerings, reduction of product search costs, reduction of price discovery costs, and facilitation of transactions by managing product delivery.

A business model has eight key elements. Each element must be addressed if you hope to be successful.

For instance, before Amazon existed, most customers personally traveled to book retailers to place an order. In some cases, the desired book might not be available, and the customer would have to wait several days or weeks, and then return to the bookstore to pick it up. Amazon makes it possible for book lovers to shop for virtually any book in print from the comfort of their home or office, 24 hours a day, and to know immedi­ately whether a book is in stock. Amazon’s Kindle takes this one step further by making e-books instantly available with no shipping wait. Amazon’s primary value propositions are unparalleled selection and convenience.
Revenue Model
A firm’s revenue model describes how the firm will earn revenue, generate profits, and produce a superior return on invested capital. We use the terms revenue model and finan­cial model interchangeably. The function of business organizations is both to generate profits and to produce returns on invested capital that exceed alternative investments.
Profits alone are not sufficient to make a company “successful” (Porter, 1985). In order to be considered successful, a firm must produce returns greater than alternative invest­ments. Firms that fail this test go out of existence.
Although there are many different e-commerce revenue models that have been developed, most companies rely on one, or some combination, of the following major revenue models: advertising, subscription, transaction fee, sales, and affiliate.
In the advertising revenue model, a company that offers content, services, and/or products also provides a forum for advertisements and receives fees from advertisers. Companies that are able to attract the greatest viewership or that have a highly special­ized, differentiated viewership and are able to retain user attention (“stickiness”) are able to charge higher advertising rates. Yahoo, for instance, derives a significant amount of revenue from display and video advertising.
In the subscription revenue model, a company that offers content or services charges a subscription fee for access to some or all of its offerings. For instance, the digi­tal version of Consumer Reports, a U.S. publication, provides access to premium content, such as detailed ratings, reviews, and recommendations, only to subscribers, who have the choice of paying a $6.95 monthly subscription fee or a $35.00 annual fee. Experience with the subscription revenue model indicates that to successfully overcome the disin­clination of users to pay for content, the content offered must be perceived as a high- value-added, premium offering that is not readily available elsewhere nor easily replicated. Companies successfully offering content or services online on a subscription basis include eHarmony (dating services), Ancestry (genealogy research), Microsoft’s Xbox Live (video games), Pandora, Spotify, and Apple Music (music), Scribd and Amazon’s Kindle Unlimited program (e-books), and Netflix and Hulu (television and movies). See Table 2.1 for examples of various subscription services.
Recently, a number of companies have been combining a subscription revenue model with a freemium strategy. In a freemium strategy, the companies give away a certain level of product or services for free, but then charge a subscription fee for pre­mium levels of the product or service.

TABLE 2.1 EXAMPLES OF SUBSCRIPTION SERVICES
NAME	DESCRIPTION
eHarmony.co.uk (dating)	•	Free: Create profile and view profiles of matches
	•	Basic (see photos, send and receive messages): £18.95 a month for 6 months; £9.95 a month for 1 year
	•	Total Connect (Basic plus additional services): £19.95 a month for 6 months; £12.95 a month for 1 year
Ancestry.co.uk (genea­ logical research)	•	Essentials (key UK census records only): £10.99 for 1 month; £54.99 for 6 months
	•	Worldwide (UK, Ireland, and all international records): £19.99 for 1 month; £99.99 for 6 months
Kindle Unlimited UK (e-books)	•	Unlimited books for £7.99/month (over 1 million from which to choose)
Spotify (music)	•	Many different permutations, depending on device (mobile, tablet, or desk­top) and plan chosen (Free, Unlimited, or Premium)

In the transaction fee revenue model, a company receives a fee for enabling or executing a transaction. For example, eBay provides an auction marketplace and receives a small transaction fee from a seller if the seller is successful in selling the item. E*Trade, a financial services provider, receives transaction fees each time it executes a stock transaction on behalf of a customer.

In the sales revenue model, companies derive revenue by selling goods, content, or services to customers. Companies such as Amazon, L.L.Bean, and Gap all have sales revenue models. A number of companies are also using a subscription-based sales rev­enue model. Birchbox, which offers home delivery of beauty products for a £10 per month or £110 per year plus £2.95 p&p/month is one example. Dollar Shave Club, which sells razor blades by subscription and was acquired by Unilever for $1 billion, is another.
In the affiliate revenue model, companies that steer business to an “affiliate” receive a referral fee or percentage of the revenue from any resulting sales. For example, MyPoints makes money by connecting companies with potential customers by offering special deals to its members. When they take advantage of an offer and make a purchase, members earn “points” they can redeem for freebies, and MyPoints receives a fee. Community feedback companies typically receive some of their revenue from steering potential customers to websites where they make a purchase.