Chapter 3
Business Models and Strategies
Learning Objectives:
By the time students complete this chapter they should be able to:
• Explain the concept and functions of a business model.
Chapter Perspective
This chapter is another important background chapter for student understanding of Internet
marketing although it is arguably more a strategy topic than a marketing topic. In that spirit,
there are two major changes from the second edition:
• The material has been condensed from revenue models and business models in to nine
categories based on the categories developed by Michael Rappa at NC State. Dr. Rappa
has an open source model and anyone can teach from his materials, which can be found
Students need to understand that a business model is a subset of the entire business planning
process, one that concentrates on value creation for the customer and revenue streams for the
business. Being able to articulate a coherent business model is an important aspect of obtaining
venture funding. However, the business model does not include the detailed operational
planning and financial data that are necessary to a full-scale business plan.
Understanding Business Models Slides 2-8
It is good to start this chapter by getting students to articulate their perception of what a business
A business model is made up of:
• The core value proposition. This is an important marketing concept that needs to be
discussed in detail. That is done in the next section.
• Revenue streams
• Marketing costs; the costs of generating that revenue. Emphasize that this does not
Many of the early “dot com/dot bomb” companies got into trouble, like eToys, for value to
manage expenses. You can look at the site in archive at:
In a further effort to differentiate “business model” from “business plan” the functions of
business models are specified as being to:
• Articulate the value proposition
• Identify the target market segment
You might wish to emphasize once again that these are the issues funders (banks and venture
capitalists) care about when they evaluate the investment-worthiness of a proposed or new
business. That is helpful in convincing students that this is not just a theory; it is a practical
guide to developing a concept for a new business.
The Value Proposition Slide 9
The graphic in Slide 9 is helpful in getting students to understand the limited scope and critical
role of the value proposition. Students can be asked for examples of how companies do (and do
Identifying Business Models Slides 10-11
Remember, if you don’t have a good offline model, moving to the Internet won’t help you. The
nine major business models found in Internet Marketing are all described with a tag line to aid in
memory:
Brokerage Model: Bringing Buyers and Sellers Together
Advertising Model: Delivering Messages with Content
Infomediary Model: Reselling Useful Data
Some business models are more well-used than others, such as the brokerage model. The
advertising model has limited utility unless one can play with the “big boys.” The community
model was somewhat underutilized until the recent explosion in social media.
Slide 10 contains a Table 3.1 from the text. It lists the business models and associated revenue
Our experience suggests that the most interesting approach for this chapter is to go live to two or
three sites that represent different core business models of special interest to you and your
students. I also have introduced the material in one class and then had them come back the next
Here is a list of examples that Dr. Roberts and I have both used recently:
Brokerage Model: Overstock.com. It uses both merchant and brokerage models. If you want a
B2B example, Exostar (aerospace industry) is one of the few consortia that has survived. Elance
Infomediary Model: Walter Karl is the list brokerage subsidiary of InfoGroup and provides
other services to direct and Interactive Marketers.
Merchant Model: Drugstore.com has been doing a good job on its own and also as an Amazon
affiliate.
Manufacturer (Direct) Model: Like Dell, HP offers direct purchases, although they could not
survive without their other distribution outlets and working closely with online merchants and
affiliates.
Yahoo! is an example also used in the chapter that shows multiple revenue streams. They
originally intended to support the business entirely through advertising; that proved to be just as
impossible as supporting AOL through only subscriber revenue.
AOL is a good example of adding many revenue streams through several business models over
the years to its original subscription for Internet access business. AOL also gets revenue from
advertising, its merchant transactions and affiliate payments. AOL has added many premium
(value-added) services including high-speed access. Much of this can be seen on their home
Virtually any nonprofit organization offers both memberships (subscription) and the opportunity
to donate (merchant). Or you might want to use your own school as an example; it collects
tuition and fees from students and donations from alumni.
Challenge students to identify a financially-sound Internet firm business model that survives on
revenue from a single revenue stream—and let me know if they come up with one!
Brokerage Model: Bringing Buyers and Sellers Together Slides 13-14
You can use the examples in Table 3.1 or the Instructor’s Manual (above) or have the students
generate their own examples. eBay has been a highly profitable example of the brokerage model
Slide 13 lists some of the subcategories of the Brokerage model, such as market place exchanges
and coupon promotion sites. These subcategories are also listed below:
• Marketplace Exchange (ex: Orbitz, ChemConnect) operate independently or through a
consortium and cover the entire transaction. Marketplaces have been part of the human
experience for thousands of years. Given the pervasiveness and longevity of the physical
seller, is an important facet of B2B activities on the Internet.
• Transaction Broker (ex: PayPal) provides a third-party payment mechanism for buyers
and sellers to settle a transaction.
• Virtual Marketplace (ex: Merchant Services at Amazon.com) provides a virtual mall—a
hosting service for online merchants that charges setup, monthly listing, and/or
transaction fees. It may also provide automated transaction and relationship marketing
services.
Advertising Model: Delivering Messages with Content Slides 15-17
Since the top five advertising sites have over a 60% market share (Table 3.2, Slide 15), and most
have alternate sources of revenue, the pure-play advertising model does not appear to be a good
idea if considering an internet business. Yahoo! Is a traditional web portal, or gateway that has
Here are some types of advertising models:
• Portal (Yahoo!, AOL) includes a search engine and varied content or services. A high
volume of user traffic makes advertising profitable and permits further diversification of
site services. A personalized portal allows customization of the interface and content to
Infomediary Model: Reselling Useful Data Slides 18-19
Examples of infomediaries abound as data explodes on the Internet. Mypoints (Figure 3.4) is a
customer loyalty program that resells customer information for targeted advertising. This is a
broad term used to encompass those that organize large amounts of data and sell it on the
internet. Other examples include:
• Advertising Networks (Google, Sharethis) feed banner ads or social media messages to a
network of member sites, thereby enabling advertisers to deploy large marketing
campaigns. Ad networks collect data about web users that can be used to analyze
marketing effectiveness.
Merchant Model: Providing Goods and Services Slides 20-21
The merchant model is a vibrant model on the internet. Consumers benefit from being able to
look at the variety of goods and services offered online and comparison shop. Slide 21 (Figure
3.5) suggests that Amazon’s growth has outpaced its profitability, especially compared to eBay,
but this would be a good time to point out that Amazon’s strategy was to expand into multiple
categories and the company has not really matured at this point.
There are a number of merchant models, indicated below:
• Virtual Merchant (Amazon.com) operates as a merchant or e-tailer solely over the web.
• Catalog Merchant (Lands’ End) operates a mail-order business with a web-based catalog
and combines mail, telephone, and online ordering.
• Click and Mortar, aka multichannel/bricks n clicks (Best Buy) operates as traditional
brick-and-mortar retail establishment with web storefront. The terms “bricks n clicks”
and “clicks and mortar” are frequently used to describe the business model that includes a
physical retail store (or stores) and an ecommerce Internet site. That is not, however, a
complete description of the business models of these firms. For example, Abercrombie &
Manufacturer (Direct) Model: Reaching Buyers Directly Slide 22
Selling directly on the internet used to be where we thought the internet was going. The term
disintermediation was used to describe eliminating the middleman and going right to the
consumer. Many companies do vend online but also rely on merchant sites or store sales. Here
are some examples of successful manufacturer models:
Several examples of the manufacturer model include:
• Direct selling (Dell) sells goods and services directly to consumer or business customer.
• Syndication or licensing of content (New York Times) is the marketing of content by
Affiliate Model: Offering Incentives to Partner Sites Slide 23
Affiliate marketing abounds but is often difficult for students to understand. Often having them
look whether their University offers a branded credit card where part of the proceeds go back to
Community Model: Connecting Individuals and Groups Slide 24
• Open Source (Linex, Firefox) is carried out by a group of volunteers and at least the basic
product is available free to all users. These sites recall the free-wheeling early days of the
Internet where commercialism was suspect. From a practical point of view, they also
contribute to the constant innovation that is the nature of the Internet. Many of them are
• Open Content (Wikipedia, dmoz) is openly accessible content developed collaboratively
by a global community of contributors who work voluntarily. For Wikipedia, the content
is provided by volunteers and donations are solicited to purchase and maintain the system
necessary to provide it.
• Crowdsourcing (Threadless, Crowdspring, Local Motors) involves a community of
members to design and vote on products that will be produced.
romance). Social networking services can provide opportunities for contextual
advertising and subscriptions for premium services.
Subscription Model: Delivering Services and Content for a Set Fee Slide 25
These companies I think will continue to grow on the internet, providing specialty services.
Ancestry.com and Legacy.com are also subscription-based examples. Here are the major types
of subscriptions:
• Membership (WCPE The Classical Station.org) provides services for a monthly
membership fee. Used by many nonprofits.
• Applications Services Provider (ASP), (Adobe, Corio) offers Internet services to access
software applications and other services. ASPs range from large to small and from
general business/ecommerce to specialized software applications for vertical markets.
They may also offer various services like domain name registration, website hosting,
Utility Model: Delivering Services or Content “Pay as You Go” Slide 26
Pay as you go content is a part of many merchant models as well as internet voice and
communications products. The increase of broadband usage has allowed for their development
also. Some examples include the following:
• Metered Usage (Skype, iTunes, or Google Voice) measures and bills users based on
actual usage of a service. Voice charge per minute called.
The Future of Business Models Slide 27
It is worth getting students to think about what a new business model would actually look like.
There may be some genuinely new models that emerge; most seem to be variants on existing
models.
Most people agree that Web 2.0 interactive and social web with more collaboration than the
static 1.0 web, which means that community business models have really taken hold in this
environment. What is coming to be known as the “Web 2.0 models” makes a good example.
Summary Slide 28
Internet business models create value for customers in a profitable way, driven by wants and
needs. The nine basic business models, brokerage, advertising, infomediary, merchant,
manufacturer, affiliate, community and subscription create a framework for the discussion of this
important topic. In my opinion, the importance of value creation cannot be stressed enough.
Here is a quick summary of the nine business models and their tag lines:
Brokerage Model: Bringing Buyers and Sellers Together
Discussion Questions
1. Why is the concept of the business model important? In what ways is it useful?
Business models describe a number of the key aspects of an enterprise. This chapter emphasizes
the value proposition and revenue streams. Marketers must be the ones who understand
2. Why did some early Internet firms such as eToys fail?
How much time do we have? Failure to control costs and create value is the short answer. Go
3. How does the value proposition change a firm’s approach to creation of new products
and new marketing strategies?
Figure 3.1, The Value Proposition, puts it in a nutshell. The traditional marketing model begins
4. Can a company have more than one business model?
6. Would you start a business today driven by the advertising model?
Given the information in Table 3.2 about the top five advertisers and Table 3.3 the reach from
7. How has the approach to content changed over the life of the commercial Internet?
Most content used to be free but you can see that many business models we have discussed
8. Some firms choose to generate revenue by selling or licensing their proprietary
software. Others choose an open systems approach and distribute it free of charge.
What do you think drives the decision?
Free software takes two forms. One is the “complimentary products” model used by firms like
Adobe and Real Player. Adobe gives away its software so professionals and web developers will
9. The example of eToys.com suggests that multichannel retailers are more likely to
experience long-run success in the Internet economy than are pure-play Internet
retailers. Be prepared to take a position on this conjecture and to defend your position.
Is there anything to learn from the Profitability and Sales Growth chart in Figure 3.3 in
this regard? What about Barnes & Noble versus Amazon.com?
This is a good question and should be a good discussion. Multi-channel retailing really evolved
10. Consider Figure 3.5 and the differences in profitability and sales growth between the
three firms. Are there any other factors other than those mentioned in the text that
explain the differences in profitability and sales growth between these companies?
It is probably not the model per se that offers the key to profitability. The issue is really the
ability to translate the business model into revenue. So the issue is really implementation and
Internet Exercises
1. Internet Career Builder Exercise.
Because there are no jobs in “business models” per se we decided to have the first career-builder
exercise emphasize how a student might approach a job interview from a strategic point of view
and first thinking about how the company makes money and how the company might have
evolved over time and ideas the student might have for future development. Students can watch
Alex Osterwalder on business model innovation to get some ideas:
2. Choose one of the websites you are following for a detailed study of the business model
it represents. Carefully examine the way(s) in which it obtains revenues, and try to find
out from its own reports or from industry sources what its current revenue is and what
weight is given to each of its revenue streams. Then make your assessment of the
manner in which the enterprise (both the website and any physical-world business
components) creates value for its target customers. Be prepared to present your
analysis in class.
This could be a good written exercise. Encourage students to visit the Press sections of websites;
they often have at least top-line financial information. Internet searches should also be
3. Choose a business that you believe fits into one of the business models in Table 3.1.
Research the elements of its business model and examine the site in considerable detail.
Be prepared to discuss both the revenue and cost models of your chosen business and to
explain how it creates value for its target customers.
This would make a good written exercise also. It is a different spin on looking at business
models from the previous exercise, which focuses students on one of the sites they are following
4. Think again about the retail entity from which you bought the material for this class
(see Internet Exercise 2 in Chapter 2). Analyze all of the ways in which that enterprise
attempts to create value for its customers. Also consider the nature of its revenue model
and whether it has only a single revenue stream or multiple sources of revenue.
This is a good exercise to begin to get students thinking about the consumer behavior aspects of
Internet marketing. They should first think about the drivers of behavior and recognize that the
5. Choose one of the business models from Table 3.1. Search for an article about an
Internet business that is representative of the model. Be prepared to discuss how the
business implements the chosen model.
6. Choose one of the business models from Table 3.1. Construct your own hypothetical
business around the model. Use some of the functions and elements of business models
discussed above to organize your model. How would you go about developing a value
proposition for the business? What would the viable revenue streams be? Why?
This is an application of what students have studied in this chapter that could also provide a
7. The Yahoo! Example explores how web portals have evolved. Based on you knowledge
of business models and what is going on currently, describe how you think the web
portal space will evolve and why? Which portal will dominate and how will each
develop its own market niche?
This is another good discussion question and a good time to look at Table 3.2 which used to be
Key Terms
Advertising Model delivers its message with content from sponsors.
ecommerce buying and selling goods and services online.
extranet a corporate information system linked together to share designated information.
infomediary intermediary in channels of distribution that specializes in the capture, analysis,
application, and distribution of information.
predictive modeling using relevant variables and associated response factors or probabilities to
estimate the likelihood of occurrence of a specific behavior, given the existence of a given level
of the specified variables.
proprietary system software or networks that are the exclusive property of the firm that
developed them and that cannot be used by others without permission
Subscription Model delivering services and content for a set fee.