Whether a company sells products or services to consumers, other businesses, or both, there are many different ways to approach the marketplace and make a profit. Business models are used to describe how companies go about this process. They spell out the main ways in which companies make profits by identifying a company's role during commerce and describing how products, information, and other important elements are structured. Just as there are many different industries and types of companies, there are many different kinds of business models. While some are simple, others are very complex. Even within the same industry, companies may rely on business models that are very different from one another, and some companies may use a combination of several different models.
General business models by themselves do not necessarily map out a company's specific strategy for success. Strategic marketing plans, which are a specialized type of business model, are used for that purpose. They identify the specific situation in which a company finds itself in a particular marketplace, the differentials that set a company apart from its competitors, the marketing tactics used to accomplish strategic objectives, and so on.
Business models involve different levels in what are known as supply/value chains. Value chains outline the activities involved in creating value from the supply side of economics, where raw materials are used to manufacture a product, to the demand side, when finished products or components are marketed and shipped to re-sellers or end-users. Companies review and analyze different steps in value chains to create optimal and effective business models.
Some long-established business models used in the physical world have been adopted on the Internet with varying degrees of success. Among these are mail-order models, advertising models, free-trial models, subscription models, and direct marketing models. Other business models are native to the Internet and e-commerce and focus heavily on the movement of electronic information. These include digital delivery models, information barter models, and free-ware models.
Every business model has its own inherent strengths and weaknesses. Just as is the case in the physical world, online business models vary in their suitability for different enterprises. Business models themselves are not enough to guarantee success in the physical or online worlds. As Jeffrey F. Rayport explains, "Every e-commerce business is either viable or not viable. They hardly qualify for the paint-by-number prescriptions that business people seem to expect. Business models themselves do not offer solutions; rather, how each business is run determines its success. So the success of e-commerce businesses will hinge largely on the art of management even as it is enabled by the science of technology."
THE UTILITY MODEL
One Internet business model is the utility model. It is based on the concept of metered use, where people pay for services as they are used. Services that are based on a utility model may involve the use of micro-payments—online transactions of low value, ranging from several pennies to approximately $10.00. Micro-payments are commonly used to pay for downloads of newspaper articles, electronic books, music clips, or software, but could be used for virtually any low-priced item for sale on the Internet. Because the cost of accepting credit cards for small purchases is prohibitively expensive, some companies involved in e-commerce have turned to third-party vendors to manage the billing and collection of micro-payments. Such vendors normally receive a percentage of each transaction as compensation.
According to Computerworld, both Forrester Research and the Gartner Group expected person-to-person micro-payments to grow in popularity. Communications International also expected the concept of mobile commerce to take off, where mobile phones and wireless devices like personal digital assistants (PDAs) are used to make micro-payments. In the early 2000s, Andersen Consulting developed prototype technology called Mobile Micropayments that had many potential uses. According to Information-Week, the technology enabled consumers to receive special offers from merchants in their immediate location via their wireless device. For example, a consumer who walks past a vending machine might be presented with a range of selections on the display of his or her PDA, which could be purchased immediately.
Digital Goods was one company that relied on the utility model in the early 2000s. Through its Digi-goods service, the company sold eBooks (books that can be downloaded off of the Internet and read on-screen or printed on a desktop printer), reports, and guides on a wide array of topics ranging from business and computer books to works of fiction. Many of the company's titles were from leading print publishers like Dun & Bradstreet, Simon & Schuster, and Harper Collins. Consumers were able to select titles of interest, and then download them to their computer for a fee.
Another company exemplifying the utility model was Fatbrain, owned by Barnes & Noble. In the early 2000s the company worked with new and established writers by allowing them to post their works online. When someone purchased the work, the writer spit the fee with Fatbrain on a 50/50 basis. Similarly, MP3.com provided downloadable music files to consumers. Just as an online bookstore might provide a sample chapter or excerpt to a potential purchaser for review, MP3.com allowed consumers to hear music before purchasing it. In addition to allowing artists to create their own Web pages with band information, the company handled the manufacturing and fulfillment of an artist's CD for a 50/50 split, similar to Fat-brain.
The utility model also has far reaching potential in the area of software. In this scenario, people are able to use software programs via the Web as they need them for small fees, instead of paying larger sums to purchase the entire applications and install them on their computers. According to InfoWorld, from 2000 to 2003 IBM planned to invest at least $4 billion to establish itself as a leader in on-demand computer services that rely on a usage fees. According to Rajeev Bharadwaj, CTO and founder of Mountain View, Calif.-based Ejasent, in order for such a model to work three elements were necessary, including "a reliable, secure, and shared infrastructure; a flexible network to handle the up-and-down demands; and a pay-as-you-go financial model." IBM planned to do far more than offer its own software programs to users on a pay-as-you-go basis. Its intent was to provide the infrastructure other software companies need to offer their products according to this model.
In order for this model to work in the software industry, companies faced several challenges. One involved the programming languages in which applications were written. In some cases software companies would be required to rewrite programs altogether in order to make them work on the Internet. Additionally, companies would need to change the way their licensing fees are structured, from one-time fees to per-usage fees. Finally, there were technical considerations surrounding memory for storage and compatibility issues for users on different kinds of computing platforms, like Windows, Macintosh, or Linux.
The utility model appeared to have potential in the early 2000s. In addition to companies like Digi-goods, Fatbrain, and MP3.com, and big plans from companies like IBM, computer industry leaders like HP and Sun Microsystems, as well as some companies in the telecommunications industry, were moving toward this business model for different types of services.
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Caulfield, Brian. "The Technology's Here—But are Net Businesses Ready to Use It?" Internet World, October 1, 2000.
Nelson, Matthew. "Innovation: A Remote Control for E-commerce." InformationWeek, October 30, 2000.
Raffray, Nathalie. "Who Will Get the Credit?" Communications International, October, 2000.
Rappa, Michael. "Business Models On The Web." April 9, 2001. Available from www.academic.uofs.edu.
Rayport, Jeffrey F. "The Truth About Internet Business Models." Strategy+Business, Third Quarter, 1999. Available from www.strategy-business.com.
Short, Sharon Gwyn. "Beyond Digital Wallets: Internet Payment Services as Ecommerce Boom or Bust?" EContent, April/May, 2000.
Solomon, Melissa. "Micropayments." Computerworld, May 1, 2000.
Timmers, Paul. "Business Models for Electronic Markets." Electronic Markets, April, 1998. Available from www.electronicmarkets.org.
Vizard, Michael; Brian Fonseca, and Ed Scannell. "IBM Readies Apps on Tap—Vendors Adapting to Evolving Utility Model." InfoWorld, December 18, 2000.
Weiner, Stuart E. "Electronic Payments in the U.S. Economy: an Overview." Government Finance Review, April, 2000.
SEE ALSO: Business Models
"Utility Model." Gale Encyclopedia of E-Commerce. . Encyclopedia.com. (September 14, 2018). http://www.encyclopedia.com/economics/encyclopedias-almanacs-transcripts-and-maps/utility-model
"Utility Model." Gale Encyclopedia of E-Commerce. . Retrieved September 14, 2018 from Encyclopedia.com: http://www.encyclopedia.com/economics/encyclopedias-almanacs-transcripts-and-maps/utility-model