Customer Data and eCommerce

1
ABCD

• Customer Data and eCommerce
• John Julius Sviokla
• October 99

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Business to business ecommerce receives far less
press than the consumer side, yet it is expected
to be 10 to 20 times larger.
The Opportunity
Projected eCommerce Revenue Growth

• Growth Drivers
• Internet promises low cost solution, replacing
  expensive EDI, and multiplying transaction volume
• Companies are ready for the next big thing- BPR
  done, Y2K winding down
• Customers professional expectations are set by
  their personal EC experiences

• Under Estimated
• Cisco alone did 8 billion in 1998
• 1.3 trillion is only 9.4 of total 03 sales
  transactions

Source Forrester Research, 11/98
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This opportunity is the result of three
converging drivers. First, technology is only
now enabling fully-integrated ecommerce.
The Drivers
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Third, a rich venture capital market is providing
needed liquidity to new ideas and innovations.
The Drivers

• A total of 6.5 billion was invested in the
  Internet during the 5-year period from 1994 -
  1998.
• Half of that amount, 3.3 billion, was invested
  in 1998 alone.
• Over 700 companies received some stage of VC
  financing in 4Q98.

Source National Venture Capital Association
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Rich information access gives customers the
ability to quickly compare specifications and
prices of complex industrial products.
Industry Structure
DC motors can be searched along 44 attributes
from maximum rotary inertia to English v. metric
design
Will this ability bring out the uniqueness of
your products or reveal them to be commodity like
substitutes?
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These changes to industry structure will not only
remove the systematic barriers that many
suppliers have relied upon to increase margin,
but will result in new pricing mechanisms.
New Economics

• Old Rules
• Transaction
• Supplier and customer each paid for own internal
  transaction costs
• Shipping cost responsibility was negotiated
• Margin
• Suppliers benefited from product and pricing
  information asymmetries, volume-based
  discrimination and channel leverage
• Based upon a cost plus formula versus true
  value added
• Cost
• Services and technical support aggregated into
  product costs as allocated overhead

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Pricing in business to business ecommerce will
have to meet the demands of customers and the
abilities of the Internet medium.
New Economics

• New Rules
• Transaction
• The transaction changes from a cost item into a
  revenue stream
• Third parties process the transaction, for a fee
• Margin
• Unique margins will be allocated according to
  value added
• Customers will only pay margins on unique
  products, not commodities
• Customers will pay for services and infomation
• Cost
• Technical information and services will become
  the wrappers on products to add uniqueness

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This new pricing creates opportunities for new
players, particularly for the transaction and
service piece of the pie. These new players are
called infomediaries.
New Economics
Supplier Infomediary Customer

• Suppliers
• New revenue streams from services and information
• Margin loss on products
• Cost savings on transactions
• Infomediary
• New revenue streams from services, information
  transactions
• Customer
• Cost saving on purchases and transactions

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Ariba looks like a winner because it is becoming
a Reed network, more option value than Sarnoff
and Metcalfe networks
The Winners
Sarnoff Model
Metcalfe Model
Reed Model
Value N
Value N2
Value 2N
Broadcast, high quality content
Interactions and transactions
Collaboration and new content creation
Source Adapted from David Reed
N the number of terminals/ users on the network
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Virtually all B2B firms exploit only the first
two network models...
The Winners
SARNOFF MODEL
REED MODEL (Venue-Based)
METCALFE MODEL
Delivery Approach
Push
Pull with push capability
Push some pull
Communication Forum
One-way media, physical or virtual
Hosted venues via online media
Company-customer relationship via interactive
media
Offering
Product
Solutions and Experience
Service
Platform
Transaction
Community-like interactions
Relationship
Communication
One-to-many
Collaborative groups
Primarily pair-wise
Metric
Conversion rate
Size and share of time
Lifetime value
Driver of Value
Reach and frequency with best content
Growth at any cost- total connections on the
network
Value of facilitated communication
Telephone, Internet
B2B VerticalNet, Consumer ivillage, AOL, eBay
EXAMPLES
Broadcast television, radio, newspaper
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However, the third is the most powerful. Firms
that achieve scale in a Reed model capture the
most value from the network
The Winners
The Value of Facilitated Venues...
...Dominates Network Value as Users Increase
Best Content(Increase a)
Most Members (Increase N)
Best Facilitation (Increase c)
REED
2N
Value of Network Based on number of potential
interconnections
METCALFE
N2
SARNOFF
N
Number of Users
Total Network Value aN bN2 c2N a20, b5,
c1

• This value is realized and shared by members and
  the host. To maximize network value, firms must
  increase the c coefficient of the network value
  equation

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New Venues, New Messages
Summary

• Senior Executives need to unlock the value of
  their customers data
• It is not about loss of control
• New margins, new relationship
• It will happen anyway

Source National Venture Capital Association