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Commentary: Business models for success

Amid the dot-com carnage, a few business-to-consumer and business-to-business Web sites have been steadily growing.

Amid the dot-com carnage, a few business-to-consumer and business-to-business Web sites have been steadily growing. Auto industry exchange Covisint, for example, recently reported that its auction site had handled transactions totaling $33 billion in the first half of 2001.

See news story:
Consumers thrive as B2B trembles
This very strong growth surprised auto industry analysts. The issue, however, is not whether the site is focused on consumers, businesses or even employees. Sites with a strong business model are growing and prospering, while those that do not have a viable business model are failing.

A strong business model must have four solid anchor points: It must clearly define its target audience; it must present a compelling value to that audience; it must have a strong financial plan; and it must have a clear differentiation in the market.

Web businesses also tend to succeed when they create a marketing channel where none previously existed. For example, eBay, one of the most successful commercial sites on the Web, provided a way for individuals to tap a nationwide market rather than be limited to the classified ad coverage of a local newspaper. Covisint exemplifies another winning strategy--enhancing an existing distribution channel. This is particularly successful when the site is sponsored by the largest players in a particular industry.

What typically has not worked is outsiders or newcomers assuming that Internet technology can be used to unseat established players in an existing, mature market. Many mature markets, while perhaps appearing inefficient from the outside, are actually based on years of evolving interpersonal relationships and business processes that have been optimized to that market's unique requirements.

Successful Web services are often extensions of things that customers are already used to. Service designers should be careful that they do not make radical changes that confuse rather than attract people.

Entertainment, travel and online auctions, for instance, are all interesting and familiar to consumers. However, at the height of the Internet craze, many Web business models focused only on generating visitor volume and gathering visitor information. Profitability and differentiable value to the visitor were secondary, at best. The inevitable and harsh consolidation of the online industry is sparing those that looked beyond this simplistic and financially unsound model. The business-to-business arena also has had an overabundance of the "if we build it, they will come" mentality, and the shakeout will continue. The survivors in both markets will be those that understand the four-point business model and create online businesses that take unique advantage of the Web to deliver clear value that customers are willing to pay for--either directly or indirectly.

Companies considering providing Web services, or investors looking for potentially successful Web services, need to focus first on the creation of a strong business plan. It is not enough just to launch a new service with lower prices--particularly when those lower prices undermine profitability--and hope that the competition will go away. Nor is simple convenience or a catchy Web name enough. These provide low, and often temporary, barriers to competition.

Business challenges, increased expectations and opportunities for Web-based business remain--as do the risks of not changing. Although doing business on the Web does not guarantee success, we believe the organizations that ignore it completely are following a risky path. Companies that develop a successful Web strategy based on a strong business plan that complements existing channels are in a position to gain market share against their competition. A solid business plan that balances multiple channels, which may include the Web, storefronts and mail order, is the soundest approach.

Meta Group analysts Dale Kutnick, Val Sribar, David Cearley, William Zachmann, David Folger and Jack Gold contributed to this article.

Visit Metagroup.com for more analysis of key IT and e-business issues.

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