Entrepreneurship Exam #2
Virtual Channels (5 & Ex.)
- Dedicated eCommerce (e.g., Your own website) - Mobile Platform (e.g., Apple App Store) - 2-Step Distribution (e.g., Amazon, eBay) - Aggregator (e.g., Zappos) - Flash Sale (e.g., Groupon)
FREE
- Multi-Sided Platform - Advertising (e.g., Google) - Freemium - 'free'; and 'for fee' (e.g., LinkedIn, Flickr, Skype)
Physical Channels (4 & Ex.)
- OEM/System Integrator/Valued Added Reseller (e.g., Computer chip; Car tire) - Directed Sales Force (e.g., GEICO) - Distributor (e.g., Avnet, Arrow Electronics) - Retailer/Dealer (e.g., Nordstrom; Antwerpen Nissan)
What are the 5 Types of Business Models?
- Unbundling Business Models - The Long Tail - Multi-Sided Platforms - FREE as a Business Model - Open Business Models (Out of Scope)
Channels: Historical Perspective (Channel - Top; Product - Left Chart)
- Virtual Product x Virtual Channel - 21st Century (e.g., Facebook) - Physical Product x Virtual Channel - Late 20th Century (e.g., eBay, Amazon) - Virtual Product x Physical Channel - Mid 20th Century (e.g., Stocks, Bonds, Insurance) - Physical Product x Physical Channel - Pre 20th Century (e.g., Cars, Clothes, Food)
Revenue Stream/Revenue Model (7 & Ex.)
1. *Asset Sale* - sale of ownership rights (cars, electronics, books) 2. *Usage Fee* - usually service; the more a service is used, the more the customer pays (# of nights in a hotel, electricity) 3. *Subscription Fee* - continuous access to a service (gym membership, annual magazine commitment) 4. *Lending/Renting/Leasing* - temporarily grant usage rights for a period of time (apartments, car rental) 5. *Licensing* - permission to use IP (Intellectual Property) (software, Apps) 6. *Brokerage Fees* - Intermediary value (credit card companies, real estate agents, AirBNB) 7. *Advertising* - Fees for advertising products and services (Google, free Apps)
Revenue Models and Pricing (2)
1. Determine Revenue Model for each segment = *strategy* THEN 2. Determine Pricing within each Revenue Model = *tactic*
Customer Relationships: Components (3)
1. How we *GET* our customers 2. How we *KEEP* our customers 3. How do we *GROW* our customers
Components of the Left-Side (Cost) BMC (4)
1. Key Partners 2. Key Activities 3. Key Resources 4. Cost Structure
Four Main Areas of the Environment
1. Key Trends 2. Market Forces 3. Macro Economic Forces 4. Industry Forces
Porter's Five-Forces Model
1. Potential Entrants (Threat of New Entrants) 2. Buyers (Bargaining Power of Buyers) 3. Substitutes (Threat of Substitute Products/Services) 4. Suppliers (Bargaining Power of Supplies) 5. Industry Competitors / Rivalry among existing firms (Evaluate industry attractiveness in terms of profit potential)
Components of the Right-Side (Revenue) BMC (5)
1. Value Proposition 2. Customer Segments 3. Channels 4. Customer Relationships 5. Revenue Streams
Unbundling Business Models
An integrated model combines *infrastructure management*, *product innovation*, and *Customer Relationships* under one roof Challenges: - Costs are too high - Several conflicting organizational cultures are combined in a single entity, resulting in undesirable trade-offs Solution: - The business is unbundled into 3 separate but complementary models dealing with: - Infrastructure management - Product innovation - Customer relationships - Economics/Customer relationship = High cost of customer acquisition makes it imperative to gain large wallet share; economies of scope are the key - Economics/Product innovation = Early market entry allows for a premium price and large market share; speed is the key - Economics/Infrastructure = High fixed costs make large volumes essential to achieve low unit costs; economies of scale are the key - Competition/Customer relationship = Battle for scope; rapid consolidation; a few big players dominate - Competition/Product innovation = Battle for talent; low barriers to entry; many small players thrive - Competition/Infrastructure = Battle for scale; rapid consolidation; a few big players dominate - Culture/Customer relationship = Highly service oriented; customer-comes-first mentality - Culture/Product innovation = Employee centered; coddling the creative stars - Culture/Infrastructure = Cost focused; street standardization, predicability, and efficiency
CAC (Customer Acquisition Cost)
CAC = Cost / # of people that buy the product Ex. $100 / 4 people = $25
Key Partners
Companies that add value to the business model in terms of optimization, economies of scale, and/or provision of resources/activities Expected Benefits: - Lower costs - suppliers - Faster time to market - suppliers, distributors, strategic alliances - Access to markets - distributors - Broader/complementary product offering - strategic alliances - Increases focus - suppliers, distributors, strategic alliances
Channel Economics: Direct vs. Indirect
Direct - COGS ($33) → G&A ($25) → Profit ($42) = Price ($100) Indirect - COGS ($33) → G&A ($10) → Profit ($37) → Reseller ($20) = Price ($100) / (Wholesalers Price - $80)
Customer Relationships Funnel
Earned and Paid Media → "Get Customers" (Awareness→Interest→Consideration→ Purchase) - Viral Loop → "Keep Customers" (Loyalty Programs, Product Updates, Customer satisfaction survey, Customer check-in calls) → "Grow Customers" (Unbuilding→Up-Sell→Cross-Sell→Referrals) - VIRAL LOOP → "Get Customers" *Life Time Value > Customer Acquisition Cost*
Fixed (3) vs. Dynamic Pricing (4)
Fixed - Cost plus (unit cost plus markup) - Value (based on features/benefits to segment) - Volume (more = cheaper; economies of scale) Dynamic - Negotiation - Yield Management (based on inventory and time of purchase) - Real Time Market (based on immediate supply and demand) - Auctions (highest bid)
Multi-Sided Platforms
One Value Proposition targets one Customer Segment Challenge: - Enterprise fails to acquire potential new customers who are interested in gaining access to a company's existing customer base (e.g., game developers who want to reach console users) Solution: - A Value Proposition "giving access" to a company's existing Customer Segment is added (e.g., a game console manufacturer provides software developers with access to its users) - Two or more distinct but interdependent groups of customers - Only valuable to one group if other group is present - chicken & egg - Platform creates value by facilitating interactions - intermediary - Value grows as it attracts more users - network effect
Pricing: Image, Competition, and Value
Price Conveys Image - psychology of pricing - Lower price = cheap, inferior quality - Higher price = superior quality, prestige, uniqueness Competitor's Prices - A factor NOT THE drive of pricing - Differentiatie to avoid price matching Focus on Value - What value does it provide the customer
The Long Tail ("selling less of more") (Graph)
The Value Proposition targets only the most profitable clients Challenge: - Targeting less profitable segments with specific Value Propositions is too costly Solution: - The new or additional Value Proposition targets a large number of historically less profitable niche Customer Segments - which in aggregate are profitable Y-axis = Unit Sales X-axis = Products Offered Most popular products (offered by most retailers) The long tail (demand exists, even though products aren't popular enough for stores to carry them) e.g., eBay, Netflix, Amazon, Lego, etc.
Cost Structure (5 Areas to Think About)
The costs incurred to operate the business model - Which BMC components incur sizable costs? - What are your fixed costs? (e.g., rent, equip. salaries) - What are your variable costs (e.g., raw materials, hourly employees) - Can you take advantage of economies of scale? (Yours or a partner's) - What is your burn rate? (how much are you spending per month) and when will you run out of money?
Key Resources (4 Types)
The most important assets required to make the business model work 1. *Physical* - Buildings, equipment, machines, systems, etc. 2. *Financial* - Small start-up - founder, friends, family - Bigger start-up - VC, SBA & Gov. grants - Up and running - banks, vendor financing 3. *Human* - Qualified employees - sales reps, software engineers, customer service - Advisory Board - outside "advice" (small % equity stake) 4. *Intelectual* - Trademark - branding, logos, slogans - Copyright - create work (software, music, film) - Trade secrets - in the "vault" (formulas, algorithms) - Contracts - NDAs, exclusivity, etc. - Patents - inventions - new, unique, of use
Key Activities (4 Categories)
The most important things the startup must do to make its business model work 1. Production and maintenance (physical products/services) 2. Platform/Network (virtual products/service) 3. Marketing and sales 4. Problem-solving
Pricing: Value vs. Cost (Graph)
Top - Price Ceiling - What will the market bear? Value-Based Pricing -------------------------------- Left (Y-axis) - Acceptable Price Range Cost plus pricing ----------------------------------- Bottom - Price Floor - What are the company's cost?