Entrepreneurship Exam 2.0

3. Bait & Hook

"Bait and Hook" refers to a business model pattern characterized by an attractive, inexpensive or free initial offer that encourages continuing future purchases of related products or services (usually at high profit margins) Popularized by King Gillette of the Gillette razor company, it is often characterized by the terms razors and razor blades, printers and ink, mobile phone and long term contracts. These examples are sell explanatory, but make sure the students understand the models as listed on pages 104-5

Other examples of the Multi-sided Platforms pattern

(Good) Windows gave away it's Software Development Kit (SDK) for free to get developers to create applications for its operating system. The more software available to run on Microsoft operating system the more customer will demand PC's with Microsoft operating systems inside (as opposed to Apple Mac). (Bad) Sony PlayStation on the other hand sold the game consoles at a loss to make money on the games. The problem for them was that not as many games were purchased so they did not make up the loss on the system side.

three (3) FREE patterns that are evident in the marketplace

1. Free offer based on a multi-sided platform. 2. Free basic services with optional premium services ("Freemium") 3. "Bait and Hook" model. Free offers lure the customer into repeat purchases of a high margin item

Google's Business Model- Three Value Propositions

1. Targeted ads = aimed at Advertisers (CS) 2. Free Search = Web surfers (CS) 3. Monetizing content = content creators (CS)

P&G built three bridges into the business model

1. Technology entrepreneurs 2. Internet platforms 3. retirees

New model

: Lulu.com turned the industry upside down. It provides authors the tools to craft, print and distribute their work through an on-line marketplace. How this works financially is that the books are only printed based on actual orders. Lulu is a multi-sided platform in that it needs the authors to write the books and the readers to buy them. The authors become customer as well as the book buyers.

Open Business Model - Pattern No. 5

Create value by collaborating with outside partners. "outside-in "approach = exploiting external ideas within the firm "inside-out" approach = providing external parties ideas or assets which are idle within the firm The term open innovation and open business model were coined by Henry Chesbrough. Chesbrough felt organizations could create more value by integrating outside knowledge, IP, and products into their own innovative process. He also thought that there were too many idle assets (products, IP, technologies, knowledge) at large companies. He felt companies could monetize these assets through licensing, joint ventures, spin-offs.

three economic triggers

Democratization, Democratization of distribution, falling search cost to connect supply to demand

example of Netflix with niche movie

Due to the business model, Netflix could buy niche movies with relatively low rental frequency but still make a good aggregate amount from the rental. Their competitor, Blockbuster could not do this with their store model as they would need to buy a minimum of 1 copy per store with over 5,500 stores and no guaranty of rental in each story. Netflix with nine regional warehouses

1. economic Triger: Democratization

Falling technology costs given individuals access to tools that were too expensive in the past. Example, we can record music, produce short films, design software with professional results. ( YouTube= Friday song over 3 million hits)

infrastructure management: Economics

High fixed cost makes large volumes essential to achieve low unit cost. Economies of scale are key. ( think Automotive, GM, Ford, Chrysler, WAL-MART)

Free as a Business Model Pattern - No. 4

IN the FREE business model at least one substantial Customer Segment is able to continuously benefit from a free-of-charge offer. Non-paying customers are financed by another part of the business model or by another Customer Segment.

Free as a Business Model Pattern - No. 4

In the music industry the historical standard is for an artist/group to go into the studio, lay down some tracks, market the music and hopefully sell enough to pay for the cost and make a profit. The artist wants to get paid for their time. Artist like Radiohead, Nine Inch Nails and The Grateful Dead have tried a different approach. The Grateful Dead invite their listeners to take recording devices and record their music for free at a concert. They are a touring band and they make their money off from concert ticket sales and merchandise sales while giving away their music for free.

examples of long tail model

Netflix, eBay, YouTube, Facebook, lulu.com

Book Publishing Industry

Old model: Many authors provide many manuscripts and the industry selects those that are most likely to achieve minimum sales targets. Less promising authors never get a chance because they can't get up to scale on the sale of their book. The cost to copyedit, design, print and promote the book will not be recovered in the sale.

Internet platforms

P&G connects with expert problem-solvers around the world. They place issues in the open, respondents provide possible solutions and are compensated with cash prizes for developing successful solutions. (don't have them on payroll, no legacy cost, only pay for solutions) (see page 114: connector; Innocentive. Talk about awards, the building blocks)

Retirees

P&G solicits knowledge from retirees through YourEncore.com, a platform the company launched to serve as a bridge to the outside world. Smart people want to be involved and love to solve puzzles. This gave them a forum to do that.

part 2 of Open Business Model - Pattern No. 5

Principles of Innovation: (closed versus Open) Closed: Keys: the smart people work for us Control or own Create it yourself Open: Keys: We need to work with smart people. Use others assets, knowledge Benefit from others Chart on page 111 (graph it on the board) P&G example: (outside-in) In 2000 A.G. Lafley became the CEO. Wants P&G to be more innovative. Obvious choice would be to increase R&D spending, right? Developed the "connect & develop" strategy Goal: create 50% of P&G's innovations with outside partners versus the 15% that was in place. By 2007 they exceeded that goal. R&D productivity soared 85% even though there only a modest increase in R&D spending.

Google's Business Model

R$ = keyword auctions drives revenues (Adword auction, more popular the higher sale price) Web surfers and content creators = free (popularity is driven by the free web search) KR = search platform (very powerful) KA = platform management, managing services, expanding reach (promoting to new users)

Freemium with a Twist: open source

Red Hat (a software company that provides Linx) Normal business model for enterprise software has two traits, first, the high fixed cost of supporting an army of expert software developers who build the product, secondly, a revenue model based no selling multiple licenses and regular upgrades to the software. Skype: Provides free long-distance calling from cell phone to cell phone. A premium is charged if the call is to a land line. This is run through user hardware and the internet. Billions of free calls have been made using Skype and yet they were able to generate $550M in sales in 2008. That number grew to $860M in 2010 and then in 2011 Skype was purchased by Microsoft for $8.5 Billion dollars. 90% of Skype users are free, only about 10% pay for premium service.

2. economic Triger: Democratization of distribution

The internet has made digital content distribution a commodity, and dramatically lowered inventory, communications, and transaction cost, opening up new markets for niche products. (eBay = like having a garage sale open to everyone on the web or Craigslist).

3. economic Triger: Falling search cost to connect supply with demand

The real challenge of selling niche content is finding interested potential buyers. Powerful search and recommendation engines, user ratings, and communities of interest have made this much easier. (Amazon = user ratings for little known books)

Multi-sided Platforms pattern No. 3

They bring together two or more distinct but interdependent groups of customers. If only one set of customers is present there is no value. This platform facilitates interactions (brokers if you will). The platform grow in what is called the network effect.

2. Freemium: Get the basics for free, pay for more

This pattern fits primarily web-based businesses that blend free basic services with paid premium services. Most of the users never become paying customers only a small portion, usually less than 10% will subscribe to the premium service.

GlaxoSmithKline

Through the sale or licensing of unused patents and technology GSK was able to increase revenues using assets they already owned but were not utilizing. Pharma companies work many on developing blockbuster drugs that will bring in billions. By allowing other researchers access to patented drugs in patent pools they opened up the possibility of more sales. This has also allowed research on drugs which could provide cures but don't have the volume to be impactful for the pharma company. Poor countries who need the drugs and or cures have a possibility of finding a cure and getting help. GSK makes money off from an idle asset. (Review the building blocks on page 113)

example of book publishing industry

Tom Clancy (my favorite author) has a strong following and is in high demand because the publisher knows they can sell a large quantity of books. In fact the publishers moved to having books written by others while using Tom Clancy's name to promote them, i.e. Tom Clancy's Ops Center written by Tom Smith.

Wii vs PSP/Xbox business model

VP = usually creates value in three main areas: 1. Attracting user groups 2. Matchmaking between customer segments 3. Reducing cost by channeling transactions through the platform CS = all have two or more customer segments. One CS cannot exist without the other R$ = One or more segment may get free service or product while the other pays the freight.

Examples of the Multi-sided Platforms pattern

Visa (credit cards), Google, eBay, Microsoft Windows. Credit Cards: they link merchants with cardholders. If customers don't carry the cards or merchants don't except the cards the customers are carrying then the platform does not work.

1. Advertising: a multi-sided platform model

We already covered multi-sided platforms (pattern #3) but in this case it is a multi-sided platform that utilizes "free". Example: Metro Metro is a free newspaper offered in Stockholm Sweden to commuters using commuter trains to get to and from work. First, the paper is offered for free Second, they focused on distributing in high traffic commuter zones to build up readership. Third it cut editorial cost to produce a paper just good enough to entertain young commuters during their short rides to work. Once the free readership numbers were great enough they were able to sell advertising space. The small customer segment (advertisers) pay the way for the large customer segment, commuters who get it for free.

A great example of this is the text we are using in class

When I first found this book it was self-published and I had to order it through Amazon. In fact I had to have the student's order it through Amazon as well as the bookstore could not buy it through their normal channels. Since the first time I used it they have found a publishers, Wiley and are available on-line or in the bookstore. Lego's new Long Tail Go over the canvas on page 73 and discuss this new Long Tail for Lego (addition to their existing business).

Two key metrics to looks for are

a) The average cost of serving a free user b) The rates at which free users convert to premium (paying) customers. Examples: Flickr from the book ESPN: you can get great basic information on the ESPN on-line web-site, they have a premium account called "Insider" which you have to pay for more in depth, detailed analysis. There is a lot of risk in the free model, since a vast majority of the Customer Segment are getting the service for free, you must be able to generate enough revenue from the small paying customers to fund the business.

infrastructure management: competition

battle for scale: rapid consolidation: a few big players dominate.

product innovation: competition

battle for talent (human resources) low barriers to entry: many small players thrive.

infrastructure management: culture

cost focused: stresses standardized, predictability, and efficiency.

what are the (3) different unbundling business model types

customer relationship business, product innovation business, infrastructure business

product innovation: Economics

early market entry enable Charing premium prices and acquiring large market share. speed is key. ( think Apple I-phone)

three core business types

economics, competition, culture

Product innovation: culture

employee centered: coddling the creative stars. they big $ to super stars. ( think of the software companies like apple, Microsoft, P&G)

customer relationship management: Economics

high cost f customer acquisition makes it imperative to gain large wallet share. Economies of scope are key. ( think banking, continued consolidation, selling multiple products, Comerica example)

GlaxoSmithKline

patent pools (inside-out)

example of unbundling business models

private banking, mobile telecon

long tail model

requires low inventory costs (not tying up cash) and strong platforms to make niche content readily available to interested buyers.

The long tail pattern

selling less of more. focus is on offering a large number of niche products, selling each one relatively infrequently. coined or named by Chris Anderson.

Technology entrepreneurs

senior scientist who develop relationships with researchers at universities and other companies.

what are the (5) business model patterns

unbundling, long tail, multi-sided platforms, free, open