MHR 322 Final Exam
Business Model (DBE and BMC)
"Framework by which you extract from your customers some portion of the value your product creates for them" -DBE -companies that spend time developing innovative business models are successful -more important than pricing because it has a more direct influence on your ability to extract value over the lifetime of your business. -Business Model Canvas (BMC): a snapshot that changes over time as you learn -DBE: a process that you can follow to learn and refine your BMC
The Endowment Effect
"People value items in their possession (or part of their endowment) more than they value items not in their possession" -College students given coffee mugs or large chocolate bar: each student given one item and at ten do class could trade for other item (e.g. 1/2 started with mug) How many would you predict traded? 50% 50%? taking away free soda shut down Cisco Systems.
Differential Pricing Types
*charging different prices to different buyers for the same quality and quantity of product. Market share must consist of multiple segments with different price sensitivities -negotiated pricing -secondary market pricing -periodic discounting -random discounting
Product-line pricing types
*establishing and adjusting the prices of multiple products within a product line -captive pricing -premium pricing -price lining
PRICE: meaning and use
*the amount of money a seller is willing to accept in exchange for a product at a given time and under certain circumstances Price is information: -allocates goods and services among those who are willing and able to buy them -allocates financial resources (sales revenue) among producers according to how well they satisfy customers -helps customers allocate their own financial resources among various want-satisfying product -provides competitors with information about potential profitability -can be perceived as a signal of quality
Product Acquisition Process
-A primary goal of a startup is to discover how customers can be systematically acquired: how it works, what it costs, how long it takes -The Customer Acquisition process is key to understanding the lifetime value of a customer
Survey/Interview Hints
-Ask questions that are more factual than opinion (Do you use a weather app to determine today's clothing choices?) -watch for sample bias (people with time to do surveys or attracted by your compensation) -always do first surveys "live" before moving to online *True feedback is the goal
Crawl Walk Run Strategy
-DBE describes a process designed to discover a sales process that can be standardized. -sometimes its necessary to build a product by working with customer using and inefficient sales strategy (crawl, then walk) before you can pursue a standardized sales process. -Sales Learning curve means the best sales person for you company is likely to change over time.
Key Questions in Customer Acquisition Process
-How customers will determine they have a need and/or opportunity to move away from their status quo? -How customer will find out about your product? -How customers will analyze your product? -How customers will acquire your product? -How customer will install your product? -how customers will pay for your product?
Lifetime Value of a Customer
-Important for businesses that expect to capture value beyond the single initial sale -repeat purchases of same product (subscription) -ability to cross-sell other products/services ex: Product sells for $100 Product cost is $75 Product profit is $25 Supplies sell for $4/month ongoing sales have a $2 profit/month expected customer life of product usage is 3 years (36 months) no impact on future product selection Product profit (25) + supplies profit ($2x 36 months = $72) = $97
The Psychology of Gains and Losses
-Individuals are sensitive to Gains and Loses: better at judging changes than absolute value(temp.) -Reference Points Matter: gains and losses are evaluated against current state/current state is different by individual/current state changes -decreasing marginal sensitivity: marginal impact is declining for both increases and decreases -aversion to losses hurt more than the same gain
Understand Time Required
-Lead Generation -Access to Influencers -Access to Design engineers -design phase -filling the distribution pipeline -installation -payment terms
General Categories of Business Models
-One-time-up-front charge plus maintenance: buy product up front with option of upgrades or maintenance for fees -cost plus: customer pays a set percentage above the cost of production. -hourly rates: rewards activity as opposed to progress -subscription or leasing model: monthly payment plan -licensing: license IP address and receive royalty that results in high gross margin. -consumables: ex: razor blades customer(low up front cost, cost based on usage) you(increases amount received by customer in the long term) -upsell with high-margin products: main product sold at low margin, but additional add ons for sale at high margins -advertising: getting paid by 3rd parties who will pay to have ads in front of your customers. -reselling the data collected (or temporary access to it): 3rd parties pay to have access to customer demographic info -transaction fee: ex: ebay receives a fee for every transaction between customers -usage-based: ex: electric: charge by the amount used -"cell phone" plan: base fee for certain amount of usage plus additional charges for overuse -parking meter or penalty charge: ticket for not putting money in parking meter -microtransactions: small transactions that add up -shared savings: customer pays only once they have received benefits from the product. -franchise: do not run business but gets paid percentage of sales and/or large startup fee. -operating and maintenance: business wants to be paid for running a plant or other operation for a fee. -crowdsourcing: getting work or funding online from a large group of people -fractionalization: selling partial parts of a product -user communities: business serving a specific community -negative operating cash cycle: company obtains cash by incurring new debt, etc.
BMC: Value Propositions
-What value do we deliver to the customer? -Which one of our customer's problems are we helping to solve? -What bundles of products and services are we offering to each customer segment? -Which customer needs are we satisfying? Characteristics: -newness -performance -customization: tailoring product to specific need of customers -"Getting the job done" -Design: superior design of product -brand/status -price -cost reduction -risk reduction -accessibility -convenience/usability
Key Components in the Customer Acquisition Process
-Who are the key players from the DMU that will be involved? -What is their influence in the process? -What is their budget authority (amount and type)? Identify budgeting/purchasing authority of each individual involved in that component is important. Often find they have limits. This could dramatically reduce your sales cycle with could be the difference between failure and success of your venture. -How long will it take to complete each component you identify? -What are the inputs and outputs of this step?
A/B or split testing
-ability to run multiple variations to test for best response -facebook, google ads -in person (ex: pricing)
Demand-based pricing
-based on the level of customer demand for the product -product prices are high when demand is high and low when demand is weak -price differentiation: setting different prices in segmented markets based on segment characteristics
Value-based Pricing
-based on the value of the customer benefit -customer will likely get the largest share of the benefit
BMC: Cost Structure
-describes all costs incurred to operate a business model 1. Cost driven: business models focused on minimizing costs wherever possible: leanest cost structure, low price value proposition, maximum automation, extensive outsourcing 2. value driven: business model focused on value creation and less concerned with cost: premium value proposition sample characteristics: -fixed costs: remain the same despite volume (salaries, rents, physical facilities) -variable costs: vary proportionally with the volume -economies of scale: cost advantages that a business benefits from as its output expands. ex: bulk purchase might lower average cost per unit -economies of scope: cost advantages due to a larger scope of operation
Landing pages for website
-marketing efforts will direct your customers to a landing page -landing pages should have: call to action, price choice, request for an email address, can also take orders
psychological pricing types
-odd-number pricing -multiple-unit pricing -reference pricing -bundle pricing -everyday low prices -customary pricing
Why Do good Ideas Fail? Key Takeaways
-people really don't like change so you need to plan accordingly: design to minimize change/maximize benefit, plant for slower than expected acceptance, even homer products had haters so don't get discouraged.
Promotional Pricing types
-price leaders -special event pricing -comparison discounting
New Product Pricing Types
-price skimming -penetration pricing
Cost-based Pricing
-seller determines the total cost of producing one unit of the product then adds on amount to cover additional costs and profit (markup) -markup may be calculated as a percentage of total costs -if costs contain both variable and fixed expenses it is common to see price breaks for different quantities -flaws: likely leaving money on the table for high value products AND difficulty of determining an effective markup percentage (price too high -> low sales, price to low -> low profit)
Steps to Discover Price
-work with persona: study purchase process, examine alternatives -look at competitors -discriminatory price when possible: try to keep special and early pricing secret -"It is easier to drop the price than to raise it" -can often raise price when increasing the value proposition -switching costs can facilitate ability to raise price -do not build a business around an artificially high price
5 Ways to Win Referrals from Influencers
1. Build Referral Relationships 2. Gather a group of VIPs 3. Target professional reviewers 4. Get online referrals 5. arm influencers with selling tools: make it easier for reviewer to say good things about your product
BMC: Customer Segments
1. Customer Segments: For whom are we creating value/who are important customers? Different types of customer segments -mass market: one large group of customers with broadly similar needs/problems -niche market: specific, specialized segment. -segmented: market segments with different needs/problems. -diversified: serves 2 unrelated customer segments with different needs/problems -multi-sided market: serves 2+ interdependent segments.
Key Factors When Designing a Business Model -DME
1. Customer: understand what the customer will be willing to do (use DMU and Process to Acquire Customer) 2. Value Creation and Capture: assess how much value your product provides to your customer and when. (Quantified Value Proposition helps) 3. Competition: Identify what your competition is doing. 4. Distribution: make sure your distribution channel has the right incentives to sell your product.
Price Objectives
1. Profit maximization 2. survival: products should be priced to establish or maintain the firm in a market 3. Target return on investment (ROI): price should allow attainment of profit goal, which a percentage of the investment the firm has made 4. Market-share goals: pricing that will increase a firm's proportion of total industry sales 5. Status quo pricing: pricing the firm's products so as not to disturb the stability of prices in the industry
Taking Action
Accept Resistance -Brace for the long haul: make sure you survive to enjoy the rewards, do not overplay the first mover advantage, be willing to alter your plan and have the resources to do so -Require 10X improvement not 1% Minimize resistance -make it behaviorally compatible (hybrid vehicles) -seek out the un-endowed: target those customers who are not going to give up an existing competitor, movie phones developing countries or college students Find Believers -find segments that place the highest value on benefits or have lowest switching costs Eliminate the old -government mandate: zero emission autos, incandescent bulbs -dollar coin succes in US vs. Canada Reduce Complexity -change the payment schedule to reduce the perceived risk: low/free up front cost, monthly fee, software, cell phones, satellite radio -strong customer guarantees -3rd party qualifications -risk sharing: consulting projects that base cost on resulting savings
competition-based pricing
Based on meeting the challenge of competitors' prices in markets where products are quite similar or price is an important customer consideration
"Olszewski" Hierarchy of Tests
Best: Actual MVBP sale with customer MVP review w/ customer In-Person Interview On-line survey Talk with Industry experts assumptions/dreams lowest:
BREAK EVEN ANALYSIS (ON EXAM)
Breakeven quantity = fixed cost / (revenue per unit - variable cost per unit) -break even quantity: the number of units sold for total revenue to equal total cost -total revenue: total amount received from sales of a product -fixed cost: cost independent from units sold -variable cost: cost dependent on number of units sold -total cost: sum of fixed costs and variable costs attributed to a product
B2B vs. B2C
Business to business and Business to customer B2B has favorable attributes: -value proposition is clearer -often need is easier to establish -sales process is potentially easier (and cheaper to standardize)
COST OF CUSTOMER ACQUISITION (ON EXAM) and example
COCA = total cost to acquire customers ($) / # of buying customers It costs $5 for 1000 fb impressions. 3% clickthrough rate of which 10% requested proposal ($25 to send a proposal). Of this, 66% bought the product. 1000 (0.03) = 30 @$5 30(.1) = 3 requested proposal @ 3 x 25 = $75 3(0.66) = 2 bought product COCA= ($75 + $5)/2 = $40
Customer Acquisition Example/ Key Take aways
Dock Technologies : medical watches that tell time once people come into the ER -Defines how DMU decides to buy product and identifies obstacles that may hinder ability to sell product such as elongated sales cycles, unforseen regulations and hidden obstacles. -selling a product is more difficult than just meeting persona needs. This step makes sure you have identified all the potential pitfalls in the sales process.
Start-up Pricing: existing vs. novel product
Existing product: -price is known, startups should price in relation to existing competitors -value proposition is important in establishing price -cost are not certain but not "unknown" Novel Product -price is "unknown" and price discovery is an important priority for the startup team -costs are likely to be unknown -startups should build business model so the company will be profitable in relation to existing competitors, when competitors show up
BMC: Revenue Streams
For what value are our customers really willing to pay? For what do they currently pay? How are they currently paying and how do they prefer to pay? How much does each Revenue Stream Contribute to overall revenues? Types of Revenue Streams: -asset sale -usage fee (ex: hotel) -subscription fee (ex: spotify) -lending/renting/leasing -licensing -brokerage fees (ex: real estate agent) -advertising Pricing Mechanisms: 1. Fixed Pricing (predefined prices based on static variables) -list price: fixed prices for individual products -product feature dependent: price depends on the number or quality of value proposition features -customer segment dependent: price depends on customer segment type -volume dependent: price as a function of quantity purchased. 2. Dynamic Pricing (prices change based on market conditions) -negotiation: price negotiated between 2+ partners -yield management: price depends on inventory and time of purchase -real-time-market: price is established dynamically based on supply and demand -auction: prices determined by competitive bidding
Price and the entrepreneur: Hayek's Tin Market
Hayek's model on how price guides the allocation of scarce resources: Hayek's Tin Market: -a disruption occurs in the world supply of tin. -new significant use of tin is discovered (Demand increases) -a primary source of supply for tin has been eliminated (supply decreases) -price of tin increases, causing economizing in the use of tin -some will switch to lower cost alternative (substitute) -some will stop using tin altogether -some will pay the higher price of tin. *point: people change behavior as if they knew the information of time and place.. when they don't need to know why. This is a marvel of the price system. Implication for tin entrepreneur: 1) ignore the underling cause of the increase in tin price 2_ you have a theory about the cause of increase in tin price
Shai agassi Reading
He believes it just might be possible to get the entire world off oil, believed future was in affordable electric family cars to decrease use of fossil fuels, he had no prototype but did explain how it would work, good ideas fail because people are hesitant to change Better place: shai agassi's plan for how electric cars would work in our society, original name of car before actually deciding on a name "Better place is a tragicomic case study of the limits of innovation"
Capturing Value from Innovations
High Behavioral change x low product change involved: strike out ex strike out: the DVORAK keyboard low behavioral change x low product change: tinkering tinkering ex: Dr. Pepper making cherry flavor High behavioral change x high product change: long haul long haul ex: Tesla Low behavioral change x high product change: home run ex: Google from: excite, Lycos, altavista, infoseek
BMC: Channels
How to reach customers/how they want to be reached. How channels are integrated/ most efficient ones/ cost efficient -channels can be direct or indirect and they can be owned or partnered 5 Channel Phases 1. awareness: how do we raise awareness about our company's products and services? 2. Evaluation: how do we help customers evaluate our Value propositions? 3. Purchase: how do we allow customers to purchase specific products and services? 4. Delivery: How do we deliver a value proposition to customers? 5. After Sales: how do we provide post-purchase customer support?
MVP vs. MVBP
MVP (minimum viable product) -minimal experiment to test a component MVBP (minimum viable business product) 1. the customer gets value out of use of the product 2. the customer pays for the product 3. the product is sufficient to start the customer feedback loop where the customer can help you iterate toward an increasingly better product
Hierarchy of Customer Interest
Most interested action: prepay 100% for solution product put down a deposit provide a letter of intent agree to a pilot express as strong interest if certain conditions are met take a meeting
Is the following true? "If you build it they will come" and "Build a better mousetrap and the world will beat a path to your door"
NO-FALSE
The Developer's Curse
Problem 1: self selection: -typical innovator is not typical consumer. -benefit in being ahead of curve is visionary -but may be dead before the curve catches up Problem 2: a clash in perspectives -typical consumer will overweigh the benefits of the "status quo" by 2-3 times -typical developer will overweigh the benefits of the new product by 2-3 times-views it as status quo. -results in huge 4-9 times gap problem 3: the curse of knowledge -years of experience with the concept vs. seeing it for the first time -recognized the need vs. unaware of the need -convinced that it works vs. skeptical
Pros and Cons of BMC
Pros: -consistent logic -less likely to miss a key gap -easily changes when new learning demands a pivot -used to generate financial model -easy to use framework means more tim to get out of the office and talk with customers -has become a bit of an "industry standard" so makes for efficient communication cons: -just filling it is the starting point not the destination -need to test and validate assumptions - just because it is on canvas doesn't make it a fact -need to generate a bottom up and credible financial model
TAM Review
TAM (Total Addressable Market) = Annual revenue your business would earn if it had 100% market share ex: Company creates attachment for Xbox that will reduce power consumption. Assuming that all US Xbox owners can use it, calculate the TAM. 100 million installed, attachment sells for $15/unit, cost is $10/unit, profit is $5/unit and your market share for an existing product is 50%. TAM: 100 million units (100% market) x selling price $15/unit = $1500 million
The Nature of Innovations
The "Gives" and "Gets" of Innovations. ex: Electric cars: give up easy refueling and get environmental friendliness. ex: online grocery: give up ability to select freshness and get home delivery. Additional Trade Off Complexities: timing, certainty, ability to quantify
Bell cow/Light house customer
Try to sell to these customers because if it is good enough for them, it is good enough for everyone else. If you put a bell on a cow, you can find the herd. Pick the bell on the lead cow because all the other customers will follow. Ex: Bose Model Speaker: entire market strategy geared towards the "godfather" of speaker reviews in magazines. Once he go ton board, the rest of the market followed.
Types of Knowledge: time/place or scientific
Types of knowledge are differentiated time and place: information you won't find in the book, but not everyone will know. They are very unique to the situation at that specific point in time. -fundamental to allocation of resources, are the particulars of time and place, known to: managers, entrepreneurs, customers -it is very difficult for policy makers and outsiders to get the same information on important factors that drive human welfare such as absolute and relative needs, goals, preferences, resources, costs, my situation scientific knowledge: -someone is an expert in that field with skills/knowledge, but it isn't enough because they don't know the local situation *Central Idea; if you want to improve human welfare.. the knowledge of time and place is more important than scientific knowledge
FlameDisk
Value Proposition: convenience, safter, portable, cost, no clean up, temp resistant, green, no need for girls or charcoal Target segment: tailgating, camping , picnic, home, beach/boating channels/distribution/place: tailgating: grocery stores, hardware, internet camping: walmart, mass market, hardware, convenience, internet cons: more expensive, natural, tradition, fixed temp, wasteful (lasts 40 mins), not exciting, risk of uncertainty, risky (never heard of brand) -changes to product intro strategy: following up with stores, more focus on online platforms, communicate benefits, improve packaging Ceo Action: new packaging, set up demos, partner with popular brands, focus on big retailers, focus on amazon What happened? The company got sold to BIC Tradeoff complexities: timing, certainty, ability to quantify Key Points: -customer acquisition -design of experiment: biased from test market being hometown, people knew him and the product got lots of sales that would not be replicated if they started elsewhere -speed of scaling: scaled too fast -importance of team
BMC: Key Activities
What key activities do our value propositions require? *Most important actions a company must make to operate successfully. Categories: 1. production: relate to designing, making and delivery product in substantial quantity or superior quality. 2. Problem-solving: coming up with new solutions to individual customer problems. 3. Platform/network: ex: ebay: business model requires it to continually develop and maintain its platform.
BMC: Customer Relationships
What type of relationship does each of our customer segments expect us to establish and maintain with them? How are they integrated into our business model? How costly are they? Examples: personal assistance dedicated personal assistance self-service (no direct relationship) automated services communities co-creation
BMC: Key Partnerships
Who are key partners/supplies? What key resources and key activities do key partners supply? Motivations for creating partnership: 1. optimization and economy of scale: buyer-supplier relationship designed to optimize the allocation of resources and activities. Formed to reduce cost. 2. Reduction of risk and uncertainty: partnerships help reduce risk in a competitive environment. Form strategic alliance 3. Acquisition of particular resources and activities: rely on other firms to help perform all activities described in business model.
special event pricing
advertised sales or price cutting linked to a holiday, season, or event
price skimming
charging the highest possible price for a product during the introduction stage of its life cycle
premium pricing
classic (good/better/best) model
Customer Decision-Making Unit
end user- the person who will experience the benefits of the product as seen in the value proposition champion: advocate of product, not necessarily the end user primary economic buyer: primary decision maker because he/she signs off on spending primary/secondary users: have in depth knowledge of subject matter and somehow influence decision. Primary has large influence and secondary has some indirect influence. Person with veto power: have the ability to reject a purchase for any reason. Rare in and individual purchase, but corporate happens a lot (ex: IT department can veto software that doesn't comply with company standards, US Govt in healthcare) Purchasing Department: department handles the logistics of the purchase. They can be another obstacle, as this department often looks to drive prices down even after the decision to purchase has been made by the primary economic buyer.
negotiated price
establishing a final price through bargaining
Free Pricing Models
freemium: product or service delivered for free, price charged for enhanced features shareware: price = 0 under certain conditions but price > 0 under other conditions adware: product is free, pricing paid by third party Typically used for products with a low marginal cost (ex: software)
Key Analysis of CoCA and LVC
good: cost of customer acquisition < LVC bad: CoCA > LVC Aim for LTV:CoCA ratio of 3:1 or higher *As you learn more both numbers should improve -A/B testing: run one add with one thing, another with something else and see which works best -targeting most profitable customer types -tricks to extend customer lifetime -2 of the most important metrics you have in a startup and investors care -LTVC needs to be much larger than CoCA to cover overhead costs
"invisible hand"
metaphor for how, in a free market economy, self-interested individuals operate through a system of mutual interdependence to promote the general benefit of society at large. -Adam Smith
bundle pricing
packaging two or more complementary products and selling them for a single price
reference pricing
pricing a product at a moderate level and positioning it next to a more expensive model or brand
customary pricing
pricing on the basis of tradition
captive pricing
pricing the initial product in a product line low, but pricing related supply items at a higher profit level
price leaders pricing
products priced below the usual markup, near cost, or below cost
price lining
selling goods only at certain predetermined prices that reflect definite price breaks
penetration pricing
setting a low price for a new product to quickly build market share and discourage customers
every day low prices
setting a low price for products on a consistent basis
comparison pricing
setting a price at a specific level and comparing it with a higher price
multiple-unit pricing
setting a single price for two or more units
secondary-market pricing
setting one price for the primary market and a different price for another market
odd-number pricing
setting prices using odd numbers that are slightly below whole dollar amounts ex: 11.99
random discounting
temporary education of prices on an unsystematic basis
periodic discounting
temporary reduction of prices on a patterned or systematic basis
Hypothesis Testing
to avoid large expensives/risk of failure: test product hypothesis with experiments -run experiments that de-risk business: MINIMIZE EFFORT WHILE MAXIMIZING LEARNING IS KEY 1) Determine What to test, use critical assumptions: -cost of product -CoCA: marketing costs, conversion ratios, sales costs, ability to close the sale -main competitors -target customer segments -price the customer will pay -LTVC Test the key assumptions 2) Develop a prototype(disposable, just enough to learn, must look real) -focus on key aspects you need to test -provide customer with something test that isn't finished product -need to be creative with tools you use 3) Receive outcomes from experiment: -confirm assumptions -refine target customer segment -pivot -feedback -response when asking for referrals
BMC: key resources
what resources do our value propositions require? Channels, relationships, revenue streams? -resources can be owned or leased by company types of resources: 1. physical: physical assets such as factories, buildings, machines, vehicles 2. Intellectual: brands, proprietary knowledge, patents, copyrights, partnerships, customer databases 3. human: people are particularly prominent in certain business models 4. financial: cash, lines of credit, stock option pool for hiring key employees, etc.
