Business models. Definitions A business model is a term used to describe a profit-producing system that has an important degree of independence from the.

Business modelsBusiness models

DefinitionsDefinitions

A business model is a term used to describe a profit-producing system that has an important degree of independence from the other systems within an enterprise.

The term is widely used for a broad range of informal and formal descriptions of the purpose, offerings, strategies, infrastructure, organizational structures, trading practices, and operational processes and policies.

Definitions

Business model is a system of suppliers, distributors, commerce service providers, infrastructure providers, and customers.

Tapscott, et al. (2000)Rappa (2003) defines a business model as

“the method of doing business by which a firm can sustain itself” -how a firm generates revenues and where it is positioned in the value chain.

Business modelBusiness model

InfrastructureInfrastructure

Core capabilities: The capabilities and competencies necessary to execute a company's business model.

Partner network: The business alliances which complement other aspects of the business model.

Value configuration: The rationale which makes a business mutually beneficial for a business and its customers.

OfferingOffering

Value proposition: The products and services a business offers.

Quoting Osterwalder (2004), a value proposition "is an overall view of .. products and services that together represent value for a specific customer segment. It describes the way a firm differentiates itself from its competitors and is the reason why customers buy from a certain firm and not from another."

CustomersCustomers

Target customer: The target audience for a business' products and services.

Distribution channel: The means by which a company delivers products and services to customers. This includes the company's marketing and distribution strategy.

Customer relationship: The links a company establishes between itself and its different customer segments. The process of managing customer relationships is referred to as customer relationship management.

FinancesFinances

Cost structure: The monetary consequences of the means employed in the business model.

Revenue: The way a company makes

money through a variety of revenue flows. A company's income.

Basic models – selling the right

Selling the right of ownership of an asset

Selling the right to use an asset. Customers buy the right to use the asset in certain

ways for a certain period of time, but the owner of the asset retains ownership and can restrict the ways customers use the asset. And, at the end of the time period, rights revert to the owner.

Selling the right to be matched with potential buyers or sellers of something.

A real estate broker, for instance, often first secures the right to buy, sell, or lease a property on behalf of the principal. She then sells this right to a counter-party, who without the right, could not be matched to the principal, because the principal and counter-party have to go through the broker.

4 Models

Creator ◦ buys raw materials or components from suppliers and then transforms or

assembles them to create a product sold to buyers. This is the predominant business model in manufacturing.

Distributor ◦ buys a product and resells essentially the same product to someone else. The

Distributor usually provides additional value by, for example, transporting or repackaging the product, or by providing customer service.

Landlord ◦ sells the right to use, but not own, an asset for a specified period of time.◦ Landlords provide not only temporary use of physical assets (like houses and airline

seats), but also lenders who provide temporary use of financial assets (like money), and contractors and consultants who provide services produced by temporary use of human assets. This asset rights model highlights a deep similarity among superficially different kinds of business: all these businesses, in very different industries, sell the right to make temporary use of their assets.

Broker ◦ facilitates sales by matching potential buyers and sellers. Broker does not take

ownership of the product being sold. Instead, the Broker receives a fee (or commission) from the buyer, the seller, or both. This business model is common in real estate brokerage, stock brokerage, and insurance brokerage.

Models – Type of assets

Physical assets ◦ durable items (houses, computers, machine tools)◦ nondurable items (food, clothing, and paper).

Financial assets ◦ cash and other assets like stocks, bonds, and insurance

policies that give their owners rights to potential future cash flows.

Intangible assets ◦ include legally protected intellectual property (such as patents,

copyrights, trademarks, and trade secrets)◦ other intangible assets like knowledge, goodwill, and brand

image.

Human assets ◦ include people’s time and effort. ◦ Of course, people are not “assets” cannot be bought and sold,

but their time and knowledge can be “rented out” for a fee.

HistoryHistory

In the 1950s, new business models came from McDonald's Restaurants and Toyota.

In the 1960s, the innovators were Wal-Mart and Hypermarkets.

The 1970s saw new business models from FedEx and Toys R Us;

the 1980s from Blockbuster, Home Depot, Intel, and Dell Computer;

the 1990s from Southwest Airlines, Netflix, eBay, Amazon.com, and Starbucks.

Poorly thought out business models were a problem with many dot-coms.

Today, the type of business models might depend on how technology is used.

For example, entrepreneurs on the internet have also created entirely new models that depend entirely on existing or emergent technology. Using technology, businesses can reach a large number of customers with minimal costs.

Examples of Business modelsExamples of Business models

1.Subscription business model 2.Razor and blades business model (bait and

hook) 3.Pyramid scheme business model 4.Multi-level marketing business model 5.Network effects business model 6.Monopolistic business model 7.Cutting out the middleman model 8.Auction business model 9.Online auction business model 10.Bricks and clicks business model

Examples of Business modelsExamples of Business models

Loyalty business models Collective business models Industrialization of services business model Servitization of products business model Low-cost carrier business model Online content business model Freemium business model Premium business model Direct sales model Professional open-source model Various distribution business models

Razor and blades business model

Over the years, business models have become much more sophisticated. The bait and hook business model (also referred to as the "razor and blades business model" or the "tied products business model") was introduced in the early 20th century.

This involves offering a basic product at a very low cost, often at a loss (the "bait"), then charging compensatory recurring amounts for refills or associated products or services (the "hook"). Examples include: razor (bait) and blades (hook); cell phones (bait) and air time (hook); computer printers (bait) and ink cartridge refills (hook); and cameras (bait) and prints (hook). An interesting variant of this model is a software developer that gives away its word processor reader for free but charges several hundred dollars for its word processor writer.

Pyramid scheme Pyramid scheme

A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, without any product or service being delivered. It has been known to come under many guises.

InternetInternet

In 2003, an internet-based "pyramid scam”(FTC), where customers would pay a registration fee to join a program and purchase a package which included Internet mail and related goods and services.

The FTC's complaint states that the company assured consumers who purchased the package that it would allow them to earn significant commissions for every website sold.

The FTC alleged that the company deceptively represented that consumers who participated in their scheme would earn substantial income, when in fact most consumers lost money in the operation, and that the defendants provided deceptive marketing material to affiliates - providing them with the means to deceive others; and finally, the company failed to disclose that a substantial percentage of participants would lose money, and that the scheme was actually an illegal pyramid scheme.

Network effect Network effect

In economics and business, a network effect (also called network externality) is the effect that one user of a good or service has on the value of that product to other users.

The classic example is the telephone. The more people own telephones, the more valuable the telephone is to each owner. This creates a positive externality because a user may purchase their phone without intending to create value for other users, but does so in any case.

The expression "network effect" is applied most commonly to positive network externalities as in the case of the telephone. Negative network externalities can also occur, where more users make a product less valuable, but are more commonly referred to as "congestion" (as in traffic congestion or network congestion).

Over time, positive network effects can create a bandwagon effect as the network becomes more valuable and more people join, in a positive feedback loop.

FreemiumFreemium

Freemium is a business model which works by offering basic services for free, while charging a premium for advanced or special features.

The business model has gained popularity with Web 2.0 companies.

The freemium business model was first articulated by venture capitalist Fred Wilson on 23 March 2006.

"Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc., then offer premium priced value added services or an enhanced version of your service to your customer base."

loyalty business model loyalty business model

The loyalty business model is a business model used in strategic management in which company resources are employed so as to increase the loyalty of customers and other stakeholders in the expectation that corporate objectives will be met or surpassed. A typical example of this type of model is: quality of product or service leads to customer satisfaction, which leads to customer loyalty, which leads to profitability.

Low-cost carrierLow-cost carrier

Low-cost carrier or low-cost airline (also known as a no-frills or discount carrier or airline) is an airline that offers generally low fares in exchange for eliminating many traditional passenger services. The concept originated in the United States before spreading to Europe in the early 1990s and subsequently to much of the rest of the world. The term originated within the airline industry referring to airlines with a lower operating cost structure than their competitors. While the term is often applied to any carrier with low ticket prices and limited services, regardless of their operating models, low-cost carriers should not be confused with regional airlines that operate short flights without service, or with full-service airlines offering some reduced fares.

Dimension of TimeDimension of Time

Perhaps the most overlooked dimension in developing a business model especially for a new product/service/business is the dimension of time, more specifically the timing of investments/expenses or cash flow out versus the receipt of revenues/accounts receivables or cash flow in. investments/expenses

$$$ OUT

$$$IN

investments/expenses

receipt of revenues/accounts receivables

The principlesThe principles

◦1) Essentially how much of the product or service has to be built before customers can make some level of either actual purchase decision and/or purchase commitment?

◦2) How much investment/expense is required to

secure these revenues/commitments from customers?

◦3 )How much risk is there in achieving net positive cash flow, given the required upfront investment and the future time to capture revenues/receivables cash inflow, within an acceptable timeframe, if ever?

Successful Business modelsSuccessful Business models

These business model issues often make or break new ventures.

Business models that are optimized to reduce the upfront investment, that accelerate the revenue/receivables cash inflow, that obtain cogent and reliable customer feedback often and earlier, and that take other measures to reduce the investment risk all have a higher probability of business success.

ExampleExample

For example, in the entertainment industry, does one have to produce a movie for $100 million plus before any box office revenues can be derived,

or can the business model be evolved by licensing certain established characters/signing leading movie stars for secondary licensing rights for fast-food chain promotional-tie-ins, movie merchandise licenses, etc. can generate pre-release cash inflow through licensing fees?

ExampleExample

Or a different entertainment business model might be to create and promote a "Weirdest Video" website platform for users to contribute the content and then based on site traffic, sell advertising for revenues.

ExampleExample

Here, the upfront investment for creating and promoting the site could be a fraction of the investment to produce a movie and the chances that it would be more popular than a movie may be much higher, as it can be tweaked as it is developed while a movie is an all or nothing production.

It comes down to a nitty gritty question: Can we make to order or do we have to create a new mousetrap and then wait to see if the world will come to it, or somewhere in-between?