Business Models

Morten Gade ITU Concept Development with Industry, Feb 15

Today, in two parts

Agenda

Before the break

>  The framework

>  Based on Osterwalder & Pigneur + Zott, Amitt & Massa

>  A small exercise

After the break

>  The examples and the inspiration – a quick run through of approx. 30 different online business models

We end at 9.45.

Business Model Canvas

So, first… What do we mean by “business model”

Zott, Amitt & Massa (2010*)

>  Literature review of 103 articles, books etc.

>  Fairly new concept (1990’s)

>  No common definition

>  Highly recommendable article, also for inspiration on different business models

*) The Business Model: Theoretical Roots, Recent Developments and Future Research http://www.iese.edu/research/pdfs/DI-0862-E.pdf

Magretta

“stories that explain how enterprises work. A good business model answers Peter Drucker’s age old questions: Who is the customer? And what does the customer value? It also answers the fundamental questions every manager must ask: How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?”

Timmers

“an architecture of the product, service and information flows, including a description of the various business actors and their roles; a description of the potential benefits for the various business actors; a description of the sources of revenues”

Osterwalder & Pigneur

“The rationale of how an organization creates, delivers and captures value.”

Osterwalder & Pigneur

> Customers

> Offer

> Infrastructure

> Financial Viability

1. Customer Segments

>  What customer group is the business trying to reach

>  Many customers aren’t necessarily better than few: There are businesses thriving with 1, 2 or 3 customers

>  However, businesses with few customers have a different risk profile than those with many customers

>  Niche markets have become easier because of the internet, however still customs etc.

>  For a well functioning business model, it can be a good idea to…. >  Develop segments where entry is easy, or… >  Develop segments where retention is easy

2. Value Propositions

>  Why should the customers use your product instead of the competition?

>  You want to understand and address the customer’s need better than the competition >  Price (e.g. MetroXpress) >  Perceived quality/features (e.g. Apple) >  Ease of use (e.g. Telmore) >  Accessibility/Just in time/right place (e.g. mobile (or the ITU

canteen))

>  Price sensitivity is very different in different markets

>  You need a very strong value proposition, even if your product is free (still competing for attention, time etc.)

3. Channels

>  You need to have a channel strategy, that reaches your customer with the right value proposition at the right time

>  E.g. Heineken (indirect, direct), Dell (direct)

>  Also goes for media, e.g. direct models such as Politiken, indirect such as Ritzau, combined models such as Avisen.dk (if we see the end user as the customer)

>  There is less risk in scaling a model with indirect partner sales fast

>  Most organizations have a business model with a mix of different channels

4. Customer relationships

>  The relationship with the customer can be very personal (e.g. an attorney) or the opposite (e.g. Google)

>  Personal service can be seen as a luxury – but so can online interaction for some: Who is your customer segment?

>  Many companies only have relationships with resellers and never meet the end users

>  In the last couple of years, we have seen a development towards a new kind of customer relationship online, e.g. Quirky.com, where you cocreate products or Threadless.com, where you codesign t-shirts

>  If you try working with communities and co design, you need to address the incentive for the user, as well as for business

5. Revenue streams

>  The relationship with the customer can be very automated (e.g. newspaper subscription) or one off interactions (e.g. a coffee table book)

>  There is a major difference in a business model, whether you’re working on one off interactions or many interactions. >  One off interactions need to have a substantially larger profit margin

(pricing) >  Long relationships need to continue adding value for customer

>  One is not “better” than the other >  razor blades: Long interaction, not automated, low entry barriers,

habitual >  Lock in (hard to change supplier, e.g. high entry barriers) >  Risk

>  Depends on value proposition and customer segment

6. Key Ressources

>  What do you need to deliver value to the customer?

>  Virtual goods scale extremely well (1 copy and 1.000.000 copies cost virtually the same)

>  Physical goods may require mass production to scale – but can still be hard – logistics, distribution, storage etc., etc.

>  Intellectual ressources can be hard to protect

>  Many of your concepts will probably require a lot of human capital (the right people –those are often hard to get, and may be expensive, esp. if you lose them)

>  Financial capital – “Why didn’t anyone invent a decent digital bank?”

7. Key Activities

>  What is it actually, that the people employed in your business do?

>  They might produce something (goods, information, knowledge…), facilitate something (processes) or keep something afloat (a platform)

>  E.g.: Key activities at Facebook is to keep servers buzzing, develop new functionality, sell ads

>  At a supermarket: Define goods and market, run logistics, keep store open and filled with goods, marketing

>  At a consultancy: Help customers define what they need, deliver processes or products by specification, keep knowledge up to date

8. Key Partnerships

>  No business is an island.

>  Many of your activities can be performed cheaper by other organizations or in cooperation with other organizations

>  E.g.: >  Organizations with shared activities (e.g. competition) >  Organizations with complimentary activities (e.g. joint ventures) >  Organizations in other customer segments >  Organizations with different pricing >  Organizations willing to partner to reduce risk for all involved

9. Cost Structure (or economic theory 101)

>  You can define your pricing based on your costs

>  Or you can define your costs based on your pricing

>  In all business models, you will have fixed costs and variable costs >  Fixed costs: Costs that you will have with 1 or 1000 customers >  Variable costs: Costs that you have “per customer”

>  Economies of scale = Low variable costs, or variable costs deteriorating with more customers à reductions in average cost (Lars Larsen: Making 1 kr on 1.000 customers or 1.000 kr on 1 customer)

>  Economies of scope = If your organization produces more than one good, you might share activities, e.g. marketing, sales - product diversification is efficient if it is based on the common and recurrent use of knowhow or on an indivisible physical asset

A small exercise

>  Use the time until the break to talk to the person next to you about a case

>  Try to apply the 9 factors of the business model canvas to the case

>  (Beware, they have many business models in one business)

Try to apply the 9 factors of the business model canvas to Amazon Key Activities Key Resources Partner Network Value Proposition Customer Segments Channels Customer Relationship Cost Structure Revenue Streams

Time for a break! 10 minutes.

Examples, examples, examples, examples,

Try to apply the 9 factors of the business model canvas to Amazon Key Activities Key Resources Partner Network Value Proposition Customer Segments Channels Customer Relationship Cost Structure Revenue Streams

OK, In the remainder of the class, I will give you a number of examples on different online business models.

In the first part, we (mostly) talked business models in general. Now, we will focus exclusively on online business models.

Sales Finding new customer segments or value propositions online.

Direct sale A clear value proposition is needed.

Combined Model Both online sale and marketing of traditional stores.

Re-selling Being the middle man for other agents, who handle logistics.

Sales of services Selling memberships, subscriptions and other services online.

Broker Where the platform is the key activity of the business.

Auction One of the most common examples.

Used goods As old as time itself, but now with larger customer segments.

Virtual marketplaces Niche oriented platforms with both buyer and seller as customer

Price comparison Both buyer and seller as customer, price is value proposition.

Contact broker/mass market Connecting the world and taking your share of the profit.

Contact broker/specialists Connecting specialist users and acting as platform.

Groups buying/brokerage Clear value proposition to both end user and business.

App Store Reducing transaction costs for the developer and the end user.

Advertising Display advertising and other models.

Content rich, heavy traffic Low pricing, huge supply.

Niche-sites Relatively high pricing, lower supply.

Heavy on page views Focused purely on display advertising.

Online tools Software as a service – fulfilling a need with huge economies of scale.

Subscription based Subscriptions make for a long term revenue stream.

Freemium Letting the user become the marketer – to themselves and others.

Adbased Product as medium for advertising.

Consumption based Pay as you go , usage fee revenue stream.

Reselling data Servicing one group in order to generate a product to another.

Subscription Subscriptions for information, services or entertainment.

Community-sites & dating Subscribing for other people.

Games Subscribing for entertainment and immersion.

Niche-oriented specialist knowledge Subscribing for low transaction costs, making your job easier

Affiliate Yet another way making money making people meet.

Revenue sharing Tight economical connection to the producer of content.

Pay per click Great economies of scale, where business is platform.

Stakeholder management Addressing other stakeholder needs.

E.g. employer branding Attracting key resources online

Or investor relations Attracting key resources online

Knowledge sharing Making internal and external processes easier.

E.g. intranet, wiki, e-learning, EDRMS… Supporting key processes in the organization

Digital processes Optimizing processes with customers, partners and other stakeholders.

Upselling Making lifetime value of customer higher.

Better service Making customer acquisition and retention easier

Reduced cost Making key processes easier, creating economies of scale

Co-creation Development of ideas, products or businesses

Of ideas Creating new value propositions, strengthening relationship to customers and partners.

Of products Creating new value propositions, strengthening relationship to customers and partners.

Of relationships Creating new value propositions, as well as creating a new kind of open partner strategy enabling easier handling of many partners.

Or even businesses Being the platform for key processes of other businesses.

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Fotos: flickr.com mm. Credits på den enkelte slide. Udgivet under Creative Commons-licens: http://creativecommons.org/licenses/by-sa/3.0/deed.da