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Business Model Review

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Business 121 Slide Ⅰ 1. What is a business model? * * A business model describes the rationale of how an organization creates, delivers, and captures value.(How a company intends to make money / the logic by which it sustains itself financially. Or how your idea actually becomes a business.) * * 2.Business model canvas? * * * * * * * * * * * * * * * * * * * * * * * * * * 3.What is a multi-sided platform business model? Give an example, list the customer groups and explain how they interact with each other. * * Multi-sided Platform is one of the business model patterns. Multi-sided Platform brings together two or more distinct but interdependent groups of customers. Such platforms are of value to one group of customers only if the other groups if customers are also present. The platform creates value by facilitating interactions between the different groups. A multi-sided platform grows in value to the extent that it attracts more users, a phenomenon known as the Network Effect. * Network effects and Positive feedback loops are economic terms that describe the snowballing benefits to front-runners in some markets. * * Example and analysis: * LinkedIn is the world’s largest professional network. As of 31st March 2012, LinkedIn had 161 million members in over 200 countries. LinkedIn helps the professionals stay connected with each other by creating and managing a professional identity and building a professional network. LinkedIn has implemented a Multi-sided Platform, which offers different solutions to different categories of users. * * LinkedIn provides the following categories of solutions to its network members for free: An ability to manage professional identity using tools such as Profile and Profile Stats; An ability to build and manage professional networks using tools such as LinkedIn Connections, Invitations, and Introductions; Access to knowledge and insights using tools such as LinkedIn Groups, Network Updates, News, Answers etc. * * LinkedIn is a good example of a Freemium business model. While the core offering is free for its network members, premium offering comes for a price. The premium offering includes tools such as LinkedIn InMails and Profile Stats Pro. The users can upgrade from a basic account type to Business, Business Plus, or Executive account types. The premium account types provide access to the premium offerings. * * LinkedIn platform induces the same-side network effects among its members. This helps in growing the network through word-of-mouth or connection-request-emails. As the average number of member connections grows, the strength of the network improves. The more the network becomes strong, the more attractive it becomes to the users on the other sides of the platform. The users on the other sides of the platform include Recruiters, Marketers & Advertisers, and Developers. * * LinkedIn offers LinkedIn Corporate Solutions, LinkedIn Jobs, and Subscription products to the Recruiters. LinkedIn Recruiter is their flagship hiring solution to find, contact, and hire candidates. Self-service postings help recruiters to post and manage job opportunities. LinkedIn Referral engine helps organizations leverage their employees network to find qualified candidates. LinkedIn provides job recommendations to its members over Job You May Be Interested In (JYMBII) section of a member home page. LinkedIn offers Talent Basic, Talent Finder, and Talent Pro as subscription products to recruiters and hiring managers. LinkedIn offers Job Seeker family of products – Job Seeker Basic, Job Seeker, and Job Seeker Plus – to its members to stand out to recruiters and hiring managers. * * LinkedIn marketing solutions enable marketers and advertisers to reach their target audience. LinkedIn Ads is their self-service product to target advertisements to specific members based on their profile information. Advertisers can setup and manage multiple campaigns and continuously monitor clicks, impressions, click-through rates, and average cost-per-click. LinkedIn Ads for Enterprise product targets larger advertisers that receive dedicated account management and get access to additional marketing solutions such as Display Ads, Custom Groups, Sponsorships, Whitepapers, and Recommendation Ads. * * LinkedIn provides a set of open APIs and embeddable Widgets to the developer community. These APIs and Widgets provide access to the content in the LinkedIn database and help the developers build third-party applications leveraging LinkedIn data. * * LinkedIn revenues come from 3 key revenue streams: Hiring Solutions, Marketing Solutions, and Premium Subscriptions. For CY 2011, these 3 streams represented 50%, 30%, and 20% of total revenues of $522 Million. LinkedIn sells Hiring and Marketing solutions through field sales organization and through their website. The Premium subscriptions are primarily sold online. Field Sales organization comprises of direct sales force, agencies, and resellers. While online channel is characterized by lower average selling prices, the offline channel is characterized by longer sales cycle, higher average selling prices, and longer contract terms. During CY 2011, Field sales contributed 55% of the total sales, whereas online channel contributed 45% of the total sales. * * As discussed earlier, LinkedIn drives almost half of its revenues from Hiring solutions. Here, LinkedIn competes with established online recruiting companies such as Monster+HotJobs, Careerbuilder, and Indeed.com, talent management companies such as Taleo, and traditional recruiting firms. Then, there are companies new to the recruiting industry such as BranchOut, which offers a Facebook application for finding jobs and recruiting employees. In a span of less than 2 years since its launch in July 2010, BranchOut has grown into largest professional networking application on Facebook with over 25 million registered users and 400 million professional profiles. With over 3 million jobs, it operates the largest job board on Facebook. * * How big, you think, is the threat of BranchOut to LinkedIn? In case Facebook decides to acquire BranchOut, then how big the threat can become? On 3 May 2012, LinkedIn announced acquisition of Slideshare, a leading professional content sharing community, for $118 Million. How acquisition of Slideshare is going to help LinkedIn boost its revenue growth and overcome the threat from companies such as BranchOut? * * * * * * * * * * * * * * * * * 4. What is a long tail business model? Give an example and give the analysis. * * The Long Tail is the transition from a hit-focused marketplace to a millions of niches marketplace. While the majority of profits previously were made by selling a handful of products (the hits) to a lot of people, now millions of products are being sold to smaller amounts of people based on niches. Yes that’s right – it’s niche marketing in it’s purest form, although it goes beyond merely setting up content sites to attract niche traffic and make a quick buck from it – we are talking about a general economic transition brought about by an opening up of distribution channels creating a near-frictionless and abundant source of product variety. * * Example and analysis: A typical example of The Long Tail Theory in action is Amazon. Amazon, one of the words most successful e-commerce website, uses the Long Tail theory business model which has given them massive advantages over their competitors and has made them one of the most powerful and popular sites in the world. Amazon, Launched in 1995, offers a huge range of titles, whether it be cd, dvd or games, across hundreds of genres, yet it isn’t the items in Amazons top 10 bestselling range that generate the most revenue… Instead much of Amazon’s success comes from supplying those hundreds of niche items. Amazon make far more from selling one or two hundred copies of “hard-to-find”products in their niche markets, compared to a few thousand copies of a “popular” item from their bestselling range. * * Google’s awareness of The Long Tail Theory is clear, they allow many small traders, in many niche markets to advertise off their site, therefore appealing to a wider scope of users. YouTube has employed the Long Tail to a similar successful effect, they have many millions of small producers uploading videos. eBay covers a massive range of categories in its marketplace, reaches many niche markets, and is always expanding with new niche’s. * * Apple, with iTunes, are maybe the latest company to really make millions from the Long Tail Theory, with their ever growing, ever extending, seemingly endless list of music. Users all around the world can access almost any weird underground category of music just as easy the top 10 music pop charts. * * Neflix, the largest online film rental site, boasts a massive amount of dvd titles, with a wide spectrum of categroies. Similar to iTunes and its music, it has become so easy to access films that may have become obsolete, rival companies such as Blockbuster can not simply keep up. With netflix, it eliminates the constraint of precious shelf-space, there is no shelf-space, the opportunity to hold dvd titles is endless, this is the infinite catalogue, The ever extending, always extending, infinitely extending Long Tail in operation. * 5. What is a Free business model? * * At least one substantial customer segment is able to continuously benefit from a free-of-charge offer, financed by another part of the business model or by another customer segment. * 6. Why use free business model? * * The trick to doing Free or Freemium business models right is to ensure that the product/service that you are giving away free is of very high value to the customer, which should result in both high customer satisfaction and a likelihood that they will tell others about your product/service, leading to viral effects. The usual temptation is to stop short of this, and take out the valuable features that would make the product interesting and valuable. * * * Another powerful effect of using the free strategy is that it usually results in a far larger customer base using the free products, who become proponents for your company. This expanded footprint or market share can have a huge effect on the price that acquirers or investors are willing to pay for your company, as they recognize that even though these customers have yet to be monetized, they represent a great potential for future monetization. Twitter and Facebook are two perfect examples of this. * * Another way of looking at the importance of footprint or marketshare is to recognize the importance of market leadership. In the tech industry, market leadership is usually self-reinforcing unless the company does stupid things to annoy its customers. Even if you have gained market leadership by giving away a product/service for free, the financial markets and acquirers realize that market leadership is worth a significant premium over niche players that may have more revenue. * * 7.What kinds of patterns are there of free business model? Explain them and give examples. * * ①The Advertising model * * The advertising model became popular with the growth of radio and TV where the TV stations earned revenue indirectly from people looking to promote services to the audience they attracted, rather than via consumers paying radio and TV stations for the consumption of their TV programs. * * Some Internet businesses derive revenue predominantly as a result of being able to offer advertisers access to highly targeted consumer niches (often in the absence of revenue from selling their goods or services). So if your website is about a narrowly defined topic, it is likely to attract a highly defined niche audience who could be offered complimentary products or services with a higher probability of success than blanket mass market advertising. * * However, this business model is increasingly difficult to justify if it is your main revenue stream. For a start, the landscape is extremely competitive and advertisers are spoilt for choice. Building brand awareness and translating that into site visits is a very difficult and costly challenge. Successes such as Facebook are very much the exception to the norm. * * If this model is being considered for your startup, it is worth noting that nowadays most savvy investors ignore ‘vanity metrics’ such as Page Impressions/Visitor numbers and want to understand whether the underlying business proposition is profitable. Examples such as YouTube illustrate how hard it can be to monetise free content even when you have significant visitor numbers. In short, this model is in decline for most businesses. * * Strengths and Weaknesses * Offering free content or services, especially when it interests a very targeted market segment, can lead to excellent ad revenue opportunities. Sponsors are often willing to pay more to reach a select audience. Ad revenue also allows you to profit from offering solutions that have limited demand from paying customers. Ad models are often harder to predict, though. Your traffic may remain steady, but advertisers may come and go based on economic and industry factors. You also may miss opportunities to get fees from customers who are willing to pay them. * * ②Freemium * * * The word freemium is a combination of the words free and premium. * * It describes a business model in which you give a core product away for free to a large group of * users and sell premium products to a smaller fraction of this user base. * * A well known example of a freemium business model is Skype which provides free computer to computer calling and sells premium products in the form of voicemail, conference calls and world wide connection to landlines and mobile phones. (see case study) * * Freemium is not… * … the same as a free trial: * A common misconception is that freemium includes or consists of a free trial period though this is not the case. The difference is that a free trial allows a user to test a product or service for a limited time before buying the actual product. * A freemium model on the other hand provides a product or service that is always free and the premium part comes from offering the free platform of users additional products or services that for a fee can expand or improve their experience. So just because a free product appears in a business model does not make it freemium. * * … the only form of free: * Another common misconception is that all business models that involve the use of free products * are freemium models. * * There are three other business models centered on a free product, which are commonly used; Direct cross-subsidy, Ad-supported and gift economy. (Illustration from Chris Anderson’s great post, four kinds of free) http://www.longtail.com/the_long_tail/2008/09/revised-the-fou.html * * If you are not using free, you will be competing with free * Freemium business models play a key role in business today. They are widely use in a range of industries. An example of this is that apps with freemium models account for 98% of the revenue in googles app store and 95 % in apples app store. * * While this disruptive model was initially only used within the software industry, this is no longer the case. Newspapers, music, publishing, telco, education and a range of other industries are now facing competition from freemium business models. * * The underlaying concept that makes this development possible is digital production. The fact that it is now possible to produce and distribute a wide variety of value propositions using computers and the internet. Because of the ever decreasing cost of computer power, storage and internet bandwidth, the marginal cost of distributing this value is virtually zero. * * Once a musician has produced an album, it costs him practically the same to have 10 people or 1 million download the album. * * This creates a situation where you can give away the core product for free and create a profitable business model from just up-selling to a few percent. * * This trend will only continue, as costs continue to decline and an ever increasing array of value propositions can be delivered through the internet. Meaning that across a wide range of industries. * * Examples: * * Zapier * Zapier is a service that helps you automate tasks within a particular service or between different services. For example, you can have everyone who makes a purchase through your Shopify store added to your customer email list on MailChimp. * * Zapier’s freemium approach is to let users start off with five zaps (automations) that can run up to 100 tasks per month for free. * * Their freemium approach works by using their free plan to get people in the door to try out a few zaps. They know that once you have automated a few things in your business, you will have a hard time not automating even more things. Therefore, you will likely be upgrading to a paid account. * * Another reason their free to paid plans work is because the next three levels of paid plans are only a little more expensive than the next. Therefore, you find yourself saying, “It’s only $20 more to get more zaps.” * * Filament Flare * Flare is a social sharing tool from Filament that was made for blog owners. They offer an easy to install and customizable social sharing bar for your content. * * Flare’s freemium approach is to give access to the lite version of their tool for free and to offer a Pro version for more advanced features. * * Their freemium approach works their homepage draws you in for trying a free tool, and their landing page gets you excited about the Pro features of their tool. Businesses and large publishers will love the ability to customize the action labels and have a mobile social sharing toolbar. * * Once you are ready to commit, you will find that those features you love are available in the Pro plan. Those that try out the free version will love it, but will miss the features that they were introduced to on the landing page. Hence, they will be moved towards the Pro plan. * * MailChimp * MailChimp is an email marketing software platform that allows you to collect email list subscribers, send regular email updates, create autoresponder series, and automate your marketing. * * MailChimp’s freemium approach is to allow users to have up an account with basic features with 2,000 subscribers and 12,000 emails per month for free. Pricing for more features starts at $10 per month, and pricing for more subscribers beyond the first 2,000 starts at $30 per month. * * Their freemium approach works for two reasons. First, you can sign up for free, but a few features that you will likely want as an email marketer, including automation, are only offered to paid account subscribers. * * Second, if you have ever set up an email list, you know that the last thing you want to do is switch to a different service. Switching means you have to change out all of your opt-in forms, get used to a new platform, set up your autoresponders and automations again, and export/import your subscribers. All of this takes time, and once you have 2,000 subscribers, you will just want to continue to grow more. * * Google Penalty Checker * The Google Penalty Checker by Fruition is a simple tool that connects to your Google Analytics account and shows you the effects Google algorithm changes and penalties have had on your website, both positive and negative. * * Fruition’s freemium approach is to allow you to sign up for free and connect up to two domains to see how they have been affected by Google updates. * * Their freemium approach works because, once inside, you see how valuable their data can be at helping you determine what Google updates are affecting your organic search engine traffic. You will also find that the most recent three months worth of data is hidden behind a call to action to upgrade your account. This is how they hook you into a paid plan. * * FreshBooks * FreshBooks is an invoicing software for freelancers and small businesses. You can also track expenses and manage projects with their platform. * * FreshBook’s freemium approach is to allow you to see their software in action with one client and the basic featurs. Additional clients and features are offered in the paid plans. * * Their approach works because most freelancers and small businesses do not have the time to try one platform to the next. If they like how it works for one client, they’ll commit to the paid plans to stick with what they know for the rest of their clients. * * Dropbox * Dropbox, the popular cloud storage platform, offers a free plan for up to 2GB of space for backups and simple file sharing. The Pro plan for a significantly larger amount of space (1TB) is only $9.99 per month. * * Dropbox’s freemium approach is to allow users to see how easy it is to backup and share their files using the Dropbox platform. * * Their approach works because they allow you to backup from anywhere, including your mobile device. And anyone with photos and videos can tell you that 2GB of space will never be enough. At $9.99 per month, you really can’t go wrong. * * HootSuite * HootSuite is a popular social media management tool. They offer free plans for individuals who want to manage up to three social profiles, and business plans for those who need more. * * HootSuite’s freemium approach is to allow users to get to know the benefits of using their platform with enough access to their main features to know that they want access to more. * * Their approach works because most social media users, even individuals, will have more than three social media profiles to manage. And with plans starting at $9.99, it’s easy to say yes to the upgrade. * * ③Bait & Hook Model * The Bait and Hook business model is one of the most well-known business models, and is often described as the Razor Blade model in reference to one of its leading examples. In more generic terms it is also quoted to as the Tied Products/Service business model. In essence the model consists of offering a basic product or service at a very low price (the bait), and then taking profit on recurrent sales of refills or associated products or services (the hook). * * The first example that comes to mind is companies like P&G (Gillette) selling their razors at low cost and earning money on the recurrent sales of the blades. Over the years the concept has been successfully copied to other industries, with leading examples like printers (the bait) and inkjet cartridges/refills (the hook); and cell phones (the bait) and air time (the hook). The video gaming industry shows another good example. The game consoles are sold at relatively low price, recouping the lost profits on the higher priced games. * * According to Investopedia, this business model is not intended to give away freebies each time a customer returns. Rather, the tactic here involves offering low prices on one type of good, while considerably marking up the price of another. This is supposed to create an illusion to the customer that they are getting a bargain, but is a way for businesses to make a profit. * * Examples: * Even smartphones today are using the bait and hook business model to get people to purchase their products and services. Providers are offering free or steeply discounted top smartphones like the iPhone 6 in exchange for long-term data plans that have higher costs. The bait is the discount on the wanted smartphone. The hook is that you’ve got to purchase a data plan that could be $60-$90 per month per person. The profits will be made back in no time at that rate. * * Here are some other common examples of the bait and hook that many get many customers to open up their wallets or purses every day. * * Printers that require new cartridges, refills, or toner. * Digital cameras that require print image development. * Offering menu items for $1, but charging higher prices for associated items, like a drink. * The goal isn’t to give away free items every time a customer returns for a product. The goal of the bait and hook business model is to get people excited about the initial bait product. They need to love it so much that they find value in buying the hook because the bait has been so great. Customers feel like they’re getting a bargain when the business model is run to perfection and businesses are able to make a ton of profit in return. * * When a business is running a sales promotion, they are using a modified version of the bait and hook. The low prices on specific items is designed to bait customers into a visit. The hook comes by having other needed items available at full price. It’s like running a sale on salty peanuts, but having bottled water being sold at regular price. The profit margins are high on the bottled water and people purchase the item because they know the salty peanuts will make them thirsty. * * A customer feels like they’ve saved money with the sale price on the salty peanuts. In reality, the business made profit on each item. Many customers wouldn’t have even thought to purchase either item except for the sale that was run. * * The bait and hook business model is a proven winner in many industries today. As long as excitement can be generated for a product, then there is always a chance for it to succeed. * 8. The process of building a business model? * ·Understand the Context and the resulting implications for your business model * ·Prototype your business model canvas -- think and create visually * ·Gain customer insights and build on them to improve your business model canvas * ·Tell the story * 9. Value Proposition Design? * * The set of value proposition benefits that you design to attract customers must FIT with the set of customer segment characteristics that you assume, observe and verify in the market * * Key Takeaway #1 * You achieve Product-Market Fit when your products and services produce pain relievers and gain creators that match one or more of the jobs, pains and gains that are important to your customer. * * Key Takeaway #2 * Although individual preferences may vary try to get a sense of customer priorities. Not all customer problems hold the same value to the customer. Find out which pains they find extreme versus merely moderate. Learn which gains do they find essential versus just nice to have. * * Key Takeaway #3 * Addressing all customers pains and gains is usually unrealistic. * * Key Takeaway #4 * Some business models, such as Platform and Intermediary, work only with a combination of several value propositions and customer segments. * * Key Takeaway #5 * Use best selling books and magazines to generate fresh ideas for new and innovative value propositions and business models. It's a quick and effective way to immerse yourself in various relevant and popular topics and build on current trends. * * Key Takeaway #6 * Interviews are an excellent starting point to learn from customers but typically they don't provide enough or sufficiently reliable insights to make decisions. Complement your interviews with other research methods. Add real life observations of customers and experiments to prove your assumptions. * * Key Takeaway #7 * Find and use earlyvangelists to build a foothold market and shape your value propositions via experimentation and learning. * * Key Takeaway #8 * Always compare your value proposition with your competitors value propositions. * * Key Takeaway #9 * When you start exploring new ideas, you are usually in a space of maximum uncertainty. You don't know if your ideas will work. Refining them in a business plan won't make them more likely to succeed. You are better off testing your ideas with cheap experiments to learn and systematically reduce uncertainty. Then increase spending on experiments, prototypes and pilots with growing certainty. * 10. List the types of customer profile and explain. * ①Customer Jobs * “The things your customers are trying to get done in their work or in their life… the tasks they are trying to perform and complete, the problems they are trying to solve, or the needs they are trying to satisfy.” * Need to take the customer’s perspective and consider a number of variables… * Types of jobs: * Functional jobs -- when they try to perform or complete a specific task or solve a specific problem * Social jobs -- when they want to look good or gain power or status; how they want to be perceived by others * Personal/emotional jobs -- when they seek a specific emotional state * Supporting jobs * Performed in the context of purchasing and consuming value, and arise from 3 different roles -- buying, co-creating, or transferring value * Job context * The context in which the job is performed may impose constraints or limitations - important to consider * Job importance * On a scale from important to insignificant -- determine how much does it matter to the customer * * Products and Services * “What you offer… that helps customers complete either functional, social, or emotional jobs or helps them satisfy basic needs.” * May include supporting ones that help the customer perform the roles of buyer, co-creator, and transferer (disposing of product) * Likely composed of various types of products and services: * Physical/tangible;Intangible;Digital;Financial;Relevance * On a scale from essential to nice to have -- determine how relevant it is to your customer and hence your value proposition * * * ②Customer Pains * “Anything that annoys your customer before, during, or after trying to get a job done or simply prevents them from getting a job done. The risks or potential bad outcomes, related to getting a job done badly or not at all.” * Seek to identify the 3 types of customer pain (in concrete terms) and how severe customers find them… * Undesired outcomes, problems, and characteristics * Pains are functional, social, or emotional, or ancillary, or may involve undesired characteristics * Obstacles * Things that prevent customers from even getting started with a job or that slow them down * Risks (undesired potential outcomes) * What could go wrong and have important negative consequences * Pain severity * On a scale from extreme to moderate -- determine how much does it annoy or affect them * * Pain Relievers * “How exactly your products and services alleviate specific customer pains… Great value propositions often focus only on a few pains that they alleviate extremely well.” * Relevance * On a scale from essential to nice to have -- determine how valuable it is to your customer * Essential pain relievers relieve extreme issues, often in a radical way, and create a lot of value * * ③Customer Gains * “The outcomes and benefits your customers want… include functional utility, social gains, positive emotions, and cost savings.” * Seek to identify the 4 types of customer gains in terms of outcomes and benefits (in concrete terms), and how relevant they are to them… * Required gains * Without which a solution wouldn’t work -- the most basic expectation * Expected gains * Relatively basic gains that customers expect from a solution, even if it could work without them * Desired gains * That go beyond what customers expect from a solution but would love to have if they could * Unexpected gains * That go beyond customer expectations and desires; they wouldn’t even come up if you asked them * Gain relevance * On a scale from essential to nice to have -- determine how relevant is the gain to them. * * Gain Creators * “Describe how your products and services create customer gains… how you intend to produce outcomes and benefits your customer expects, desires, or would be surprised by… Focus on those that are relevant to customers and where your products and services can make a difference.” * Relevance * On a scale from essential to nice to have -- determine how relevant it is to your customer * 11. Tell the story * Build the model one image at a time * Make sure you are telling a story -- weave a thread through the elements and show the connections in a logical order * Use colour-coding for different segments/revenue streams -- whatever you can do to make visuals clear * In your presentation focus on the critical elements that create a clear narrative and make your case -- the follow-up details are for your report *

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