Key Elements of a Business Model
8 Key Elements of a Business Model
1. Value proposition 2. Revenue model 3. Market opportunity 4. Competitive environment 5. Competitive advantage 6. Market strategy 7. Organizational development 8. Management team
1. Value Proposition
- Why should the customer buy from you?- What will your firm provide that other firms do not and cannot?
- A value proposition defines how a company's product or service fulfills the needs of customers.
- Successful e-commerce value propositions:
a) Personalization/customization
• Reduction of product search, price discovery costs Facilitation of transactions by managing product delivery
Example: Before Amezone.com? The customers used to visit supermarkets; Book shops, keep waiting for the availability of the book; keep coming back!!!
2. Revenue Model
- How will the firm earn revenue, generate profits, and produce a superior return on invested capital?- Types of Revenue Model:-
a) Advertising revenue model
- A company provides a forum for advertisements and receives fees from advertisers.
- Yahoo.com, for instance, derives a significant amount of its revenue from selling advertising such as banner ads.
b) Subscription revenue model
- A company that offers its users content or services charges a subscription fee for access to some or all of its offerings.
- Yahoo has broadened its business model to include a monthly subscription to Yahoo Platinum, which gives viewers access to CNN, NASCAR racing, ABC News, and other video feed.
c) Transaction fee revenue model
- a company receives a fee for enabling or executing a transaction.
- For example, eBay.com an online auction marketplace receives a small transaction fee from a seller if the seller is successful in selling the item.
- E-Trade.com, an online stockbroker, receives transaction fees each time it executes a stock transaction on behalf of a customer.
d) Sales revenue model
- companies derive revenue by selling goods, information, or services to customers.
- Companies such as Amazon.com (which sells books, music, and other products), LLBean.com, and Gap.com, all have sales revenue models.
e) Affiliate revenue model
- sites that steer business to an “affiliate” receive a referral fee or percentage of the revenue from any resulting sales.
- For example, MyPoints.com makes money by connecting companies with potential customers by offering special deals to its members. When they make a purchase, members earn “points” they can redeem for freebies, and MyPoints.com receives a fee.
- Community feedback sites such as Epinions.com receive much of their revenue from steering potential customers to Web sites where they make a purchase
3. Market Opportunity
- What marketspace do you intend to serve and what is its size?- Marketspace: Area of actual or potential commercial value in which company intends to operate
- Realistic market opportunity: Defined by revenue potential in each of market niches in which company hopes to compete
- Market opportunity typically divided into smaller niches
4. Competitive Environment
- Who else occupies your intended market space?- Other companies selling similar products in the same market space Includes both direct and indirect competitors
- Example: automobile manufacturers and airline companies operate in different industries, but compete indirectly because they offer alternative means of transportation.
- CNN.com and ESPN.com compete for airtime consumed by the clients.
- Competitive environment Influenced by:
Number and size of active competitors
Each competitor's market share
Competitors' profitability Competitors' pricing
Customer buying power.
5. Competitive Advantage
- What special advantages does your firm bring to the market space?- Achieved when a firm produces the superior product or can bring the product to market at a lower price than competitors
- Important concepts:
Asymmetries: exists whenever one participant in a market has an edge than others due to more resources such as financial backing, knowledge, information, and/or power.
- Example: AOL.com offered music subscription of their 250,000 songs catalog through MusicNet
- Advantage:-
Unfair competitive advantage: occurs when one firm develops an advantage based on a factor that other firms cannot purchase. For example, a brand name cannot be purchased and is in that sense an "unfair" advantage. brands are built upon loyalty, trust, reliability, and quality.
Leverage: when a company uses its competitive advantages to achieve more advantage in surrounding markets. For example, Amazon.com move into the online auction arena leveraged the company's customer database, offering one more way to buy from Amazon A perfect markets, in which there are no competitive advantages or asymmetries because all firms have access to all the factors of production
6. Market Strategy
- How do you plan to promote your products or services to attract your target audience?- Details how a company intends to enter the market and attract customers
- Best business concepts will fail if not properly marketed to potential customers
- Example: AOL, uses sampling of millions of free CD ROMs to attract new users. AOL encloses CDs with the free trial offer in magazines and newspapers across the country. This strategy has proven to be very successful for AOLS
7. Organizational Development
- What types of organizational structures within the firm are necessary to carry out the business plan?- An organizational development plan that describes how the company will organize the work that needs to be accomplished.
- Typically divided into functional departments
- Hiring moves from generalists to specialists as company grows
8. Management Team
- What kinds of experiences and background are important for the company's leaders to have?
- Employees are responsible for making the business model work Strong management team gives instant credibility to outside investors
- A strong management team may not be able to salvage a weak business model but should be able to change the model and redefine the business as it becomes necessary Important
- Questions to be answered: What kind of technical background is desirable? What kind of supervisory experience is necessary? How many years in a particular function should be required? What job functions should be fulfilled first: marketing, production, finance, or operations?
Short Anser from upper one /Shortcut of upper one answer, Downward
8 Key Elements of a Business Model
1) Value Proposition
- Defines how a company's product or service fulfills the needs of customers
- Questions to ask:
- Why will customers choose to do business with your firm instead of another?
- What will your firm provide that others do not or cannot?
- Examples of successful value propositions:
▪ Personalization/customization
▪ Reduction of product search, price discovery costs
▪ Facilitation of transactions by managing product delivery
2) Revenue Model
- Describes how the firm will earn revenue, generate profits, and produce a superior return on invested capital
- Major types:
a) Advertising revenue model
b) Subscription revenue model
c) Transaction fee revenue model
d) Sales revenue model
e) Affiliate revenue model
a) Advertising Revenue Model
- Web site that offers content, services, and/or products also provides a forum for advertisements and receives fees from advertisers
- Example: Yahoo.com
b) Subscription Revenue Model
- The website that offers users content or services charges a subscription fee for access to some or all of its offerings
- Examples: Consumer Reports Online
c) Transaction Fee Revenue Model
- the company that receives a fee for enabling or executing a transaction
- Examples: eBay.com, E-Trade.com
d) Sales Revenue Model
- The company derives revenue by selling goods, information, or services to customers
- Examples: Amazon.com, LLBean.com, Gap.com
e) Affiliate Revenue Model
- Sites that steer business to an "affiliate" receive a referral fee or percentage of the revenue from any resulting sales
- Example: MyPoints.com
3) Market Opportunity
- Refers to a company's intended market space and overall potential financial opportunities available to the firm in that marketspace
a) Marketspace:- Area of actual or potential commercial value in which company intends to operate
b) Realistic market opportunity:- Defined by revenue potential in each of market niches in which company hopes to compete
4) Competitive Environment
- Refers to the other companies selling similar products and operating in the same marketspace
- Influenced by:
▪ Number of active competitors
▪ Each competitor's market share
▪ Competitors' profitability
▪ Competitors' pricing
- Includes both direct competitors and indirect competitors
a) Direct competitors - companies that sell products or services that are very similar and into the same market segment Example: Priceline.com and Travelocity.com
b) Indirect competitors - companies that may be in different industries but that still compete indirectly because their products can substitute for one another Example: CNN.com and ESPN.com
5) Competitive Advantage
- Achieved when a firm can produce a superior product and/or bring the product to market at a lower price than most, or all, of competitors.
- Firms achieve a competitive advantage when they can obtain differential access to the factors of production that are denied to competitors
- Asymmetry - when one participant in a market has more resources than others
Types of competitive advantage include:
a) First mover advantage results from a firm being first into a marketplace
b) Unfair competitive advantage occurs when one firm develops an advantage based on a factor that other firms cannot purchase
c) Leverage occurs when a company use its completive advantage to achieve more advantage in another market
6) Market Strategy
- The plan details how a company intends to enter a new market and attract customers
- Best business concepts will fail if not properly marketed to potential customers
7) Organizational Development
- The plan that describes how the company will organize the work that needs to be accomplished
- Work is typically divided into functional departments
- Hiring moves from generalists to specialists as a company grows
8) Management Team
- Employees of the company responsible for making the business model work Strong management team gives instant credibility to outside investors
- A strong management team may not be able to salvage a weak business model but should be able to change the model and redefine the business as it becomes necessary
OR,
8 Key Elements of a Business Model
1) Value proposition: This describes how a company’s product or service fulfills the needs of customers and why a customer would buy from the company. For example, a successful value proposition must include personalization, customization, reduction of product search, price discovery costs, and facilitation of transactions by managing product delivery.
2) Revenue model: This describes how a company plans to make money from its business because earning revenue and produce a superior return on invested capital is the primary objective of a company. For example, the 5 major e-commerce revenue models include the advertising revenue model, subscription revenue model, transaction fee revenue model, sales revenue model, affiliate revenue model.
3) Market opportunity: This describes what market space does the company intends to serve and what is its size. Basically, it is referred to the company’s intended market space and the overall potential financial opportunities available to the company in that market space.
4) Competitive environment: This describes the direct and indirect competitors who doing similar business in the same market space. For example, the additional information includes how large they are, their net profits, their share of the market space, and the price of their product.
5) Competitive advantage: This describes the factors that differentiate the business from its competition and which may encourage customers to purchase the company’s product or service. For example, the product or service of the company may cheaper or of higher quality than its competitors.
6) Market strategy: This describes how the company plans to enter the market and attract customers and potential customers such as promoting the product and service to attract a target audience.
7) Organizational development: This describes what types of organizational structures within the business need to be in place to ensure it runs smoothly and all the necessary work is completed. For example, the process of defining all the functions within a business and the skills necessary to perform each job as well as the process of recruiting and hiring efficient employees.
8) Management team: This describes what kinds of experiences and background are important for the company’s leader to have. For example, a strong management team may not be able to salvage a weak business model, but should be able to change the business model and redefine the business, and also a strong management team should give good credibility to outside investors.
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