Business Model for Entrepreneurs
9 Building Blocks of a Business Model
1. Customer Segments – An organization serves one or several customer segments.
2. Value Propositions – It seeks to solve customer problems and satisfy customer needs with value propositions.
3. Channels – Value Propositions are delivered to customers through communication, distribution and sales channels.
4. Customer Relationships – Customer relationships are established and maintained with each customer segment.
5. Revenue Streams – Revenue streams result from value propositions successfully offered to customers.
6. Key Resources – Key resources are the assets required to offer and deliver the previously described elements…
7. Key Activities – … by performing a number of key activities.
8. Key Parnerships – Some activities are outsourced and some resources are acquired outside the enterprise.
9. Cost Structure – The business model elements result in the cost structure.
1. How to segment customer?
a. Their needs require and justify a distinct offer
b. They are reached through different Distribution Channels.
c. They require different types of relationships
d. They have substantially different profitabilities
e. They are willing to pay for different aspects of the offer
Types of Customer Segments:
· Mass market: focus on one large group of customers with broadly similar needs/problems
· Niche market: specific requirements, focusing on niche in the market
· Segmented: slightly different needs/problems
· Diversified: very differend needs/problems
· Multi-sided platforms: serve 2 or more interdependent customer segments
2. Value Proposition? the reason why customers turn to one company over another.
Describes the bundle of products and services that create value for specific customer segment. It solves a customer problem or satisfies a customer needs.
How to check value proposition?
· What value do we deliver to the customer?
· Which one of our customer’s problems are we helping to solve?
· Which customer needs are we satisfying?
· What bundles of products & servicecs are we offering to each Customer Segment?
Elements to contribute a customer value creation:
- Getting the job done
- Cos tor Risk Reduction
3. Channels: customer touch points that play an important role in the customer experience
Describes how a company communicates with and reaches its Customer Segments to deliver a Value Proposition
*Communication, Distribution, Sales Channels comprise a company’s interface with customers.
How to create & understand Channels?
· Through which Channels do our Customer Segments want to be reached?
· How are we reaching them now?
· How are our Channels integrated?
· Which ones work best?
· Which ones are most cost-efficient?
· How are we integrating them with customer routines?
Mix of channel Types
· Partner Channels lead to lower margins, but they allow an organization to expand its reach and benefit from partner strengths
· Owned Channels and particularly direct ones have higher margins, but can be costly to put in place and to operate
- Own(direct): Sales force, Websites, Own stores
- Partner(indirect): Partner stores, Wholesaler
1. Awareness: How do we raise awareness about our company’s products and services?
2. Evaluation: How do we help customers evaluate our organization’s Value Proposition?
3. Purchase: How do we allow customers to purchase pecific products and services?
4. Delivery: How do we deliver a Value Proposition to customers?
5. AfterSales: How do we provide post-purchase customer support?
4. Customer Relationship: deeply influence the overall customer experience
Describes the types of relationships a company establishes with specific Customer Segments. Relationship can range from personal to automated.
Driven by motivations: customer acquisition, customer retention, and boosting sales(upselling)
How to build relationship with Customer Segment?
· What type of relationship does each of our Customer Segments expect us to establish and maintain with them?
· Which ones have we established?
· How costly are they?
· How are they integrated with the rest of our business model?
Categories of Customer Relationships
- Personal assistance
- Dedicated personal assistance
- Automated services
5. Revenue Streams: For what value is each Customer Segment truly willing to pay?
o Represents the cash a company generates from each Customer Segment (costs must be subtracted from revenues to create earnings)
o The firm generate one or more Revenue Streams from each Customer Segment
o Each Revenue Stream may have different pricing mechanisms
2 Different types of Revenue Streams
· Transaction revenues: resulting from one-time customer payments
· Recurring revenues: resulting from ongoing paymnets to either deliver a Value Proposition to customers or provide post-purchase customer support.
How to understand Revenue Streams?
· For what value are our customers really willing to pay?
· For what do they currently pay?
· How are they currently paying?
· How would they prefer to pay?
· How much does each Revenue Stream contribute to overall revenues?
Several Ways to generate Revenue Streams?
· Asset sale
· Usage fee
· Subscription fees
· Brokerage fees
Fixed Menu Pricing: Predefined prices are based on static variables.
- List price: Fixed prices for individual products, services, or other Value Propositions
- Product feature dependent: Price depends on the number or quality of Value Propositions features
- Customer segment dependent: Price depends on the type and characteristic of a Customer Segment
- Volume dependent: Price as a function of the quantity pruchased
Dynamic Pricing: Prices change based on market conditions
- Negotiation: (bargaining) Price negotiated between two or more partners depending on negotiation power and/or negotiation skills.
- Yield management: Price depends on inventory and time of purchase (normally used for perishable resources such as hotel rooms or airline seats)
- Real time market: Price established dynamically based on supply and demand.
- Auctions: Price determined by outcome of competitive bidding
6. Key Resources: the most important assets required to make a business model work
· These resources allow an enterprise to create and offer a Value Proposition, reach markets, maintain relationships with Customer Segments, and earn Revenues.
· Key resources can be physical, financial, intellectual or human.
· Key resources can be owned or leased by the company or acquired from key partners
What is the Key Resources in your business?
- What Key Resources do our Value Propositions require?
- Our Distribution Channels?
- Customer Relationships?
- Revenue Streams?
7. Key Activities: the most important actions a company must take to operate successfully
· Describes the most important things a company must do to make its business model work
· Key Resources required to create and offer a Value Proposition, reach markets, maintain Customer Relationships, and earn Revenues.
· Key Activities differ depending on business model type
What Key Activities do?
- What Key Activities do our Value Propositions require?
- Our Distribution Channels?
- Customer Relationships?
- Revenue Streams?
· Production: designing, making & delivering a product in substantial quantitiy or superior quality
· Problem solving: coming up with new solutions to individual customer problems.
· Platfrom/network: dominated by platfrom or network-related Key activities (networks, software, brands, etc..)
8. Key Partnerships: create alliances to optimize their business models, reduce risk, or acquire resources.
· Describes the network of suppliers and partners that maket he business model work
Four different types of partnerships:
1. Strategic alliances between non-competitors
2. Coopetition: strategic partnerships between competitors
3. Joint ventures to develop new businesses
4. Buyer-supplier relationships to assure reliable supplies
Who & Which
- Who are our Key Partners?
- Who are our Key Suppliers?
- Which Key Resources are we acquiring from partners?
- Which Key Activities do partners perform?
3 motivations for creating partnerships:
1. Optimization and economy of scale
2. Reduction of risk and uncertainity
3. Acquisition of particular resources and activities
9. Cost Structure: the most important costs incurred while operating under a particular business model
· Describes all costs incurred to operate a business model
· Creating and delivering value, maintaining Customer Relationships and generating revenue all incur costs
· Such costs can be calculated relatively easily after defining Key Resources, Key Activities, and Key Partnerships
How to measure costs?
- What are the most important costs inherent in our business model?
- Which Key Resources are most expensive?
- Which Key Activities are most expensive?
- Two broad classes of business model Cost Structures:
o Cost Driven
o Value Driven
Classes of business model Cost Structures
· Cost Driven (focus on minimizing costs wherever possible)
· Value Driven (instead focus on valuve creation)
1. Fixed Costs (Costs that remain the same despite the volüme of goods or services producced)
2. Variable Costs (Costs that vary proportionally with the volüme of goods or services produced)
3. Economies of Scale (Cost advantages that a business enjoys as its output expands)
4. Economies of Scope (Cost advantages that a business enjoys due to a larger scope of operations)