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C6 business models

  1. 1. -CHAPTER 7BUSINESS MODEL By: Nor Aida Abdul Rahman
  2. 2. Introduction             A business model also called a business design. A business model is the mechanism by which a intends to generate revenue and profits. It is a summary of how a company plans to serve its customers. Its involves both strategy and implementation. It is the totality of: How it will select its customers How it defines and differentiates its product offerings How it creates utility for its customers How it acquires and keeps customers How it goes to the market (promotion and distribution strategy) How it defines the tasks to be performed How it configures its resources How it captures profit By: Nor Aida Abdul Rahman
  3. 3. Types of Business Model         The Subscription Business Model The Razor & Blades Business Model The Pyramid Scheme Business Model The Multi-level Marketing Business model The Network Effects Business Model The Monopolistic Business Model The cutting Out the Middleman model The Auction Business Model         The Online Auction Business Model The Bricks and Clicks Business Model Loyalty Business Models Collective Business Models The industrialization of services business models The servitization of products business model The low cost carrier business model The online content business model By: Nor Aida Abdul Rahman
  4. 4. 1. Subscription Business Model     The subscription business model is a business model that has long been used by magazines and record clubs, but the application of this model is spreading Rather than sell products directly, more and more companies are selling monthly or yearly access to a product or service This, in effect, converts a one time sale of a product into a recurring sale of a service In addition to magazines, book clubs and record clubs, many other industries are using the subscription model. They include phone companies, newspapers, cable providers, cell phone companies, internet providers, pay TV channels, software providers, business solutions providers and financial services firms. By: Nor Aida Abdul Rahman
  5. 5. Impact on the vendor      Businesses benefit because they are assured a constant revenue stream. This greatly reduces uncertainty and the risky ness of the enterprise Also, in many cases (such as integrated software solutions), the subscription pricing structure is designed so that the revenue stream from the recurring subscription is considerably greater than the revenue from simple one time purchases. In some subscription schemes (like magazines), it also increases sales, by not giving subscribers the option to accept or reject any specific issue. This reduces customer acquisition costs, and allows personalized marketing or database marketing. Subscription business models also have their drawbacks. The business must commit to a large infrastructure to manage and track subscription. By: Nor Aida Abdul Rahman
  6. 6. Impact on the customers      Consumer can also benefit. If they were going to purchase the product regularly any way, they will benefit from the convenience. They only have to make one purchase decision. Then sit back and wait for the product to arrive. It is also useful for those people that are looking for structure and constancy in their otherwise hectic lives. There are also many people that use regular subscriptions to fulfill a need for belonging. Subscription can do this by presenting themselves as clubs. Example; Computer Science Book Club. Subscription pricing can blunt the sting of paying for expensive items. By spreading the cost over a period of time, the purchase seems more affordable. By: Nor Aida Abdul Rahman
  7. 7. 2. Razor and Blades Business Models     The razor and blades business model (also called the “bait and hook model” or the “tied products model” works by selling a “master” product at a subsidized price, and making the profit on high margin ‘consumables’ that are essential to the use of the master product. The master product may actually be sold at a loss, in order to ‘capture’ the customer into using the consumable product. In effect, this is the same as offering a high interest loan to the customer to offset the price of the master product, which is to be paid off in installments as they use the consumables The business model can be dated to King C. Gilette, who used this business model for his sales of razor handles and disposable razor blades. This business model continues to be used in the disposable razor blade business to this day. By: Nor Aida Abdul Rahman
  8. 8. Cont.. o o o This model may be threatened if the price of the high margin consumables is in question. For example, computer printer manufacturers have gone through extensive efforts to make sure that printer ink cartridges are not interchangeable. In markets where all the major competitors follow this business model, there may be suspicions of the existence of cartels and violation of antitrust legislation. In some cases, notably auto parts in the United States, legislation exist specifically to prevent this business model from existing. Other example include: - computer printers and their ink cartridges - games consoles and the games they play - cell phones and air time costs - inexpensive cameras and prints By: Nor Aida Abdul Rahman
  9. 9. 3. Pyramid Scheme Business Model     A pyramid is a business model that involves the exchange of money primarily for enrolling other people into the scheme, without any product or service being delivered Pyramid schemes have been in existence for at least a century. The method of conducting business known as multi level marketing (MLM) often closely resembles pyramid schemes. Although pyramid schemes have been declared illegal, they still persist in many forms. While schemes simply involving the blatant exchange of money have generally disappeared, many schemes persist that purportedly ‘sell’ a product to mask the primary intention of simply enrolling new members. The key identifiers of a pyramid scheme are: - A highly excited sales pitch - Vaguely phrased promises of limitless income potential By: Nor Aida Abdul Rahman
  10. 10. Cont.. No product, or a product being sold at a price ridiculously in excess of its real market value. An income stream that chiefly depend on the commissions earned by enrolling new members A tendency for only the early investors/joiners to make any real income  The key distinction between these schemes and “legitimate” MLM businesses (e.g. Excel Communications is that in the latter cases a meaningful income can be earned solely from the sales of the associated product or service. While these MLM businesses also offer commissions from recruiting new members, this is not essential to successful operation of the business by any individual member. By: Nor Aida Abdul Rahman
  11. 11. 4. Multi-level Marketing Business Model       MLM also called Network Marketing (NM) MLM exhibits a business model which exemplifies direct marketing. Typically, independent business owner (IBOs) become associated with a parent company in a contractor-like relationship. IBOs receive remuneration for shopping within their own business, for selling products and for expanding their network of people (“down line”) doing the same. An IBOs receives a percentage of the profits generated by the network of all IBOs introduced to the system by him or her, and also of the profits generated by the people introduced by those IBOs, and so on. A point system, where the points represent the volume of products sold through the IBO network, track rewards. By: Nor Aida Abdul Rahman
  12. 12.    MLM has a recognized image problem because of difficulties in making a clear distinction between legitimate network marketing and illegal “pyramid schemes” or Ponzi schemes. Nonetheless, many NM/MLM businesses operate legitimately in various parts of the world. E.g.; Amway (the world’s leading company in network marketing, with annual turnover exceeding USD $1 billion) in particular often receives criticism for generating considerable revenue from selling instructional and motivational materials to its participants. The United States Department of Justice indicted the company, but Amway secured an acquittal. By: Nor Aida Abdul Rahman
  13. 13. 5. Network Effect Business Model    The network effect means that a good or service is such that the value of the good or service to a potential customer is dependent on the number of customers already owning that good or using that service. Equivalently, it means that the total value of a good or service that possesses network effects is roughly proportional to the square of the number of customers already owning that good or using that service. One consequence of a network effect is that the purchase of a good by one individual indirectly benefits others who own the good – for example by purchasing a telephone a person makes other people’s telephones more useful. This type of side effect in a transaction is known as an externality in economics, and externalities arising from network effects are known as ‘network externalities’. By: Nor Aida Abdul Rahman
  14. 14. Cont..  Network effects were used as justification for some of the business models for dot-coms in the late 1990s. These firms operated under the belief that when a new market comes into being which contains strong network effects, firms should care more about growing their market share than about becoming profitable.  This was believed to be rational because market share will determine which firm can set technical and marketing standards and thus determine the basis of future competition.  A good example of this strategy was that deployed by Mirabilis, the Israeli start up which pioneered instant messaging and was boughtout by By: Nor Aida Abdul Rahman
  15. 15. Cont…  Example: There are very strong network effects operating in the market for widely-used computer software. Take for example Microsoft Office. For many people choosing an office suite, a prime consideration is how valuable having learned that office suite will prove to potential employers. That is, since learning to use an office suite takes many hours, they want to invest that time learning the office suite that will make them most attractive to potential employers (or consulting clients, etc) Network effects and technology lifecycle   If an existing technology or company whose benefits are largely based on network effects starts to lose market share against a challenger such as disruptive technology or open standards based competition, the benefits of network effects will reduce for the incumbent, and increase for the challenger In this model, a tipping point is eventually reached at which the network effects of the challenger dominate those of the former incumbent, and the incumbent is forced into an accelerating decline, whilst the challenger takes over the incumbent’s former position. By: Nor Aida Abdul Rahman
  16. 16. 6. Monopoly Business Model     In economics, a monopoly (from the Greek monos, one + polein, to sell) is defined as a market situation where there is only one provider of a product or service. Monopoly should be distinguished from “monopsony”, in which there is only one buyer of the product or service. It should also strictly, be distinguished from the (closely related) phenomenon of a cartel (whish is a type of oligopoly), in which a centralized institution is set up to (partially) coordinate the actions of several independent providers – as opposed to monopoly, in which there is one sole provider – although in some cases, that sole provider may have been created by consolidating several formerly independent firms. Monopolies are characterized by a lack of economic competition for the good or service that they provide (and a lack of viable substitute goods), as well as high barriers to entry for potential competitors in the market By: Nor Aida Abdul Rahman
  17. 17. Cont….    Large corporation often attempt to monopolize markets through horizontal integration, in which a parent company controls consolidates control over several small, seemingly diverse companies (sometimes even using different branding to create the illusion of marketplace competition). A magazine publishing firm, for example, might publish many different magazines on many different subjects, but it would still be considered to engage in monopolistic practices if the intent of doing this was to control the entire magazine-reader market, and prevent the emergence of competitors. The economic incentives for a monopoly make it likely that they will sell a lower quantity of goods at a higher price than firms would in a purely competitive market in order to secure monopoly profits. This will typically lead to an outcome which is inefficient. By: Nor Aida Abdul Rahman
  18. 18. Cont..    In economics, a company is said to have monopoly power if it faces a downward sloping demand curve. This is in contrast to a price taker that faces a horizontal demand curve. A price taker cannot choose the price that they sell at, since if they set it above the equilibrium price, they will sell none, and if they set it below the equilibrium price, they will have an infinite number of buyers (and be making less money than they could if they sold at the equilibrium price). In contrast, a business with monopoly power can choose the price they want to sell at. If they set it higher, they sell less. If they sell it lower, they sell more. In economics, a government-granted monopoly, also known as a state monopoly or a coercive monopoly, is a monopoly which is established and protected through the use of laws, regulations or other mechanism of government enforcement to forbid competition in providing a particular good or service. By: Nor Aida Abdul Rahman
  19. 19. 7. Cutting Out The Middleman     Cutting out the middleman is a business model that involves reducing costs by removing layers from a distribution network. Cutting out the middleman may become possible as a result of better technology or economies of scale. In economics, the term ‘economies of scale’ refers to a situation where the cost of producing one unit of a good or service decreases as the volume of production increases. The converse situation in which the cost of producing a good or service increases as the volume of production increases is known ‘diseconomies of scale’. Economies of scale tend to occur in industries with high capital costs in which those costs can be distributed across a large number of units of production. By: Nor Aida Abdul Rahman
  20. 20. Cont…  The exploitation of economies of scale helps explain why companies grow large in some industries, why marketplaces with many participants are sometimes more efficient, and how a natural monopoly can often occur. It is also a justification for free trade policies, under the idea that a large unified market presents more opportunities for economies of scale. By: Nor Aida Abdul Rahman
  21. 21. 8. The Auction Business Model     An auction is the process of buying and selling things by offering them up for bid, taking bids, and then selling the item to the highest bidder In economic theory, an auction is a method for determining the value of a commodity that has an undetermined or variable price. In some cases, there is a minimum or reserve price; if the bidding does not reach the minimum, there is no sale (but the person who puts the item up for auction still owes a fee to the auctioneer). In the context of auctions, a bid is an offered price. Auctions are publicly seen in several contexts; in the antique, where besides being an opportunity for trade they also serve as social occasions and entertainment; in the sale of collectibles such as stamps, coins, classic cars and fine art; in thoroughbred horseracing, where yearling horses are commonly auctioned off; and in legal contexts where forced auctions occur, as when one’s farm or house is sold at auction on the courthouse steps. By: Nor Aida Abdul Rahman
  22. 22. Types of Auctions 1. 2. 3. English auction : In this type of auction, participants bid openly against one another, with each bid being higher than the previous bid. The auction ends when no participant is willing to bid further, or when a pre-determined “buy-out” price is reached, at which point the highest bidder pays the price. Dutch Auction : In the traditional dutch auction the auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneer’s price. That participant pays the last announced price. This term can also be used to describe online auctions where several identical goods are sold simultaneously to an equal number of high bidders Sealed first-price auction : In this type of auction all bidders simultaneously submit bids in such a way that no bidder knows the bid of any other participant. The highest bidder pays the price he submitted. By: Nor Aida Abdul Rahman
  23. 23. 4. Sealed Second-price auction : also known as a Vickrey auction: This is identical to the sealed first-price auction, except the winning bidder pays the second highest bid rather than his own. Both the English and the second-price sealed-bid auctions will theoretically lead to the bidder’s bidding up to (or submitting as a sealed bid) their true valuation of the item. These two auctions are theoretically equivalent, a result which has been verified in practice as well. By: Nor Aida Abdul Rahman
  24. 24. 9. Online Auction Business Model  The online auction business model is one in which participants bid for products and services over the internet. Strengths of the Online Business Model  No time constraint – Bids can be placed at any time. This convenience increases the number of bidders.  No Geographical constraint – Seller and bidders can participate from anywhere that has internet access. This make them more accessible and reduces the cost of attending an auction. This increases the number of listed items (i.e..: number of sellers) and the number of bids for each item (i.e..: number of bidders). The items do not need to be shipped to a central location, reducing costs, and reducing the seller's minimum acceptable price. By: Nor Aida Abdul Rahman
  25. 25. Cont..     Intensity of social interactions . The social interactions involved in the bidding process are very similar to gambling. The bidders wait in anticipation hoping they will ?win? Large number of bidders . Because of the potential for a relatively low price, the broad scope of products and services available, the ease of access, and the social benefits of the auction process, there are a large numbers of bidders. Large number of sellers . Because of the large number of bidders, the potential for a relatively high price, reduced selling costs, and ease of access, there are a large number of sellers. Network economies . The large number of bidders will encourage more sellers, which, in turn, will encourage more bidders, which will encourage more sellers, etc., in a virtuous spiral. The more the spiral operates, the larger the system becomes, and the more valuable the business model becomes for all participants. By: Nor Aida Abdul Rahman
  26. 26. 10. Bricks and Clicks Business Model    Bricks and clicks is a business strategy or business model in e-commerce by which a company attempts to integrate both online and physical presences. It is also known as Click-andmortar or clicks-and-bricks. For example, an electronics store may allow the user to order online, but pick up their order immediately at a local store. Conversely, a furniture store may have displays at a local store from which a customer can order an item electronically for delivery. The bricks and clicks strategy has typically been used by traditional retailers who have extensive logistical and supply chains. Part of the reason for its success is that it is far easier for a traditional retailer to establish an online presence than it is for a start-up company to employ a successful pure dot.com strategy, or an online retailer to establish a traditional presence. This strategy has contradicted analysts who believed that the internet would render traditional retailers obsolete through disintermediation. By: Nor Aida Abdul Rahman
  27. 27. Cont.. Advantages of the model:1. 2. 3. 4. 5. 6. 7. 8. Leveraging their core competency Leveraging existing supplier networks Leveraging existing distribution channels Leveraging brand equity Leveraging stability Leveraging existing customer base Leveraging a lower cost of capital Leveraging learning curve advantages By: Nor Aida Abdul Rahman
  28. 28. 11. 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. By: Nor Aida Abdul Rahman
  29. 29. 12. Collective Business Model    A collective business system is a business organization or association typically comprised of relatively large numbers of businesses, tradespersons or professionals in the same or related fields of endeavor, which pools resources, shares information or provides other benefits for their members. In the past, collective business systems such as the trade association, the cooperative and the franchise were created to allow groups of independently owned businesses with common interests to successfully compete in the marketplace. The following is a brief synopsis of those traditional collective business systems. i. Trade Association ii. Cooperative iii. Franchise By: Nor Aida Abdul Rahman
  30. 30. Cont.. 1. Trade Association  Trade associations are non-profit organizations in which the individual members are companies or individuals engaged in a common business pursuit. Competitors join together to create a platform format in which they deal with common problems of their industry. Any applicant meeting the standards of the association must be accepted as a member. Anti-trust law prohibits a member trade association from denying an otherwise qualified applicant's membership based upon a geographical proximity to an existing member. Trade associations commonly offer their members educational programs, the opportunity to come together at meetings to discuss common problems, and marketing materials designed to be imprinted by each member with its relevant information.    By: Nor Aida Abdul Rahman
  31. 31. Cont.. 2. Cooperative  A cooperative is a non-profit organization somewhat similar to a trade association. A significant difference between the cooperative and the trade association, however, is that with a trade association, the members have a non-equity position in the association, whereas in the typical cooperative the members will have an equity interest as all members of the cooperative own a portion of the cooperative. Generally, a cooperative only addresses one facet of business operation needs of interest to its members, e.g., purchasing of goods and services at advantageous prices. A purchasing cooperative is at risk in that it holds considerable assets in the form of inventory and provides credit to the businesses in the cooperative. In addition, the members of the cooperative risk loss of invested capital if the cooperative proves unsuccessful.     By: Nor Aida Abdul Rahman
  32. 32. Cont..  Franchise  The franchise is a for-profit collective business system wherein the franchiser offers proprietary products or services to its franchisees. The franchiser generally gives considerable marketing support to its franchisees. In exchange, the franchisees are subject to a substantial amount of control by the franchiser concerning its operations and marketing including the use of the franchisor's trade names, trademarks and copyrighted materials. A franchisee's employees typically are required to wear uniforms and to dress as specified by the franchisor.    By: Nor Aida Abdul Rahman
  33. 33. Cont..    Franchises can be offered by the franchisor on a territorial basis without violating antitrust laws. Ordinarily, the franchisee owns the non-real estate assets of a franchise. There is generally a substantial fee paid by the franchisee for the privilege of becoming a franchisee. This is followed by a period of training that is offered on an ongoing basis throughout the franchise. Most states have laws highly protective of franchisees in prohibiting the franchisor from terminating the franchise so long as the franchisee meets predetermined business requirements and does not otherwise violate the terms of the franchise agreement. The franchisor derives income from the initial franchise fees and products and services, which are offered to the franchisees on either a mandatory or optional purchase basis. The franchisor generally derives additional income based upon a percentage of the volume of business conducted by the franchisee. The franchise agreement also usually provides that the franchisee can only sell products supplied or approved by the franchisor. By: Nor Aida Abdul Rahman
  34. 34. Cont..  Among the traditional collective business systems only the franchise can create exclusive trade territories. Conversely, however, the franchise structure severely inhibits the independence of the franchisee and the success of the franchisee is inextricably tied to the success of the franchisor. The franchisee is not free to introduce non-approved products or services and is generally precluded from introducing innovative business or marketing strategies by the extensive control imposed by the franchisor. By: Nor Aida Abdul Rahman
  35. 35. 13. The Industrialization of Service Business Models • The industrialization of services business model is a business model used in strategic management and services marketing that treats service provision as an industrial process, subject to industrial optimization procedures. It originated in the early 1970s at a time when various quality control techniques were being successfully implemented on production assembly lines. By: Nor Aida Abdul Rahman
  36. 36. 14. Service Economy (Servitization of products business model)   Service economy can refer to one or both of two recent economic developments. One is the increased importance of the service sector in industrialized economies. Services account for a higher percentage of US GDP than 20 years ago. The current list of Fortune 500 companies contains more service companies and fewer manufacturers than in previous decades. The term is also used to refer to the relative importance of service in a product offering. That is, products today have a higher service component than in previous decades. In the management literature this is referred to as the servitization of products. By: Nor Aida Abdul Rahman
  37. 37. 15. Low Cost Carrier Business Model A low-cost carrier (also known as a no-frills or discount carrier) is an airline that offers low fares but eliminates all unnecessary services. The typical low-cost carrier business model is based on:        a single passenger class a single type of airplane (reducing training and servicing costs) a simple fare scheme (typically fares increase as the plane fills up, which rewards early reservations) free seating (which encourages passengers to board early) direct, point to point flights with no transfers flying to cheaper, less congested secondary airports short flights and fast turnaround times (allowing maximum utilization of planes) By: Nor Aida Abdul Rahman
  38. 38. Cont..   "Free" in-flight catering and other "complimentary" services are eliminated, and replaced by optional paid-for in-flight food and drink. The first successful low-cost carrier is generally acknowledged to be Southwest Airlines in the United States, which pioneered the concept when founded in 1971 and has been profitable every year since 1973. With the advent of aviation deregulation the model spread to Europe as well, the most notable success being the Irish Ryanair, founded in 1985. As of 2004, low cost carriers are now edging into Asia, lead by operators such as Malaysia's Air Asia. By: Nor Aida Abdul Rahman
  39. 39. Cont..   Low-cost carriers pose a serious threat to traditional 'full service' airlines, since full-service carriers cannot compete on price and, when given a choice, most consumers will opt for low price over other amenities. From 2001 to 2003, when the aviation industry was rocked by terrorism, war and SARS, the large majority of traditional airlines suffered heavy losses while low-cost carriers generally stayed profitable. Many carriers have opted to launch their own no-frills airlines, such as KLM's Buzz and United's Ted, but have found it difficult to avoid cannibalizing their core business. By: Nor Aida Abdul Rahman
  40. 40. Cont…  In Canada, Air Canada has found it difficult to compete with new lowcost rivals such as Westjet and Canjet despite their previously dominant position in the Canadian market: Air Canada declared bankruptcy in 2003.  A low-cost carrier or low cost airline (also known as a no-frills or discount carrier / 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 low - or lower - operating cost structure than their competitors. Through popular media the term has since come to define any carrier with low ticket prices and limited services regardless of their operating costs. By: Nor Aida Abdul Rahman
  41. 41. Cont.. Typical low-cost carrier business model practices include:  a single passenger class  a single type of airplane, commonly the Airbus A320 or Boeing 737 (reducing training and servicing costs) except for Song (airline) Boeing 757 and Kingfisher Airlines order of the A380.  a simple fare scheme (typically fares increase as the plane fills up, which rewards early reservations)  unreserved seating (encouraging passengers to board early and quickly)  flying to cheaper, less congested secondary airports (avoiding air traffic delays and taking advantage of lower landing fees)  short flights and fast turnaround times (allowing maximum utilization of planes) By: Nor Aida Abdul Rahman
  42. 42. Cont.        simplified routes, emphasizing point-to-point transit instead of transfers at hubs (again enhancing aircraft utilization and eliminating disruption due to delayed passengers or luggage missing connecting flights) emphasis on direct sales of tickets, especially over the Internet (avoiding fees and commissions paid to travel agents and Computer Reservations Systems) employees working in multiple roles, for instance flight attendants also cleaning the aircraft or working as gate agents (limiting personnel costs) "Free" in-flight catering and other "complimentary" services are eliminated, and replaced by optional paid-for in-flight food and drink (which represent an additional profit source for the airline). Aggressive fuel hedging programs. "Unbundling" of ancillary charges (showing airport fees, taxes as separate charges rather than as part of the advertised fare) to make the "headline fare" appear lower. Low or lower operating costs relative to their competitors. By: Nor Aida Abdul Rahman
  43. 43. Cont.. Not every low-cost carrier implements all of the above points (for example, some try to differentiate themselves with allocated seating, while others operate more than one aircraft type, still others will have relatively high operating costs but lower fares). Nonetheless these are general characteristics, most of which apply to any given low-cost carrier. By: Nor Aida Abdul Rahman
  44. 44. 16. Online Content Business Model     In general, something is said to be online if it is connected to some larger network or system (which is implicitly the "line", though this interpretation is often useless). Several more specific meanings exist: In common parlance, the larger network in question is usually the Internet, so that 'online' describes information that is accessible through the Internet. In a system for the performance of a particular task, an element of the system is said to be online if it is operational. For instance, a power plant is online if it is supplying power to the power grid. Alternatively, a section of road may be said to be online if it is open to traffic. In telecommunication, the term has another very specific meaning. A device associated with a larger system is online if it is under the direct control of the system. It it is available for immediate use by the system, on demand, without human intervention, but may not be operated independently of the system. By: Nor Aida Abdul Rahman
  45. 45. THANK YOU….. By: Nor Aida Abdul Rahman