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- 1. Chapter 5: Building Business Models
- 2. What is a Business Model? (1 of 2) • Describes how a new venture creates, delivers, and captures value. • Evidence is gathered from talking to people, investigating and asking questions. • Built over time by collecting evidence that what you are creating works. • Startup: Temporary organization in search of a scalable business model. M. Neck, P. Neck, and Murray, Entrepreneurship: The Practice and Mindset, 2e. © SAGE Publications, 2020. 2
- 3. What is a Business Model? (2 of 2) • Helps entrepreneurs understand what they are doing. • Types of Business Models: Innovation, disruption, differentiation, and imitation. – Easier to make quick changes to the business model during the startup stage. – The ability to change business models is not as quick for established organizations. M. Neck, P. Neck, and Murray, Entrepreneurship: The Practice and Mindset, 2e. © SAGE Publications, 2020. 3
- 4. The Four Parts of a Business Model (1 of 5) • Four interlocking parts of a business model: – Offering, customers, infrastructure, and financial viability. • Innovation and advantage over the competition. • Competitive advantage can come from other areas of the business. M. Neck, P. Neck, and Murray, Entrepreneurship: The Practice and Mindset, 2e. © SAGE Publications, 2020. 4
- 5. The Four Parts of a Business Model (2 of 5) The Offering • Identifies what you are offering to a particular customer segment. • Customer value proposition describes what products your business offers. • The “value” part of the CVP: How much your product or service is worth to customers. M. Neck, P. Neck, and Murray, Entrepreneurship: The Practice and Mindset, 2e. © SAGE Publications, 2020. 5
- 6. The Four Parts of a Business Model (3 of 5) Customers • Individuals or businesses willing to pay for what you are offering. – Bryan Bitticks, franchise owner of Great Clips hair salons, created a virtual online experience. M. Neck, P. Neck, and Murray, Entrepreneurship: The Practice and Mindset, 2e. © SAGE Publications, 2020. 6
- 7. The Four Parts of a Business Model (4 of 5) Infrastructure • Inclusive of all the resources an entrepreneur must have to deliver the CVP. – Justin Gold of the nut butters brand created a competitive advantage using infrastructure. M. Neck, P. Neck, and Murray, Entrepreneurship: The Practice and Mindset, 2e. © SAGE Publications, 2020. 7
- 8. The Four Parts of a Business Model (5 of 5) Financial Viability • Defines the revenue and cost structures a business needs to meet its operating expenses. • A business model is more than a financial model. M. Neck, P. Neck, and Murray, Entrepreneurship: The Practice and Mindset, 2e. © SAGE Publications, 2020. 8
- 9. The Customer Value Proposition (CVP) (1 of 4) • It is the value generated for the customer. • The three qualities of an effective CVP. – Better value than the competition. – Measurable in monetary terms. – It must be sustainable. • Design thinking is a collaborative effort. – It is business from the customer’s viewpoint. M. Neck, P. Neck, and Murray, Entrepreneurship: The Practice and Mindset, 2e. © SAGE Publications, 2020. 9
- 10. The Customer Value Proposition (CVP) (2 of 4) Jobs, Pain Points, & Needs • Successful CVP: Understanding what the customer wants. – Businesses survive because they successfully answer three questions. – It is about one big benefit. – Credibility in the eyes of the customer. – Dramatic difference relates to uniqueness. M. Neck, P. Neck, and Murray, Entrepreneurship: The Practice and Mindset, 2e. © SAGE Publications, 2020. 10
- 11. The Customer Value Proposition (CVP) (3 of 4) Four Problems Experienced by Customers • Customers face problems when it comes to getting a job done. • Lack of time: The example waiting time in hospitals. • Lack of money: Delivering previously unaffordable products or services for less money. M. Neck, P. Neck, and Murray, Entrepreneurship: The Practice and Mindset, 2e. © SAGE Publications, 2020. 11
- 12. The Customer Value Proposition (CVP) (4 of 4) Four Problems Experienced by Customers • Lack of skills: People might like to accomplish a task but lack the specialized skills to get the job done. • Lack of access: Prevents them from getting a job done. M. Neck, P. Neck, and Murray, Entrepreneurship: The Practice and Mindset, 2e. © SAGE Publications, 2020. 12
- 13. Different Types of CVPs and Customer Segments (1 of 5) • Convincing people about a great product. • Problems with marketing and execution. • Delineating the value of an idea to meet customer needs. M. Neck, P. Neck, and Murray, Entrepreneurship: The Practice and Mindset, 2e. © SAGE Publications, 2020. 13
- 14. Different Types of CVPs and Customer Segments (2 of 5) Types of Value Propositions • The all-benefits approach to CVP. • The points-of-difference approach. • A CVP that stems from the resonating-focus approach. M. Neck, P. Neck, and Murray, Entrepreneurship: The Practice and Mindset, 2e. © SAGE Publications, 2020. 14
- 15. Different Types of CVPs and Customer Segments (3 of 5) Types of Customer Segments • Different CVPs for different customer segments. • Creating a product or service that the customer would be willing to buy. M. Neck, P. Neck, and Murray, Entrepreneurship: The Practice and Mindset, 2e. © SAGE Publications, 2020. 15
- 16. Different Types of CVPs and Customer Segments (4 of 5) Types of Customer Segments • Mass market: Many customers. • Niche market: Customers with specific needs. • Segmented market: Breaking customer segments into groups. M. Neck, P. Neck, and Murray, Entrepreneurship: The Practice and Mindset, 2e. © SAGE Publications, 2020. 16
- 17. Different Types of CVPs and Customer Segments (5 of 5) Types of Customer Segments • Diversified market: Variety of services. • Multisided markets: Two or more customer segments. M. Neck, P. Neck, and Murray, Entrepreneurship: The Practice and Mindset, 2e. © SAGE Publications, 2020. 17
- 18. The Business Model (1 of 3) • Knowing how a customer intends to create, capture and deliver value. • The BMC introduced in 2008. • The four parts of the BMC: – What the offering constitutes. – What customers relate to. – What the infrastructure includes. – What financial viability means. M. Neck, P. Neck, and Murray, Entrepreneurship: The Practice and Mindset, 2e. © SAGE Publications, 2020. 18
- 19. The Business Model (2 of 3) • Exploring the nine components through an idea for a new retail store that sells trendy T- shirts: – Customer value proposition. – Customer segments. – Channels. – Customer relationships. M. Neck, P. Neck, and Murray, Entrepreneurship: The Practice and Mindset, 2e. © SAGE Publications, 2020. 19
- 20. The Business Model (3 of 3) • Exploring the nine components (Contd.) – Key activities. – Key resources. – Key partners. – Revenue streams. – Cost structure. M. Neck, P. Neck, and Murray, Entrepreneurship: The Practice and Mindset, 2e. © SAGE Publications, 2020. 20
Editor's Notes
- Satisfies Learning Objective: 5.1 Define the business model. It describes how a new venture creates, delivers, and captures value: The business model is a journey to gather evidence and prove that the startup can be a sustainable business. Evidence is gathered from talking to people, investigating and asking questions: As well as questioning and testing assumptions, and learning continuously. It’s built over time by collecting evidence that what you are creating works: A business model is not created in a vacuum and has value for customers, is profitable, and is sustainable over the long term. Startup: A temporary organization in search of a scalable business model. Steve Blank, Silicon Valley entrepreneur, defines a startup as a temporary organization in search of a scalable business model.
- Satisfies Learning Objective: 5.1 Define the business model. A business model help entrepreneurs better understand what they are doing: Working through the components of a business model help entrepreneurs better understand what they are doing, how they are doing it, for whom, and why. Types of Business Models: a. Innovation: Business models can create a whole new market where new customers are offered a new product or service; the advent of social media sites such as Facebook illustrates a type of business model known as Innovation. b. Disruption: The emergence of MOOCs—Massive Open Online Courses—disrupted higher education when students opted for these free courses rather than paying tuition at colleges and universities; this emergence of MOOCs is the business model Disruption. Differentiation: Fulfilling unmet needs of customers using an existing product or service is called Differentiation; Quip, an electric toothbrush, for example, founded by entrepreneur and inventor Simon Enever. Imitation: Finally, the Imitation business model should really be avoided; imitation without differentiation is not the greatest form of flattery. It is easier to make quick changes to the business model during the startup stage: Because new businesses tend to be small in the beginning, it is much easier to be agile and make quick, efficient changes to the business model during the startup stage itself. The ability to change business models is not as quick for larger or more established organizations: However, the ability to tweak and change business models is not as quick or as efficient for some larger or more established organizations, and some of them have ultimately failed because of their inability to change their business models. U.S.-based food company, General Mills, stays true to its business model by manufacturing food that meets the needs of its customers; for instance, in response to the demand for less sugar and simpler ingredients, the company has introduced a new yogurt brand call YQ, which is targeted at key health influencers.
- Satisfies Learning Objective: 5.2 Identify the four core areas of a business model. Four interlocking parts of a business model: The business model consists of four main interlocking parts that together create “the business.” Offering, customers, infrastructure, and financial viability: These are as follows: the offering, the customers, the infrastructure, and the financial viability. Innovation and advantage over the competition: All must coexist, and none can be ignored; however, each can be a source of innovation and advantage over the competition. Competitive advantage can come from other areas of the business: In other words, competitive advantage doesn’t always come from the product or service you are offering, but can come from other areas of the business as well.
- Satisfies Learning Objective: 5.2 Identify the four core areas of a business model. It identifies what you are offering to a particular customer segment: The first part of the business model is the offering, which identifies what you are offering to a particular customer segment, the value generated for those customers, and how you will reach and communicate with them. Customer value proposition describes what products your business offers: The offering includes the customer value proposition (CVP), which describes exactly what products or services your business offers and sells to customers. The “value” part of the CVP: how much your product or service is worth to customers: For instance, it might only cost a plumber $40 to fix a burst pipe at a customer’s house ($5 for travel, $5 for materials, and $30 for an hour’s labor) but the value to the customer for having the problem fixed is far greater, which is why the plumber can afford to charge more.
- Satisfies Learning Objective: 5.2 Identify the four core areas of a business model. Individuals or businesses willing to pay for what you are offering: These are the customers; entrepreneurs typically can’t serve everyone in a market, so you have to choose whom best to target. Bryan Bitticks, franchise owner of Great Clips hair salons, created a virtual online experience: It enabled its customers to check in online and explore wait times. This approach attracted thousands of younger tech-savvy customers who are more accustomed to booking appointments online.
- Satisfies Learning Objective: 5.2 Identify the four core areas of a business model. Inclusive of all the resources an entrepreneur must have to deliver the CVP: The infrastructure generally includes all the resources (people, technology, products, suppliers, partners, facilities) that an entrepreneur must have in order to deliver the CVP. Justin Gold of the nut butters brand created a competitive advantage using infrastructure: Justin Gold, founder of the nut butters brand, Justin’s, started off using his own food processor to make his nut butter from his own kitchen but found he couldn’t upscale the business as he could not afford the types of peanut butter mills used by manufacturers. Gold went out and bought the oldest food processors he could and started to produce perfect peanut butter that was impossible for the traditional manufacturers to mimic. By being resourceful, Gold was able build competitive advantage and uniqueness into his infrastructure to create a successful business.
- Satisfies Learning Objective: 5.2 Identify the four core areas of a business model. Defines the revenue and cost structures a business needs to meet its operating expenses: And financial obligations: How much will it cost to deliver the offering to our customers? How much revenue can we generate from customers? And, of course, the difference between revenue and cost is profit. For example, when Brandon Steiner, founder of Steiner Sports, featured in Entrepreneurship in Action, realized the business wasn’t managing its margins or meeting its financial obligations, he took out another mortgage on his house and made some changes to his business model to meet the needs of his customers. A business model is more than a financial model: It has to describe more than how you intend to make money; it needs to explain why a customer would give you money in the first place and this is where the CVP comes in.
- Satisfies Learning Objective: 5.3 Explore the importance of the Customer Value Proposition in further detail. It is the value generated for the customer: The key word in CVP is “customer,”—the focus should always be on the value generated for the customer and how this value is then captured by the business in the form of profit. The three qualities of an effective CVP: For your CVP to be truly effective, it needs three qualities. Better value than the competition: It must offer better value than the competition. Measurable in monetary terms: It must be measurable in monetary terms (i.e., you must be able to prove that your CVP is better value than other offerings on the market). It must be sustainable: It must be sustainable (i.e., you must have the ability to execute it for a considerable length of time). Design thinking is a collaborative effort: As we have learned, design thinking is ultimately an iterative and collaborative process that combines the skills of observation, synthesis, searching and generating alternatives, critical thinking, feedback, visual representation, creativity, problem solving, and need-finding. It is business from the customer’s viewpoint: As with design thinking, the CVP means thinking about your business from the customer’s viewpoint rather than from an organizational perspective; it must demonstrate that you are meeting the needs of various customer segments.
- Satisfies Learning Objective: 5.3 Explore the importance of the Customer Value Proposition in further detail. A successful CVP: understanding what the customer wants: The key to a successful CVP involves a deep understanding of what the customer really wants or needs and is an exciting opportunity to meet the needs of a real customer who wants to accomplish a goal, to get the job done. Businesses survive because they successfully answer three questions: Businesses start and survive because they successfully answer three questions for customers: What’s in it for me? Why should I believe you? Why should I care? It is about one big benefit: The overt benefit is the one big benefit for the customer, not the list of benefits—just the one big one. Credibility in the eyes of the customer: Real reason to believe provides evidence to the customer that you will do as you promise; you have to have credibility in the eyes of the customer and this is more important than ever with the proliferation of online reviews. Dramatic difference relates to uniqueness: And how your product or service is different from the many other options that are likely available. By providing do-it-yourself furniture kits at a lower cost than ready-made furniture sold in major furniture stores, IKEA solved the problem of obtaining good quality new, stylish furniture for a low price. Similarly, FedEx made the job of transporting a letter or package overnight from point A to point B effortless in comparison with the regular mailing and parcel delivery services that existed in the 1970s. One very successful venture was when Tata Motors in India created a CVP focused on providing an affordable, safer, more comfortable mode of transport for the low price of $2,500—this price was intended to make the car price—competitive with scooters, which its target customers were currently buying due to affordability.
- Satisfies Learning Objective: 5.3 Explore the importance of the Customer Value Proposition in further detail. Customers face problems when it comes to getting a job done: Typically, customers face at least one of four problems that prevent them from getting a job done, which include lack of time, lack of money, lack of skills, and lack of access. Lack of time: The example waiting time in hospitals In the U.S., people waste $1.5 billion annually waiting to be seen during patient visits in hospital. Hanging around for results and waiting to be discharged often takes up hours of valuable time. The ThedaCare hospital system in Wisconsin has found a solution to this time-wasting problem by ensuring that patients are seen more quickly and that results are dispatched before they leave, rather than days later.
- Satisfies Learning Objective: 5.3 Explore the importance of the Customer Value Proposition in further detail. Lack of money: delivering previously unaffordable products or services for less money This can help beat the competition and open up a whole new market. Getting a taxi used to be a luxury until Uber came along; dining out was viewed as an unnecessary expense before Groupon started to offer restaurant deals and discounts; and staying in decent accommodation seemed like an impossibility for many until Airbnb launched its hospitality service. Uber, Groupon, and Airbnb are among thousands of startups that have succeeded in democratizing services previously reserved by a small portion of the population. Lack of skills: people might like to accomplish a task but lack the specialized skills to get the job done A recent example of how ease of use transformed customers’ lives is the shift from computers with arcane command-line interfaces to computers with graphical user interfaces like Apple’s Macintosh or Microsoft Windows. These computers meant that you no longer had to have expertise in computer programming to use a computer. To solve another common problem, lack of writing skills, online grammar checking platform Grammarly enabled users to help people communicate better. Lack of access: this prevents them from getting a job done Most of us think nothing of travelling on public transport to get to our chosen destinations, but for millions of visually impaired people, it can be one of the most difficult journeys to achieve. UK-based non-profit organization Wayfindr aims to solve this problem by providing an open standard (software that can be used by anyone) that gives audio instructions to help vision-impaired people to navigate their journey without a human guide.
- Satisfies Learning Objective: 5.4 Describe the different types of Customer Value Propositions and learn how to identify your target customers. Convincing people about a great product: Even if you feel you have the greatest product or service idea in the world, how do you convince others of its greatness? Problems with marketing and execution: Many entrepreneurs have the idea in mind but may not be so clear on the marketing or the execution. Delineating the value of an idea to meet customer needs: This is where the CVP really fulfills its potential, as it delineates the value of your idea in meeting customer needs.
- Satisfies Learning Objective: 5.4 Describe the different types of Customer Value Propositions and learn how to identify your target customers. The all-benefits approach to CVP: The all-benefits approach to CVP involves identifying and promoting all the benefits of your product or service to target customers, with little regard to the competition or any real insight into what the customer really wants or needs; being overly product-focused, you are promoting features and benefits that customers may not even need. The points-of-difference approach: The points-of-difference approach produces a stronger CVP than all benefits because it focuses on your product or service relative to the competition and recognizes that your offering is unique and different from others on the market; but assuming that customers will find these points of difference favorable is not evidence enough to prove they will buy from you. A CVP that stems from the resonating-focus approach: A CVP that stems from the resonating-focus approach (also called “just what the customer wants” or product-market fit) is the “gold standard”; all-benefits and points-of-difference CVPs each provide a laundry list of the presumed benefits to the customers, and the differences between your products or services in comparison with the competition, but a resonating-focus CVP drills down to what is most important to the customer.
- Satisfies Learning Objective: 5.4 Describe the different types of Customer Value Propositions and learn how to identify your target customers. Different CVPs for different customer segments: How can a “gold standard” CVP be developed if the focus is supposed to center on the customer—the answer is that businesses often have different CVPs for each customer segment. Creating a product or service that the customer would be willing to buy: By understanding the motivations, desires, and unmet needs of your customers, you are better able to create a product or service that they will be willing to buy. Market research indicated that young men shied away from Diet Coke because they associated it with women who were trying to lose weight, and in response, a new CVP was created, resulting in Coca-Cola Zero, which many people believe is clearly aimed at men.
- Satisfies Learning Objective: 5.4 Describe the different types of Customer Value Propositions and learn how to identify your target customers. Mass market: many customers: A mass market comprises a large group of customers with very similar needs; “it’s gone mass market,” means a product or service is being purchased by an enormous proportion of customers all looking for the same thing. Niche market: customers with specific needs: A niche market is a small market segment comprising customers with specific needs and requirements; entrepreneurs Carlton and Hazel Solle created the Bioscarf as an alternative to the common filtration masks used in China to protect local citizens from breathing in the polluted air. Segmented market: breaking customer segments into groups: A segmented market involves breaking customer segments into groups according to their different needs and problems; a bank might provide different services to its wealthier clients than they would to people with an average income, or offer different products for small versus large businesses.
- Satisfies Learning Objective: 5.4 Describe the different types of Customer Value Propositions and learn how to identify your target customers. Mass market: many customers: A mass market comprises a large group of customers with very similar needs; “it’s gone mass market,” means a product or service is being purchased by an enormous proportion of customers all looking for the same thing. Niche market: customers with specific needs: A niche market is a small market segment comprising customers with specific needs and requirements; entrepreneurs Carlton and Hazel Solle created the Bioscarf as an alternative to the common filtration masks used in China to protect local citizens from breathing in the polluted air. Segmented market: breaking customer segments into groups: A segmented market involves breaking customer segments into groups according to their different needs and problems; a bank might provide different services to its wealthier clients than they would to people with an average income, or offer different products for small versus large businesses. Diversified market: variety of services: A diversified market offers a variety of services to serve two or more customer segments with different needs and problems, which bear no relationship to each other; Amazon is a good example that diversified from its retail business—selling books and other tangible products—to sell cloud computing services, online storage space, and on-demand server usage. Multisided markets: two or more customer segments: Multisided markets describe two or more customer segments that are linked but are independent of each other; a free newspaper caters to its readership customer base by providing commuters with newsworthy content while the newspaper also needs to prove to advertisers that it has a large readership in order to get the funding to produce and distribute the free publication.
- Satisfies Learning Objective: 5.5 Identify the nine components of the Business Model Canvas. Knowing how a customer intends to create, capture, and deliver value: To know how a company intends to create, deliver, and capture value for customers, we need to look at a more in-depth study of the business model canvas (BMC). The BMC introduced in 2008: The BMC, introduced in 2008 by Swiss business theorist Alexander Osterwalder, divides the business model’s four parts into nine components in order to provide a more thorough overview of the logic of the business model. The four parts of the BMC What the offering constitutes: The offering constitutes the (1) value proposition. What customers relate to: Customers relate to (2) customer segments, (3) channels, and (4) customer relationships. What the infrastructure includes: Infrastructure includes (5) key activities, (6) key resources, and (7) key partners. What financial viability means: Financial viability includes (8) cost structure and (9) revenue streams.
- Satisfies Learning Objective: 5.4 Describe the different types of Customer Value Propositions and learn how to identify your target customers. Exploring the nine components by asking questions based on a T-shirt store model: We will explore the nine components through an idea for a new retail store that sells trendy T-shirts emblazoned with original designs by young, emerging artists by applying the T-Shirt store example to some questions that each of the nine components must address. Customer Value Proposition: What value do we deliver? What bundle of products and services are we offering? What are we helping customers achieve by providing a new range of T-shirts? Customer Segments: Who are your most important customers? What segment of the market would be most likely to buy your T-shirts? Channels: What are all the ways in which you can reach your customer—online, through a brick-and-mortar store, and/or through word of mouth? Customer Relationships: How do you establish and maintain relationships with your customers?
- Satisfies Learning Objective: 5.4 Describe the different types of Customer Value Propositions and learn how to identify your target customers. Key Activities: What are the most important activities that the company participates in to get the job done? Key Resources: How much and which resources will you need if your company has 1,000 customers or 1,000,000? What resources do you need to accomplish the key activities? Key Partners: Could some activities be outsourced? Do you have a network of suppliers/buyers you could tap into or negotiate with? Revenue Streams: How much are my customers willing to pay? How many customers do I need? How much cash can be generated through T-shirt sales in the store or T-shirt sales online? How much does each stream contribute to the total? Cost structure: What are the most important costs inherent in the business model, which resources are the most expensive to get, which activities are the most expensive?