The document discusses key aspects of developing a business model including defining a value proposition, understanding costs and revenues, segmentation strategy, and sustainability and implementability. It presents business models as a formula of revenue minus costs equaling profit, and breaks down costs and revenues into further elements. These include the four Ps of costs (people, production, promotion, place) and expressing revenue as price times volume. It discusses setting price as a balance of factors and expressing volume through a segmentation and market share strategy. Finally, it covers sustainability, implementability, and using metrics like NPV to evaluate projects.

1. PART THREE
INTRODUCTION TO BUSINESS
MODELING

2. WHAT DOES “VALUE PROPOSITION” MEAN TO YOU?
ASPECT DESCRIPTION
VALUED Customer will pay money to buy what you are selling because it
addresses a real urgent & intense need/pain/opportunity
VALUABLE The # of customers willing to pay is sufficiently large to fund
your company & your segmentation strategy gets you access to
them effectively
VALID Your product works, is compliant as required, and has the right
features
VALUNIQUE You have a sustainable & defensible competitive advantage and
are competing on the right vectors of differentiation
VALUE
CHAIN
You can deliver the product promises across the value chain and
scale with growth
VALENCE You have a strongly-bonded team with all the right skills to pull
this off
VALUATION Your cost and revenue models lead to profit and the profit
potential is attractive enough for shareholders and investors

3. BUSINESS MODELS CAN BE EXPRESSED AS A FORMULA
$= REVENUE – COST
implementability,
sustainability, & exit
&
$ > $ from other
investments

4. COSTS BOIL DOWN TO 4Ps
COST = PEOPLE
+ PRODUCTION
+ PROMOTION
+ PLACE
PROFIT = (REVENUE – COST) I, S,E

5. COSTS TREES HELP FOCUS VARIABLES AND LEVERS
PROFIT = (REVENUE – COST) I, S,E
PEOPLE
COST
# OF
PEOPLE
COST PER
PERSON
REDUCE
HEADCOUNT
REDUCE
SALARY
REDUCE
OTHER
COSTS
Automate functions
Support fewer
process/product
Consolidate functions
across silos
Increase productivity
Pay cuts
Replace expensive staff
with cheaper
Grants & Subsidies
Reduce recruiting costs
Reduce benefits
Outsource

6. REVENUE IS MORE COMPLEX, BUT STILL DIVISIBLE
PROFIT = (REVENUE – COST) I, S, E
REVENUE =
Rev stream 1
All revenue streams
(PRICE x VOL)
Revenue is slightly more complex than cost &
embodies more assumptions that you must justify!
We must still break out PRICE & VOLUME
separately.
∑

7. PRICE IS A BALANCING ACT
PROFIT = (REVENUE – COST) I, S, E
& REVENUE = PRICE x VOLUME
Customer
Perceived
Value
Cost to
Produce
Range of
Prices
Customer
Perceived
Value
Cost to
Produce
Effect of
Competition
Customer
Perceived
Value
Cost to
Produce
Goal of
Competitive
Positioning
Customer
Perceived
Value
Cost to
Produce
Goal of
Branding &
PR Strategy
Customer
Perceived
Value
Cost to
Produce
Goal of
Operations
Strategy

8. VOLUME STARTS WITH SEGMENTATION STRATEGY
PROFIT = (REVENUE – COST) I, S, E
& REVENUE = PRICE x VOLUME
Q: Why are whole markets not addressable by any single company.
• Real customer wants – who wants a generic product?
• Product realities – no one product can satisfy these days
• Production realities – Production facilities typically hard-coded to build certain
forms of a product
• Marketing resources – Marketing collateral $
So, marketers segment markets into smaller, addressable chunks where
individual buyers in any given segment share the same motivations to buy &
want the same feature set
Q: How could you segment a market?
• Buyer demographics (size, geographic location)
• Buyer psychographics (early adopter, late adopters, etc)
• Industry
• Product usage
• There is no right answer, but there are “better” answers!

9. SEGMENTATION STRATEGY SHOULD BE PHASED
PROFIT = (REVENUE – COST) I, S, E
& REVENUE = PRICE x VOLUME
• Choose a “beach head” segment to target first
• Lowest hanging fruit
• Higher value – lower risk
• Specify “bowling pin” segments to target over the next 2-3
years

10. VOLUME CAN BE EXPRESSED AS A FORMULA
PROFIT = (REVENUE – COST) I, S, E
& REVENUE = PRICE x VOLUME
VOLUME = BeachHeadMarket(SIZE x SHARE)
+ BowlingPinMarket(SIZE X SHARE)
Market 1
All markets
∑
SHARE = 100%
- UNINTERESTED BUYERS
– COMPETITORS % SHARE)

11. SUSTAINABILITY & IMPLEMENTABILITY
PROFIT = (REVENUE – COST) I, S, E
IMPLEMENTABILITY = PEOPLE (EXP & SKILLS)
+ PRODUCT
+ PROCESSES
+ PRODUCTION CAPABILITY
+ PARTNERS (SUPPLY & DISTRIBUTION)
+ PROMOTION PLAN
+ PESTs

12. SUSTAINABILITY & IMPLEMENTABILITY
PROFIT = (REVENUE – COST) I, S, E
SUSTAINABILITY = MARKET LIFE SPAN
+ COMPETITIVE DEFENCE
and
MARKET LIFE SPAN = TECH RATE OF CHANGE
+ RATE OF MARKET COMMODITIZATION
COMPETITIVE DEFENCE = BARRIERS TO ENTRY
+ BARRIERS TO EXIT
+ PLANNED RESPONSE TO
COMPETITIVE POSITIONING
OVER TIME

13. EXIT
PROFIT = (REVENUE – COST) I, S, E
• Spin Out (Promise)
• Trade Sale (Synergy)
• Dividends (Sustainability)
• Liquidation (Transferability)

14. WHAT WAS VAGUE, IS NOW CALCULATABLE
$ = (REVENUE – COST) ISE
= REVENUE – (P4) ISE
= ∑(PRICE x VOLUME) - (P4) ISE
= ∑(PRICE x [BHMS + BPMS] - (P4 )) ISE
= ∑(C<P<PV & P=f(CP, SP, BP) x [BHMS + BPMS]- (P4)) ISE
= ∑(C<P<PV & P=f(CP, SP, BP) x [BHM + BPMs] - (P4)) (P7) & (MLS +
CD) & (I|T|D|L)
This formula is much more complex, but now the
components are actionable & the assumptions can
be identified and justified.
Convert this math to words and there’s your
Executive Summary!

15. WHAT WAS VAGUE, IS NOW A CONVINCING ARGUMENT THAT CAN BE
SUMMARIZED IN 1 PAGE
∑(C<P<PV & P=f(CP, SP, BP) x [BHM + BPMs] - (P4)) (P7) & (MLS + CD) & (I|T|D|L)
• Our product is X
• 60% of our revenue comes from license fees
• At 16.99 per unit, we will sell 1.2M units in 2009
• Given market size of X for our beachhead niche and our key competitive
advantages of IP, control of distribution network, our max manufacturing
capacity of 1.2M, and general good looks our first year revenue will be 21M.
• Phased expansion across key bowling pin niches and 3 E Asian countries
as well as 40% additional revenue from S&M and Training will yield 5YR
revenue of 240M
• Profit margin is 25% given key costs in People and manufacturing
• This plan is possible given 2.5M investment for 25% equity to complete
development and support startup sales

16. NPV KEEPS MGMT FOCUSED ON PROFITABILITY
t - the time of the cash flow
N - the total time of the project
r - the discount rate (the rate of return that could be
earned on an investment in the financial markets with
similar risk.)
Ct - the net cash flow (the amount of cash) at time t (for
educational purposes, C0 is commonly placed to the left
of the sum to emphasize its role as the initial
investment.).
Time to make Decisions
1. Is NPV Project 1 < NPV Project 2?
2. Remember, ML has a top-down budget culture
3. Management may define incremental, fixed, flexible, zero-base,
or rolling budget assumptions
Once you submit the cost model and the business submits the revenue model for a
Project, the firm must evaluate the project against others that it could invest in.
This is done with some form of “time value of money” equation such as NPV or IRR