This document discusses business models and business design. It provides advice on developing an effective business model, including: - Define a clear value proposition that can be quantified in terms of costs, price, and value created. - Understand your target customer segments and how to acquire customers at a reasonable cost over their lifetime value. - Develop a revenue model that considers customer acquisition costs, lifetime value, marketing, sales cycles and growth. - Use tools like the Business Model Canvas to define the key elements of your business model in a clear way. - Continually observe the environment and market to ensure your business vision remains aligned with reality.

1. BUSINESS MODELS
AND BUSINESS DESIGN
IKHLAQ SIDHU
Founding Faculty Director
Sutardja Center for Entrepreneurship & Technology
IEOR Emerging Area Professor
Department of Industrial Engineering & Operations Research
UC Berkeley

2. Quick Review
Ready to execute?
1. Your High Concept 2. Your Target 3. Match with Your Team
A B

3. Observe
Environment
Skills and
Background of
Team
Stories
at work
Story/Pitch
Prototype
Validation
Execution: Work Backwards
Sell First/
Build Later
Market
Traction
Funding
Scale/
Goal
Business Model Forming
Learning the Sales Cycle
Business Model Clear
Sales Process Clear
Mindshare Awareness / PR Story / Brand

4. Now Lets Filter Out Common Mistakes
1 + 1 = 3

5. Market Size
Why should
you care?
Total Addressable:
TAM = No. of possible customers x purchase/year x price
Served Addressable:
SAM = TAM x fraction that would buy based on your primary
market research
Target Market:
Who can you afford to sell to this year (your plan)
For VCs: TAM > $1 Billion
Suppose 20% adopt and your market share is 10%
TAM = $50M ➡ Revenue = $1M (personal business with 5 employees)
TAM = $1B ➡ Revenue = $20M

6. What do you think of this business?

7. What is an ideal business?
Answer:
A mailbox where checks simply
come in.
Every other thing adds costs and
requires management.
(Minimum Visible Business, not just MVP)

8. Can you quantify the Value Proposition?
Value Proposition:
Cost to
Produce
per unit
Selling
Price
Next Best
Alternative
Value Captured
Value Created
• Quantitative (above)
• Qualitative: a few
words on why people
will buy/adopt
• Wider means more
room for error

9. Starbucks as a Business
Value Proposition for a cappucino:
Cost to Produce
per unit = $0.50
Selling Price
= $3.00
Next Best Alternative
= 5.00…?
Value Captured
= $2.50
Value Created
And if this is the
value proposition,
what is the
business model?
Needs served: coffee, quality, addiction,
convenience, social status…

10. Starbucks Business Model
Product and Value
Proposition
Segment 1 / Prod. Def
Segment 2 / Prod Def.
Customer Segment 1
Customer Segment 2
Supplier
Key
Activities
Cost Structures & Financial
Model, Payment Streams
Pricing Strategy &
Revenue Streams
Needed
Resources
Key
Partners
Customer
Relationships,
Communications
Channels,
Distribution,
Fulfilment
• Store / rent / furniture
• Bakery supplier
• Cups, coffee
• Free Wi-Fi
• Mobile application
• Advertising
1. Many costs that are not charged
2. How would you make money
3. Does it hold water?
4. Business model’s change
12 3
4
5
6
7
8
9
10

11. Business Model Canvas
Key
Partners
Key
Activities
Value
Proposition
Customer
Relationships
Customer
segments
Key
Resources
Channels
Cost Structure Revenue Streams
?

12. Real Differentiation:
According to this chart, Fonera
2.0 would be the #1 Wi-Fi Ruter

13. Customer
Segments &
Influencers:
Decision
Making Unit
(DMU)

14. Customer Acquisition Cost and
Life Time Customer Value
3 weeks
You
Possible
Customer
3 weeks 12 weeks
・・・
Google Ad to
10,000 people
$1000
Send 100 emails
with YouTube link
$1000
3 live meetings /
customer
$30,000
100 request more
information
10 request sales
call / trail
1 sale of
$50,000
Rev = $50,000
COGS = $20,000
CAC = $32,000
Loss = $2,000
Sales Cycle = 18 weeks

15. Building Your Revenue Model
CAC
GET
LTV KEEP GROW
Marketing
PR / News
Same Customers
New Products
(Up-sell, Cross-sell)
* Viral
* Loyalty Program
* Reference

16. Is your vision diverging from reality?
Imbalance: Focus of Will vs Reality
Successful entrepreneurs can balance their attention
between execution and observing the environment
Stories
at
work
Story/Pitch
Prototype
Validation
Information from industry news,
environment, context
Path of Execution

17. Summary:
How to Get a Working Business Model
• Are you trying to do too much - focus on core competence
• Poor value proposition
• Market too small
• You are not really listening
• No ability to differentiate and pull away
• Who can do it better, you or them
• Customers and DMUs
• Marketing and sales - it’s not magic
• Imbalance: focus of will vs reality

18. END OF SECTION