Business Models

Business Model

Business Model

Definition:

• Business Model

Business Model describes details of planned activities in business that involve with

·        purpose,

·        offerings,

·        strategies,

·        infrastructure,

·        organization structures,

·        trading practices,

·        operational processes, and

·        policies

designed to result in profits in a marketplace.

Business model is very important because business model is a main component of business plan and every good business must have a business model.

• Business Plan

Business plan is a formal statement that describes objectives of a company and how the company will achieve those objectives. And business plan also describes the company’s business model.

• E-commerce business model
E-commerce business model aims to use and leverage unique qualities of Internet and Web.

Key elements of business model:

Business model composes of different parts of activities that organizations use to earn revenues and there are 8 key elements of business model as following: (for most of the case study, students need to indentify the following key elements)

Laudon and Laudon (2009)

1. Value proposition

Value proposition describes the unique value of a company offers to its customers that can fulfill the needs of them. There are some questions that a company has to ask itself in order to create the value proposition such as:

• Why will customers want to do business with you instead of others?
• What can attract customers to buy your products or services?
• What does your company provide that others cannot?
• What can set your company different from your competitors?

For example: Why do customers choose to use Google instead of Yahoo or MSN?
What are advantages of Google over its rivals?

Examples of successful value propositions:
• Personalization/ Customization
• Reduction of product search costs
• Reduction of price discover costs
• Facilitation of transactions by managing product delivery

Therefore, values proposition represents a company’s uniqueness over its competitors. And if the company know its own value proposition for its business, the company is much more likely to succeed because the value proposition will separate the company from its competitors.

2. Revenue Model

Revenue model is the most important element of business model in professor’s opinion because revenue model describes how the firm will earn revenue, generate profits, and produce a superior return on invested capital.

There are 5 major types of e- business revenue model as follows:

• Advertising revenue model
• Subscription revenue model
• Transaction fee revenue model
• Sales revenue model
• Affiliate revenue model

Example:

• What would be the revenue model for Google? AdWords and AdSense

• What would be the revenue model for HP? Sales of products (PC) and service

• What would be the revenue model for Microsoft?
Software and service

Laudon and Laudon (2004)

Advertising Revenue Model

The Advertising Revenue Model is very famous for e-commerce business and this type of revenue model is implemented from the business model of newspapers. The idea of this revenue model is to offer and sell space to companies or individuals that want to put their advertisings in the space over the internet such as Google, Yahoo, MSN, and Ask.com. These companies make money through the advertising revenue model.

For example, Google earns most of the revenue from “Google AdWords”. Google Adwords is a pay per click advertising program of Google that created for advertisers who want to post their advertisements to attract people who are looking for some information that advertisers offer. According to OrganicSpam.com, when a user searches Google's search engine, ads for relevant words are shown as “sponsored link” on the right side of the screen, and sometimes above the main search results.

Google- AdWords Advertising Revenue Model for Google.com

(Source: http://www.webddcenter.com/promoteweb/images/google_adwords.gif 11/17/09)

Yahoo - An Advertising Revenue Model for Yahoo.com

( Source: http://dataopedia.com/storage/24/yahoo.com.au.jpg 11/17/09)

Subscription Revenue Model

The idea of this revenue model is that a customer has to pay a subscription price in order to have access to the products or services. The model was first used in magazines and newspapers businesses but it is currently used by various types of businesses and websites such as Xdrive, and yahoo.

For example, Xdrive.com provides online storage for customers to upload their data and keep it on the internet to backup their valuable files. And another example would be companies who produce game online such as SIM and WARCRAFT games that offer game online but users have to subscribe first in order to get the games.

Xdrive – A Subscription Revenue Model

( Source: http://www.xdrive.com 11/17/09)

Yahoo – A Subscription Revenue Model for Yahoo Mail Plus

( Source: http://overview.mail.yahoo.com/enhancements/mailplus 11/17/09)

Transaction Fee Revenue Model

Transaction fee revenue model is very famous for B2C, C2C, and also B2B. The idea of this model is to match the buyer and seller together and a company will receive a fee for enabling or executing a transaction. The revenues will base on transaction fees and the amount of transactions. Examples of companies that use this model would be eBay (Become the biggest market in the world), and Paypal.

Participation: Bruno (ID) is both buyer and seller on eBay. He sells iPhone on eBay and buys some computer software on eBay because the price is normally cheaper.

Participation: Choomsak (5110212016) is a buyer on eBay. He bought Mac case on eBay.

eBay – A Transaction Fee Revenue Model

(Source: http://www.ebay.com 11/17/09)

PayPal – A Transaction Fee Revenue Model

(Source: https://www.paypal.com/am/cgi-bin/webscr?cmd=_home&locale.x=en_US 11/17/09)

Sales Revenue Model

A company that uses sales revenue model generating revenues based on selling goods, information, or services to customers such as Amazon, HP, Microsoft, Apple (product started from PC, iPhone and iTunes) that sell both product and service to the customers.

Amazon - A Sales Revenue Model

(Source: http://www.amazon.com 11/17/09)

Microsoft - A Sales Revenue Model

( Source: http://www.microsoft.com/en/us/default.aspx 11/17/09)

Affiliate Revenue Model

Affiliate revenue model is a model that can generate revenues by earning commissions from selling products and services of other companies or providing advertisements and links of others companies. And the revenues depend on the numbers of customers that view the links or the advertisements. A lot of big companies also use this type of revenue model such as MyPoints.com, Google (AdSense) eBay, and Amazon.

AdSense is an ad serving application run by Google Inc. Website owners can enroll in this program to enable text, image, and more recently, video advertisements on their websites. These advertisements are administered by Google and generate revenue on either a per-click or per-impression basis. Google beta tested a cost-per-action service, but discontinued it in October 2008 in favor of a DoubleClick offering (also owned by Google).
Source: http://en.wikipedia.org/wiki/AdSense

MyPoints - An Affiliate Revenue Model

(Source: http://www.mypoints.com/emp/u/index.vm 11/17/09)

3. Market Opportunity

Market Opportunity consists of 2 things which are market value and market share comparing to your competitors.

5 Forces Model is one of the tools that can use to analyze market opportunity. And market opportunity describes needs, wants, or demand trends that a company can take advantage of because they are not being addressed by the competitors. Any company has to be able to identify these questions as following:
• What is your market space?
• What is your market value of products and services?
• What is your market share comparing to your competitors?

For example, Google is a big company who offers search engine. Google has to identify many aspects for finding market opportunity such as:
• What the value for search engine market is
• How much it is
• What Google’s share is, comparing to its competitors

Marketspace

Marketspace is area of actual or potential commercial value in which company intends to operate.

Realistic market opportunity

Realistic market opportunity is defined by revenue potential in each of market niches in which a company hopes to.

Example of Market Opportunity

4. Competitive Environment

Competitive environment refers to a company’s external environment that consists of direct and indirect competitors that offer similar products and services and competing in the same market. And 5 forces model is one of the tools that can be used to analyze the competitive environment.

Competitive environment is related to:
• How many active competitors are in the market
• How large of the active competitors’ operations are
• How profitable of these competitors are
• What market share of each competitor is
• How they set up their prices

5. Competitive Advantage

A competitive advantage exists when the company is able to gain superiority or an advantage over its competitors by delivering the same products or services as its competitors to the customers but at a lower price or at greater value through differentiation. Therefore, competitive advantage will set the company different from its competitors.
Competitive advantage can refer to:
• The first mover in the market
• Having economy of scale in the company’s operations
• Having a unique organizational culture in the company
• Having access to valuable resources that others do not have
• Unfair competitive advantage
• Perfect market: No competitive advantages or asymmetries
• Leverage: When a company uses its competitive advantage to achieve more advantage in surrounding markets

6. Market Strategy

Market strategy is a detailed plan that describes a process of how a company intends
to enter a new market and attract customers, and concentrate on how its limited resources can increase sales and achieve a sustainable competitive advantage by fulfilling the customers’ satisfactions. Best business concepts will fail if not properly marketed to potential customers.

Market Strategy is related to:
• How do you plan to promote your products?
• How do you target your customers?

7. Organizational Development

Organizational Development can be described as a plan from top-down that relates to how a company organizes beliefs, attitudes, values, and structure of people and the company itself for the positive changing or to accomplish the work. In order to have a good organizational development, the company has to understand the nature of its structure and culture of the company first, and then the company will know what aspects of the organization need to be improved to get the work done and to achieve the success.
• Work is typically divided into functional departments.
• Hiring moves from generalists to specialists as company grows.

8. Management Team

Management team refers to employees in the company who have control in making the business model work. Before the company assigns the management team to work on the business model, it has to know the management team’s background, strong points and weak points in order to get the right management team to control the business model.
• Strong management team gives instant credibility to outside investors.
• Strong management team may not be able to salvage a weak business model, but should be able to change the model and redefine the business as it becomes necessary.