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62 Cards in this Set
- Front
- Back
- 3rd side (hint)
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What is a business model?
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the method of doing business by which a company can sustain itself -- that is, generate revenue
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Brokerage Model
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Bring together buyers and sellers
Revenue: Transactions, advertising, value-added service… Examples: Marketplace: facilitate business-to-business transactions (Ariba) Auction broker: conduct auctions for sellers (eBay) Demand collection: name-your-own-price (priceline) |
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Advertising Model
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Attract eyeballs with content…charge advertisers for access to eyeballs.
Revenue: CPM, CPC, CPA Examples: Portal: destination site for broad selection of consumers (YAHOO!) Content Website: (NYTimes, NYTimes Bookpage) Search engine: (Bing) |
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Merchant/Manufacturer Model
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Sell goods at a markup over marginal cost
Revenue: Q*(P-MC) Examples: Virtual Merchant: Internet-only merchant (Amazon.com) Bricks-and-Clicks (Click-and-Mortar) merchant (BN.com) Manufacturer: Direct to consumer, bypass retail aggregators (Apple, Dell) |
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Subscription Model
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Customers purchase access to content
Revenue: Subscriptions, advertising, merchant… Examples: Subscription: Periodic payment for access to content (WSJ) Premium Content: Most content offered for free, but some paid content (CNN Video, ESPN) Community: Payment for access to information from community (MacFixIt) |
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Total Value
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Value – Marginal Cost – Transactions Cost
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Value – Marginal Cost – Transactions Cost
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Consumer Surplus
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Value – Price – Transactions Cost
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Producer Surplus
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Price – Marginal Cost
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Transaction Costs
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Cost to locate product
Cost to obtain product |
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How to make the pie bigger?
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increase demand or decrease your costs.
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Value Created when...
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Customer Value of Product (Net Transactions Costs) > Cost of Resources Used to Produce Product
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Ways to create value
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1) Enhancing Product Value to Consumers
2) Reducing Costs 3) Improving Match Between Consumers and Products (e.g., reducing transactions costs) |
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Enhancing Value to Consumers
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Improve existing products or services => Online Newspapers
Personalization -> filters information Customization -> changes product |
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Reducing Costs
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Manufacturing efficiencies:
Lower cost of manufacturing Lower cost of maintaining infrastructure Distribution efficiencies Digital delivery of information goods Highly valuable channel Flexibility in usage Personalized bundles of product Radically reduced channel costs No distribution network No middlemen Direct delivery of physical goods Physical delivery: less expensive for company to deliver product bundled to store. However, more expensive overall for customer to get product. |
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main problem with distribution is
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perception of cost
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Improving consumer-products match
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Match buyers with sellers and reduce transaction costs
Real transactions costs Search cost - Shopbots sort by low price Uncertainty - reduced by instore inventories, customer knows they can pick it up in the store. |
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What factors, other than price, are important to your buying decision?
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Service, shipping/delivery, ease of use, reputation/trust/safety of data, one-stop shopping, recommendation, payment method, financing, return policy, advertising, brand name
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How does the Internet in general, and search intermediaries like shopbots in particular, affect your ability to search on these factors?
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Price is transparent, but these factors are NOT!
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Joint Executive Committee
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Setup in the 1880's by Major Railroad companies to set prices.
Public price + secret discounts. |
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Price transparency = low price. Under what condition would this happen?
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Homogeneous products
Many sellers Buyers use the price information; sellers do not use the price information |
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Do we observe zero price dispersion on the Internet?
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thedispersion in posted prices is surprisingly high. Posted prices vary by as much as 47% across Internet
retailers. Furthermore, the retailers with the lowest prices do not make the most sales. At the same time dispersion in weighted prices is lower on the Internet than in conventional outlets—reflecting a dominance among certain heavily branded retailers. |
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Effect of Lowering Search Costs
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Eliminating search costs eliminates the “ignorance premium” (a.k.a. profits!)
People feel a reward when they finally find the product but if they search for too long, they no longer want to purchase the product at the opitmal price. |
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Differentiating
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1) Marketing
-Amazon "The earths biggest selection" Note, difficult to change message. 2) brand value -Word-of-mouth, online communities, partner programs, links from other trusted sites, existing relationships with brick-and-mortar customers 3) product design -Enhancing your product and making it complex -Car insurance contracts has always been a commodity |
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Switching cost
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Brand-specific training
Information and data Search cost (setup cost) Loyalty program Contractual commitment |
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Ubiquitous presence/awareness
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Viral Marketing / Placement
High quality information |
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Innovative Price Setting
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Personalize prices (First degree discrimination)
Introduce price uncertainty Reduce price transparency (don't let see price without being in cart) Bundle to avoid direct price comparison Selectively lower prices on high profile “loss leader” items Remove incentives for competitors to lower price -Price cutting only rational if customers respond faster than competitors |
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Strategies under price competition in commodity markets
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Low costs are critical
Winner will have economy of scale and scope |
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Strategies under price competition in emerging markets
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Winner will be firms that pioneer new products/services/business models
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Strategies under price competition in mature markets
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Differentiate
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Amazon’s business model/strategies 1995-1998
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Need input
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Amazon’s business model/strategies 1999-2002
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Need input
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Why Seattle, why books?
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Need input
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Amazon’s operating cycle vs. brick-and-mortar stores’ operating cycle
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AMAZON:
Day 0: book enters inventory Day 16: book sold Day 17: payment received Day 58: supplier paid =-41 days B&M Day 0: book enters inventory Day 90: supplier paid Day 167: book sold Day 168: payment received =+78 days |
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Amazon’s competitors, and Amazon’s advantage/disadvantage vs. BN.com, WalMart and eBay
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Need input
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Amazon’s profit margins across product categories, how do Amazon’s changes in business model affect its profitability
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Need input
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Early predictions on how Internet commerce will affect price, price change, and price dispersion
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Low prices: Low search costs drive margins to near zero
-Note that to survive (P-MC)*Q>FC Frequent and small price changes: -Low Menu Costs Low price dispersion: -Any retailer pricing above market price will lose significant sales |
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Relationship between sales and sales rank
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Use ranking, assume log-linear relationship between rank and sales:
log(Quantity)= a+b*log(Rank) |
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Why internet retailers offer more product varieties than offline retailer?
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REDUCE MARGINAL COST
-Centralized warehouse, -inexpensive real estate -Drop-shipping -Electronic delivery of products -Print-on-demand at $3 per copy, instead of in volumes of 1,000 -IT lowers production, distribution, promotion costs INCREASED MARGINAL REVENUE -Local store serves a market within a radius -Internet markets serves the whole country, or the whole planet |
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How to estimate sales from obscure books that are not available in brick-and-mortar stores?
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log(Quantity)= a+b*log(Rank)
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Conditions that can lead to superstars
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Market fragmentation
Economy of scale Distribution of talent Constraint on supply Promotion/attention deficit Increasing return on quality/talent Uncertainty Herding/social interaction |
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How to offer niche products?
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Make everything available
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How to help consumers locate niche products?
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Active Tools
-search tools Sampling Tools Passive Tools -Recommendation System Product Reviews -On popular websites |
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How to price niche products?
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Need Market
-Consumers already know what they want. Long tail simply offers availability. -Finding the perfect fit makes consumers less price sensitive. Prices should rise down the tail. Want Market -Prices should fall down the tail, to stimulate demand and encourage exploration into unknown niches. -Example: Music |
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Examples of switching costs
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MS Office = Individual switching costs: learning new software. Collective switching costs: file formats for exchanging work
Online bill payments |
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Impact of switching costs on competition
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Before choice is made, envrionment may be very competitive... competition leads to low prices.
After choice is made, few alternatives. Lack of competition leads to high prices. |
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identify 7+2 types of switching costs
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Durable purchases and replacement
Brand-specific training Information and data Personalized suppliers Search costs Loyalty programs Contractual commitments |
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Durable Purchases
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After-purchase supplies and maintenance
-Printer Ink |
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Brand-specific Training
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Software retraining costs can be huge
Competitors want to lower switching costs -Apple help PC users switch |
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Information and Databases
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Data files insist on standard formats.
Control of data is valuable. |
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Personalized Suppliers
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Advertising, legal, accounting firms
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Search Costs
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Customer cost in finding new supplier
Supplier costs in finding and servicing new customer Example: Credit Cards |
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Loyalty Programs
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Frequent flyer programs
Frequent coffee programs Nonlinear reward structure is important |
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Contractual Commitments
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"Requirements contract”
Beware of “evergreen contracts” that renew automatically -Magazines, AOL, Cell Phones |
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Multiple products
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Multiple Products already owned
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Customer base
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Large Customer Base
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Intermediation
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Adding a value-creating layer in the value chain that didn’t exist before
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Disintermediation
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Removing a layer in the value chain because it no longer adds value or the value can be added by another entity in the chain.
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Vertical Integration
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Combining two layers in the value chain because this leads to a more profitable entity than the two levels would have been separately
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Inefficiencies in the travel industry before Internet, how can Internet remove these inefficiencies?
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Labor cost
Communication cost Consumer search cost Lack of travel information Difficulty of making changes Paper tickets |
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Why travel is an ideal product to be provided over the Internet?
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An information-intensive product that has multiple dimensions
-Lowers search cost, allows consumers to match with needs An electronic product in the sense that travel arrangements can be accomplished for the most part online -No physical inventory Suppliers are always looking for customers to fill excess capacity -Demand is very dynamic, and Internet allows creative pricing mechanisms and frequent price changes |
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Internet leads to intermediation in travel industry—information intermediaries
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Tripadvisor... Millions of unbiased reviews / opinions
Books, electronics, cars, cell phones, expert review, customer review, preview, price comparison |
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Examples of vertical integration
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Retailers may benefit from acquiring information intermediaries
UPS buying iShip |
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