Business Models Chapter 4 McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 4: Business Models Questions answered in this chapter: What are the four components of an online business model? Do firms compete on value propositions or value clusters? What are the approaches to developing an online offering, whether the business is providing a product, service, or information? What is a successful, unique resource system? What are the characteristics of good resource systems? What are the revenue sources available to firms?

Exhibit 4-1: Components of a Business Model Value Cluster Online Offering Resource System Financial Model

Value Propositions and Value Clusters Value Proposition-requires management to specify three things: Target segment Focal customer benefits Key resource that give market advantage Value Cluster- value proposition consisting of a cluster of composed of three parts: Choice of target customer segments Particular focal combination of customer-driven benefits Rationale for why this firm and its partners can deliver the value cluster in a significantly better way than competitors

Value Propositions and Value Clusters (cont’d) Choice of Segments Market size and growth rates Unmet or insufficiently met customer needs Weak or nonexistent competitors Choice of Focal Customer Benefits Single-benefit approach Multiple-benefit approach Choice of Unique and Differentiating Capabilities Tangible assets Intangible assets Capabilities of the organization

Quality of a Value Proposition or Cluster Customer Criteria. Do target customers understand the proposition or cluster? Is it relevant to their needs? Is it believable? Is it perceived as unique or indistinguishable from other propositions or clusters? Will it provoke action on the part of the target customer?

Quality of a Value Proposition or Cluster Company Criteria. Will the organization “rally around” the proposition or cluster? Does the company have the resources or capabilities to own this cluster? Will it block or facilitate the eventual move to additional vertical markets?

Quality of a Value Proposition or Cluster Competitive Criteria. Are other competitors trying to hold a similar proposition or cluster? Can current or future competitors match this cluster? How easy is it for future competitors to match this cluster?

The Online Offering Scope of the Offering Category-Specific Dominance-Companies that focus exclusively on one product category, such as flowers. Cross-Category Dominance- The extension of product offerings from a single category to additional product categories, such as Amazon.com.

Exhibit 4-2: Customer Decision Process — Flower Example Disposal Loyalty Satisfaction Purchase Decision Evaluation of Alternatives Information Search Problem Recognition PREPURCHASE PURCHASE POSTPURCHASE

Exhibit 4-3: Egg Diagram for 1-800-Flowers.com Gift reminder service Holiday specials Everyday celebration suggestions Special occasion suggestions Ideas and Information “Care and handling” “Do it yourself” Special events and educational workshops held at stores Floral ideas Garden ideas Home ideas Gift ideas Gourmet ideas Store locator Recommendations by budget Bestsellers Flower / Gift Decision Process Need Recognition Product Offering Gift Recommendations Education on Flowers and Decoration Search for Ideas and Offerings Birthday Gift Central Gift by occasion Gift by price Monthly gift clubs Corporate gift services Post-Sales Support Order receipt e-mail Q&A chat FAQ Customer service inquiry form Post-Sales Support and Perks Evaluation of Alternatives Product price Product picture Product description Delivery information Delivery availability Perks Miles earned with flower purchases Free gifts Discounts at AOL & BN.com with flower purchases Member specials Message Selection Purchase Decision Shopping basket E-commerce transaction Special shopping features Delivery outside U.S. 1-800-lasfloras.com Physical cards in gifts E-mail a bouquet Source: Adapted from Mohanbir Sawhney, “Making New Markets,” Business 2.0 (May 1999): 116–21.

What Is a Successful Resource System? Modifications to the activity system logic for the online marketplace Shift from physical world to virtual and back to physical world Shift from a supply-side focus to a demand-side focus Shift from resources to benefits Shift from single to multifirm systems

Specifying a Resource System Step 1: Identify core benefits in the value cluster Step 2: Identify resources that relate to each benefit Step 3: Identify to what degree the firm can deliver each benefit Step 4: Identify partners who can complete resources

Exhibit 4-4: 1-800-Flowers.com Resource System Strong Distribution Network Online Gift Center Broad Assortment of Gifts High Quality of Flowers Popular Website Integrated Partner Offers Core Benefits Customer Service Widespread Easy Access Multiple Contact Points Technology Strong Brand Name Wide Reach to Customers = Core Benefits =Resources

Criteria to Assess the Quality of a Resource System Uniqueness of the system Links between resources and benefits Links among resources in the system Links among resources Links between virtual world and physical world business systems Sustainable advantage

Exhibit 4-5 : Online/Offline Egg Diagram for 1-800-flowers.com Prompts on toll free number recording Suggestions from CSRs* in stores and via phone Special events and educational workshops held at stores Prompts on toll free number recording Suggestions from CSRs* in stores and via phone Brochure Gift reminder service Holiday specials Everyday celebrations suggestions Special occasion suggestions Off-line Product Offering Ideas and Information “Care and handling” “Do it yourself” Floral ideas Garden ideas Home ideas Gift ideas Gourmet ideas Store locator Recommendations by budget Best sellers Flower / Gift Decision Process Need Recognition On-line Product Offering Gift Recommendations Education on Flowers and Decoration Search For Ideas and Offerings Gift guru Favorite gifts Gift frequency Gift impossible Gift baskets Corporate gift services Suggestions from CSRs in stores via phone Brochure Post-Sales Support In-store customer service Customer servifce on toll-free number Order receipt email eQ&A online customer service FAQ Customer service inquiry form Post Sales Support and Perks Evaluation of Alternatives Product price Product picture Product description Delivery information Delivery availability Information from CSRs in store and via phone Brochure Perks In-store specials Specials offered via phone Miles earned with flower purchases Free gifts Discounts at AOL & BN with flower purchases Member specials Message Selection Purchase Decision Shopping basket E commerce transaction Special shopping features Delivery outside U.S. 1-800-lasfloras.com Gizmo fully-animated greeting cards Physical cards in gifts Select card in-store Select card via phone Purchase in-store Purchase via phone *CSR = Customer service representative

The Role of Partnerships Portal agreements (AOL, Yahoo, MSN, etc.) Anchor tenant agreements (exclusive partnerships) Promotion agreements (cross industry promotions such as frequent-flier miles, telephone discount rates, gift certificates, etc.)

Revenue Models Advertising- Earning revenue through the selling of ads (banner or interstitial), site sponsorships, event underwriting, or other forms of communication Product, Service, or Information Sales- Income generated from the sale of goods on the site Transaction- Revenue accrued from charging a fee or taking a portion of the transaction sum Subscription- Revenue generated through subscriber fees for magazines, newspapers, or other information/service businesses License Fees- Revenue generated from licensing of content

Online Business Models Metamarket Switchboard Model Traditional and Reverse Auction Models Freshest-Information Model Highest-Quality Model Widest-Assortment Model Lowest-Price Model Most-Personalized Model

Exhibit 4-6: Summary of Online Business Models

Marketwatch.com Business Model Value Cluster Target segments (savvy investors, “seekers”, “dabblers”) Key benefits (up-to-the-minute information; original, in-depth analysis; personal-finance tools; multiple points of access) Supportive rationale (experienced editorial staff, multiple forms of media, CBS News and Financial Times brand names)

Marketwatch.com Business Model (cont’d) Supportive Rationale Experienced editorial staff with financial expertise Infrastructure allowing access from multiple forms of media Credibility through its association with CBS News

Exhibit 4-7: MarketWatch.com Egg Diagram Planning Tools Sharebuilder Payment Calculator Home Price Check Best Credit Card Rates Insurance QuickQuote Learn Getting Started Investor’s Primer IPO Basics Financial Term Glossary Breaking News Online News Watch E-mail Alerts Real-time Headlines Hotstock Tracker Marketwatch Live eSignal Radio Contribution to Westwood One Television CBS MarketWatch Weekend Contributions To: CBS Early Show CBS Evening News CBS NewsPath Personal Finance Process Learn About Personal Finance Plan Investment Strategy Stay Updated on the Latest News and Figures Develop Insight Invest Track Investments Track Investments Portfolio View Portfolio Analyzer Portfolio Allocation Portfolio Tracker Market Figures Futures and Options Futures Contracts After-Hours Futures Bonds Bellwether Bonds Report Funds Fund Profile Fund Charts Stocks Interactive Charting Historical Charts Global Markets Key Rate Snapshot International Indexes Non-Us Stocks US Markets Market Monitor Major Indexes Dollar Volume Leaders Invest Sponsorships by Online Brokerages Datek Online Fidelity Investments National Discount Brokers Ameritrade Cybertrader Scottrade Broker Decision Center Develop Insight Third-Party Sources Market Guide Hoover’s Online Multex Annual Reports Club INVESTools Over 250,000 Investment Research Reports Community Private e-mail People Watch Hot Discussions Occasional Polls Commentary Thom Calandra’s Stockwatch Bambi Francisco’s Net Sense Bezderick on Bonds (Many other commentary columns) eNewsletters

Marketwatch.com Business Model (cont’d) Resource System CBS News Financial Times Marketwatch.com BigCharts.com Content partners (Hoovers, Zacks, INVESTools, etc.) Distribution partners (Yahoo, AOL, Quicken, etc.)

Exhibit 4-8: MarketWatch.com Resource System International Presence Distribution Partnerships Up-to-the-Minute Information Partnerships with Content Providers Multiple Points of Access Available Infrastructure Credible Analysis and Personal Finance Tools Association with CBS Experienced Editorial Staff CORE BENEFITS =Core Benefits =Resources

Marketwatch.com Business Model (cont’d) Revenue model Advertising revenue (37% in 2001) Licensing revenue (52% in 2001) Other revenue, subscription, etc. (6% in 2001) Value model (best information) Growth model Advanced portfolio-tracking tools International markets Services to address expanded trading hours Expand reach to wireless devices Expand TV and radio shows to more stations

Exhibit 4-9: Partners Give / Get Matrix

Exhibit 4-10: MarketWatch.com’s Revenue Distribution