Copyright © 2001 by Marketspace LLC Chapter 3 Business Models

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Business Models — Today’s Objective To develop an understanding of business models for the networked economy Where will the business compete? How will the business win? Chapter 2 Chapter 3

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Exhibit 3–1: Components of a Business Model Value Cluster Marketspace Offering Resource System Financial Model Developing a business model in the networked economy requires four key choices on the part of the senior management: Specify the value proposition or the value cluster for the business Articulate the online product, service and information offer Define how the company needs to align its resources to deliver the value proposition Define and select the most appropriate revenue model to pursue

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Exhibit 3–2: Shattering the Myth That Consumers Care Only About Prices Online Percentage of Customers Who Care About Attribute Attribute Source: JP Morgan Report: etailing and the five Cs

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Exhibit 3–3: Value Proposition/Cluster Value Cluster Marketspace Offering Resource System Financial Model The first step in the articulation of the business model is clearly specifying the value proposition or the value cluster for the business: Defining the value proposition or the value cluster requires managers to answer the following questions: Which target segments should the company focus on? What is the combination of customer benefits that is offered? What makes the firm and its partners better positioned to deliver the offering than anybody else?

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Exhibit 3–4: Value Proposition/Cluster Target Segments Target Segments The definition of the value proposition is the result of a combination of choices about the customers, the benefits offered and the unique capabilities of the firm: “The special occasion segment” Key Benefits Offered Key Benefits Offered Unique Capabilities Unique Capabilities Value Proposition Value Proposition + + Online experience Unique, broad product line of complementary gifts PC Flowers & Gift PC Flowers & Gift Fresh flowers Complementary gifts Low prices “PC Flowers & Gift serves the special occasion segment by providing fresh flowers and unique complementary gifts” FTD.com “Mid- to high-end market” Strong brand name Market Communication Supplier network Easy delivery of flowers “FTD.com provides the mid- to high-end market with the easiest way to send flowers thanks to its extended network of suppliers”

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Exhibit 3–5: Marketspace Offering Value Cluster Marketspace Offering Resource System Financial Model The next step is to articulate the online product, service and information offering: Defining the Marketspace offering requires managers to complete the following sequential tasks: Identify the scope of the offering Identify the customer decision process Map the offering to the consumer decision process

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Exhibit 3–6: Scope of the Offering The scope of the offering refers to the number of categories of products and services offered on the site: Category-Specific Dominance Focus on one product category Secondspin.com (used CDs) PremiumOrchids.com (orchids) Peapod (online grocery) Continuum of Scope Cross-Category Dominance Focus on a large number of categories Dealtime (electronics and other goods) Flowers (flowers) Streamline* (online grocery, dry cleaning service, etc.) * Streamline closed down in 2000

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Exhibit 3–7: Metamarkets The term ‘metamarkets’ refers to sites that group products and services that are closely related in the mind of customers: BabyCenter.com offers a good example of a “goal-derived” metamarket. The site’s products and information focus on one goal: raising a healthy child. Shopping for baby and maternity products Support community for parents User personalization Reference information Support and help from experts

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Exhibit 3–8: Customer Decision Process Flowers Example Disposal Loyalty Satisfaction Purchase Decision Evaluation of Alternatives Information Search Problem Recognition Prepurchase Purchase Postpurchase Need recognition, potentially triggered by a holiday, anniversary or everyday events Search for ideas and offerings, including: –Available online and offline stores –Gift ideas and recommendations –Advice on selection style and match Evaluation of alternatives along a number of dimensions, such as price, appeal, availability, etc. Purchase decision Message selection (medium and content) Post-sales support –Order tracking –Customer service Education on flowers and decoration Post-sale perks The second step in the construction of the online offering is the articulation of the customer decision process for the various product categories:

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Exhibit 3–9: Mapping the Offering to the Decision Process The last step in the construction of the online offering is mapping the products and services onto the customer decision process: Customer Decision Process Need Recognition Search for Ideas and Offerings Purchas e Decision Post-Sale Support and Perks Evaluation of Alternatives What occasions trigger the need for my product? What tactics can be used to stimulate demand? What information would the consumer need to make a selection? What are the key evaluation criteria that the consumer will use to evaluate my product/service? What information should the website offer to make the consumer comfortable with his or her choice? What functionality should the site present to communicate privacy, trust and security? What post-sale services can the website offer to create loyalty?

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Flower / Gift Decision Process Need Recognition Search for Ideas and Offerings Purchase Decision Message Selection Post-Sale Support and Perks Education on Flowers and Decoration Exhibit 3–10: Egg Diagram for Flowers.com Gift reminder service Holiday specials Everyday celebrations suggestions Special occasion suggestions Gift guru Favorite gifts Gift frequency Gift impossible Gift baskets Corporate gift services Ideas and Information Post-Sale Support Product price Product picture Product description Delivery information Delivery availability Gizmo fully-animated greeting cards Physical cards in gifts Order receipt eQ&A online customer service FAQ Customer service inquiry form Perks Miles earned with flower purchases Free gifts Discounts at AOL & BN.com with flower purchases Member specials “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 Evaluation of Alternatives Gift Recommendations Shopping basket E-commerce transaction Special shopping features –Delivery outside US –1-800-lasfloras.com Product Offering

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Exhibit 3–11: Resource System Value Cluster Marketspace Offering Resource System Financial Model The third step is to define the resource system and how the company must align it to deliver the benefits in the value proposition: A series of activities is required to construct a resource system: 1. Identify core benefits in the value cluster. 2. Identify capabilities that relate to each benefit. 3. Link resources to each capability. 4. Identify to what degree the firm can deliver each capability. 5. Identify partners who can complete capabilities.

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Exhibit 3–12: Step No. 1 — Identify Core Benefits Broad Assortment of Gifts Customer Service Widespread, Easy Access High Quality of Flowers The core benefits must be identified in the construction of the value cluster: Flowers.com serves the “mid- to high-end market” with a broad gift assortment, fresh flowers, reasonable prices and easy access because of its strong brand name, product and media partnerships and bricks-and-mortar network of franchises.

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Exhibit 3–13: Step No. 2 — Link Capabilities to Benefits Broad Assortment of Gifts Customer Service Widespread, Easy Access High Quality of Flowers Managers need to identify which capabilities are required to deliver each benefit, regardless (at this point) of the ability of the company to access or develop that capability: For Flowers.com, the benefit “widespread, easy access” is linked to four capabilities: strong brand name, wide reach to customers, multiple points of contacts and a popular website. Wide Reach to Customers Multiple Contact Points Popular Website Strong Brand Name = Capabilities = Core benefits

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Exhibit 3–14: Step No. 3 — Link Resources to Capability Broad Assortment of Gifts Customer Service Widespread, Easy Access High Quality of Flowers After the capabilities are identified, the firm should determined the resources necessary to deliver each capability: Wide Reach to Customers Multiple Contact Points Popular Website Strong Brand Name Telephone Online Franchis e Stores Catalog 3,000 Affiliates = Activities & assets = Capabilities = Core benefits

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Exhibit 3–15: Steps No. 4 and 5 — Ability to Deliver Capabilities Broad Assortment of Gifts Customer Service Widespread, Easy Access High Quality of Flowers The next steps assess whether the company has all the necessary capabilities in-house or if it has to look outside and select the most appropriate partners to complete the missing capabilities Flowers.com would not be able to deliver the capability “wide reach to customers” alone, and therefore would need to create partnerships. Companies like MSN, AOL and Snap are potential partners. Wide Reach to Customers Multiple Contact Points Popular Website Strong Brand Name = Activities & assets = Capabilities = Core benefits AOL MSN Snap Starmedia = Partners

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Exhibit 3–16: flowers.com Resource System Online Gift Center Integrated Partner Offers Broad Assortment of Gifts Customer Service AOL MSN Snap Wide Reach to Customers Widespread, Easy Access Multiple Contact Points Popular Website High Quality of Flowers Technology Strong Brand Name Strong Distribution Network Telephone Online Franch ise Stores Catalog Starmedia Gift Recommend- ations Gift Recommend- ations Address Book Gift Reminder Garden Works Plow & Hearth Great Foods = Activities & assets = Capabilities = Core Benefits Custome r Service Centers Integrated online offline Systems 3,000 Affiliates Personalization Capabilities Rich Content Third-Party Contractors Stores BloomNet Network Fulfillment Center

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Supporting Slide 3 – C: Flowers.com Resource System Online and Offline Integration Online Gift Center Integrated Partner Offers Broad Assortment of Gifts Customer Service AOL MSN Snap Wide Reach to Customers Widespread, Easy Access Multiple Contact Points Popular Website High Quality of Flowers Technology Strong Brand Name Strong Distribution Network Telephone Online Franch ise Stores Catalog Starmedi a Gift Recommend- ations Gift Recommend- ations Address Book Gift Reminder Garden Works Plow & Hearth Great Foods = Online Activities & Assets Custome r Service Centers 3,000 Affiliates Personalization Capabilities Rich Content Third-Party Contractors Stores BloomNet Network Fulfillment Center = Offline Activities & Assets Integrated Online and Offline

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Exhibit 3 – 17: Flowers.com Egg Diagram Online and Offline Integration Offline Product Offering Special events and educational workshops held at stores Prompts on toll-free number recording Suggestions from CSRs* in-store and via phone Prompts on toll-free number recording Suggestions from CSRs* in-store and via phone Brochure Suggestions from CSRs in stores via phone Brochure Information from CSRs in-store and via phone Brochure Purchase in-store Purchase via phone In-store specials Specials offered via phone *CSR = Customer service representative Flower / Gift Decision Process Need Recognition Search for Ideas and Offerings Purchase Decision Message Selection Post-Sale Support and Perks Education on Flowers and Decoration Gift reminder service Holiday specials Everyday celebrations suggestions Special occasion suggestions Gift guru Favorite gifts Gift frequency Gift impossible Gift baskets Corporate gift services Ideas and Information Post-Sale Support Product price Product picture Product description Delivery information Delivery availability Gizmo fully-animated greeting cards Physical cards in gifts Order receipt eQ&A online customer service FAQ Customer service inquiry form Perks Miles earned with flower purchases Free gifts Discounts at AOL & BN.com with flower purchases Member specials “Care and handling” “Do it yourself” Floral ideas Garden ideas Home ideas Gift ideas Gourmet ideas Store locator Recommendations by budget Bestsellers Evaluation of Alternatives Gift Recommendations Shopping basket E-commerce transaction Special shopping features –Delivery outside US –1-800-lasfloras.com Online Product Offering In-store customer service Customer service on toll- free number Select card in-store Select card via phone

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Supporting Slide 3–D: flowers.com Partnerships American Airlines Advantage, Delta Airlines SkyMiles, United Airlines Mileage Plus –Earn frequent-flyer miles with flowers.com purchases MCI WorldCom –Receive flowers.com gift certificates with long distance sign-up –Receive 10 percent off every flowers.com purchase with MCI WorldCom membership America Online –First agreement signed in 1994 –Exclusive marketer of fresh-cut flowers across key AOL brands until 2003 –One-year exclusive agreement to market gardening products commenced November 1999 Microsoft Networks –Premier floral partner and anchor in the MSN home and garden department –Products, advertising and links featured on MSN shopping channel Snap.com –One of the 45 premier merchants in Snap shopping service (online e-superstore) –Anchor tenant in Snap.com flower shop –To be spotlighted in select Snap.com on-air promotions, scheduled to run on the NBC Television Network during the Valentine’s Day and Mother’s Day periods Source: flowers.com website, WR Hambrecht & Co., TheStandard.com. Hoover’s Online

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Supporting Slide 3–D: flowers.com Partnerships (Cont.) Source: flowers.com website, WR Hambrecht & Co., TheStandard.com. Hoover’s Online –Markets flowers and other gifts through Excite.com and webcrawler.com web sites –Products, advertisments and links featured in the Excite Shopping Channel –Entered second year of marketing relationship in October 1999 Yahoo Inc. –Will run banner advertisements throughout the Yahoo Network, with additional presence in shopping area StarMedia Network –Developing Spanish and Portuguese language versions of flowers.com website People PC –Signed one-year agreement to become key floral and gift-provider for PeoplePC as of October 1999 Zapa.com –Offers selection of online greeting cards on flowers.com website –Greeting cards never deleted by Zapa.com –Users will be able to personalize greetings with their own photos, clip art or other multimedia creations Sears, Roebuck and Co. –Licensing relationship which enables Sears customers to use their store charge cards when shopping with flowers.com

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Chapter 3: Business Models Components of a business model Defining the value proposition Articulating the Marketspace offering Aligning the resource system Selecting the financial model Best taxonomies for the networked economy

Last Updated: 09/12/01 Copyright  2001 by Marketspace LLC Exhibit 3–19: Type of Financial Models A variety of financial models can be used to assess the value of the business model that follows from the resource system. Three examples are: Revenues Models Revenues Models Shareholder Value Models Shareholder Value Models Growth Models Growth Models Identify the flow of cash into the organization Assess how the company intends to generate cash flow or shareholder value Assess how the company will be able to drive revenue growth