Business Models - Part 1 CPS 181s Jan 28, 2003

Market Opportunity Analysis Where will business compete? Business Model How will company win?

QuestionsQuestions  What is a business model?  Do firms compete on value propositions or value clusters?  How does a firm develop an outline offering-whether product, service, or information?  What is a successful, unique resource system? What are characteristics of good resource systems?

QuestionsQuestions  What are the financial models available to firms?  What business classification schemes seem most appropriate for eCommerce?

Components of A Business Model  Four business choices on the part of senior management  a value proposition or a value Cluster for targeted customers  a marketspace offering >product, service, information, or all three  a unique, defendable resource system  a financial (revenue) model Heidi Roizen

Components of a Business Model Value Cluster Online Offering Resource System Financial Model Lise Buyer

Value Propositions or Value Clusters  First step is to specify the value proposition for the business  Items include  1) choice of target customer segment  2) choice of focal customer benefits  3) rationale for why the firm can deliver the benefit package significantly better than competitors in the same space  Can view as value cluster (on-line customization capability)  the choice of target customer segments  a particular focal combination of customer-driven benefits that are offered  the rationale for why this firm and its partners can deliver the value cluster significantly better than competitors

1) Choice of Segments  Target segments  Market size and growth rate  Unmet or insufficiently met customer needs  Weak or nonexistent competitors  Examine ability to compete through examining a business’ strengths matching the customers benefits desired

1) Choice of Segments...  Degree of fit with existing channels  Can be  demographic segments  benefit segments, or  combination  Segmentation example  demographic segment  the under-30 segment  upper-income segment  benefit segment  fresh flowers  most convenient buying method  lowest priced flowers  Must maximize actionability and meaningfulness Yossi Vardi

2) Choice of Focal Customer Benefits  Factors  price  customer support  on-time delivery  shipping and handling  privacy concerns  Price sensitivity can actually decrease when usability of quality information increase  Could be the dominated by direct buying from manufacturer  Trying to compete on more than one benefit creates problems  customers confused about message  on supply side, systems must be uniquely constructed to deliver certain benefits (forces compromise solutions, i.e., low price/fast delivery)

Point-Counterpoint: Single Vs. Cluster of Benefits

12 Shattering Myth That Consumers Care Only About Prices On-line PERCENTAGE OF CUSTOMERS WHO CARE ABOUT ATTRIBUTE ATTRIBUTE Source: JP Morgan Report: etailing and the five Cs

3) Firms Ability to Deliver Unique and Differentiating Capabilities  Factors inside the firm leading to delivery of targeted benefits  “core competencies”  “business strengths”  “strategic control points”  “unique resources”  “unique capabilities”  Key is linking directly to the core benefits that customers value most

Flower Industry Framework  Highly competitive  Rapidly changing  $15B domestic  Highly fragmented  No National brand  Multiple layers of distribution  Uneven product quality  Sold days after harvest  60% walk-in sales  80% sales are for local delivery

On-line Flower Market  $350M (1999) > $2.5B (2004)  Value Proposition of on-line retailers is quite similar  High prospect of consolidation

Value Propositions or Clusters  Dot.com flower comparisons  PC Flowers & Gifts  special occasions target segment  key benefits >fresh flowers >complementary gifts >lower prices  differentiating capabilities >online experience and knowledge >unique, broad product line of complementary gifts  Proflowers  price sensitive, convenience oriented  freshest cut flowers at competitive prices  FedEx shipping

Value Propositions or Clusters...  FTD.com  mid-to-high end market  ease of sending flowers and gifts  supplier network  flowers.com  mid-to-high end market with broad assortments, fresh flowers, reasonable prices  easy to access because of >their strong brand name >product and media partnerships >brick-and-mortar network of franchises (I.e. Bloomnet) How differentiated are these value propositions?

Classes of Criteria  Customer Criteria  understand criteria?  relevant to needs?  believable?  unique or “me-too”?  provoke action?  Company Criteria  a rally point?  resources or capabilities available?  block or facilitate move to additional vertical markets?  Competitive Criteria  others attempting to hold a similar proposition or cluster?  will others allow the focal company to own cluster?  can competitors match cluster?  ease at matching cluster?

Components of a Business Model Value Cluster Online Offering Resource System Financial Model Lise Buyer

Develop an Online Offering  Articulating broad description of the online product/service through three sequential tasks (not yet designing content look & feel)  1) Identify scope of the offering  2) Identify customer decision process  3) Map the offering (product, services, information) to the decision process

1. Scope of Offering  The categories of products and services offered  Category-specific dominance(increasingly rare)  Cross-category dominance  Amazon “supply side” logically grouped for logistics and distribution >Physical goods >Stored in inventory >Can not be digitized >Consumer focused

1. Scope of Offering...  “metamarkets”  those sites offering a category of clustered goods and services  “Customers think in terms of activities, while firms think in terms of products…Metamarkets, then, are clusters of markets in the minds of customers.”  Online businesses can be organized in a variety of goal-derived ways.

2. Identify Consumer Decision Process  Articulating the consumer decision process for the various product categories  Prepurchase  Purchase  Postpurchase

Consumer Decision Process — Flower Example Flowers Disposal Loyalty Satisfaction Purchase Decision Evaluation of Alternatives Information Search Problem - Recognition Pre-Purchase Purchase Post- Purchase Need recognition, potentially triggered by a holiday, anniversary or everyday events Search for ideas and offerings, including: –Available on-line and off-line 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 sales perks

3. Mapping Products and Services onto the Customer Decision Process  Articulating the steps of the decision process for a particular product category  Identify the products, services, and information

Flower / Gift Decision Process Need Recognition Search For Ideas and Offerings Purchase Decision Message Selection Post Sales Support and Perks Education on Flowers and Decoration 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-Sales 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 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 Best sellers Evaluation of Alternatives Gift Recommendations Shopping basket E commerce transaction Special shopping features –Delivery outside U.S. –1-800-lasfloras.com Product Offering

Components of a Business Model Value Cluster Online Offering Resource System Financial Model

What Is a Successful, Unique Resource System?  Value proposition and offering specification critical  Dictate resource system of the company  Unique activities, tied to a value proposition, lead to a competitive advantage  Selection of capabilities and activities  Supply of resources  Four modifications for e-Commerce  Shift from Physical World to Virtual-and-Physical World  Shift from a Supply-Side Focus to a Demand-Side Focus  initial focus on the benefits desired by targeted customers  Shift from Activities to Capabilities  higher order of skills and assets of the company  physical or intangible assets (Yahoo’s brand name, Priceline’s patents)  Shift from Single to Multifirm Systems  partnerships

Specifying a Resource System  Step 1 - Identify Core Benefits in the Value Cluster

1-800-flowers.com Resource System Broad Assortment of Gifts Customer Service Widespread, Easy Access High Quality of Flowers = Activities & assets = Capabilities = Core Benefits = Partnerships

Specifying a Resource System  Step 1 - Identify Core Benefits in the Value Cluster  Step 2 - Identify Capabilities That Relate to Each Benefit

1-800-flowers.com Resource System Online Gift Center Integrated Partner Offers Broad Assortment of Gifts Customer Service Wide Reach to Customers Widespread, Easy Access Multiple Contact Points Popular Web Site High Quality of Flowers Technology Strong Brand Name Strong Distribution Network = Activities & assets = Capabilities = Core Benefits = Partnerships

Specifying a Resource System  Step 1 - Identify Core Benefits in the Value Cluster  Step 2 - Identify Capabilities That Relate to Each Benefit  Step 3 - Link Resources to Each Capability, and…..  Step 4 - Identify to Which Degree the Firm Can Deliver Each Capability

1-800-flowers.com Resource System Online Gift Center Integrated Partner Offers Broad Assortment of Gifts Customer Service Wide Reach to Customers Widespread, Easy Access Multiple Contact Points Popular Web Site High Quality of Flowers Technology Strong Brand Name Strong Distribution Network Telephone On-line Fran -chise Stores Fran -chise Stores Catalog Gift Recommend- ations Gift Recommend- ations Address Book Gift Reminder = Activities & assets = Capabilities = Core Benefits Custome r Service Centers Integrated on-line off- line systems Personalization Capabilities Rich Content Stores Fulfillment Center = Partnerships

Specifying a Resource System  Step 1 - Identify Core Benefits in the Value Cluster  Step 2 - Identify Capabilities That Relate to Each Benefit  Step 3 - Link Resources to Each Capability  Step 4 - Identify to Which Degree the Firm Can Deliver Each Capability  Step 5 - Identify Partners Who Can Complete Capabilities

1-800-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 Web Site High Quality of Flowers Technology Strong Brand Name Strong Distribution Network Telephone On-line Fran -chise Stores Fran -chise 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 on-line off- line systems 3,000 Affiliates Personalization Capabilities Rich Content Third Party Contractors Stores BloomNet Network Fulfillment Center = Partnerships

Criteria to Assess the Quality of a Resource System  Uniqueness of the System  Links between Capabilities and Benefits  Links Among Capabilities in the System  Links among Resources  Links between Virtual World and Physical World Business Systems  Sustainable Advantage Donna Dubinsky

Benefits and Challenges of Integrated Online/Offline Business Model Benefits Persistent connection with customers New value for customers Access to new customers Scalability Persistent connection with customers New value for customers Access to new customers Scalability Challenges Cannibalization Channel conflict Customer confusion Investor confusion Cannibalization Channel conflict Customer confusion Investor confusion

On-line/Off-line Egg Diagram for flowers.com Off-line Product Offering Special events and educational workshops held at stores Prompts on toll free number recording Suggestions from CSRs* in stores and via phone Prompts on toll free number recording Suggestions from CSRs* in stores 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 Sales 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-Sales 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 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 Best sellers Evaluation of Alternatives Gift Recommendations Shopping basket E commerce transaction Special shopping features –Delivery outside U.S. –1-800-lasfloras.com On-line Product Offering In-store customer service Customer service on toll- free number Select card in-store Select card via phone

On-line and Off-line Integration for the FLOWERS 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 Web Site High Quality of Flowers Technology Strong Brand Name Strong Distribution Network Telephone On-line Franch ise Stores Catalog Starmedia Gift Recommend- ations Gift Recommend- ations Address Book Gift Reminder Garden Works Plow & Hearth Great Foods = On-line Activities & Assets Custome r Service Centers 3,000 Affiliates Personalization Capabilities Rich Content Third Party Contractors Stores BloomNet Network Fulfillment Center = Off-line Activities & Assets Integrated on-line off-line systems

The Role of Partnerships  For flowers.com  Portal Agreements  America Online  Microsoft Networks  Yahoo! Inc.   StarMedia Network  Anchor Tenant Agreements  Snap.com  Sears, Roebuck, and Company  Promotion Agreements  American Airlines ® Advantage ®, Delta Airlines SkyMiles ®, United Airlines Mileage Plus: Frequent Flyer Miles  MCI Worldcom: Gift Certificates, 10% discount  PeoplePC: Became key floral and gift provider  Zapa.com: Offers greeting cards on flowers.com, allowing personalization

1-800-FLOWERS 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% 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 commencing Nov  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 (on-line 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

1-800-FLOWERS Partnerships (Cont.)   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 web site  People PC  Signed one year agreement to become key floral and gift-provider for PeoplePC commencing October 1999  Zapa.com  Offers selection of online greeting cards on FLOWERS.com web site  Greeting cards never deleted by Zapa.com  Users will be able to personalize greetings with their own photos, clip-art or other multi-media creations  Sears, Roebuck and Company  Licensing relationship which enables Sears customers to use their store charge cards when shopping with FLOWERS.com Source: FLOWERS.com website, WR Hambrecht & Co., TheStandard.com. Hoover’s Online

Components of a Business Model Value Cluster Online Offering Resource System Financial Model Yossi Vardi

Case Study - Frontgate Catalog 1.Why has Frontgate Catalog met with such success as a new catalog offering in an already crowded direct-mail market? 2.Who are the customers who buy from Frontgate?? 3.What aspects of its operations enhance the customers’ level of perceived value, satisfaction, and loyalty? 4.Given that customer lifetime value drives profitability of any direct marketing business, how should Frontgate managers maximize the value of the catalog’s customer relations? 5.Evaluate the existing Frontgate catalog site on the Web. How well suited is the site to building awareness, selling product, and providing customer service in the Web environment? 6.Is Frontgate’s stated plan for its website implementation reasonable and sound? What changes in strategy or tactics would you recommend?