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4-2 Chapter 4 Business Models McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

4-3 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?

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

4-5 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

4-6 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

4-7 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?

4-8 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?

4-9 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?

4-10 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.

4-11 Exhibit 4-2: Customer Decision Process — Flower Example Disposal Loyalty Satisfaction Purchase Decision Evaluation of Alternatives Information Search Problem Recognition PREPURCHASE PURCHASE POSTPURCHASE

4-12 Exhibit 4-3: Egg Diagram for Flowers.com 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 celebration suggestions Special occasion suggestions Birthday Gift Central Gift by occasion Gift by price Monthly gift clubs Corporate gift services Ideas and Information Post-Sales Support Product price Product picture Product description Delivery information Delivery availability Physical cards in gifts a bouquet Order receipt Q&A chat 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 U.S. –1-800-lasfloras.com Product Offering Source: Adapted from Mohanbir Sawhney, “Making New Markets,” Business 2.0 (May 1999): 116–21.

4-13 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 What Is a Successful Resource System?

4-14 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 Specifying a Resource System

4-15 Online Gift Center Integrated Partner Offers Broad Assortmen t of Gifts Customer Service Wide Reach to Customers Widesprea d Easy Access Widesprea d Easy Access Multiple Contact Points Popular Website High Quality of Flowers Technology Strong Brand Name Strong Distribution Network =Resources = Core Benefits Core Benefits Exhibit 4-4: Flowers.com Resource System

4-16 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 Criteria to Assess the Quality of a Resource System

4-17 Exhibit 4-5 : Online/Offline 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 servifce on toll- free number Select card in-store Select card via phone

4-18 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.) The Role of Partnerships

4-19 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

4-20 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

4-21 Exhibit 4-6: Summary of Online Business Models

4-22 Metamarket Switchboard Model Women Related Categories Magazine Subscriptions Baby Products

4-23 Traditional and Reverse Auction Models Transaction Fees

4-24 Freshest-Information Model Advertising

4-25 Highest-Quality Model High Quality and Exclusive Products

4-26 Widest-Assortment Model Assorted Products

4-27 Lowest-Price Model

4-28 Most-Personalized Model

4-29 Business Models on the Web Brokerage Advertising Infomediary Merchant Manufacturer (Direct) Affiliate Community Subscription Utility

4-30 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

4-31 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

4-32 Exhibit 4-7: MarketWatch.com Egg Diagram Learn Getting Started Investor’s Primer IPO Basics Financial Term Glossary Invest Sponsorships by Online Brokerages Datek Online Fidelity Investments National Discount Brokers Ameritrade Cybertrader Scottrade Broker Decision Center Planning Tools Sharebuilder Payment Calculator Home Price Check Best Credit Card Rates Insurance QuickQuote Third-Party Sources Market Guide Hoover’s Online Multex Annual Reports Club INVESTools Over 250,000 Investment Research Reports Community Private People Watch Hot Discussions Occasional Polls US Markets Market Monitor Major Indexes Dollar Volume Leaders Commentary Thom Calandra’s Stockwatch Bambi Francisco’s Net Sense Bezderick on Bonds (Many other commentary columns) eNewsletters Online News Watch Alerts Real-time Headlines Hotstock Tracker Marketwatch Live eSignal Radio Contribution to Westwood One Global Markets Key Rate Snapshot International Indexes Non-Us Stocks Track Investments Portfolio View Portfolio Analyzer Portfolio Allocation Portfolio Tracker Breaking News Market Figures Personal Finance Process Learn About Personal Finance Plan Investment Strategy Stay Updated on the Latest News and Figures Develop Insight Invest Track Investments Television CBS MarketWatch Weekend Contributions To: – CBS Early Show – CBS Evening News – CBS NewsPath Develop Insight Futures and Options Futures Contracts After-Hours Futures Bonds Bellwether Bonds Report Funds Fund Profile Fund Charts Stocks Interactive Charting Historical Charts

4-33 Resource System –CBS News –Financial Times –Marketwatch.com –BigCharts.com –Content partners (Hoovers, Zacks, INVESTools, etc.) –Distribution partners (Yahoo, AOL, Quicken, etc.) Marketwatch.com Business Model (cont’d)

4-34 Exhibit 4-8: MarketWatch.com Resource System =Core Benefits =Resources Credible Analysis and Personal Finance Tools Up-to-the- Minute Information Multiple Points of Access Distribution Partnerships Distribution Partnerships Association with CBS Association with CBS Experienced Editorial Staff Experienced Editorial Staff Partnerships with Content Providers Partnerships with Content Providers Available Infrastructure Available Infrastructure International Presence International Presence CORE BENEFITS

4-35 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 Marketwatch.com Business Model (cont’d)

4-36 Exhibit 4-9: Partners Give / Get Matrix

4-37 Exhibit 4-10: MarketWatch.com’s Revenue Distribution