Business Models

Economics and Management

Management Modules First Sessions

Profusely cites and references

Harvard Business Review articles Dr. Althaf S
School of Management Studies
Why should you understand
The core questions you should be asking the entrepreneur /business
should be around her/his/their business model ?
What is a business
model?
All it really meant was how you planned to make money
Lewis

Context: dot.com bubble (2000s)

“central to the Internet boom; (“Business Models”) glorified all manner of
half-baked plans …

• Microsoft: to sell software for 120 bucks a pop that cost fifty cents to
manufacture
• The business model of most Internet companies was to attract huge
crowds of people to a Web site, and then sell others the chance to
advertise products to the crowds.
“assumptions about what a company gets
paid for” Peter Drucker’s “theory of the business.”

•“Theory of the business” was a set of assumptions about what a business will and
won’t do,

•In addition to what a company is paid for,

•“these assumptions are about markets.
• identifying customers and competitors, their values and behavior.
•technology and its dynamics, about a company’s strengths and weaknesses.”

•Theory of the business concept to explain how smart companies fail to keep up with
changing market conditions
•by failing to make those assumptions explicit.
 • Most strategically nimble companies of
all time — IBM
• Sooner or later, some assumption you
have about what’s critical to your
company will turn out to be no longer
true.
• In IBM’s case, having made the shift from
• tabulating machine company to
• hardware leaser to
• a vendor of mainframe,
minicomputer,
• and even PC hardware,
• runs adrift on its assumption that it’s
essentially in the hardware business,
• make money through services for quite
some time

IBM Story
It’s a story after all!
• Business models are “at heart, stories — stories that explain how
enterprises work. …..
• A good business model answers Peter Drucker’s age-old questions,
‘Who is the customer? And what does the customer value?’
• It also answers the fundamental questions every manager must ask:
How do we make money in this business?
• What is the underlying economic logic that explains how we can
deliver value to customers at an appropriate cost?”

Magretta, Joan. "Why business models matter." (2002).

A post-spreadsheet / PC thing?
• successful business models “were created more by accident than by
design or foresight, and became clear only after the fact”
• By enabling companies to tie their marketplace insights much more
tightly to the resulting economics
• — to link their assumptions about how people would behave to the
numbers of a pro forma P&L 
• — spreadsheets made it possible to model businesses before they
were launched.”
A Business Model as Value Chain!
• A business model has two parts:
1. all the activities associated with making something:
• designing it,
• purchasing raw materials,
• manufacturing, and so on.
2. all the activities associated with selling something:
• finding and reaching customers,
• transacting a sale,
• distributing the product, or
• delivering the service.
A new business model may turn on designing a new product for an unmet need or on
a process innovation
Business Model Canvas
• As an organized way to lay out your assumptions about
• the key resources and key activities of your value chain,
• your value proposition,
• customer relationships,
• channels,
• customer segments,
• cost structures,
• and revenue streams

Osterwalder, Alexander. "A better way to think about your

business model." Harvard Business Review 6 (2013).
Disruptive Innovations
• Introducing a better business model into an existing market is the
definition of a disruptive innovation.
• Clay Christensen -“In Reinventing Your Business Model”
• work out how a new entrant’s business model might disrupt yours.
• This approach begins by focusing on the customer value proposition
— what Christensen calls the customer’s “job-to-be-done.”
• Many writers have suggested signs that could indicate that your
current business model is running out of gas.
• The first symptom, Rita McGrath says in “
When Your Business Model is In Trouble,” is when innovations to your
current offerings create smaller and smaller improvements (and
Christensen would agree).
• You should also be worried, she says, when your own people have
trouble thinking up new improvements at all or your customers are
increasingly finding new alternatives.
• It then identifies
• those aspects of the profit formula,
• the processes, and the resources that make the rival offering not only better,
• but harder to copy or respond to —
•  a different distribution system, perhaps (the iTunes store);
• or faster inventory turns (Kmart);  or
• maybe a different manufacturing approach (steel minimills).
When is a business model is running out of
gas?
(Rita McGrath :“When Your Business Model is In Trouble,”
When innovations to your current offerings create smaller and smaller
improvements
• When your own people have trouble thinking up new improvements at all or your customers
are increasingly finding new alternatives.
(Karan Giotra and Serguei Netessine : Four Paths to Business Model Innovation)
So then, creating a new model by altering your current business model in four broad
categories:
• by changing the mix of products or services,
• postponing decisions,
• changing the people who make the decisions, and
• changing incentives in the value chain.
Affinity Clubs
• Pay Royalties to some large organization for the
right to sell your product exclusively to third
customers
• By buying or using your products, customers
also get special access to other perks, giving
them extra incentive and
• provide an incentive to those partners to get
them on board.
• best used in competitive fields where
products are all similar.
• A MBNA: Mastercard and VISA-Different cards
come with different perks, so they can target a
wide audience.
Brokerage Model
• A broker connects buyers to sellers and gets a
small fee for each transaction.
• Any marketplace that allows others to sell on
it, and
• focuses on bringing in customers for those
sellers is using a brokerage model
• Fiverr, Udemy
 • A bundling business
model packages related goods and
services  together to make a more
convenient and enjoyable
experience for customers.
• fast-food value meal
• but that can be replicated fairly easily.

• iPod + iTunes.
• You can’t use an iPod without
iTunes,?
• so each new iPod customer
results in a new iTunes user
(and potential customer).

Bundling
 • The idea behind a data-into-assets is to
obtain valuable data that can be sold to
willing buyers.
• This is one of the few that can run into real
ethical dilemmas.
• For example, this is the business model that
Facebook uses. The site is free for users, but
in return, Facebook collects massive
amounts of data about users and uses that
to generate revenue through advertisers.
• The Dangers of Data
• They are facing large privacy lawsuits that
could set a precedent for other businesses.
• It’s hard to know where to draw the line, as
Google is another data-into-assets business
that most have no big issues with. They
scrape data from just about all sites and
transform that into search results that users
desire.
• Then they sell ads to advertisers on the

DATA-INTO-ASSETS
search results.
Crowdsourcing
• Get a large group of people to contribute content for
free in exchange for access
• NOT crowdsourcing funding from sites like Kickstarter.
• A crowdsourcing business model relies on user-
generated content.
• The business focuses on making contributions easy and
providing an incentive for users to contribute (usually
money or a charitable goal).
• YouTube - users upload videos, and most hope to
generate revenue from those videos.
• Wikipedia is another great example, where all the
content on the site has been created for free by willing
users who want to spread knowledge.
Disintermediation

• Sell direct, sidestepping traditional

middlemen
• Directly delivering a service or product
instead of through a middleman.
• Tesla.
• Instead of selling cars through a
dealership, you buy online and skip
the salesman.
• Not only is it more convenient, but
it reduces costs for consumers.
e.g. Dell, WebMD
Freemium
• Freemium is a modern business model that is often used by
software companies.
• Because there’s very little overhead in serving data,
businesses can choose to provide a portion of their service
or product for free, but requiring payment for full access.
• Dropbox gives you a small amount of free cloud storage and asks you
to upgrade to a paid plan if you need more space.
• Spotify offers free music but has ads. If a user buys a paid plan, they
get rid of the ads.
• Freemium lets you reach a wider audience, and often get
more referrals, which can lead to a steady stream of
customers.
 • Since the beginning of the Internet,
creating a digital platform has been a
viable business model for some
companies.
• For example, OpenTable started in 1998,
which is a site that provides an online
restaurant-reservation service.
• There are still opportunities to be
innovative in an industry simply by
providing a useful product online.
• To use this, you can apply modern
technology to outdated industries, or
apply new technology to any industries
ready for it.
• We’re also seeing new digital platforms
innovate upon old ones by leveraging
new technology like machine learning
and blockchain technology. These could
almost be considered business models of
their own.

DIGITAL PLATFORMS
Fractionalization
• Sell partial use of something and letting customers buy a portion of a product or
service.
• It’s a great model when your target customers only want your product or service part
of the time. They get the full benefits but don’t have to pay full price.
• a timeshare is a property – typically a hotel or a luxury resort in which multiple
parties hold rights to use the property, and each sharer/ member is allotted a period
of time (about one week, almost the same time every year in a fixed package and one
week of their choice in floater package) in which they may use the property.
• A membership costs about Rs 1 lakh upwards and the annual maintenance
costs about Rs 10,000 upwards depending on which package you are with the
timeshare company.
• One can also sell the share to others if they are not keen on holding it.
• The member, however, holds no claim to ownership of the property.
• Sterling Holiday Resorts, Club Mahindra, Country Club , . NetJets, Time-shares
Leasing
• Rent, rather than sell, high-margin,
high-priced products
• Leasing is nothing new and has been
used by car dealerships for many years.
It works best for expensive products.
• When a customer often can’t afford to
pay cash or only needs a product one
time, you offer them use of the product
for a rental fee.

e.g. Cars, MachineryLink

Low-touch
• Lower prices by decreasing service
• A low-touch model takes a high-end
offering and reduces the cost (and quality)
of that product or service.
• Competing on cost is a difficult business
model to succeed with, but can work if you
get enough customer volume.
• Walmart - sell lower-quality products than
most competitors, but at a better price.
e.g. Walmart, IKEA
 Negative Operating Cycle
Business model popularized by
Amazon How Does It Work?
• By maintaining a low inventory and getting
payment upfront.
• you need a reliable and fast fulfillment
• Lower prices by receiving process for this to work effectively.
payment before delivering the • The profits then come from the volume of
offering sales that are attracted through low prices,
or by utilizing the money sitting around
• popular with online retail before having to pay suppliers.
businesses and allows businesses • That money generates interest or can be
to sell products at a low-profit- used to fund long-term investments or
margin (or even at cost), and still research and development.
be highly profitable.
PAY-AS-YOU-GO

• Charge for actual, metered usage

• This business model is exactly what it sounds like,
customers pay as they use your service.
• This can only be used in certain industries where
customers regularly consume varying amounts.
• Car2go lets you pay for car rentals by the minute,
hour, or day.
• Some web hosts, like Cloudways, let’s you pay only
for the resources your websites actually use.
• E.g. Electric Companies
RAZORS AND BLADES
• Razors and blades can be interpreted literally or symbolically.
• Offer the high-margin razor below cost to increase volume sales
of the low margin razor blades
• This business model consists of bundling 2 products together
that require each other.
• Then, you sell the main component (razor) at no profit or even a
loss but recoup that because the complementary product has
high margins (blades).
• Personal printer. They’re cheap to buy, but the ink is very
expensive and high margin.
 • Offer the low-margin item below
cost to encourage sales of the
high margin companion product
• Same as Razors and Blades, but
the two products are split.
• You offer the “blades” at a very
low cost in order to get people to
buy the expensive and high
margin “razor.”
• Kindle and iPod/iTunes
• Amazon Kindle books, which are
very cheap, and may tempt
consumers into purchasing an
expensive Kindle to read the

REVERSE RAZORS AND books on.

BLADES
Reverse auction Set a celing price and have participants bids as
the price drops
• In a reverse auction, extremely price-sensitive
buyers name their price for a service. If the seller
accepts the price, the buyers must commit to the
seller’s terms.
• Priceline offers to desperate, price-sensitive
travelers who give up convenience for the lowest
price on accommodations, rental cars and airline
tickets.
• Priceline profits because plenty of consumers feel
they are winning with their bid that’s just a tad
higher than a price that would be too low for
Priceline’s suppliers to accept.
 • Rather than sell a
product, sell the service
the product performs
• There are many times that
people want to use a product,
without buying it.
• A product-to-service model
lets people pay a service fee
to have access to a product.
• It’s similar to leasing and
fractionalization.
• Zipcar, which is a car-sharing
company. Members pay a
monthly or annual fee to have
access to car reservations as
PRODUCT-TO-SERVICE needed.
Standardizations

• Standardize a previously
personalized service to
lower costs
• If you can take something that has
a lot of variabilities and create a
consistent, standardized product,
you stand out from competitors.
• Dominos did this with their “30
minutes or it’s free” offer for pizza
delivery, which at the time was
unheard of.

• e.g. MinuteClinic
Subscription Cllub

• Charge a subscription fee to gain access to

a service
• A subscription club lets customers buy a
product on a regular basis.
• This is a popular model for software
businesses that most SAAS (Software As A
Service) platforms fall under.
• Netflix and Dollar Shave Club also would
be subscription clubs.
User Communities

• Grant members access to a network,

• Charging both membership fees and for advertising
• Finally, some businesses create paid user communities that generate
revenue from fees and possibly advertising.
• The most famous example of this is Angie’s List, a home services review
community that required payment until a little while ago.
• It’s a tough model because most people prefer free forums and other
types of communities, but good if people will pay for higher quality
information.

• e.g. Angie’s List, Yelp, Lego and Lego community

Typology adapted from

• Mark Johnson
• Seizing the White Space