C6 business models

By: Nor Aida Abdul RahmanBy: Nor Aida Abdul Rahman

-CHAPTER 7--CHAPTER 7-BUSINESS MODELBUSINESS MODEL


IntroductionIntroduction A business model also called a business design.A business model also called a business design. A business model is the mechanism by which aA business model is the mechanism by which a intends to generate intends to generate

revenue and profits.revenue and profits. It is a summary of how a company plans to serve its customers. Its It is a summary of how a company plans to serve its customers. Its

involves both strategy and implementation.involves both strategy and implementation. It is the totality of:It is the totality of: How it will select its customersHow it will select its customers How it defines and differentiates its product offeringsHow it defines and differentiates its product offerings How it creates utility for its customersHow it creates utility for its customers How it acquires and keeps customersHow it acquires and keeps customers How it goes to the market (promotion and distribution strategy)How it goes to the market (promotion and distribution strategy) How it defines the tasks to be performedHow it defines the tasks to be performed How it configures its resourcesHow it configures its resources How it captures profitHow it captures profit


Types of Business ModelTypes of Business Model

The Subscription Business The Subscription Business ModelModel

The Razor & Blades Business The Razor & Blades Business ModelModel

The Pyramid Scheme The Pyramid Scheme Business ModelBusiness Model

The Multi-level Marketing The Multi-level Marketing Business modelBusiness model

The Network Effects Business The Network Effects Business ModelModel

The Monopolistic Business The Monopolistic Business ModelModel

The cutting Out the Middleman The cutting Out the Middleman modelmodel

The Auction Business ModelThe Auction Business Model

The Online Auction Business The Online Auction Business ModelModel

The Bricks and Clicks The Bricks and Clicks Business ModelBusiness Model

Loyalty Business ModelsLoyalty Business Models Collective Business ModelsCollective Business Models The industrialization of The industrialization of

services business modelsservices business models The servitization of products The servitization of products

business modelbusiness model The low cost carrier business The low cost carrier business

modelmodel The online content business The online content business

modelmodel


1. Subscription Business Model1. Subscription Business Model

The subscription business model is a business model that has long The subscription business model is a business model that has long been used by magazines and record clubs, but the application of been used by magazines and record clubs, but the application of this model is spreadingthis model is spreading

Rather than sell products directly, more and more companies are Rather than sell products directly, more and more companies are selling monthly or yearly access to a product or serviceselling monthly or yearly access to a product or service

This, in effect, converts a one time sale of a product into a recurring This, in effect, converts a one time sale of a product into a recurring sale of a servicesale of a service

In addition to magazines, book clubs and record clubs, many other In addition to magazines, book clubs and record clubs, many other industries are using the subscription model. They include phone industries are using the subscription model. They include phone companies, newspapers, cable providers, cell phone companies, companies, newspapers, cable providers, cell phone companies, internet providers, pay TV channels, software providers, business internet providers, pay TV channels, software providers, business solutions providers and financial services firms. solutions providers and financial services firms.


Impact on the vendorImpact on the vendor

Businesses benefit because they are assured a constant revenue Businesses benefit because they are assured a constant revenue stream. This greatly reduces uncertainty and the risky ness of the stream. This greatly reduces uncertainty and the risky ness of the enterpriseenterprise

Also, in many cases (such as integrated software solutions), the Also, in many cases (such as integrated software solutions), the subscription pricing structure is designed so that the revenue stream subscription pricing structure is designed so that the revenue stream from the recurring subscription is considerably greater than the from the recurring subscription is considerably greater than the revenue from simple one time purchases. revenue from simple one time purchases.

In some subscription schemes (like magazines), it also increases In some subscription schemes (like magazines), it also increases sales, by not giving subscribers the option to accept or reject any sales, by not giving subscribers the option to accept or reject any specific issue. specific issue.

This reduces customer acquisition costs, and allows personalized This reduces customer acquisition costs, and allows personalized marketing or database marketing. marketing or database marketing.

Subscription business models also have their Subscription business models also have their drawbacks. drawbacks. The The business must commit to a large infrastructure to manage and track business must commit to a large infrastructure to manage and track subscription.subscription.


Impact on the customersImpact on the customers

Consumer can also benefit. If they were going to purchase the Consumer can also benefit. If they were going to purchase the product regularly any way, they will benefit from the convenience. product regularly any way, they will benefit from the convenience.

They only have to make one purchase decision. Then sit back and They only have to make one purchase decision. Then sit back and wait for the product to arrive.wait for the product to arrive.

It is also useful for those people that are looking for structure and It is also useful for those people that are looking for structure and constancy in their otherwise hectic lives. constancy in their otherwise hectic lives.

There are also many people that use regular subscriptions to fulfill a There are also many people that use regular subscriptions to fulfill a need for belonging. Subscription can do this by presenting need for belonging. Subscription can do this by presenting themselves as clubs. Example; Computer Science Book Club. themselves as clubs. Example; Computer Science Book Club.

Subscription pricing can blunt the sting of paying for expensive Subscription pricing can blunt the sting of paying for expensive items. By spreading the cost over a period of time, the purchase items. By spreading the cost over a period of time, the purchase seems more affordable. seems more affordable.


2. Razor and Blades Business Models2. Razor and Blades Business Models

The razor and blades business model (also called the “bait and The razor and blades business model (also called the “bait and hook model” or the “tied products model” works by selling a “master” hook model” or the “tied products model” works by selling a “master” product at a subsidized price, and making the profit on high margin product at a subsidized price, and making the profit on high margin ‘consumables’ that are essential to the use of the master product.‘consumables’ that are essential to the use of the master product.

The master product may actually be sold at a loss, in order to The master product may actually be sold at a loss, in order to ‘capture’ the customer into using the consumable product.‘capture’ the customer into using the consumable product.

In effect, this is the same as offering a high interest loan to the In effect, this is the same as offering a high interest loan to the customer to offset the price of the master product, which is to be customer to offset the price of the master product, which is to be paid off in installments as they use the consumablespaid off in installments as they use the consumables

The business model can be dated to King C. Gilette, who used this The business model can be dated to King C. Gilette, who used this business model for his sales of razor handles and disposable razor business model for his sales of razor handles and disposable razor blades. This business model continues to be used in the disposable blades. This business model continues to be used in the disposable razor blade business to this day. razor blade business to this day.


Cont..Cont..

o This model may be threatened if the price of the high margin This model may be threatened if the price of the high margin consumables is in question. For example, computer printer consumables is in question. For example, computer printer manufacturers have gone through extensive efforts to make sure manufacturers have gone through extensive efforts to make sure that printer ink cartridges are not interchangeable. that printer ink cartridges are not interchangeable.

o In markets where all the major competitors follow this business In markets where all the major competitors follow this business model, there may be suspicions of the existence of cartels and model, there may be suspicions of the existence of cartels and violation of antitrust legislation. In some cases, notably auto parts violation of antitrust legislation. In some cases, notably auto parts in the United States, legislation exist specifically to prevent this in the United States, legislation exist specifically to prevent this business model from existing. business model from existing.

o Other example include:Other example include:

- computer printers and their ink cartridges- computer printers and their ink cartridges

- games consoles and the games they play- games consoles and the games they play

- cell phones and air time costs- cell phones and air time costs

- inexpensive cameras and prints- inexpensive cameras and prints


3. Pyramid Scheme Business Model3. Pyramid Scheme Business Model

A pyramid is a business model that involves the exchange of money A pyramid is a business model that involves the exchange of money primarily for enrolling other people into the scheme, without any primarily for enrolling other people into the scheme, without any product or service being deliveredproduct or service being delivered

Pyramid schemes have been in existence for at least a century. The Pyramid schemes have been in existence for at least a century. The method of conducting business known as multi level marketing method of conducting business known as multi level marketing (MLM) often closely resembles pyramid schemes. (MLM) often closely resembles pyramid schemes.

Although pyramid schemes have been declared illegal, they still Although pyramid schemes have been declared illegal, they still persist in many forms. While schemes simply involving the blatant persist in many forms. While schemes simply involving the blatant exchange of money have generally disappeared, many schemes exchange of money have generally disappeared, many schemes persist that purportedly ‘sell’ a product to mask the primary intention persist that purportedly ‘sell’ a product to mask the primary intention of simply enrolling new members. of simply enrolling new members.

The key identifiers of a pyramid scheme are:The key identifiers of a pyramid scheme are:

- A highly excited sales pitch- A highly excited sales pitch

- Vaguely phrased promises of limitless income potential- Vaguely phrased promises of limitless income potential


Cont.. Cont..

-- No product, or a product being sold at a price ridiculously in No product, or a product being sold at a price ridiculously in excess of its real market value. excess of its real market value.

- - An income stream that chiefly depend on the commissions An income stream that chiefly depend on the commissions earned by enrolling new membersearned by enrolling new members

- - A tendency for only the early investors/joiners to make any A tendency for only the early investors/joiners to make any real incomereal income

The key distinction between these schemes and “legitimate” MLM The key distinction between these schemes and “legitimate” MLM businesses (e.g. Excel Communications is that in the latter cases a businesses (e.g. Excel Communications is that in the latter cases a meaningful income can be earned solely from the sales of the meaningful income can be earned solely from the sales of the associated product or service. While these MLM businesses also associated product or service. While these MLM businesses also offer commissions from recruiting new members, this is not offer commissions from recruiting new members, this is not essential to successful operation of the business by any individual essential to successful operation of the business by any individual member.member.


4. Multi-level Marketing Business Model4. Multi-level Marketing Business Model

MLM also called Network Marketing (NM)MLM also called Network Marketing (NM) MLM exhibits a business model which exemplifies direct marketing. MLM exhibits a business model which exemplifies direct marketing. Typically, independent business owner (IBOs) become associated Typically, independent business owner (IBOs) become associated

with a parent company in a contractor-like relationship. with a parent company in a contractor-like relationship. IBOs receive remuneration for shopping within their own business, IBOs receive remuneration for shopping within their own business,

for selling products and for expanding their network of people for selling products and for expanding their network of people (“down line”) doing the same. (“down line”) doing the same.

An IBOs receives a percentage of the profits generated by the An IBOs receives a percentage of the profits generated by the network of all IBOs introduced to the system by him or her, and also network of all IBOs introduced to the system by him or her, and also of the profits generated by the people introduced by those IBOs, of the profits generated by the people introduced by those IBOs, and so on. and so on.

A point system, where the points represent the volume of products A point system, where the points represent the volume of products sold through the IBO network, track rewards. sold through the IBO network, track rewards.


MLM has a recognized image problem because of difficulties in MLM has a recognized image problem because of difficulties in making a clear distinction between legitimate network marketing and making a clear distinction between legitimate network marketing and illegal “pyramid schemes” or Ponzi schemes. illegal “pyramid schemes” or Ponzi schemes.

Nonetheless, many NM/MLM businesses operate legitimately in Nonetheless, many NM/MLM businesses operate legitimately in various parts of the world.various parts of the world.

E.g.; Amway (the world’s leading company in network marketing, E.g.; Amway (the world’s leading company in network marketing, with annual turnover exceeding USD $1 billion) in particular often with annual turnover exceeding USD $1 billion) in particular often receives criticism for generating considerable revenue from selling receives criticism for generating considerable revenue from selling instructional and motivational materials to its participants. The United instructional and motivational materials to its participants. The United States Department of Justice indicted the company, but Amway States Department of Justice indicted the company, but Amway secured an acquittal. secured an acquittal.


5. Network Effect Business Model5. Network Effect Business Model

The The network effect network effect means that a good or service is such that the means that a good or service is such that the value of the good or service to a potential customer is dependent on value of the good or service to a potential customer is dependent on the number of customers already owning that good or using that the number of customers already owning that good or using that service.service.

Equivalently, it means that the total value of a good or service that Equivalently, it means that the total value of a good or service that possesses network effects is roughly proportional to the square of possesses network effects is roughly proportional to the square of the number of customers already owning that good or using that the number of customers already owning that good or using that service.service.

One consequence of a network effect is that the purchase of a good One consequence of a network effect is that the purchase of a good by one individual indirectly benefits others who own the good – for by one individual indirectly benefits others who own the good – for example by purchasing a telephone a person makes other people’s example by purchasing a telephone a person makes other people’s telephones more useful. This type of side effect in a transaction is telephones more useful. This type of side effect in a transaction is known as an externality in economics, and externalities arising from known as an externality in economics, and externalities arising from network effects are known as network effects are known as ‘network externalities’‘network externalities’..


Cont..Cont.. Network effects were used as justification for some of the business Network effects were used as justification for some of the business

models for dot-coms in the late 1990s. These firms operated under models for dot-coms in the late 1990s. These firms operated under the belief that when a new market comes into being which contains the belief that when a new market comes into being which contains strong network effects, firms should care more about growing their strong network effects, firms should care more about growing their market share than about becoming profitable. market share than about becoming profitable.

This was believed to be rational because market share will This was believed to be rational because market share will determine which firm can set technical and marketing standards and determine which firm can set technical and marketing standards and thus determine the basis of future competition. thus determine the basis of future competition.

A good example of this strategy was that deployed by Mirabilis, the A good example of this strategy was that deployed by Mirabilis, the Israeli start up which pioneered instant messaging and was bought-Israeli start up which pioneered instant messaging and was bought-out by out by


Cont…Cont… Example: There are very strong network effects operating in the market Example: There are very strong network effects operating in the market

for widely-used computer software. Take for example Microsoft Office. for widely-used computer software. Take for example Microsoft Office. For many people choosing an office suite, a prime consideration is how For many people choosing an office suite, a prime consideration is how valuable having learned that office suite will prove to potential valuable having learned that office suite will prove to potential employers. That is, since learning to use an office suite takes many employers. That is, since learning to use an office suite takes many hours, they want to invest that time learning the office suite that will hours, they want to invest that time learning the office suite that will make them most attractive to potential employers (or consulting clients, make them most attractive to potential employers (or consulting clients, etc)etc)

Network effects and technology lifecycleNetwork effects and technology lifecycle If an existing technology or company whose benefits are largely based If an existing technology or company whose benefits are largely based

on network effects starts to lose market share against a challenger on network effects starts to lose market share against a challenger such as disruptive technology or open standards based competition, such as disruptive technology or open standards based competition, the benefits of network effects will reduce for the incumbent, and the benefits of network effects will reduce for the incumbent, and increase for the challengerincrease for the challenger

In this model, a tipping point is eventually reached at which the network In this model, a tipping point is eventually reached at which the network effects of the challenger dominate those of the former incumbent, and effects of the challenger dominate those of the former incumbent, and the incumbent is forced into an accelerating decline, whilst the the incumbent is forced into an accelerating decline, whilst the challenger takes over the incumbent’s former position. challenger takes over the incumbent’s former position.


6. Monopoly Business Model6. Monopoly Business Model

In economics, a monopoly (from the Greek monos, one + polein, to In economics, a monopoly (from the Greek monos, one + polein, to sell) is defined as a market situation where there is only one provider sell) is defined as a market situation where there is only one provider of a product or service.of a product or service.

Monopoly should be distinguished from “monopsony”, in which there Monopoly should be distinguished from “monopsony”, in which there is only one buyer of the product or service.is only one buyer of the product or service.

It should also strictly, be distinguished from the (closely related) It should also strictly, be distinguished from the (closely related) phenomenon of a cartel (whish is a type of oligopoly), in which a phenomenon of a cartel (whish is a type of oligopoly), in which a centralized institution is set up to (partially) coordinate the actions of centralized institution is set up to (partially) coordinate the actions of several independent providers – as opposed to monopoly, in which several independent providers – as opposed to monopoly, in which there is one sole provider – although in some cases, that sole provider there is one sole provider – although in some cases, that sole provider may have been created by consolidating several formerly independent may have been created by consolidating several formerly independent firms. firms.

Monopolies are characterized by a lack of economic competition for Monopolies are characterized by a lack of economic competition for the good or service that they provide (and a lack of viable substitute the good or service that they provide (and a lack of viable substitute goods), as well as high barriers to entry for potential competitors in the goods), as well as high barriers to entry for potential competitors in the marketmarket


Cont….Cont….

Large corporation often attempt to monopolize markets through Large corporation often attempt to monopolize markets through horizontal integration, in which a parent company controls horizontal integration, in which a parent company controls consolidates control over several small, seemingly diverse consolidates control over several small, seemingly diverse companies (sometimes even using different branding to create the companies (sometimes even using different branding to create the illusion of marketplace competition).illusion of marketplace competition).

A magazine publishing firm, for example, might publish many different A magazine publishing firm, for example, might publish many different magazines on many different subjects, but it would still be considered magazines on many different subjects, but it would still be considered to engage in monopolistic practices if the intent of doing this was to to engage in monopolistic practices if the intent of doing this was to control the entire magazine-reader market, and prevent the control the entire magazine-reader market, and prevent the emergence of competitors. emergence of competitors.

The economic incentives for a monopoly make it likely that they will The economic incentives for a monopoly make it likely that they will sell a lower quantity of goods at a higher price than firms would in a sell a lower quantity of goods at a higher price than firms would in a purely competitive market in order to secure monopoly profits. This purely competitive market in order to secure monopoly profits. This will typically lead to an outcome which is inefficient. will typically lead to an outcome which is inefficient.


Cont..Cont..

In economics, a company is said to have monopoly power if it faces a In economics, a company is said to have monopoly power if it faces a downward sloping demand curve. This is in contrast to a price taker downward sloping demand curve. This is in contrast to a price taker that faces a horizontal demand curve. that faces a horizontal demand curve.

A price taker cannot choose the price that they sell at, since if they A price taker cannot choose the price that they sell at, since if they set it above the equilibrium price, they will sell none, and if they set it set it above the equilibrium price, they will sell none, and if they set it below the equilibrium price, they will have an infinite number of below the equilibrium price, they will have an infinite number of buyers (and be making less money than they could if they sold at the buyers (and be making less money than they could if they sold at the equilibrium price). In contrast, a business with monopoly power can equilibrium price). In contrast, a business with monopoly power can choose the price they want to sell at. If they set it higher, they sell choose the price they want to sell at. If they set it higher, they sell less. If they sell it lower, they sell more.less. If they sell it lower, they sell more.

In economics, a government-granted monopoly, also known as a In economics, a government-granted monopoly, also known as a state monopoly or a coercive monopoly, is a monopoly which is state monopoly or a coercive monopoly, is a monopoly which is established and protected through the use of laws, regulations or established and protected through the use of laws, regulations or other mechanism of government enforcement to forbid competition in other mechanism of government enforcement to forbid competition in providing a particular good or service.providing a particular good or service.


7. Cutting Out The Middleman7. Cutting Out The Middleman

Cutting out the middleman is a business model that involves Cutting out the middleman is a business model that involves reducing costs by removing layers from a distribution network. reducing costs by removing layers from a distribution network. Cutting out the middleman may become possible as a result of Cutting out the middleman may become possible as a result of better technology or economies of scale.better technology or economies of scale.

In economics, the term ‘economies of scale’ refers to a situation In economics, the term ‘economies of scale’ refers to a situation where the cost of producing one unit of a good or service decreases where the cost of producing one unit of a good or service decreases as the volume of production increases.as the volume of production increases.

The converse situation in which the cost of producing a good or The converse situation in which the cost of producing a good or service increases as the volume of production increases is known service increases as the volume of production increases is known ‘diseconomies of scale’.‘diseconomies of scale’.

Economies of scale tend to occur in industries with high capital Economies of scale tend to occur in industries with high capital costs in which those costs can be distributed across a large number costs in which those costs can be distributed across a large number of units of production.of units of production.


Cont… Cont…

The exploitation of economies of scale helps explain why The exploitation of economies of scale helps explain why companies grow large in some industries, why companies grow large in some industries, why marketplaces with many participants are sometimes more marketplaces with many participants are sometimes more efficient, and how a natural monopoly can often occur. It efficient, and how a natural monopoly can often occur. It is also a justification for free trade policies, under the idea is also a justification for free trade policies, under the idea that a large unified market presents more opportunities for that a large unified market presents more opportunities for economies of scale. economies of scale.


8. The Auction Business Model8. The Auction Business Model

An auction is the process of buying and selling things by offering An auction is the process of buying and selling things by offering them up for bid, taking bids, and then selling the item to the highest them up for bid, taking bids, and then selling the item to the highest bidderbidder

In economic theory, an auction is a method for determining the value In economic theory, an auction is a method for determining the value of a commodity that has an undetermined or variable price. of a commodity that has an undetermined or variable price.

In some cases, there is a minimum or reserve price; if the bidding In some cases, there is a minimum or reserve price; if the bidding does not reach the minimum, there is no sale (but the person who does not reach the minimum, there is no sale (but the person who puts the item up for auction still owes a fee to the auctioneer). In the puts the item up for auction still owes a fee to the auctioneer). In the context of auctions, a bid is an offered price. context of auctions, a bid is an offered price.

Auctions are publicly seen in several contexts; in the antique, where Auctions are publicly seen in several contexts; in the antique, where besides being an opportunity for trade they also serve as social besides being an opportunity for trade they also serve as social occasions and entertainment; in the sale of collectibles such as occasions and entertainment; in the sale of collectibles such as stamps, coins, classic cars and fine art; in thoroughbred horseracing, stamps, coins, classic cars and fine art; in thoroughbred horseracing, where yearling horses are commonly auctioned off; and in legal where yearling horses are commonly auctioned off; and in legal contexts where forced auctions occur, as when one’s farm or house contexts where forced auctions occur, as when one’s farm or house is sold at auction on the courthouse steps. is sold at auction on the courthouse steps.


Types of AuctionsTypes of Auctions

1.1. English auctionEnglish auction : In this type of auction, participants bid : In this type of auction, participants bid openly against one another, with each bid being higher than the openly against one another, with each bid being higher than the previous bid. The auction ends when no participant is willing to bid previous bid. The auction ends when no participant is willing to bid further, or when a pre-determined “buy-out” price is reached, at further, or when a pre-determined “buy-out” price is reached, at which point the highest bidder pays the price.which point the highest bidder pays the price.

2.2. Dutch AuctionDutch Auction : In the traditional dutch auction the auctioneer : In the traditional dutch auction the auctioneer begins with a high asking price which is lowered until some begins with a high asking price which is lowered until some participant is willing to accept the auctioneer’s price. That participant is willing to accept the auctioneer’s price. That participant pays the last announced price. This term can also be participant pays the last announced price. This term can also be used to describe online auctions where several identical goods are used to describe online auctions where several identical goods are sold simultaneously to an equal number of high bidderssold simultaneously to an equal number of high bidders

3.3. Sealed first-price auctionSealed first-price auction : In this type of auction all bidders : In this type of auction all bidders simultaneously submit bids in such a way that no bidder knows the simultaneously submit bids in such a way that no bidder knows the bid of any other participant. The highest bidder pays the price he bid of any other participant. The highest bidder pays the price he submitted. submitted.


4.4. Sealed Second-price auction : also known as a Vickrey auction: Sealed Second-price auction : also known as a Vickrey auction: This is identical to the sealed first-price auction, except the This is identical to the sealed first-price auction, except the winning bidder pays the second highest bid rather than his own. winning bidder pays the second highest bid rather than his own. Both the English and the second-price sealed-bid auctions will Both the English and the second-price sealed-bid auctions will theoretically lead to the bidder’s bidding up to (or submitting as a theoretically lead to the bidder’s bidding up to (or submitting as a sealed bid) their true valuation of the item. These two auctions are sealed bid) their true valuation of the item. These two auctions are theoretically equivalent, a result which has been verified in theoretically equivalent, a result which has been verified in practice as well.practice as well.


9. Online Auction Business Model9. Online Auction Business Model

The online auction business model is one in which participants bid The online auction business model is one in which participants bid for products and services over the internet.for products and services over the internet.

Strengths of the Online Business ModelStrengths of the Online Business Model No time constraintNo time constraint – Bids can be placed at any time. This – Bids can be placed at any time. This

convenience increases the number of bidders.convenience increases the number of bidders. No Geographical constraintNo Geographical constraint – Seller and bidders can participate – Seller and bidders can participate

from anywhere that has internet access. This make them more from anywhere that has internet access. This make them more accessible and reduces the cost of attending an auction. accessible and reduces the cost of attending an auction. This This increases the number of listed items (i.e..: number of sellers) and the increases the number of listed items (i.e..: number of sellers) and the number of bids for each item (i.e..: number of bidders). The items do number of bids for each item (i.e..: number of bidders). The items do not need to be shipped to a central location, reducing costs, and not need to be shipped to a central location, reducing costs, and reducing the seller's minimum acceptable price. reducing the seller's minimum acceptable price.


Cont..Cont..

Intensity of social interactionsIntensity of social interactions. The social interactions . The social interactions involved in the bidding process are very similar to gambling. The involved in the bidding process are very similar to gambling. The bidders wait in anticipation hoping they will ?win? bidders wait in anticipation hoping they will ?win?

Large number of biddersLarge number of bidders.. Because of the potential for a Because of the potential for a relatively low price, the broad scope of products and services relatively low price, the broad scope of products and services available, the ease of access, and the social benefits of the auction available, the ease of access, and the social benefits of the auction process, there are a large numbers of bidders. process, there are a large numbers of bidders.

Large number of sellersLarge number of sellers. Because of the large number of . Because of the large number of bidders, the potential for a relatively high price, reduced selling bidders, the potential for a relatively high price, reduced selling costs, and ease of access, there are a large number of sellers. costs, and ease of access, there are a large number of sellers.

Network economiesNetwork economies.. The large number of bidders will The large number of bidders will encourage more sellers, which, in turn, will encourage more bidders, encourage more sellers, which, in turn, will encourage more bidders, which will encourage more sellers, etc., in a virtuous spiral. The which will encourage more sellers, etc., in a virtuous spiral. The more the spiral operates, the larger the system becomes, and the more the spiral operates, the larger the system becomes, and the more valuable the business model becomes for all participants. more valuable the business model becomes for all participants.


10. Bricks and Clicks Business Model10. Bricks and Clicks Business Model

Bricks and clicksBricks and clicks is a business strategy or is a business strategy or business modelbusiness model in in e-commercee-commerce by which a company attempts to integrate both by which a company attempts to integrate both online and physical presences. It is also known as online and physical presences. It is also known as Click-and-Click-and-mortarmortar or or clicks-and-bricksclicks-and-bricks. .

For example, an electronics store may allow the user to order For example, an electronics store may allow the user to order online, but pick up their order immediately at a local store. online, but pick up their order immediately at a local store. Conversely, a furniture store may have displays at a local store Conversely, a furniture store may have displays at a local store from which a customer can order an item electronically for from which a customer can order an item electronically for delivery. delivery.

The bricks and clicks strategy has typically been used by The bricks and clicks strategy has typically been used by traditional retailers who have extensive logistical and supply traditional retailers who have extensive logistical and supply chains. Part of the reason for its success is that it is far easier for chains. Part of the reason for its success is that it is far easier for a traditional retailer to establish an online presence than it is for a a traditional retailer to establish an online presence than it is for a start-up company to employ a successful pure dot.com strategy, start-up company to employ a successful pure dot.com strategy, or an online retailer to establish a traditional presence. This or an online retailer to establish a traditional presence. This strategy has contradicted analysts who believed that the internet strategy has contradicted analysts who believed that the internet would render traditional retailers obsolete through would render traditional retailers obsolete through disintermediationdisintermediation. .


Cont..Cont..

Advantages of the model:-Advantages of the model:-

1.1. Leveraging their core competencyLeveraging their core competency

2.2. Leveraging existing supplier networksLeveraging existing supplier networks

3.3. Leveraging existing distribution channelsLeveraging existing distribution channels

4.4. Leveraging brand equityLeveraging brand equity

5.5. Leveraging stabilityLeveraging stability

6.6. Leveraging existing customer baseLeveraging existing customer base

7.7. Leveraging a lower cost of capitalLeveraging a lower cost of capital

8.8. Leveraging learning curve advantagesLeveraging learning curve advantages


11. Loyalty Business Model11. Loyalty Business Model

The The loyalty business modelloyalty business model is a is a business modelbusiness model used used in in strategic managementstrategic management in which company resources in which company resources are employed so as to increase the loyalty of customers are employed so as to increase the loyalty of customers and other stakeholders in the expectation that corporate and other stakeholders in the expectation that corporate objectives will be met or surpassed. A typical example of objectives will be met or surpassed. A typical example of this type of model is: quality of this type of model is: quality of productproduct or or serviceservice leads leads to customer satisfaction, which leads to customer loyalty, to customer satisfaction, which leads to customer loyalty, which leads to profitability.which leads to profitability.


12. Collective Business Model12. Collective Business Model

A A collective business systemcollective business system is a business organization or is a business organization or association typically comprised of relatively large numbers of association typically comprised of relatively large numbers of businesses, tradespersons or professionals in the same or related businesses, tradespersons or professionals in the same or related fields of endeavor, which pools resources, shares information or fields of endeavor, which pools resources, shares information or provides other benefits for their members. provides other benefits for their members.

In the past, collective business systems such as the trade In the past, collective business systems such as the trade association, the association, the cooperativecooperative and the and the franchisefranchise were created to allow were created to allow groups of independently owned businesses with common interests groups of independently owned businesses with common interests to successfully compete in the marketplace.to successfully compete in the marketplace.

The following is a brief synopsis of those traditional collective The following is a brief synopsis of those traditional collective business systems.business systems.i. Trade Associationi. Trade Associationii. Cooperativeii. Cooperativeiii. Franchiseiii. Franchise


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1.1. Trade AssociationTrade Association Trade associations are non-profit organizations in which the Trade associations are non-profit organizations in which the

individual members are companies or individuals engaged in a individual members are companies or individuals engaged in a common business pursuit. common business pursuit.

Competitors join together to create a platform format in which they Competitors join together to create a platform format in which they deal with common problems of their industry. Any applicant meeting deal with common problems of their industry. Any applicant meeting the standards of the association must be accepted as a member. the standards of the association must be accepted as a member.

Anti-trust law prohibits a member trade association from denying an Anti-trust law prohibits a member trade association from denying an otherwise qualified applicant's membership based upon a otherwise qualified applicant's membership based upon a geographical proximity to an existing member. geographical proximity to an existing member.

Trade associations commonly offer their members educational Trade associations commonly offer their members educational programs, the opportunity to come together at meetings to discuss programs, the opportunity to come together at meetings to discuss common problems, and marketing materials designed to be imprinted common problems, and marketing materials designed to be imprinted by each member with its relevant information. by each member with its relevant information.


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2.2. CooperativeCooperative

A cooperative is a non-profit organization somewhat similar to a A cooperative is a non-profit organization somewhat similar to a trade association.trade association.

A significant difference between the cooperative and the trade A significant difference between the cooperative and the trade association, however, is that with a trade association, the members association, however, is that with a trade association, the members have a non-equity position in the association, whereas in the have a non-equity position in the association, whereas in the typical cooperative the members will have an equity interest as all typical cooperative the members will have an equity interest as all members of the cooperative own a portion of the cooperative.members of the cooperative own a portion of the cooperative.

Generally, a cooperative only addresses one facet of business Generally, a cooperative only addresses one facet of business operation needs of interest to its members, e.g., purchasing of operation needs of interest to its members, e.g., purchasing of goods and services at advantageous prices.goods and services at advantageous prices.

A purchasing cooperative is at risk in that it holds considerable A purchasing cooperative is at risk in that it holds considerable assets in the form of inventory and provides credit to the assets in the form of inventory and provides credit to the businesses in the cooperative. businesses in the cooperative.

In addition, the members of the cooperative risk loss of invested In addition, the members of the cooperative risk loss of invested capital if the cooperative proves unsuccessful. capital if the cooperative proves unsuccessful.


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FranchiseFranchise

The franchise is a for-profit collective business system wherein The franchise is a for-profit collective business system wherein the franchiser offers proprietary products or services to its the franchiser offers proprietary products or services to its franchisees. franchisees.

The franchiser generally gives considerable marketing support to The franchiser generally gives considerable marketing support to its franchisees.its franchisees.

In exchange, the franchisees are subject to a substantial amount In exchange, the franchisees are subject to a substantial amount of control by the franchiser concerning its operations and of control by the franchiser concerning its operations and marketing including the use of the franchisor's trade names, marketing including the use of the franchisor's trade names, trademarks and copyrighted materials. trademarks and copyrighted materials.

A franchisee's employees typically are required to wear uniforms A franchisee's employees typically are required to wear uniforms and to dress as specified by the franchisor. and to dress as specified by the franchisor.


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Franchises can be offered by the franchisor on a territorial basis Franchises can be offered by the franchisor on a territorial basis without violating antitrust laws. Ordinarily, the franchisee owns the without violating antitrust laws. Ordinarily, the franchisee owns the non-real estate assets of a franchise. There is generally a substantial non-real estate assets of a franchise. There is generally a substantial fee paid by the franchisee for the privilege of becoming a franchisee. fee paid by the franchisee for the privilege of becoming a franchisee. This is followed by a period of training that is offered on an ongoing This is followed by a period of training that is offered on an ongoing basis throughout the franchise.basis throughout the franchise.

Most states have laws highly protective of franchisees in prohibiting Most states have laws highly protective of franchisees in prohibiting the franchisor from terminating the franchise so long as the the franchisor from terminating the franchise so long as the franchisee meets predetermined business requirements and does not franchisee meets predetermined business requirements and does not otherwise violate the terms of the franchise agreement. otherwise violate the terms of the franchise agreement.

The franchisor derives income from the initial franchise fees and The franchisor derives income from the initial franchise fees and products and services, which are offered to the franchisees on either products and services, which are offered to the franchisees on either a mandatory or optional purchase basis. The franchisor generally a mandatory or optional purchase basis. The franchisor generally derives additional income based upon a percentage of the volume of derives additional income based upon a percentage of the volume of business conducted by the franchisee. The franchise agreement also business conducted by the franchisee. The franchise agreement also usually provides that the franchisee can only sell products supplied or usually provides that the franchisee can only sell products supplied or approved by the franchisor. approved by the franchisor.


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Among the traditional collective business systems only the Among the traditional collective business systems only the franchise can create exclusive trade territories. Conversely, franchise can create exclusive trade territories. Conversely, however, the franchise structure severely inhibits the however, the franchise structure severely inhibits the independence of the franchisee and the success of the franchisee independence of the franchisee and the success of the franchisee is inextricably tied to the success of the franchisor. The franchisee is inextricably tied to the success of the franchisor. The franchisee is not free to introduce non-approved products or services and is is not free to introduce non-approved products or services and is generally precluded from introducing innovative business or generally precluded from introducing innovative business or marketing strategies by the extensive control imposed by the marketing strategies by the extensive control imposed by the franchisor. franchisor.


13. The Industrialization of Service Business 13. The Industrialization of Service Business ModelsModels

• The The industrialization of services business modelindustrialization of services business model is a is a business modelbusiness model used in used in strategic managementstrategic management and and services marketingservices marketing that treats service provision as an that treats service provision as an industrial process, subject to industrial optimization industrial process, subject to industrial optimization procedures. It originated in the early 1970s at a time when procedures. It originated in the early 1970s at a time when various quality control techniques were being successfully various quality control techniques were being successfully implemented on production assembly lines.implemented on production assembly lines.


14. Service Economy (Servitization of 14. Service Economy (Servitization of

products business model)products business model) Service economyService economy can refer to one or both of two recent can refer to one or both of two recent

economic developments. One is the increased economic developments. One is the increased importance of the importance of the service sectorservice sector in industrialized in industrialized economies. Services account for a higher percentage of economies. Services account for a higher percentage of US US GDPGDP than 20 years ago. The current list of than 20 years ago. The current list of Fortune 500Fortune 500 companies contains more service companies contains more service companies and fewer manufacturers than in previous companies and fewer manufacturers than in previous decades.decades.

The term is also used to refer to the relative importance The term is also used to refer to the relative importance of service in a product offering. That is, products today of service in a product offering. That is, products today have a higher service component than in previous have a higher service component than in previous decades. In the management literature this is referred to decades. In the management literature this is referred to as as the servitization of productsthe servitization of products. .


15. Low Cost Carrier Business Model15. Low Cost Carrier Business Model

A A low-cost carrierlow-cost carrier (also known as a (also known as a no-frillsno-frills or or discountdiscount carrier) is carrier) is an an airlineairline that offers low fares but eliminates all unnecessary that offers low fares but eliminates all unnecessary services. The typical low-cost carrier services. The typical low-cost carrier business modelbusiness model is based on: is based on:

a single passenger class a single passenger class a single type of a single type of airplaneairplane (reducing training and servicing costs) (reducing training and servicing costs) a simple fare scheme (typically fares increase as the plane fills up, a simple fare scheme (typically fares increase as the plane fills up,

which rewards early reservations) which rewards early reservations) free seating (which encourages passengers to board early) free seating (which encourages passengers to board early) direct, point to point flights with no transfers direct, point to point flights with no transfers flying to cheaper, less congested secondary flying to cheaper, less congested secondary airportsairports short flights and fast turnaround times (allowing maximum utilization short flights and fast turnaround times (allowing maximum utilization

of planes) of planes)


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"Free" in-flight catering and other "complimentary" "Free" in-flight catering and other "complimentary" services are eliminated, and replaced by optional paid-for services are eliminated, and replaced by optional paid-for in-flight food and drink. in-flight food and drink.

The first successful low-cost carrier is generally The first successful low-cost carrier is generally acknowledged to be acknowledged to be Southwest AirlinesSouthwest Airlines in the in the United StatesUnited States, which pioneered the concept when , which pioneered the concept when founded in founded in 19711971 and has been profitable every year since and has been profitable every year since 19731973. With the advent of aviation . With the advent of aviation deregulationderegulation the model the model spread to spread to EuropeEurope as well, the most notable success as well, the most notable success being the Irish being the Irish RyanairRyanair, founded in , founded in 19851985. As of 2004, low . As of 2004, low cost carriers are now edging into cost carriers are now edging into AsiaAsia, lead by operators , lead by operators such as such as MalaysiaMalaysia's 's Air AsiaAir Asia. .


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Low-cost carriers pose a serious threat to traditional 'full Low-cost carriers pose a serious threat to traditional 'full service' airlines, since full-service carriers cannot compete service' airlines, since full-service carriers cannot compete on price and, when given a choice, most consumers will on price and, when given a choice, most consumers will opt for low price over other amenities. From opt for low price over other amenities. From 20012001 to to 20032003, , when the aviation industry was rocked by when the aviation industry was rocked by terrorismterrorism, , warwar and and SARSSARS, the large majority of traditional airlines , the large majority of traditional airlines suffered heavy losses while low-cost carriers generally suffered heavy losses while low-cost carriers generally stayed profitable. stayed profitable.

Many carriers have opted to launch their own no-frills Many carriers have opted to launch their own no-frills airlines, such as airlines, such as KLMKLM's 's BuzzBuzz and and UnitedUnited's 's TedTed, but have , but have found it difficult to avoid cannibalizing their core business. found it difficult to avoid cannibalizing their core business.


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In In CanadaCanada, , Air CanadaAir Canada has found it difficult to compete with new low- has found it difficult to compete with new low-cost rivals such as cost rivals such as WestjetWestjet and and CanjetCanjet despite their previously despite their previously dominant position in the Canadian market: Air Canada declared dominant position in the Canadian market: Air Canada declared bankruptcy in 2003.bankruptcy in 2003.

A A low-cost carrierlow-cost carrier or or low cost airlinelow cost airline (also known as a (also known as a no-frillsno-frills or or discountdiscount carrier / airline) is an carrier / airline) is an airlineairline that offers generally low fares in that offers generally low fares in exchange for eliminating many traditional passenger services. The exchange for eliminating many traditional passenger services. The concept originated in the concept originated in the United StatesUnited States before spreading to before spreading to EuropeEurope in in the early 1990s and subsequently to much of the rest of the world. the early 1990s and subsequently to much of the rest of the world. The term originated within the airline industry referring to airlines with The term originated within the airline industry referring to airlines with a low - or lower - operating cost structure than their competitors. a low - or lower - operating cost structure than their competitors. Through popular media the term has since come to define any carrier Through popular media the term has since come to define any carrier with low ticket prices and limited services regardless of their with low ticket prices and limited services regardless of their operating costs.operating costs.


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Typical low-cost carrier Typical low-cost carrier business modelbusiness model practices include: practices include: a single passenger class a single passenger class a single type of a single type of airplaneairplane, commonly the , commonly the Airbus A320Airbus A320 or or

Boeing 737Boeing 737 (reducing training and servicing costs) (reducing training and servicing costs) except for except for Song (airline)Song (airline) Boeing 757Boeing 757 and Kingfisher and Kingfisher Airlines order of the A380. Airlines order of the A380.

a simple fare scheme (typically fares increase as the a simple fare scheme (typically fares increase as the plane fills up, which rewards early reservations) plane fills up, which rewards early reservations)

unreserved seating (encouraging passengers to board unreserved seating (encouraging passengers to board early and quickly) early and quickly)

flying to cheaper, less congested secondary airports flying to cheaper, less congested secondary airports (avoiding air traffic delays and taking advantage of lower (avoiding air traffic delays and taking advantage of lower landing fees) landing fees)

short flights and fast turnaround times (allowing short flights and fast turnaround times (allowing maximum utilization of planes) maximum utilization of planes)


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simplified routes, emphasizing point-to-point transit instead of transfers at simplified routes, emphasizing point-to-point transit instead of transfers at hubs (again enhancing aircraft utilization and eliminating disruption due to hubs (again enhancing aircraft utilization and eliminating disruption due to delayed passengers or luggage missing connecting flights) delayed passengers or luggage missing connecting flights)

emphasis on direct sales of tickets, especially over the Internet (avoiding emphasis on direct sales of tickets, especially over the Internet (avoiding fees and commissions paid to travel agents and Computer Reservations fees and commissions paid to travel agents and Computer Reservations Systems) Systems)

employees working in multiple roles, for instance flight attendants also employees working in multiple roles, for instance flight attendants also cleaning the aircraft or working as gate agents (limiting personnel costs) cleaning the aircraft or working as gate agents (limiting personnel costs)

"Free" in-flight catering and other "complimentary" services are eliminated, "Free" in-flight catering and other "complimentary" services are eliminated, and replaced by optional paid-for in-flight food and drink (which represent an and replaced by optional paid-for in-flight food and drink (which represent an additional profit source for the airline). additional profit source for the airline).

Aggressive fuel hedging programs. Aggressive fuel hedging programs. "Unbundling" of ancillary charges (showing airport fees, taxes as separate "Unbundling" of ancillary charges (showing airport fees, taxes as separate

charges rather than as part of the advertised fare) to make the "headline charges rather than as part of the advertised fare) to make the "headline fare" appear lower. fare" appear lower.

Low or lower operating costs relative to their competitors. Low or lower operating costs relative to their competitors.


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Not every low-cost carrier implements all of the above Not every low-cost carrier implements all of the above points (for example, some try to differentiate themselves points (for example, some try to differentiate themselves with allocated seating, while others operate more than with allocated seating, while others operate more than

one aircraft type, still others will have relatively high one aircraft type, still others will have relatively high operating costs but lower fares). Nonetheless these are operating costs but lower fares). Nonetheless these are general characteristics, most of which apply to any given general characteristics, most of which apply to any given

low-cost carrier.low-cost carrier.


16. Online Content Business Model16. Online Content Business Model

In general, something is said to be In general, something is said to be onlineonline if it is connected to some if it is connected to some larger network or system (which is implicitly the "line", though this larger network or system (which is implicitly the "line", though this interpretation is often useless). Several more specific meanings exist:interpretation is often useless). Several more specific meanings exist:

In common parlance, the larger network in question is usually the In common parlance, the larger network in question is usually the Internet, so that 'online' describes information that is accessible Internet, so that 'online' describes information that is accessible through the Internet. through the Internet.

In a system for the performance of a particular task, an element of the In a system for the performance of a particular task, an element of the system is said to be online if it is operational. For instance, a power system is said to be online if it is operational. For instance, a power plant is online if it is supplying power to the power grid. Alternatively, plant is online if it is supplying power to the power grid. Alternatively, a section of road may be said to be online if it is open to traffic. a section of road may be said to be online if it is open to traffic.

In telecommunication, the term has another very specific meaning. A In telecommunication, the term has another very specific meaning. A device associated with a larger system is online if it is under the direct device associated with a larger system is online if it is under the direct control of the system. It it is available for immediate use by the control of the system. It it is available for immediate use by the system, on demand, without human intervention, but may not be system, on demand, without human intervention, but may not be operated independently of the system. operated independently of the system.


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