book

1. 4-1

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

3. 4-3
Chapter 4: Business ModelsChapter 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. 4-4
Value ClusterValue Cluster
Online OfferingOnline Offering
Resource SystemResource System
Financial ModelFinancial Model
Exhibit 4-1: ComponentsExhibit 4-1: Components
of a Business Modelof a Business Model

5. 4-5
Value Propositions and Value ClustersValue 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

6. 4-6
Value Propositions and Value ClustersValue Propositions and Value Clusters (cont’d)(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

7. 4-7
Quality of a Value Proposition or ClusterQuality 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?

8. 4-8
Quality of a Value Proposition or ClusterQuality 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?

9. 4-9
Quality of a Value Proposition or ClusterQuality 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?

10. 4-10
The Online OfferingThe 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.

11. 4-11Exhibit 4-2: Customer DecisionExhibit 4-2: Customer Decision
Process — Flower ExampleProcess — Flower Example
DisposalDisposal
LoyaltyLoyalty
SatisfactionSatisfaction
Purchase DecisionPurchase Decision
Evaluation of AlternativesEvaluation of Alternatives
Information SearchInformation Search
Problem RecognitionProblem Recognition
PREPURCHASE
PURCHASE
POSTPURCHASE

12. 4-12
Exhibit 4-3: Egg Diagram for 1-800-Flowers.comExhibit 4-3: Egg Diagram for 1-800-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
 E-mail a bouquet
 Order receipt e-mail
 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.

13. 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?What Is a Successful Resource System?

14. 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 SystemSpecifying a Resource System

15. 4-15
Online Gift
Center
Online Gift
Center
Integrated
Partner Offers
Integrated
Partner Offers
Broad
Assortmen
t of Gifts
Broad
Assortmen
t of Gifts
Customer
Service
Customer
Service
Wide Reach to
Customers
Wide Reach to
Customers
Widesprea
d
Easy
Access
Widesprea
d
Easy
Access
Multiple
Contact Points
Multiple
Contact Points
Popular
Website
Popular
Website
High
Quality of
Flowers
High
Quality of
Flowers
TechnologyTechnology
Strong Brand
Name
Strong Brand
Name
Strong
Distribution
Network
Strong
Distribution
Network
=Resources
= Core Benefits
Core
Benefits
Exhibit 4-4: 1-800-Flowers.com Resource SystemExhibit 4-4: 1-800-Flowers.com Resource System

16. 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 theCriteria to Assess the
Quality of a Resource SystemQuality of a Resource System

17. 4-17Exhibit 4-5 : Online/Offline Egg DiagramExhibit 4-5 : Online/Offline Egg Diagram
for 1-800-flowers.comfor 1-800-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 email
 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

18. 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 PartnershipsThe Role of Partnerships

19. 4-19
Revenue ModelsRevenue 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

20. 4-20
Online Business ModelsOnline 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

21. 4-21Exhibit 4-6: SummaryExhibit 4-6: Summary
of Online Business Modelsof Online Business Models
Business
Models
Metamarkets
Switchboard
Auction
Freshest
Information
Highest Quality
Widest
Assortment
Lowest Prices
Most
Personalized
Core
Benefits and
Proposition
• Single point of
access for all
needs
• Depth and
breadth of
product as-
sortment
• Number of ac-
tive buyers
• Timely and ac-
curate informa-
tion
• High-quality
products with
exclusivity
•Broadest in-
ventory possi-
ble
•Can lead to
best prices
• Lowest prices • Unique prod-
uct, service, or
experience
Online
Offering
• Either cate-
gory specific
of access
categories
• Usually a large
number of
products
• Broad or tar-
geted audi-
ence
• Concentrates
on smaller
offerings for
smaller mar-
kets
•Can be either
category killer
in one category
or widest as-
sortment
across man
categories
• Niche cate-
gory or across
wide variety of
categories
• Geared toward
a single buyer
Key
Resources
• Large, active
customer base
• Commitment
to building
• Large base of
buyers and
sellers
• Good, reliable
technology
• Strong brand
name
• Hiring best
personnel
• Ability to
source
products
• Outstanding
customer ser-
vice
• Strong brand
•Significant
brand name
•Strong logistics
to manage
brand name
• Ability to build
strong back-
office systems
and leverage
scale econo-
mies
• Ability to
generate ex-
ceptional cus-
tomer knowl-
edge
Revenue
Model
• Transaction
fees
• Product sales
• Advertising
• Affiliate deals
• Transaction
fees
• Product and
service sales
• Subscription
• Advertising
• Product,
service, and
information
sales
• Advertising
• Product sales • Product sales • Product sales
• Subscriptions
Examples
• BabyCen-
ter.com
• Verticalnet
• CarPoint.com
• Fashion-
Mall.com
• eBay
• Amazon Auc-
tions
• Covisint
• NYTimes.com
• Salon.com
• Business 2.0
• Zagat.com
• FAO.com
• Ashford.com
• Amazon.com
• CDNow
• Sephora.com
• EBags.com
• Lowest-
fare.com
• Allbooksfor-
less.com
• Outpost.com
• Reflect.com
• Sevency-
cles.com
• eDiets.com

22. 4-22
• 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 ModelMarketwatch.com Business Model

23. 4-23
Marketwatch.com Business ModelMarketwatch.com Business Model (cont’d)(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

24. 4-24
Exhibit 4-7: MarketWatch.com Egg DiagramExhibit 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 e-mail
 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
 E-mail 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

25. 4-25
• 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 ModelMarketwatch.com Business Model (cont’d)(cont’d)

26. 4-26Exhibit 4-8: MarketWatch.comExhibit 4-8: MarketWatch.com
Resource SystemResource 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

27. 4-27
• 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 ModelMarketwatch.com Business Model (cont’d)(cont’d)

28. 4-28
Exhibit 4-9: Partners Give / Get MatrixExhibit 4-9: Partners Give / Get Matrix
Partners
Benefits to Partner:
“Give”
Benefits to MarketWatch.com:
“Get”
CBS News
 Experienced editorial staff
 24/7 international coverage of
financial markets
 Real-time financial news
 34 percent ownership of
MarketWatch.com
 Credibility of CBS brand name
 Access to CBS facilities
 Access to CBS audience of 6.6
million homes
 $30 million of rate-card
promotion and advertising on
CBS channels
Content Partners
(e.g., Hoovers,
Zacks, INVESTools)
 Access to MarketWatch.com
audience
 High-quality analysis of financial
news
 Portion of revenue generated
from sales of partner products
Distribution Partners
(e.g., Yahoo, AOL,
Quicken)
 Users get access to
MarketWatch.com content and
tools
 Advertising and click-through
fees collected
 Increase in audience reach
 Increase in brand recognition

29. 4-29Exhibit 4-10: MarketWatch.com’sExhibit 4-10: MarketWatch.com’s
Revenue DistributionRevenue Distribution
18.03
34.95
17.98
5.26
15.81
24.77
1.64
3.15 3.09
0
5
10
15
20
25
30
35
40
1999 2000 2001
Advertising
Licensing
Other