Building Business Models

Building Business Models
(MBA crash course)
Editor
Jose Berengueres
Edition
First Edition. September 24th, 2014.
Text Copyright
© Jose Berengueres 2014. All Rights Reserved.
i
©

Video, Audio & Artwork Copyright
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corresponding original Copyright or Creative Commons
License. Except where otherwise noted a Creative
Commons Attribution 3.0 License applies.
Limit of Liability
The editor makes no representations or warranties
concerning the accuracy or exhaustivity of the contents
and theories hereby presented and particularly disclaim
any implied warranties regarding merchantability or
fitness for a particular use including but not limited to
educational, industrial and academic application.
Neither the editor or the authors are liable for any loss
or profit or any commercial damages including but not
limited to incidental, consequential or other damages.
Course
This textbook is based on Business Models Innovation
taught at CEDIM in summer 2014.
ii

1 | Stanford View
Building Business Models is a subject taught
online at Stanford University in California.
Joseeee!!! Why
should I learn about
Business models?
To
avoid:
1. Rokie mistakes
2. Reinventing the
wheel
according to
Stanford these are the main
parts of a solid Business Model*
Profit Model
(How money is extracted)
Value
Creation
(What)
(According to Haim Mendelson)
Biz Logic
( Why does the biz work )

Why This Book?
Would you build your house without putting
together a blueprint ﬁrst? No. Similarly, an
innovative idea needs a structured process
before you bring it to market. How you make it,
how you sell it. The business model is the
blueprint used for planning, building and,
evolving your company. It describes, in short,
the rationale of how your company makes
money and why. When you try to
commercialize and innovation there is a lot of
chaos and unstructured activity. This is
textbook will help you navigate the process
from idea creation to successful commercial
innovation by giving you a set of proven tools
and structured processes so you do not waste
time reinventing the wheel.
How this book is organized
The book is divided in three
chapters:
- In Chapter one
(here) we teach you
what you can learn
at Standford, the
Stanford most
MBAish view on
business models.
4
1 | Stanford View - Stanford View
TheHSBCBuildingbyFoster+Partners

- In Chapter two we review the continental
(Lausanne) view on business Models, namely
the Canvas tool invented by Alex.
- In Chapter three ( going deep) we drill down
by means of exploring business cases. By the
end of the course you are expected to know
how to:
- Build a Business Model
- Articulate a Business Model
This book is based on the weekend course:
Business Models Innovation Module at
Centro de Estudios de Diseño e Interiorismo
de Monterrey 2014 (CEDIM), Mexico.
Build a business model...
Articulate a business model...
5

But
what if I only
have two parts?!
“Everything in life can be divided in three parts
-- Haim Mendelson
Add a 3rd part
as a combination of
the previous two.
6

Value Creation (model)
– Who are our customers? (Market Fit)
– How does the offering create differentiated value?
– What is the value chain?
– What is our go‐to‐market strategy?
Profit (model) How
– What are our sources of revenue?
– What is our cost structure?
– What are our key drivers of profitability?
Logic (model) Why it works
7

8
1 | Stanford View - The Value Creation Model
“Sitting in a San Antonio bar with a business partner in 1967, the
entrepreneur Herb Kelleher grabbed a (now-legendary) cocktail napkin
and sketched out a simple triangle while posing this question: What if
we were to create a small, local airline that connected these three
cities?” - Southwest started in 1968 and is now the largest airline in the
USA. We will use it as an example on how to analyze a biz model. http://
www.thehiredguns.com/blogs/2011/10/24/the-art-of-napkin-sketching-a-simple-powerful-way-to-
generate-and-communicate-ideas/
It all started
with a napkin

– Who are our customers? (Market/product Fit*)
Proﬁt(model)
Logic(model)
9

Value Creation at SW: What’s diﬀerent?
-Low Cost
-Low cost was achieved via simpliﬁcation and
standardization of operations (what is called
operational excellence).
-Thrill factor
This value creation was achieved by :
10

This value creation was achieved by :
-Simplify. Use of only one aircraft model: the B-737
- Use of secondary non congested airports, which resulted in ---> Less delays
- Reduction of TurnArround times (from 45 to 30 minutes). TA time is the wait time
of refueling, cleaning, loading plane for the next trip. Due to standardizing the plane
model to one, this could be done faster because people knew what they had to do.
- Question: How much % operational improvement is a 15 minute drop in TA time?
- If operating expense of airplane is $1.3 M per month, how much saving is that on the
Dallas to Houston route?
- Switch from Hub&spoke model to triangle model. (No waiting for delayed
planes)
- Fun (like Virgin America) and thrill factor - A stewardess might sign during the ﬂight.
Also, SW could hire a younger more beautiful hostess than legacy airlines
11

1993 CEO Herb buys Neeleman’s Morris Air
watch on Bloomberg TV 9:40 to 11:40 http://www.bloomberg.com/video/proﬁle-david-neeleman-MP4EMVi3QomUmlAVmmnrNw.html
12

Thrill Example (Real) at SW
https://www.youtube.com/watch?v=TxNrizGdhtY
13

Commercial of 1971
https://www.youtube.com/watch?v=tAbGW3i3LM0
http://www.youtube.com/watch?v=oHnqnyzegfc
14

The B737
The Boeing 737 is a short- to medium-range twinjet narrow-body airliner. Originally developed as a shorter, lower-cost twin-
engined airliner derived from Boeing's 707 and 727 Introduced: 1968 . The company lists the price of a 737 as between $51.5
million and $87 million. Source: http://www.boeing.com/boeing/commercial/prices/
15

Profit (model)
– What are our key drivers of
profitability?
Logic(model)
16
1 | Stanford View - The Profit Model
The
Profit model deals
with the ‘How’ do we
extract the money from
the customers pockets
----
How the money is
extracted

SW did a cunning innovation here. They realized that there
are basically two types of customers. The ones that pay with
their own money, and the ones that pay with other’s
peoples money. Milton Friedman said it before. (And he got
the Nobel prize for it)
17
----
----
http://www.youtube.com/watch?v=5RDMdc5r5z8
It is
not the business of
the Government to
sponsor public parks. This
should be carried by private
initiative.
----
M. Friedman

At the time (and today) Airlines had a very complex pricing
structures on how they priced and marketed air tickets. They
used segmentation to try to carve out every niche so the
extraction of dollars is maximized from all the potential
customers.
Even today most airlines use a software called PROSPricing.
This software regulates the amount of seats made available to
each country route and they change the price dynamically in
order to maximize the amount of extracted dollars. For
example, if you are using a Mac to buy a ticket the price is
higher. Checking the price and coming back to the website
might increase the price. Some of the practices involved in
dynamic pricing are not legal in the EU but are legal in other
countries.
Operational Excellence through Simplification
SW decided to simplify. They would lose about 20% of
revenues by doing so, but they would save on headaches,
costs and stream line the sale of tickets. So SW just sold two
types of tickets, hugely simplifying the sales process.
Standardizing the price of tickets had also an added
advantage. Customers who before paid different prices to be
in the same class would not be put in that awkward situation
anymore when they crosschecked what they paid.
Low-cost (uncanny)Revenue streams
Low cost bare bones means you can upsell All sorts
of Add ons, upgrades, food... It is a way inflight segmentation.
18

Key drivers of profitability and Key Performance Indicators (KPIs)
This is McKinsey jargon. What it means is that you can isolate a single element in your
business that has the most influence on profitability and use it to predict future profit. Is
actionable? For example, let’s assume a simplified SW. Levers: plane occupancy ratio, price
of ticket, price of fuel, labour costs. Which one is a good driver of profitability?
19
in
fixed costs type
biz such as restaurants
and airlines usually
occupancy rate is a good
predictor (driver) of
profitability
----
Good
drivers are
actionable
see also McKisney’s
“Levers”
----

20
+
Profit
-
Driver of Profitability
Action
(cause)

SW is based in what we call operational excellence: $ is
important but it is not everything: timeliness,
convenience count too.
Another example is FEDEX, that uses hub-spoke system for
sending packs. This works well for sending packets around
the US. Spoke is when you need to make sure that the
packets will arrive on time: less emphasis on cost and more
on reliability.
The cost leader
Another: Wall-Mart. .5 trill in sales. Largest in the world. Wall-
Mart is the cost leader. Every day low prices. The Key is
more Volume = more leverage with suppliers. (spiraling
process). Quote Super Lopez famous meeting with suppliers
at VW: make the money somewhere else
Benchmarking
Wall-Mart and (Intel factories)
stores all look same. This
a l l o w s f o r r a t - r a c e
benchmarking of store against
each others… sharing of good
p r a c t i c e s t h a t c a n b e
propagated to other stores.
21
1 | Stanford View - Operational Excellence
If you want
operational excellence
best practices, talk to
McKinsey
Lean
Practice

Auto industry example
Ford Model T. The trick that made the car aﬀordable (2 years salary). If door knob outlast other parts their cost should be
lowered.
22

Product Leadership is about producing a stream of lead products
“A car for every one”
23

ValueCreation (model)
Proﬁt(model)
Logic (model)
- How it works in detail
- The growth strategy (spiral)
- How business objects interact with
each other (ERP insides)
24
1 | Stanford View - The Business Logic
The nitty gritty

How did an upcoming airline in 1968 become
the largest US carrier? In other words:
How do you scale up without
screwing up?
The Growth Spiral
If you start an airline based in secondary
airports, it will never go mainstream. So how can
you market it? How can you make it grow? SW did
something smart. They marketed it to cash strapped
students. After it became popular with them, it was just a
matter of time that parents themselves would start using it.
How to grow the business smoothly without breaking it is
one of the hardest things to do. A tool called adoption
curves can help in managing the process.
The
Biz Logic part
explain why the
business functions
25
1 | Stanford View - The Business Logic

What part of the biz model is explained here?
http://www.youtube.com/watch?v=UTHlXb0PXh4#t=58 (55 to 2:30)
26
1 | Stanford View - Wolf of Wall Street Test

What part of the biz model is explained here?
http://www.youtube.com/watch?v=sxRStrx8xtc
27

What scenes correspond to value creation?
28

Adoption curves
Fact. Any new product is subject to an
adoption curve. Rate accelerates and then
decays. It cannot be any other way. However, it
is useful to know the exact shape of the curve
for purpose of marketing. Don’t believe it?
Choose the Apple mac book for example, look
among your friends. See if you can ﬁnd a
friend that ﬁlls each group.
29
1 | Stanford View - Adoption Curves

The Adoption Chasm
One thing that happens is that some early adopters buy your product (pioppio) but then ... it is incredibly hard to convince the
Majority, the mainstream. This is what it is called a chasm.
30
?
chasm

Laggards
For example, some people will not by a Mac until 95% of their
friends have one, no matter what.
Early adopters
On the other hand, there are groups of people that like to try
new things, be the ﬁrst, or where really waiting for your
product and do not care of how many people are using it
already. Lady Gaga is an early adopter of herself.
The Chasm
When I started pioppio.com (a twist on Twitter in Barcelona)
There were 400 users using it. But it was very hard to gain
more users. This is called the chasm. At the end pioppio.com
died.
How to Cross the Chasm
The Best strategy to cross the chasm is the slice-and-conquer
strategy. Target a subgroup of the main stream and repeat. For
example, at Dropbox they added a photo friendly feature to
convince the main stream photo enthusiasts.
31

Network effects
When the adoption rate is higher because the number of users that already use your product is larger, and when its lower
if the number of users is low chances are that your product is subject to network effects. Network effects appear when
the value of your product depends on others already using it. Case in point is the walkie talkie. One walkie talkie is
useless. Two walkie talkies is more useful. If every body owns one it is more useful. Phones, email, Uber and others are
subject to network effects.
32

Critical Mass
In such cases, if the number of users reaches a certain number it is possible that it number will grow endogenously
(without any marketing help). Those points in the adoption curve are called critical points. Facebook was an example of
an adoption curve where the critical mass number was very very low.
33

Early Adopters
34

35
PROCLIVITY TO ADOPT NEW PRODUCT (IPOD 2004)PROCLIVITY TO ADOPT NEW PRODUCT (IPOD 2004)
NAME
# OF USERS THAT SHOULD ALREADY
BE USING THE SERVICE OR PRODUCT
DO THAT I ADOPT THIS PRODUCT
Juan 0
Ana 0
Bob 1
Rike 2
Mikimoto 3
Jose 9

36
0
25
50
75
100
0% 20% 40% 60% 80% 100%
Marketpenetration
Market penetration
y =x required penetration (Y) for X to adopt
A
B
1. Early
adopters
2. If point A is reached we will arrive to B
automatically with no marketing expense

37
0
25
50
75
100
0% 20% 40% 60% 80% 100%
Facebook adoption curve (example)
Marketpenetration
Market penetration
3. Skeptics
We all have some
friend who says she
will never join
----
A

38
0
25
50
75
100
0% 20% 40% 60% 80% 100%
Pioppio adoption curve (example)
Marketpenetration
Market penetration
THE
CHASM
-.-’
Estimated curve
A
B
KNOW
YOUR
ADOPTION
CURVE!

2 | Continental View
Business Model Canvas. Invented at
EPFL by Alex Osterwalder
Alex What’s the
biz canvas about?
----
...it is
just a brain
hack...to cut the blah blah
blah at board meetings
----
Alex
Many students think the
Biz Canvas is useless... But
what is happening is that
they try to practice it
without any real in depth
knowledge of the case

Zara A / B
Workshop
40
2 | Continental View - Alex Osterwalder's Biz Model Canvas
THE KEY
ELEMENTS
VISUALIZED

Many students in Mexico told me that the Biz canvas left them
as cold as a cold pizza. I can understand why. Doing a biz
canvas without real insights of a company is boring. The aim
of this A/B workshop is to change that perception*.
B (B is for Before) Workshop
Teams of 4 print the canvas in A3 size.
Goal: Do the canvas for Zara in less than 20 minutes with the
purpose of understanding and visualizing all the biz
components.
B Workshop
Be Genchi Gembutsu and watch the best and only
documentary on Zara ever done. (“Planeta Zara” video, Ch4
The Brown Book of Design Thinking).
After watching the video let them improve (kaizen) the canvas
again.
Reﬂection
The video contains many insights into the biz model of Zara
this are the top ones:
1. KA - Every employee acts like a trend-spotter
2. Channel - delivery of camion is twice weekly
3. Value Prop - Smaller batches, sold out quickly, customers
know that if they visit the shop they will always ﬁnd
something new. --> Zara shoppers visit stores x4 times
more often than H&M shoppers
4. Local customization of stock depending on area where
shop is.
5. CR - Eye contact training
6. Cost Structure - Two tiered. High fashion garments are
produced locally. Low fashion items or basics, such as
jeans are produced in China.
41
* I got this idea from Ben Graham’s Company A company B
teaching methodology
Company A

42
The Business Model Canvas
Revenue Streams
Channels
Customer SegmentsValue PropositionsKey ActivitiesKey Partners
Key Resources
Cost Structure
Customer Relationships
Designed by: Date: Version:Designed for:
designed by: Business Model Foundry AG
The makers of Business Model Generation and Strategyzer
This work is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported License. To view a copy of this license, visit:
http://creativecommons.org/licenses/by-sa/3.0/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA.
What are the most important costs inherent in our business model?
Which Key Resources are most expensive?
Which Key Activities are most expensive?
is your business more
Cost Driven (leanest cost structure, low price value proposition, maximum automation, extensive outsourcing)
Value Driven (focused on value creation, premium value proposition)
sample characteristics
Fixed Costs (salaries, rents, utilities)
Variable costs
Economies of scale
Economies of scope
Through which Channels do our Customer Segments
want to be reached?
How are we reaching them now?
How are our Channels integrated?
Which ones work best?
Which ones are most cost-efficient?
How are we integrating them with customer routines?
channel phases
1. Awareness
How do we raise awareness about our company’s products and services?
2. Evaluation
How do we help customers evaluate our organization’s Value Proposition?
3. Purchase
How do we allow customers to purchase specific products and services?
4. Delivery
How do we deliver a Value Proposition to customers?
5. After sales
How do we provide post-purchase customer support?
For what value are our customers really willing to pay?
For what do they currently pay?
How are they currently paying?
How would they prefer to pay?
How much does each Revenue Stream contribute to overall revenues?
For whom are we creating value?
Who are our most important customers?
Mass Market
Niche Market
Segmented
Diversified
Multi-sided Platform
What type of relationship does each of our
Customer Segments expect us to establish
and maintain with them?
Which ones have we established?
How are they integrated with the rest of our
business model?
How costly are they?
examples
Personal assistance
Dedicated Personal Assistance
Self-Service
Automated Services
Communities
Co-creation
What Key Activities do our Value Propositions require?
Our Distribution Channels?
Customer Relationships?
Revenue streams?
catergories
Production
Problem Solving
Platform/Network
What Key Resources do our Value Propositions require?
Our Distribution Channels? Customer Relationships?
Revenue Streams?
types of resources
Physical
Intellectual (brand patents, copyrights, data)
Human
Financial
Who are our Key Partners?
Who are our key suppliers?
Which Key Resources are we acquairing from partners?
Which Key Activities do partners perform?
motivations for partnerships
Optimization and economy
Reduction of risk and uncertainty
Acquisition of particular resources and activities
What value do we deliver to the customer?
Which one of our customer’s problems are we
helping to solve?
What bundles of products and services are we
offering to each Customer Segment?
Which customer needs are we satisfying?
characteristics
Newness
Performance
Customization
“Getting the Job Done”
Design
Brand/Status
Price
Cost Reduction
Risk Reduction
Accessibility
Convenience/Usability
types
Asset sale
Usage fee
Subscription Fees
Lending/Renting/Leasing
Licensing
Brokerage fees
Advertising
fixed pricing
List Price
Product feature dependent
Customer segment
dependent
Volume dependent
dynamic pricing
Negotiation (bargaining)
Yield Management
Real-time-Market
strategyzer.com
Employees as
trendspotters
Empowerment of
store manager
Employees spy what
trends are popular
with customers and
inform
HQ
Short lead
time driven
savings
Armani at
affordable
prices
Special
Trainings
eye contact
No Advertising
Lot of R&D in
Window
dressing
Segmentation
Zara, Oysho,
BRSHKA....
Dual Tier
High /Low
fashion
Company B
Op profit
GAP 3%
H&M
5%
ZRARA 7%

43
2 | Continental View - The Lean Canvas
NEW
Start up focused
ppl find this
version more
useful

Zara A/B Workshop
Many students in Mexico told me that the Biz canvas left them
as cold as a cold pizza. I can understand why. Doing a biz
canvas without real insights of a company is boring. The aim
of this A/B workshop is to change that perception*.
B (B is for Before) Workshop
Teams of 4 print the canvas in A3 size.
: Do the canvas for Zara in less than 20 minutes with the
purpose of understanding and visualizing all the biz
components.
B Workshop
Be Genchi Gembutsu and watch the best and only
documentary on Zara ever done. (“Planeta Zara” video, Ch4
The Brown Book of Design Thinking).
After watching the video let them improve (kaizen) the canvas
again.
Reﬂection
The video contains many insights into the biz model of Zara
this are the top ones:
1. KA - Every employee acts like a trend-spotter
2. Channel - delivery of camion is twice weekly
3. Value Prop - Smaller batches, sold out quickly, customers
know that if they visit the shop they will always ﬁnd
something new. --> Zara shoppers visit stores x4 times
more often than H&M shoppers
4. local customization of stock depending on area where shop
is.
5. CR - Eye contact training
6. Cost Structure - Two tiered. High fashion garments are
produced locally. Low fashion items or basics, such as
jeans are produced in China.
44
2 | Continental View - The Lean Canvas

3 | Cases
Zip Car case
Relay Rides case
Dropbox case
Vibrasol case
XINE249 Ex.4.1
J Berengueres
Friday, 8 August 2014
Vibrasol - Foot pain
& natural posture correction!
Background:
- I have been suffering three foot deform
ations called hallux valgus, bunion and
pronation for 10 years
now. Recently it just got so bad even a short hike would end up
in swelling and pain. For about 10 years
I was not really properly diagnosed. One day
a podiatrist diagnosed the following: “O
h my goodness! Your feet! Your feet, are
terrible! Take a photo
with iPhone form
behind and you will see! ” I did and the photo
showed a terrible pronation of the feet, (rolling in, sunk arches, knee looking inward).
The doctor prescribed “custom
insole for posture
correction”. To which I replied: “O
K...
How much do they cost, Doc? and for How long will I have to
wear them?” The Doc.
shook his head smiling…
“This is like glasses my friend. You will have to
carry them
forever. You see, the only thing we can do is to
slow-the-progress of the deform
ation.”
This interaction exemplifies the dominant thinking in podiatry today, that bunion
deform
ity progress can only
be slow down by wearing insoles or by a cheilechtomy
surgery. However, other more
forward-thinking practitioners
have different views:
“Slowing the progress is not only possible, but Hallux valgus, bunions and other
ailments can be reversed in many cases - if you start walking correctly and using the
right shoes. (Dr. Ray McClanahan)”. Back at the old Doc office…
I asked: “W
hat if…
I
just walk correctly” . The doc said: “You can try but you will forget in 5 minutes”. After
the visit finished I went to
a friends lab nearby and connected an Arduino, a pressure
sensor and a coin cell vibrator motor. Put the sensor in my shoe insole to
monitor my
pronation degree. It worked! I named this device Vibrasol, and what it does is that it
vibrates when you walk wrong. Traditional orthotics thinking is like this: The more
comfortable, the more
ergonomic. We disagree. Vibrasol reeducates your muscles, so
you can achieve a healthy body posture
naturally without artificial orthotic shapes -
just by giving you feedback. That is how barefoot child learn
to
walk anyway.!
Business Model (1st + 2nd cut)
- Value Creation Model!
• People will pay anything to
get rid of foot pain!
• People prefer “natural” methods!
• Vibrasol treats the root cause of foot pain not the sympthom
so it is prescribed
more
by physical therapists !
- Profit Model!
• Market size!
1
In this
chapter we drill
down

Cambridge. Founded in 2000 by Antje
Danielson and Robin Chase. Sold to Avis in
1014 for $500
46
3 | Cases - ZipCar & unit economics
In this chapter analyze
the Profit Model via unit
economics

Value creation Model
-I oﬀer car freedom in four steps
-Owning car in city is expensive. Parking. Maintenance
47

Profit = Revenues - Costs
Profit = N x unit profit
48

Profit Model
- Profit Model (how to model it?)
- Find the key drivers via unit economics. (What would you calculate?)
- Ex. One restaurant profitability. Multiply by number of restaurants. In case
of zip car unit economic is one customer. How much does one customer
cost us?
49

Source of revenue per individual member
Customers’ fees:
Annual fee $300. (they copied of E.U. membership fee model)
per mile $0.4
and per hour $1.4
Average customer monthly usage is:
four trips per year
average length is 22miles
and average trip time is 4h
What are the uni economics (per customer per year?)
50

We have,
4 trips x 22 miles x 4 hours… per customer per month.
Per year amounts to:
300 + 12 x 4 x (22x0.4 + 1.5x4)
300 + 44x(8.8+6)
300 + 44 x(14.8)
----------------------
Revenue per customer is $933.6
51

Anual cost per member
cost car 6500
memeber / car 18
maintenace $24 anual fee per member
other: 0.06 / mile
What is the unit cost?
52

Cost per member
6500/18
+
12x4x22x0.06
+24
-------------------
361 + 63 + 24 = 448
Member economics (annual)profit = rev - costs =
931 - 448 = 500!! (high margin?)
53

Now that we have the unit economics, What are the key drivers of zip car’s
proﬁt?
- car cost ?
- members per car?
- the more members sharing the lower the quality of service.
Trade-off identiﬁed?
- Can we reduce the annual membership? What would you do?
Why $300 initially?
- Zipcar tried replicate the original EU rental car ops. These high fees
are used to FUND their car buying… BUT zip car was funded! So they didn't
need the $300. The EU car ops… didn't have external VC funding.
54

Biz Logic
Are u going to sing up? (yes if it has to reduce my cost.) It has to
be convenient to where I am going to be. Key elements:
- Availability, enough cars in enough location. it requires
substantial capital investment…
- Logistics
- Measuring device in car
55

RelayRides is a peer-to-peer car sharing service.
Shelby Clark founded RelayRides in 2009, but the
service was ﬁrst launched in June 2010, in Boston.
56
3 | Cases - RelayRides
In this chapter we
analyze the Value
Model

Value creation Model
- Who are RelayRides’ customers?
- What is their product/service offering?
- How does the offering create differentiated value for them?
- What is the value chain? What parts are they in?
- What is their go-to-market strategy?
57

RR is a typical platform model that matches supply and demand. In this
case supply is owners of idle cars willing to rent/ lend their car for a fee
and the demand is anyone that needs/wants to rent a car. Relay rides
makes profit by being the middle man facilitating the transaction to both
parties. Where is the value created here?
1. Two customers: owners of idle cars and that are willing to lend them
for a fee, and pple who need a individual transportation solution.
2. You would not lend your car to a stranger. RelayRides offers you
some guarantees (!), insurance, and simplifies paperwork to car
lenders.
58
For more on model
types check:
McKinsey 783457
Innovation Company
Profiles

Value chain of RR
- Car owner has idle car
- lists on platform
- car gets booked
- hand over car
- receive $ - RelayRides fee
- Car renter
- Need for transport/ want speciﬁc model
- search for car
- book
- Pay, use
59

To car owners: "Put your idle car to work for you". A guy who listed a
Tesla, made the money back in a few months I heard somewhere.
To car renters: Availability to rent cars models that are not usually
available at Avis?
60

61
3 | Cases - DropBox and the MVP
Dropbox, was founded in 2007 by Drew Houston
and Arash Ferdowsi, as a Y Combinator company.
Idea came after forgetting his USB at MIT in 2006
- The unfinished Zen
Temple (perfect vs.
complete)
- MVP

Lean startup.
Drop Box is a Lean startup
1. Lean startup = prototype or die
1. Try things out (with an MVP)
2. Test hypothesis
3. Iterate
4. Revise biz model
2. The key is: How to accelerate this process.
3. We do not know if we have a good biz model, no matter how
smart you are.
62

Dropbox cycle - adoption curve
How to overcome the CHASM between early adopters/techies and
mainstream…
Techies are willing to accept an incomplete solution. Show it to me.
pioppio chasm.
63

Dropbox demo video of 2008
http://techcrunch.com/2011/10/19/dropbox-minimal-viable-product/
64

DropBox MVPs
-2007. They posted a video on Hacker news.
-2008 posted a video Digg 2008 but they posted a
video not a beta.
-DropBox is a mission critical product no one will
use it to store critical data at the beginning.
-MVP = lowest resolution prototype for purpose of
testing
(in this case video was the lowest resolution prototype!!)
65

Viral Marketing
- How to acquire customers?
- Adword too expensive
- What is VM?
- Marketing as a by-product of use (this is one of the most
eﬀective)
- If i am a user and my friend is not… I will PERSUADE my
friend and get value out of it BOTH of us.
- Skype… want to talk to grandma in australia?
- In the case of DropBox
- Pay for referral incentives
- in product storage GB… etc.
66

Value Creation (top benefits)
1.Help you coordinate (“synchronize”) across
multiple devices (PC, smartphone, etc.)
2.Share files with friends or colleagues
3.Back‐up your files
67

Fremium economics of DropBox
-100k pay for 4M
-Why they do it? because it helps Acquire future
customers!
-Churn rate
-Cheaper than adwords? Yes… ppl don’t know what it
is. they wont try it… unless… it is FREE!
68

Let’s calculate the Unit economics of DropBox
(Based on HBR Dropbox case 9-811-065)
- Two customer types
- paying
- free
- Paying customer revenue Total revenue last year is $19M
- $120/year
- 19M/120 = 158k users
- Cost of Revenue
- total costs = 9M (bandwith)
- 9M / 158k =56$/paying customer
69

- What are the mck drivers of profitability?
- Cost of bandwidth?
- if you now that you will grow, can u pull a Steve jobs maneuver
and negotiate a better deal with bandwidth selling utilites?)
- Ratio of free to paying (1:40)
Assume 25 m users as total base, assume unit profit = $20)
- 25M users
- Profit contribution of paying customers: 25M/41 x 20$ = 12.2
- Overhead: 25 engineers x $150k/salary = 3.75M
- 12.2 - 3.75 = 8.44M
70

The Market Fit
- When you start a business it is really important to find the right
customers. Not just the early adopters.
Tesla
- Elon knew that to sell electric cars you had to appeal to the sexyness of the
product. People don’t just but Electric cars because it is good for the
environment.
- They want to feel sexy and they want to broadcast that they are green. Tesla got
it right! It took ten years to make the product. This is called market fit. You have
to find your product-market fit.
- The customers that are going to become your evangelists - the trendy-
environmentalists, the Leonardo DiCrapio’s that made driving a Prius cool,
- The zipsters of Zipcar.
Peter Thiel (2014) Peter Thiel’s Start Zero. Tesla Chapter. Trendy Environmentalists. Tesla - Roadster - Prius
71

This is an example of a
three page biz model document
the Stanford way
72
3 | Cases - Vibrasol - How to Write a formal Buisness Model
XINE249 Ex.4.1
J Berengueres
Friday, 8 August 2014
Vibrasol - Foot pain &
natural posture correction!
Background:
-
I have been suffering three foot deformations called hallux valgus, bunion and
pronation for 10 years now. Recently it just got so bad even a short hike would end up
in swelling and pain. For about 10 years I was not really properly diagnosed. One day
a podiatrist diagnosed the following: “Oh my goodness! Your feet! Your feet, are
terrible! Take a photo with iPhone form
behind and you will see! ” I did and the photo
showed a terrible pronation of the feet, (rolling in, sunk arches, knee looking inward).
The doctor prescribed “custom
insole for posture correction”. To which I replied: “OK...
How
much do they cost, Doc? and for How
long will I have to wear them?” The Doc.
shook his head smiling…
“This is like glasses my friend. You will have to carry them
forever. You see, the only thing we can do is to slow-the-progress of the deformation.”
This interaction exemplifies the dominant thinking in podiatry today, that bunion
deformity progress can only be slow
down by wearing insoles or by a cheilechtomy
surgery. However, other more forward-thinking practitioners have different views:
“Slowing the progress is not only possible, but Hallux valgus, bunions and other
ailments can be reversed in many cases - if you start walking correctly and using the
right shoes. (Dr. Ray McClanahan)”. Back at the old Doc office…
I asked: “W
hat if…
I
just walk correctly” . The doc said: “You can try but you will forget in 5 minutes”. After
the visit finished I went to a friends lab nearby and connected an Arduino, a pressure
sensor and a coin cell vibrator motor. Put the sensor in my shoe insole to monitor my
pronation degree. It worked! I named this device Vibrasol, and what it does is that it
vibrates when you walk wrong. Traditional orthotics thinking is like this: The more
comfortable, the more ergonomic. W
e disagree. Vibrasol reeducates your muscles, so
you can achieve a healthy body posture naturally without artificial orthotic shapes -
just by giving you feedback. That is how
barefoot child learn to walk anyway.!
Business Model (1st +
2nd
cut)
-
Value Creation Model!
• People will pay anything to get rid of foot pain!
• People prefer “natural” methods!
• Vibrasol treats the root cause of foot pain not the sympthom
so it is prescribed
more by physical therapists !
-
Profit Model!
• Market size!
1
The Vibrasol case: Sourced in California. Made
in China. Assembled in Dubai.

Background
- I have been suffering three foot deformations called hallux
valgus, bunion and pronation for 10 years now. Recently it
just got so bad even a short hike would end up in swelling
and pain. For about 10 years I was not really properly
diagnosed. One day a podiatrist diagnosed the following:
“Oh my goodness Your feet! Your feet, are terrible! Take a
photo with iPhone form behind and you will see! ” I did and
the photo showed a terrible pronation of the feet, (rolling in,
sunk arches, knee looking inward). The doctor prescribed
“custom insole for posture correction”. To which I replied:
“OK... How much do they cost, Doc? and for How long will
I have to wear them?” The Doc. shook his head smiling...
“This is like glasses my friend. You will have to carry them
forever. You see, the only thing we can do is to slow-the-
progress of the deformation.” This interaction exemplifies
the dominant thinking in podiatry today, that bunion
deformity progress can only be slow down by wearing
insoles or by a cheilechtomy surgery. However, other more
forward-thinking practitioners have different views:
“Slowing the progress is not only possible, but Hallux
valgus, bunions and other ailments can be reversed in
many cases - if you start walking correctly and using the
right shoes. (Dr. Ray McClanahan)”. Back at the old Doc
office... I asked: “What if... I just walk correctly” . The doc
said: “You can try but you will forget in 5 minutes”. After the
visit finished I went to a friends lab nearby and connected
an Arduino, a pressure sensor and a coin cell vibrator
motor. Put the sensor in my shoe insole to monitor my
pronation degree. It worked! I named this device Vibrasol,
and what it does is that it vibrates when you walk wrong.
Traditional orthotics thinking is like this: The more
comfortable, the more ergonomic. We disagree. Vibrasol
reeducates your muscles, so you can achieve a healthy
body posture naturally without artificial orthotic shapes -
just by giving you feedback. That is how barefoot child
learn to walk anyway
73

Value Creation Model
-People will pay anything to get rid of foot pain
-People prefer natural methods
-Vibrasol treats the root cause of foot pain not the symptom
74

Proﬁt Model
- Market size:
- 80% of american will have a foot pain at some point
- Orthotics, insole industry is $10bn year in USA alone
- Estimated TAM: 10bn x 20% (bunions + hallux valgus)
- Estimated penetration rate vs. practitioners that do not like the idea (based on sample of 3) = 100%
- SAM=$2bn
- Cost Structure:
- After six months of prototyping we realised that to build a ﬁrst run in China we need to rise $100,000.00.
Each unit would cost $60 to make. So it would have to retail for +$199. Production and recall risk are very
high. We decided to make a simple, no frills, no electronics protoype (MVP)
- MVP: This prototype has the shape of an arch support and works by being uncomfortable when the foot is in
a wrong posture and being less uncomfortable when the patient walks in a better posture. Thus biofeedback
is achieved and the patient can correct its posture naturally by being aware of the posture
- Cost of the no-frills device is $2 to 3D print, 2$ if made of silicon injection in Hanzou by a supplier of a
leading phone manufacturer. The devices are supplied at no upfront cost to physical doctors that then sell it
to patients with foot pain etc..
- Selling through physical therapists works. Selling online does not work because online it is hard to
communicate the value. We plan to sell each for $20
75

Business Logic Model
- Iterative prototyping used to evolve fast design cycle
- Works closely with physical therapists to iterate prototypes fast by using 3D printers.
-Work closely with selected forward looking practitioners from Kaiser, holistic disciplines and other
-Initially, to increase production volume, ( to achieve operational excellence and evolve the
product faster), we give a high sales commission to the physical therapist (+50%)
-Costs of evangelists
-Virality: The device is composed of a support and an elastic band that keeps the support from
moving around inside the shoe/sandal/high heels. We only have ﬂashy colorful bands. We want to
position this as a cool, no-shame, no stigma orthotic and to have people ask: What is that cool
thing on your foot
-Proﬁt/Loss Drivers
-Commission to doctor
-Cost of Sales force that evangelizes doctors (it takes about 3 days to evangelize a doctor)
-Regulation permits
-Value chain: win win for doctor-patient
76

Parts of compelling Investment pitch
- The Hook
- ( you have limited amount of time so… focus! high level message)
- Value proposition
- SAM = TAM x penetration rate (Addressable Market Size)
- Body
- blah blah
- Closing
- Action Step step for investors
- How much money you need,
- Why and
- When do you need it
77

The Business Model in Video Format
https://vimeo.com/103532118
78

79

Dr. Jose Berengueres joined UAE University
as Assistant Professor in 2011. He received
MEE from Polytechnic University of
Catalonia in 1999 and a PhD in bio-inspired
robotics from Tokyo Institute of Technology
in 2007.
He has authored books on:
The Toyota Production System
Design Thinking
Human Computer Interaction/ UX
He has given talks and workshops on Design
Thinking & Business Models in Germany,
Mexico, Dubai, and California.

Building Business Models

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