Time Value of Money
Present value: Value today of a future cash flow
Discount factor: Present value of a $1 future payment
Discount rate: Interest rate used to compute present
values of future cash flows
Inflation: Rate at which prices are increasing
Nominal interest rate: Rate at which money invested grows
Real interest rate: Rate at which purchasing power of
investment increases
Stream of cash payments
that never ends
Stream of cash payments
starting immediately
Fisher
Equation
Marketing
Need
Want
Demand
Basic requirements to survive
Needs shaped by society, culture, and personality
Wants backed by purchasing power
Customer Lifetime Value: Net present value of
all future cash flows from a customer
Marketing: Delivering value to customers, and capturing value from customers
Marketing myopia: Focusing on current wants (i.e., increasing sales) instead of underlying needs (i.e., utility of products)
Concept
Feature of products
Organisational
Evaluation
implications
Production
Easily available and highly
Improve production
Demand > Supply
concept
affordable
and distribution
Economies of scale and experience curve
efficiency
Assembly-lines
Product concept
Quality, performance,
Product innovation
Marketing myopia (focus on improving product
features
instead of solutions)
Selling concept
Not bought unless
Selling and promotion
“Hard sell”
stimulated aggressively
Unscrupulous image
Focus on sales volume
Marketing
Meets the needs and wants
Understand target
“Sense and respond” instead of “make and sell”
concept
of consumers
markets
Focus on customer satisfaction
Pricing
Experience curve: The drop in the
average per-unit production cost
that comes with accumulated
production experience
(Combined effects of learning,
volume, investment, &
specialization)
Product Mix Pricing Strategies: Maximise the profits on the total product mix (Product line pricing, Optional-product pricing,
Captive-product pricing, By-product pricing, Product bundle pricing)
Price Adjustment Strategies: Adjust prices to account for customer differences and changing situations (Psychological pricing,
Discount pricing, Segmented pricing, Promotional pricing (Loss Leader), Geographical pricing, Dynamic pricing, International
pricing)
New Product Pricing Strategies: Set prices for products in introductory stage
Digital Platforms
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Platform’s purpose is to consummate matches among users and facilitate the exchange of goods, hence enabling value
creation for all participants
Platform
Advantages:
Transformation
o No gatekeepers to manage flow through frictionless entry
o Scalability by creating value using resources they don’t own or control
Information▪ Sharing economy: optimising usage of idle assets
intensive
o Community feedback loops by deriving much of their value from the communities they serve
industries
▪ Quality signals (e.g., YouTube comments)
Unscalable
o In a nutshell, the focus has shifted from broadcast to segmentation, and then
gatekeepers
to virality and social influence; from push to pull; and from outbound to inbound
Network effects arise when the number of users affects the value created for each user
o Industrial-era firms – supply economies of scale
Linear Value Chain: Design → Manufacture → Sell → Deliver
o Platforms – demand economies of scale (network effects) – Non-linear growth
Virality attracts people, but network effects keep them there
To minimise negative network effects, increase the chances of a happy match (quality curation)
o Issues: Matching is difficult when numbers are high, hence, curate on multiple levels
Positive same side: Adoption of telephones; Negative same side: Effect of competition, surge pricing
Positive cross side: Adoption of Visa by merchants; Negative cross side: Matching problems, clutter
Highly fragmented
(hence susceptible
to market
aggregation, like
Airbnb)
Extreme
information
asymmetries
(used car markets)
Internet of Things
(connectivity and
power)
Low regulatory
control, failure
cost
Issue of Monetisation: Inherent value of platforms lies in the network effect, but charging will discourage users from joining
May reduce negative network effects by increasing quality curation with lower numbers
Metrics
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Traditional business models focus on the efficiency with which value flows through the pipeline
o Operations: Produce goods and services efficiently at scale to meet demand
o Marketing: Reach customers through proper channels at appropriate prices
o Finance: Ensure sufficient revenue generated to produce profits and value for investors
o Metrics: Cash flow, inventory turnover, operating income, gross margin, overhead, ROI
Platform business models generate value through network effects
o Rate of interaction success (e.g., first few interactions)
Platform Metrics (Focus on rate of interaction success)
Startup Phase (Core Interactions)
Liquidity: No. of producers and consumers (focus on active usage)
Matching: Accuracy of algorithm (% of searches that lead to interactions – sales conversion rate)
Trust: Degree of comfort for users (risk and safety – reviews and certification)
Growth Phase (Enhanced Value Creation)
• Balance between consumer
and producer numbers
• Lifetime value of producers
and consumers
• Sales conversion rate
• Side switching
Maturity Phase (Innovation)
• Identify new functionalities
• Identify strategic threats