Value and Business Models
Jan 26, 2011
Thanks to
Bill Collins and Google
Agenda
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HW Presentations
Value Chain
Business Models
Exercise
Value Chain
• The Value Chain is the set
of activities that a company
engages in to produce a
product.
• At each activity the
“nascent” product gains
value
• Some activities produce
more value than others
Value Chain
• You have bought a new refrigerator
– Describe your perception of value for all the
people who “touched” it
Value Chain
• Let’s take one of the E 102 projects.
Imagine you are the end customer. What
is the value chain for the product you are
using
Value Chain
• Key questions for you to address
– What will the value chain be for your product?
– What is the value contributed by each stage
of the chain?
– Where would you like to play? (Where will you
capture the most value?)
Business Models
• Business Model as defined here is your
structure for receiving compensation.
• Your choice of business model is a critical
consideration for your company.
• It is also a critical point of review by prospective
financiers
• Most companies do not exploit all the
possibilities they have to monetize their product
Business Models
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Auction
Bricks and clicks
Cutting out the middleman model
Direct sales model
Distribution business models
Franchise
Freemium business model
Business Models (continued)
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Advertising through eyeballs
Selling customer information
Razor and Blades
Subscription
Servitization
Business Models (continued)
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Sell project
Trading
Insurance
Publisher
Broker
Reseller
Value added reseller
Successful business Models have
1. Foothold: identify niche customer, early adopter
Valuable Feedback
Cheap marketing
2. Differentiation
Amazon.com added
– user reviews
– recommendations,
– wish lists
– speedy shipping
3. Pricing
• Pricing: Salesforce.com monthly service fee
instead of large upfront fee
Biz Models – Financial Questions
1. How will you charge for your solution?
2. What would make your customers
excited about your price structure now?
Over time?
3. How will you generate recurring sales
from your customers (printers versus ink,
hardware vs ongoing service)?
Biz Models – Financial Questions
4. How will you deliver continuously
increasing value over time?
5. How can you extend your model to enable
continuous cash flow, profits and growth?
6. Is there more than one way to monetize
your product?
Biz Models – Financial Q’s
7. What gross margin can you generate?
Primary indicator of value
Needs to support your overhead
Needs to allow room for partners/customers to
make money.
8. How do you generate positive cash flow?
Payment terms with suppliers and customers –
bias these in your favor
Working capital needs - minimize
Understand who is paying the cost of money
Biz Models – Financial Q’s
9. What are your sales/employee?
10. What is your “cost of growth” (scalability)
11. How defensible are your margins?
consider Porter’s forces
12. How do all these affect the value of your
enterprise?
Set A Value Roadmap
• You must plan to increase your value each year
• Cost-performance improvement curve is inexorable
• Stems from human expectations model – continuously
expect more for less. Each industry has it’s norms.
– Productivity improvements enable price reductions
– Additional features enable stable or higher prices
Cost versus
performance
Expectation
Slower = margin loss
Faster = margin gain
Industry Case
• Whether your model is selling “cell phones”
or “minutes” you need a roadmap.
– Cell phones: Started out expensive, got cheap,
then were given away to get the minutes, now
need to be combined with cameras and PDA’s to
have value……
– Minutes: Started out expensive per unit, got
cheaper, went to lump sum, then needed lots of
additions just to keep the lump sum, eventually
are basically free….
Pricing Fundamentals
• Always price to value
• Approaches:
– Price to payback
• Rule of thumb – 6 months to 1 year
– Price to displace existing solutions on cost basis
• Rule of thumb – 30% net savings or more
– Price to displace existing solutions on
performance basis
• Rule of thumb – hard to get customers to pay more
– Price to protect against indirect competition
• Rule of thumb – highest price that allows end solution to
stay attractive versus alternative approaches
Value Factors
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Price
Performance
Quality
Lead-time
**RISK/PRESTIGE PERCEPTION**
Lead Customer Pricing
• Lead customers are critical for validating value
proposition and ROI, price
– Sets a future “success pattern”
– Lowers risk/increases prestige of solution
– Eventually you want to become a “safe bet.”
• Lead customers must pay for solution
– Not credible otherwise
– Can receive a favorable deal, but not too favorable
The Pricing Acid Test
Does your pricing excite both
your customers and investors
at the same time?
Summary
• Your business model must be:
– Acceptable to your customers
– Able to provide recurring sales.
– Able to deliver more for less while generating
profitable growth.
• Your pricing must:
– Have a clear reconciliation to value
– Get early validation from lead customers.
– Create excitement for both your customers and
investors.
Breakout
What is your business model?
HW for Next Week
• What is the value you provide your
customers?
• How will you capture that value (Business
Model)? Name at least 2.
• How will you price your product(s)?
• How will your value capture be sustainable
for 5 years?