Building Business Models

BUILDING BUSINESS MODELS

®

Building Business Models (MBA crash course)

EditorJose Berengueres

Edition First Edition. September 24th, 2014.

Text Copyright© Jose Berengueres 2014. All Rights Reserved.

i

©

Video, Audio & Artwork CopyrightArtwork appearing in this work is subject to their 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 mistakes2. Reinventing the

wheel

according to Stanford these are the main

parts of a solid Business Model*

Profit Model(How money is extracted)

ValueCreation(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

The

HSB

C Bu

ildin

g by

Fos

ter+

Part

ners

- 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

http://www.thehiredguns.com/blogs/2011/10/24/the-art-of-napkin-sketching-a-simple-powerful-way-to-generate-and-communicate-ideas/







– Who are our customers? (Market/product Fit*)

– How does the offering create differentiated value?


– What is our go‐to‐market strategy?Profit (model)

– What are our sources of revenue?

– What is our cost structure?

– What are our key drivers of profitability?

Logic (model)

9


Value Creation at SW: What’s different?

-Low Cost - Low cost was achieved via simplification and standardizat ion of operat ions (what is cal led 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


http://www.youtube.com/watch?v=r1rsVloe0KA

http://www.youtube.com/watch?v=r1rsVloe0KA

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


http://www.bloomberg.com/video/profile-david-neeleman-MP4EMVi3QomUmlAVmmnrNw.html

http://www.bloomberg.com/video/profile-david-neeleman-MP4EMVi3QomUmlAVmmnrNw.html

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


https://www.google.com/search?safe=off&es_sm=91&biw=1251&bih=610&q=boeing+737+introduced&stick=H4sIAAAAAAAAAGOovnz8BQMDgykHnxCnfq6-gaGxebaFllp2spV-YllmYklmfp5-YmZRclFiWkl8bn5Kao5VZl5JUX5KaXJqSnzmrk8OK3clX3AUentFbjNPxV-HJgDgB9mjUgAAAA&sa=X&ei=31wcVK_MGqiN7Aaxo4HgBQ&ved=0CKoBEOgTKAEwDg

https://www.google.com/search?safe=off&es_sm=91&biw=1251&bih=610&q=boeing+737+introduced&stick=H4sIAAAAAAAAAGOovnz8BQMDgykHnxCnfq6-gaGxebaFllp2spV-YllmYklmfp5-YmZRclFiWkl8bn5Kao5VZl5JUX5KaXJqSnzmrk8OK3clX3AUentFbjNPxV-HJgDgB9mjUgAAAA&sa=X&ei=31wcVK_MGqiN7Aaxo4HgBQ&ved=0CKoBEOgTKAEwDg

http://www.boeing.com/boeing/commercial/prices/

http://www.boeing.com/boeing/commercial/prices/


– Who are our customers? (Market Fit)




Profit (model)

– What are our sources of revenue? – What is our cost structure? – 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

extracte

d

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 SimplificationSW 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 leaderAnother: 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

BenchmarkingWall-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



– Who are our customers? (Market Fit)




Profit (model)

– What are our sources of revenue?

– What is our cost structure?

– What are our key drivers of profitability?

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 nit

ty 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 ChasmOne 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

LaggardsFor example, some people will not by a Mac until 95% of their friends have one, no matter what.

Early adoptersOn 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 ChasmWhen 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 ChasmThe 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%

Mar

ket p

enet

rati

on

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)

Mar

ket p

enet

rati

on

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)

Mar

ket p

enet

rati

on

Market penetration


THECHASM

-.-’Estimated curve

AB

KNOW

YOUR

ADOPTI

ON

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 stu

dents t

hink the

Biz Canv

as is us

eless... B

ut

what is h

appenin

g is tha

t

they try

to prac

tice it

without a

ny real

in depth

knowled

ge of th

e case

Zara A / B

Workshop 40

2 | Continental View - Alex Osterwalder's Biz Model Canvas

THE KEY

ELEMENT

S

VISUALI

ZED

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) WorkshopTeams 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 AGThe 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 moreCost Driven (leanest cost structure, low price value proposition, maximum automation, extensive outsourcing)Value Driven (focused on value creation, premium value proposition)

sample characteristicsFixed Costs (salaries, rents, utilities)Variable costsEconomies of scaleEconomies 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 phases1. 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 MarketNiche MarketSegmentedDiversifiedMulti-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?

examplesPersonal assistanceDedicated Personal AssistanceSelf-ServiceAutomated ServicesCommunitiesCo-creation

What Key Activities do our Value Propositions require?Our Distribution Channels? Customer Relationships?Revenue streams?

catergoriesProductionProblem SolvingPlatform/Network

What Key Resources do our Value Propositions require?Our Distribution Channels? Customer Relationships?Revenue Streams?

types of resourcesPhysicalIntellectual (brand patents, copyrights, data)HumanFinancial

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 partnershipsOptimization and economy Reduction of risk and uncertaintyAcquisition 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?

characteristicsNewnessPerformanceCustomization“Getting the Job Done”DesignBrand/StatusPriceCost ReductionRisk ReductionAccessibilityConvenience/Usability

typesAsset saleUsage feeSubscription FeesLending/Renting/LeasingLicensingBrokerage feesAdvertising

fixed pricingList PriceProduct feature dependentCustomer segment dependentVolume dependent

dynamic pricingNegotiation (bargaining)Yield ManagementReal-time-Market

strategyzer.com

Employees

as

trendspot

ters

Empowerm

ent of

store m

anager

Employees

spy what

trends ar

e popula

r

with cus

tomers

and

inform HQ

Short l

ead

time d

riven

savings

Armani

at

afforda

ble

prices

Special

Trainin

gs

eye con

tact

No Adv

ertising

Lot of R

&D in

Window

dressin

g

Segmenta

tion

Zara, O

ysho,

BRSHKA

....

Dual Ti

er

High /Lo

w

fashion

Company B

Op pro

fit

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) WorkshopTeams 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 WorkshopBe 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 caseXINE249 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: “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 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 w

alking correctly and using the

right shoes. (Dr. Ray McClanahan)”. B

ack at the old Doc office… I asked: “What if…

I

just walk correctly” . The doc said: “You can try but you will fo

rget 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 n

amed 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

analyz

e

the Pro

fit Mode

l via u

nit

econom

ics

Value creation Model

- I offer car freedom in four steps

-Owning car in city is expensive. Parking. Maintenance

47


Profit = Revenues - CostsProfit = 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 LogicAre 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 Val

ue

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.

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For more

on mode

l

types ch

eck:

McKinsey

783457

Innova

tion Compan

y

Profile

s

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

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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?

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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 un

finished

Zen

Temple

(perfect

vs.

complet

e)

- 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. Iterate4. 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.

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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/

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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!!)

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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.

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Value Creation (top benefits)1.Help you coordinate (“synchronize”) across

multiple devices (PC, smartphone, etc.)2.Share files with friends or colleagues3.Back‐up your files

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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!

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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

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- 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

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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

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This is an example of a

three page biz model document

the Stanford way

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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: “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.!

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

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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

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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

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The Business Model in Video Format

https://vimeo.com/103532118

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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 SystemDesign ThinkingHuman Computer Interaction/ UX

He has given talks and workshops on Design Thinking & Business Models in Germany, Mexico, Dubai, and California.