Babson Build for Universidad de Guadalajara

Business Models
Dissecting, Understanding & Developing

Andrew C. Corbett
Babson Research Scholar
Chair, Entrepreneurship Division
Professor of Entrepreneurial Studies
Faculty Director, John E. & Alice L. Butler Venture Accelerator
 Agenda
• Business Models ???
• Defined
• Dissected
• Canvas Options
• Models of Mexico and the World
• ZipCar
• Revenue models
• Your model and levers

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 Business Model?

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 WHAT IS A BUSINESS MODEL?

A business model describes the

rationale of how an organization
creates, delivers, and captures value.
Source: Osterwalder & Pigneur, Business Model Generation

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 9 building blocks Cost
Key Partners Structure

Value
Propositions

Revenue
Streams

Channels Customer
Relationships

Key
Customer Key
Activities
Segments Resources

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 7
2 1
4
8

6
3

9 5

According to Business Model Generation by Osterwalder & Pigneur

EFFICIENCY VALUE

4 main areas of business:

- CUSTOMERS
- OFFER
- INFRASTRUCTURE
- FINANCIAL VIABILITY
 Mapping out the Business Model
Osterwalder & Pigeur Canvas

11
Source: Adapted from Business Model Generation, Osterwalder, Alexander and Pigneur, Yves

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 Mapping the Business Model
Maurya’s Lean Canvas

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Source: Running Lean; Maurya, Ash
 Building Blocks of the Babson Business Model

Key Partners
Cost
Structure

Revenue
Streams
Channels Key
Metrics

Key
Differentiation Resources
Customer Change:
Segments Customer Relationship
Key Activities
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 The Babson Business Model Canvas
Key Partners Key Resources Value Proposition Differentiation Leading Customer Segments
to Advantage

Key Metrics Channels

Cost Structure Revenue Structure

Adapted from The Business Model Canvas (http://www.businessmodelgeneration.com): by Angelo Santinelli . 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/

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 Business Model is Not Your Business Plan
• Is there a need for Business Plans early on?
– Most are developed in a vacuum and are nothing
more than a series of untested assumptions
– Most have 5 year financial plans built with useless
assumptions
– Start ups do not operate like large, established
businesses
• “A start-up is a temporary organization that moves
quickly from failure to failure in search of a repeatable
and scalable business model”

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Key Partners
• Who are your key partners?
• What value is delivered by
each?
• How critical are partners to
delivering the value
proposition?
• What key resources or
activities are delivered by
each?
• What risks or uncertainties are
reduced?
The Babson Business Model Canvas
Key Resources
• What key assets are required to
deliver on the value
proposition? (Human, Financial,
Physical, Intellectual)
• Are these resources available
to you at a reasonable cost?
• What can be rented, leased or
borrowed rather than
purchased?
Key Metrics
• What are the key measures of
business model success?
• How will value delivery to the
customer be measured?
• How are performance
standards developed?
• How do these metrics inform
your revenue and costs?
Value Proposition
• What is it?
• Who is it for?
• Why do they need it?
• How important is the problem
that you are solving for the
customer?
• How does it work?
• What is unique or different?
Differentiation Leading to
Advantage
• What is truly unique about your
product?
• Which attributes resonate with
your target customer?
• Is there a durable advantage?
Why?
• Can the value be substantiated
quantitatively or qualitatively?
Channels
• How will you reach the
customer? Each segment?
• How are they reached today?
Direct? Indirect? Owned?
Partnered?
• What services/relationship is
offered with each?
• Which channels work best?
• Are the channels integrated?
• Which channels are most cost
efficient?
Customer Segments
• For whom are you creating
value?
• What is the Total Available
Market?
• What is the Segmented
Obtainable Market?
• Identify each potential market
segment?
• Compare the needs of each
segment?
• Where do they purchase?
• How do they purchase?
• Why do they purchase?
• What and how do they pay?
• What relationship is required for
each?
• What other products or
services do they want you to
provide?
• How profitable is each
segment?
• What is your formula for
success in terms of how
customers view the Value
Proposition – Differentiation –
Channel - Pricing

Cost Structure Revenue Structure

• What are the cost drivers? (activities, resources, standards) • What are the drivers of revenue?
• What is the resource intensity of producing your product or service? • What are customers willing to pay? What are the pricing mechanisms?
• What is the unit cost structure? • How do they pay? Are there alternative methods of payment?
• Are there economies of scale or scope? • What is the average time to a sale? Frequency of purchase? Volume of purchase?
• What costs are fixed. Which costs are variable? • What is the contribution margin?
• Is the value proposition cost driven or value driven? • What are the breakeven points? (unit volume, sales volume)
• Where is there leverage in the cost model? • Where is there leverage in the revenue model?
• What is the cost to acquire a customer (CAC)? • What is the Customer Lifetime Value (CLTV)?
• What are the working capital requirements?
Adapted from The Business Model Canvas (http://www.businessmodelgeneration.com): by Angelo Santinelli . 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/

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 Customer Segments
• For whom are you creating value?
• What customer segments do we serve?
– Common needs
– Common behaviors
– Common attributes
• Who are your most important customers?
• Market size and growth potential?
• What is the relationship expectation with each segment?
• How much do they cost to attain and retain? (CAC?)
• Which to you hope to maintain? Why? (CLTV)
• What is the formula for success with each segment?
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 Value Proposition

• The Offering - What is it?

• The Customer – Who is it for?
• Compelling Reason to Act – Why is it needed?
• The Experience – How does it work?
• The Benefit – How does it work to meet the needs of the
customer?
• The Timeframe – When will it pay back?
• The Advantage – How better than alternatives?

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 Differentiation Leading to Advantage
Real advantages can’t be easily copied or bought
– How can you satisfy customers needs in a truly unique and differentiated
fashion?
• (e.g. Information advantage, Intellectual property, Barriers to entry,
Corporate secrets)
• Don’t want to be the fourth pizza place on the block!
– Is your differentiation durable/sustainable?
– Does your differentiation lead to unfair advantages (e.g. pricing, time to
market, access to channels)
– Are there core processes that provide unique advantage (e.g. design,
manufacturing, service)
– Can you “substantiate” your differentiation?
• (e.g. case studies, statistics, proof)

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 Channels

• How do you reach your customer segments?

– Direct sales, web, own retail, partner retail, wholesale
• Are your channels integrated?
• Which work best?
• What service relationship is offered by each?
• Which are most cost-efficient?
• How do you build awareness, foster evaluation, attain
trial usage, delivery and post-sale service?

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 Key Resources
• What resources are required to deliver on the value proposition, reach
markets, retail customers, provide for revenues?
• What is the velocity of resources required to deliver on the value
proposition?
• Typical types of resources:
– Physical (e.g. facilities, equipment, networks)
– Intellectual (e.g. patents, copyrights, partnerships, brands)
– Human (e.g. specialized knowledge/skills)
– Financial (e.g. cash, LOC, stock options)
• Which do you need to own, versus rent or borrow?

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 Key Partners
• What partnerships/alliances are required to deliver on the value
proposition?
• What resources and activities can be obtained?
• What risks can be mitigated?
• What costs can be reduced/avoided?
• Typical types of partnerships:
– Strategic alliances
– Co-opetition
– Joint Ventures
– Buyer-Supplier Arrangements

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 Key Metrics
You can’t manage what you can’t measure!
– Determine the key activities that need to be
measured (e.g. margin model, resource velocity,
development cycle)
– Financials alone are not enough
• Look at what informs your financials
• Early warning KPIs (key performance indicators)
– Create a company Dashboard
– Measure, Manage, Communicate
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 Cost Structure
• What are the most important costs in your model?
– Resources, Core Processes, Partnerships, Channels
• How do they support the value proposition, differentiation or
advantage?
• What are your fixed, variable, semi-variable costs and how do
they behave under different business conditions?
• Can you achieve economies of scale or scope?

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 Revenue Structure
• For what value are customer segments willing to pay?
– What do they currently pay?
– How do they pay?
– What and how would they like to pay?
• What types of revenue streams does your business have?
– Transactional – one time fee for product or service
– Recurring – ongoing payments
– Freemium – free to fee
• Possible types of revenue streams:
– Unit sales, Usage fees, Subscription, Franchise
– Lend/Rent/Lease, License, Advertising….
• What are the margins? (gross, operating, profit, contribution)
– Cost of Customer Acquisition
– Customer Life Time Value
– Break Even
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 Cost Structure

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 Differentiation (Entrepreneurship)
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 Value Prop = Luxury, Brand, Status

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 Channels

Key
Partners

Key Resources = Secret Formula 31

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 32

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 “Our” Definition

The Economic Logic used to deliver the Value

Proposition to the Customer at an Attractive
Price to them and Cost to the Business

Or
The Rationale of How a Business Creates,
Delivers and Captures Value

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 Elements of the Business Model

Customer Value Proposition Profit Formula

• Revenue Model
Target Customer • Cost Drivers
Problem Being Solved • Margin Model
Offering • Resource Velocity

Key Resources
Needed to deliver the customer
value proposition profitably
Key Processes
That enable profitable, repeatable,
• People scalable delivery of the customer
• Technology value proposition
• Equipment • Processes – design,
• Information development, sourcing,
manufacturing, marketing,
• Channels
hiring, IT
• Partnerships • Rules and Metrics –
• Brand margin requirements, credit
terms, lead times, supplier
terms
• Norms – Culture, approach
Source: Christensen, Clayton, “Reinventing Your Business Model”, HBR December 2008 to channels and customers 34

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 Business Model?

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 1. Evaluate the venture and the progress Chase
has made to date?
2. What is the business model and how has it
changed over time?
3. What do the data from actual operations say
about how the business model is playing out in
practice?
4. What needs to change based upon the actual
first results?

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 1 1

According to Andrew
 New Venture Transactional Understanding

Customer
Segment

Value Revenue
Proposition Generation

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 New Venture Transactional Understanding

• You have to get to the point

of where the transaction
happens. Customer
Segment

• If you do not understand

this, you do not understand Value Revenue
Proposition Generation
anything!
• And nothing else's matters
no matter how brilliant your
idea is!

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 Various Revenue Models
Using selling lemonade as the basic concept, show how the offering would look substantially different using the seven other revenue models. Can you come up with a really new
revenue model for a lemonade stand? Are there any revenue models missing?

Unit Sales Advertising Fees Franchise Fees Utility Fees

Sell a product or service to Sell opportunities to distribute Sell and support a replicable business for Sell goods and services on a per-use or
customers. messages. others to invest in, grow, and mange as-consumed basis.
locally.
LISA’S LEMONADE STAND

A lemonade stand sells individual

units of lemonade sized by cup to
consumers on a per unit basis

Subscription Fees Transaction Fees Professional Fees License Fees

Charge a fixed price for access to your Charge a fee for referring, enabling, or Provide professional services on a time- Sell the rights to use intellectual
services for a period of time or series of executing a transaction between parties. and-materials contract. property.
uses.

Source: Prof Andrew Zacharakis 40

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© Jump Associates (Used with Permission)
 Financials… get the economics right!

The Economic Logic used to deliver the Value

Proposition to the Customer at an Attractive
Price to them and Cost to the Business

Or
The Rationale of How a Business Creates,
Delivers and Captures Value

41

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 Using the Canvas
Business Model Canvas
Feasibility Analysis Loop

Product/Indust
Problem/Soluti Product/Mark ry & Product/Finan
on Fit et Fit Competitive cial Fit
Fit

Customer Development Process

Customer Customer Customer Company

Many Testable Hypothesis Discovery Validation Creation Building

Pivot

Search Execution
Focus: Validated Learning Focus: Execute & Scale
Experiments: Pivots Experiments: Operationalize

Source: Four Steps to the Epiphany

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 Iterating & Evaluating Your Business Model

Feasibility Analysis Loop

Problem/Solution Product/Market Product/Industry Product/Financial

Fit Fit & Competitive Fit Fit

Is this a problem worth solving?

Is it big enough, important enough?
Is the target customer willing to pay?
Is this a larger and/or growing market?
Can the market be reached economically?
Are there barriers to entry or exit?
Is rivalry fierce?
Are there large entrenched players?
Is there sufficient margin to be made?
What is the asset intensity required?
43

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 The Babson Business Model Canvas
Key Partners Key Resources Value Proposition Differentiation Leading Customer Segments
to Advantage

Key Metrics Channels

Cost Structure Revenue Structure

Adapted from The Business Model Canvas (http://www.businessmodelgeneration.com): by Angelo Santinelli . 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/

BABSON COLLEGE — ALL RIGHTS RESERVED

Final Thoughts
The importance of business models to
investors
 Trade-offs to Consider
Revenue Sources
• Number of cash streams
• Source of each (sales, service, royalty,
advertising)
• Size and Importance
• Timing

Cost Drivers • Fixed, Semi-Variable, Variable, Non-

recurring
• Size and Importance
• Scale effects

Investment Size • Cash: Accomplishment Ratio

• Total Cash Need
• Working Capital Requirements
Critical • What can go right?
Uncertainties • What can go wrong?
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 Importance
• Connections between
business model and the
revenue model Customer
Segment
• Know the metrics that
drive your proformas
• Relationship between Value Revenue
Proposition Generation
and the development of
CS, VP, and revenue in
key metrics and
differentiation
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Babson Build for Universidad de Guadalajara

Business Models
Dissecting, Understanding & Developing

Andrew C. Corbett
Babson Research Scholar
Chair, Entrepreneurship Division
Professor of Entrepreneurial Studies
Faculty Director, John E. & Alice L. Butler Venture Accelerator