Business Model
Definition
The underlying logic of a company: how it creates and captures value?
-
Two fundamental choices
- Value Proposition — low cost/price vs. product/service differentiation
- Target Market (scope) — board (mass market) vs. narrow/niche (focused)
-
Fit vs. Trade-offs
Examples
- Razor and Blades: low-margin item, high markup replacements
- Hotel California: a must-have product that traps customers into buying unrelated high-profit items
- Cheap Chic: Stylish but inexpensive merchandise. Typically allows for high margins with low price points but expensive feel.
- Bricks and Clicks: Online ordering, in-store pickup
- Franchise: Sell the right to use business model in exchange for percentage of revenue.
- Loss Leader: Velocity items offered at low margin in anticipation of additional sales at higher margin. (e.g. Gas stations)
- Subscription: Recurring revenue. Creating a significant asset and renting a piece of it.
- Freemium: Product offered for free. Typically 8% of users upgrade to become paying customers.
- Nickel and Dime: Price the most cost-sensitive item as low as possible and then charge for every little extra. (e.g. Airlines)