Copyright © 2001 by Marketspace LLC Chapter 3 Business Models.

Copyright © 2001 by Marketspace LLC

Chapter 3 Business Models

Last Updated: 09/12/01Copyright 2001 by Marketspace LLC

Business Models — Today’s Objective

To develop an understanding of business models for the networked economy

Where will the Where will the business business compete?compete?

Where will the Where will the business business compete?compete?

How will the business win?

How will the business win?

Chapter 2

Chapter 3


Exhibit 3–1: Components of a Business Model

Value ClusterValue Cluster

Marketspace OfferingMarketspace Offering

Resource SystemResource System

Financial ModelFinancial Model

Developing a business model in the networked economy requires four key choices on the part of the senior management:

• Specify the value proposition or the value cluster for the business

• Articulate the online product, service and information offer

• Define how the company needs to align its resources to deliver the value proposition

• Define and select the most appropriate revenue model to pursue


Exhibit 3–2: Shattering the Myth That Consumers Care Only About Prices Online

19

22

23

24

24

45

49

49

58

65

0 10 20 30 40 50 60 70

Product Price

Product Selection

Web Site Navigation & Locks

Product Information

Ease of Ordering

Privacy Policies

Product Content

Product Shipping & Handling

On-time Delivery

Customer Support

Percentage of Customers Who Care About Attribute

Att

rib

ute

Source: JP Morgan Report: etailing and the five Cs


Exhibit 3–3: Value Proposition/Cluster





The first step in the articulation of the business model is clearly specifying the value proposition or the value cluster for the business:

Defining the value proposition or the value cluster requires managers to answer the following questions:

• Which target segments should the company focus on?

• What is the combination of customer benefits that is offered?

• What makes the firm and its partners better positioned to deliver the offering than anybody else?


Exhibit 3–4: Value Proposition/Cluster

Target Segments

Target Segments

The definition of the value proposition is the result of a combination of choices about the customers, the benefits offered and the unique capabilities of the firm:

“The special occasion segment”

Key Benefits Offered

Key Benefits Offered

Unique Capabilities

Unique Capabilities

Value Proposition

Value Proposition+ +

• Online experience• Unique, broad product line of complementary gifts

PC Flowers & Gift

PC Flowers & Gift

• Fresh flowers• Complementary gifts• Low prices

“PC Flowers & Gift serves the special occasion segment by providing fresh flowers and unique complementary gifts”

FTD.comFTD.com“Mid- to high-end market”

• Strong brand name• Market Communication• Supplier network

• Easy delivery of flowers

“FTD.com provides the mid- to high-end market with the easiest way to send flowers thanks to its extended network of suppliers”


Exhibit 3–5: Marketspace Offering





The next step is to articulate the online product, service and information offering:

Defining the Marketspace offering requires managers to complete the following sequential tasks:

• Identify the scope of the offering

• Identify the customer decision process

• Map the offering to the consumer decision process


Exhibit 3–6: Scope of the Offering

The scope of the offering refers to the number of categories of products and services offered on the site:

Category-Specific DominanceFocus on one product category

• Secondspin.com (used CDs)

• PremiumOrchids.com (orchids)

• Peapod (online grocery)

Continuum of Scope

Cross-Category DominanceFocus on a large number of categories

• Dealtime (electronics and other goods)

• 1-800-Flowers (flowers)

• Streamline* (online grocery, dry cleaning service, etc.)

* Streamline closed down in 2000


Exhibit 3–7: Metamarkets

The term ‘metamarkets’ refers to sites that group products and services that are closely related in the mind of customers:

BabyCenter.com offers a good example of a “goal-derived” metamarket. The site’s products and information focus on one goal: raising a healthy child.

• Shopping for baby and maternity products

• Support community for parents

• User personalization

• Reference information

• Support and help from experts


Exhibit 3–8: Customer Decision Process

Flowers Example

DisposalDisposal

LoyaltyLoyalty

SatisfactionSatisfaction

Purchase DecisionPurchase Decision

Evaluation of AlternativesEvaluation of Alternatives

Information SearchInformation Search

Problem RecognitionProblem Recognition

Prepurchase

Purchase

Postpurchase

Need recognition, potentially triggered by a holiday, anniversary or everyday events

Search for ideas and offerings, including:– Available online and offline stores– Gift ideas and recommendations– Advice on selection style and match

Evaluation of alternatives along a number of dimensions, such as price, appeal, availability, etc.

Purchase decision Message selection (medium and content)

Post-sales support– Order tracking– Customer service

Education on flowers and decoration Post-sale perks

The second step in the construction of the online offering is the articulation of the customer decision process for the various product categories:


Exhibit 3–9: Mapping the Offering to the Decision Process

The last step in the construction of the online offering is mapping the products and services onto the customer decision process:

Customer Decision Process

Need Recognition

Search for Ideas and Offerings

Purchase

Decision

Post-Sale Support and

Perks

Evaluation of Alternatives

What occasions trigger the need for my product? What tactics can be used to stimulate demand?

What information would the consumer need to make a selection?

What are the key evaluation criteria that the consumer will use to evaluate my product/service? What information should the website offer to make the consumer comfortable with his or her choice?

What functionality should the site present to communicate privacy, trust and security?

What post-sale services can the website offer to create loyalty?


Flower / Gift Decision Process

Need Recognition


Purchase Decision

Message Selection

Post-Sale Support and Perks

Education on Flowers and Decoration

Exhibit 3–10: Egg Diagram for 1-800-Flowers.com

Gift reminder service Holiday specials Everyday celebrations

suggestions Special occasion suggestions

Gift guru Favorite gifts Gift frequency Gift impossible Gift baskets Corporate gift services

Ideas and Information

Post-Sale Support

Product price Product picture Product description Delivery information Delivery availability

Gizmo fully-animated greeting cards

Physical cards in gifts

Order receipt e-mail eQ&A online customer

service FAQ Customer service

inquiry form

Perks Miles earned with

flower purchases Free gifts Discounts at AOL &

BN.com with flower purchases

Member specials

“Care and handling” “Do it yourself” Special events and

educational workshops held at stores

Floral ideas Garden ideas Home ideas Gift ideas Gourmet ideas Store locator Recommendations by budget Bestsellers


Gift Recommendations

Shopping basket E-commerce transaction Special shopping features

– Delivery outside US– 1-800-lasfloras.com

Product Offering


Exhibit 3–11: Resource System





The third step is to define the resource system and how the company must align it to deliver the benefits in the value proposition:

A series of activities is required to construct a resource system:

1. Identify core benefits in the value cluster.

2. Identify capabilities that relate to each benefit.

3. Link resources to each capability.

4. Identify to what degree the firm can deliver each capability.

5. Identify partners who can complete capabilities.


Exhibit 3–12: Step No. 1 — Identify Core Benefits

Broad Assortment

of Gifts

Broad Assortment

of Gifts

Customer Service

Customer Service

Widespread, Easy

Access

Widespread, Easy

Access

High Quality of Flowers


The core benefits must be identified in the construction of the value cluster:

1-800-Flowers.com serves the “mid- to high-end market” with a broad gift assortment, fresh flowers, reasonable prices and easy access because of its strong brand name, product and media partnerships and bricks-and-mortar network of franchises.


Exhibit 3–13: Step No. 2 — Link Capabilities to Benefits

Broad Assortment

of Gifts

Broad Assortment

of Gifts

Customer Service

Customer Service

Widespread, Easy

Access

Widespread, Easy

Access



Managers need to identify which capabilities are required to deliver each benefit, regardless (at this point) of the ability of the company to access or develop that capability:

For 1-800-Flowers.com, the benefit “widespread, easy access” is linked to four capabilities: strong brand name, wide reach to customers, multiple points of contacts and a popular website.

Wide Reach to Customers


Multiple Contact Points


Popular WebsitePopular Website

Strong Brand Name

Strong Brand Name= Capabilities

= Core benefits


Exhibit 3–14: Step No. 3 — Link Resources to Capability

Broad Assortment

of Gifts

Broad Assortment

of Gifts

Customer Service

Customer Service

Widespread, Easy

Access

Widespread, Easy

Access



After the capabilities are identified, the firm should determined the resources necessary to deliver each capability:






Strong Brand Name

Strong Brand Name

TelephoneTelephone

OnlineOnline

Franchise Stores

Franchise Stores

CatalogCatalog

3,000 Affiliates3,000 Affiliates

= Activities & assets

= Capabilities

= Core benefits


Exhibit 3–15: Steps No. 4 and 5 — Ability to Deliver Capabilities

Broad Assortment

of Gifts

Broad Assortment

of Gifts

Customer Service

Customer Service

Widespread, Easy

Access

Widespread, Easy

Access



The next steps assess whether the company has all the necessary capabilities in-house or if it has to look outside and select the most appropriate partners to complete the missing capabilities.

1-800-Flowers.com would not be able to deliver the capability “wide reach to customers” alone, and therefore would need to create partnerships. Companies like MSN, AOL and Snap are potential partners.






Strong Brand Name

Strong Brand Name= Activities & assets

= Capabilities

= Core benefitsAOLAOL

MSNMSN

SnapSnap

StarmediaStarmedia

= Partners


Exhibit 3–16: 1-800-flowers.com Resource System

Online Gift Center

Online Gift Center

Integrated Partner Offers


Broad Assortment

of Gifts

Broad Assortment

of Gifts

Customer Service

Customer Service

AOLAOLMSNMSN

SnapSnap



Widespread, Easy

Access

Widespread, Easy

Access






TechnologyTechnologyStrong Brand

NameStrong Brand

Name

Strong Distribution

Network

Strong Distribution

Network

TelephoneTelephone

OnlineOnline

Franchise

Stores

Franchise

Stores

CatalogCatalog

StarmediaStarmedia

Gift Recommend-

ations

Gift Recommend-

ations

Address BookAddress Book

Gift ReminderGift Reminder

Garden WorksGarden Works

Plow & HearthPlow & Hearth

Great FoodsGreat Foods

= Activities & assets

= Capabilities

= Core Benefits

Customer Service Centers


Integrated online offline

Systems

Integrated online offline

Systems


Personalization Capabilities


Rich ContentRich Content

Third-Party Contractors


StoresStores

BloomNet Network

BloomNet Network

Fulfillment Center

Fulfillment Center


Supporting Slide 3–C: 1-800-Flowers.com Resource SystemOnline and Offline Integration

Online Gift Center

Online Gift Center



Broad Assortment

of Gifts

Broad Assortment

of Gifts

Customer Service

Customer Service

AOLAOLMSNMSN

SnapSnap



Widespread, Easy

Access

Widespread, Easy

Access






TechnologyTechnologyStrong Brand

NameStrong Brand

Name

Strong Distribution

Network

Strong Distribution

Network

TelephoneTelephone

OnlineOnline

Franchise

Stores

Franchise

Stores

CatalogCatalog

StarmediaStarmedia

Gift Recommend-

ations

Gift Recommend-

ations

Address BookAddress Book

Gift ReminderGift Reminder

Garden WorksGarden Works

Plow & HearthPlow & Hearth

Great FoodsGreat Foods

= Online Activities & Assets






Rich ContentRich Content



StoresStores

BloomNet Network

BloomNet Network

Fulfillment Center

Fulfillment Center

= Offline Activities & Assets

Integrated Online and

Offline


Exhibit 3–17: 1-800-Flowers.com Egg DiagramOnline and Offline Integration

Offline Product Offering

Special events and educational workshops held at stores

Prompts on toll-free number recording Suggestions from CSRs* in-store and via phone

Prompts on toll-free number recording

Suggestions from CSRs* in-store and via phone

Brochure

Suggestions from CSRs in stores via phone

Brochure

Information from CSRs in-store and via phone

Brochure

Purchase in-store Purchase via phone

In-store specials Specials offered

via phone

*CSR = Customer service representative

Flower / Gift Decision Process

Need Recognition


Purchase Decision

Message Selection

Post-Sale Support and Perks

Education on Flowers and Decoration

Gift reminder service Holiday specials Everyday celebrations suggestions Special occasion suggestions

Gift guru Favorite gifts Gift frequency Gift impossible Gift baskets Corporate gift services

Ideas and Information

Post-Sale Support

Product price Product picture Product description Delivery information Delivery availability

Gizmo fully-animated greeting cards

Physical cards in gifts

Order receipt e-mail eQ&A online customer

service FAQ Customer service inquiry

form

Perks

Miles earned with flower purchases

Free gifts Discounts at AOL &

BN.com with flower purchases

Member specials

“Care and handling” “Do it yourself”

Floral ideas Garden ideas Home ideas Gift ideas Gourmet ideas Store locator Recommendations by budget Bestsellers


Gift Recommendations

Shopping basket E-commerce transaction Special shopping features

– Delivery outside US– 1-800-lasfloras.com

Online Product Offering

In-store customer service

Customer service on toll-free number

Select card in-store Select card via phone


Supporting Slide 3–D: 1-800-flowers.com Partnerships

American Airlines Advantage, Delta Airlines SkyMiles, United Airlines Mileage Plus

– Earn frequent-flyer miles with 1-800-flowers.com purchases

MCI WorldCom

– Receive 1-800-flowers.com gift certificates with long distance sign-up

– Receive 10 percent off every 1-800-flowers.com purchase with MCI WorldCom membership

America Online

– First agreement signed in 1994

– Exclusive marketer of fresh-cut flowers across key AOL brands until 2003

– One-year exclusive agreement to market gardening products commenced November 1999

Microsoft Networks

– Premier floral partner and anchor in the MSN home and garden department

– Products, advertising and links featured on MSN shopping channel

Snap.com

– One of the 45 premier merchants in Snap shopping service (online e-superstore)

– Anchor tenant in Snap.com flower shop

– To be spotlighted in select Snap.com on-air promotions, scheduled to run on the NBC Television Network during the Valentine’s Day and Mother’s Day periods

Source: 1-800-flowers.com website, WR Hambrecht & Co., TheStandard.com. Hoover’s Online


Supporting Slide 3–D: 1-800-flowers.com Partnerships(Cont.)

Source: 1-800-flowers.com website, WR Hambrecht & Co., TheStandard.com. Hoover’s Online

Excite@Home

– Markets flowers and other gifts through Excite.com and webcrawler.com web sites

– Products, advertisments and links featured in the Excite Shopping Channel

– Entered second year of marketing relationship in October 1999

Yahoo Inc.

– Will run banner advertisements throughout the Yahoo Network, with additional presence in shopping area

StarMedia Network

– Developing Spanish and Portuguese language versions of 1-800-flowers.com website

People PC

– Signed one-year agreement to become key floral and gift-provider for PeoplePC as of October 1999

Zapa.com

– Offers selection of online greeting cards on 1-800-flowers.com website

– Greeting cards never deleted by Zapa.com

– Users will be able to personalize greetings with their own photos, clip art or other multimedia creations

Sears, Roebuck and Co.

– Licensing relationship which enables Sears customers to use their store charge cards when shopping with 1-800-flowers.com


Chapter 3:Business Models

Components of a business model

Defining the value proposition

Articulating the Marketspace offering

Aligning the resource system

Selecting the financial model

Best taxonomies for the networked economy


Exhibit 3–19: Type of Financial Models

A variety of financial models can be used to assess the value of the business model that follows from the resource system. Three examples are:

Revenues Models

Revenues Models

Shareholder Value ModelsShareholder Value Models

Growth Models

Growth Models

• Identify the flow of cash into the organization

• Assess how the company intends to generate cash flow or shareholder value

• Assess how the company will be able to drive revenue growth

Copyright © 2001 by Marketspace LLC Chapter 3 Business Models.

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