Block II

2.1-Business models
The definition of the business model
Business model: definition
 A business model describes the basics of how an organization creates,
provides and captures value.

 The process of designing the business model is part of the business strategy.

 In theory and practice the concept of business model is used to describe in a

formal and/or informal manner all the fundamental aspects of a business,
namely targets, products, strategies, infrastructure, organizational
structures, commercial practices, operational processes and company’s
policies.
Business model: definition
 Essentially it helps to answer to a very simple yet important question:

HOW IS THE COMPANY GOING TO MAKE MONEY?

 Another definition:
 A business model is a strategic plan of how a company will make money. The
model describes the way a business will take its product, offer it to the
market, and drive sales. A business model determines what products make
sense for a company to sell, how it wants to promote its products, what type
of people it should try to cater to, and what revenue streams it may expect.
Business model: IKEA example
Example: IKEA
 Economical furniture for all your needs
 Volume of sales is a crucial variable: economies of scale
 High volume of sales => Low cost on furniture => high profits
 Location: cities with a population over 500,000.
 IKEA provides cheaper furniture than the standard furniture manufacturer in the
area
 IKEA is owned by a charitable non-profit organization: INGKA (The
Netherlands) –Why? To minimize taxes
 Reduced taxes
 impossible to make a hostile takeover
 obtain the privilege to perform as a non-profit organization
 intellectual property is held by another company
Source: https://www.feedough.com/why-is-ikea-so-cheap-ikea-business-model/
Business model: IKEA example
 Other variables:
 Low Shipping costs – flat pack system
 Hybrid materials – lower cost and weight than wood
 Lesser skilled carpenters – investment in R&D (automatized work)
 Focus on consumer needs (pivot point when they decided to adapt to each
market)
 Private franchising: 3% of all sales from the store
 Distribution channel: 1400 suppliers (in 52 countries) and more than 40
distribution centres in 16 countries
 Supply chain management: 60% of IKEA’s suppliers are from European
countries and the rest from China and other local markets => very low costs
(suppliers’ profit comes from volumes of production)

Source: https://www.feedough.com/why-is-ikea-so-cheap-ikea-business-model/
 Block II
2.2-Classic Business models
Long-lasting business models
What types of business models can we
develop?
Classic business models
 There are many (infinite?) types of business models. Some classic ones are:
 Retailers
 Franchises
 Direct Sales
 Affiliates
 Ads or sponsorships
 Aggregator
Classic business models
 Retailers:
 A retailer is the last entity along a supply chain. They often buy finished goods
from manufacturers or distributors and interface directly with customers.
 Example: Carrefour, Costco, small shops.
Classic business models
 Franchise:
 The franchise business model leverages existing business plans to expand and
reproduce a company at a different location. Often food, hardware, or fitness
companies, franchisers work with incoming franchisees to finance the business,
promote the new location, and oversee operations. In return, the franchisor
receives a percentage of earnings from the franchisee.
 Example: McDonald’s, Domino’s Pizza, SmartFit (Brazil)
Classic business models
 Direct Sales:
 The direct sales business model consists of selling a product directly to the
targeted customer, hence bypassing the “middleman”.
 Example: Intel, Online wine shops, …
Classic business models
 Affiliates:
 Affiliate business models are based on marketing and the broad reach of a specific
entity or person's platform. Companies pay an entity to promote a good, and that
entity often receives compensation in exchange for their promotion. That
compensation may be a fixed payment, a percentage of sales derived from their
promotion, or both.
 Example: Influencers (“Use my code”), blogs, …
Classic business models
 Ads or sponsorships:
 The advertising model works by providing a free product or service that people
want to consume. Later, it displays ads to those readers or viewers.
 Example: YouTube, sports clubs, …
Classic business models
 Aggregators:
 Aggregator business model should be followed by a company in which it is not just
a mediator but a firm with a brand for providing the goods/services from smaller
providers. This model allows a company to connect with different goods/service
providers and sell its goods/services under its brand.
 Example: Würth, packaging companies, …
 Block II
2.3-New Business models
New business models of the XXI century
New business models of the XXI century
 Business models are reinvented continuously. Some of the newest ones are:
 Subscription
 Freemium
 Bait and Hook
 SaaS
 On Demand
 Dropshipping
New business models
 Subscription:
 Subscription-based business models strive to attract clients in the hopes of luring
them into long-time, loyal patrons. This is done by offering a product that requires
ongoing payment, usually in return for a fixed duration of benefit.
 Example: Netflix, online courses, Dermavision.
New business models
 Freemium:
 It derives from 2 words free (free) and premium FREE + PREMIUM = FREEMIUM
 The product is offered in at least two forms or different versions.
 The first (free) allows open access to the public with a free version and limited
functionalities.
 The second (premium) allows access to functions or exclusive content unique to the
users who pay a subscription.
 Example: MailChimp, LinkedIn, WeTransfer, …

 https://www.youtube.com/watch?v=hCvQclgRizg
New business models
 Bait and Hook:
 In bait and hook model (or the razor and blade), the basic product (bait) is offered
cheaply or free while the complementary product or refill (hook) is sold expensively. We
cannot use the basic product without a corresponding product. It is easy to attract
customers with the “bait” product because it seems to them like they are getting a
bargain.
 Example: Gillette, Nespresso, PlayStation, …
New business models
 SaaS:
 SaaS or Software as a Service business model is a centrally-hosted software that is
hosted on a cloud infrastructure. Customers pay a subscription fee to utilize the
software.
 Example: Microsoft, Shopify, HubSpot, …
New business models
 On Demand:
 The on-demand business model is based on “Access is better than ownership rule”. The
products & services are easily accessible to the customer in less time.
 Example: Uber, Glovo, …
New business models
 Dropshipping:
 Dropshipping is an online business model based on an order fulfilment strategy where the
merchant sells a product under his own brand but doesn’t keep an inventory or handle
the shipping and fulfilment of the product. Rather, he purchases the product from the
third party as soon as a customer makes a purchase and makes them ship directly to the
customer.
 Example: Meowingtons (cat store), Mooshe Socks (original socks), …
Business model: Spotify example
Business model: Spotify example
Let’s summarize Spotify business model in 5 points:

1- Attract a Large Base of Users with a Free Service

Spotify’s free music streaming service gives users access to a catalog of millions
of songs. The free service has basic functionality and users have to listen to
messages from advertisers that partially subsidize the free service.

2- Convert Free Users to a Premium Value Proposition

Spotify has been extremely successful at converting free users to paid users. Its
premium service has additional features and it removes advertising. Spotify had
220 million subscribers in Q2 2023, a 17% increase year-on-year, who generate
90% of its total revenues.
Business model: Spotify example

Source: Statista
Business model: Spotify example
3- Manage Retention and Churn
The user’s lifetime value (LTV**)—how much Spotify can earn from a user over
time, on average— increases the longer the company can retain users. This is
called managing customer churn*. In the first half year of 2022, Spotify’s
premium subscriber churn rate fell to a record low of 4.8%.
*Customer churn is the percentage of customers that stopped using your company's
product or service during a certain time frame.
**Customer LTV: LTV = ARPU (average monthly recurring revenue per user) × Customer
Lifetime (in months) or Customer LTV = ARPU / User Churn

4- Balance Cost of Free and Premium

Over 85% of music streamed from Spotify belongs to four record labels: Sony,
Universal, Warner, and Merlin. In 2022, Spotify pays €7.5 billion in royalties for
premium users and €1.5 billion for free users, which equates to 76% of total
revenue.
Business model: Spotify example
5- Finance It All with Your Revenue Stream from Premium
The particularity of the freemium model is that you need to be able to cover the
costs of free and paying users. This is a critical point for freemium models.

Simply shown on a Canvas framework:

Business model: Spotify example
But… losses!

Source: Statista

Why???
Business model: Spotify example
Because… User numbers are the company's priority… and it’s working!
Business model: Spotify example
Target: To be the biggest music streaming platform in the world
User Growth requires a big financial effort (marketing costs increase y.o.y.).
When they get rid of competitors, they expect to get:

 Better deals with labels/artists

 Barriers of entry for new players
 Expanding customer LTV
 Reducing customer churn
 $ Profits!

Counterintuitively, some companies’ main target is NOT to maximize profits (at

least not during some periods, like Spotify nowadays).
Who defines the business model?
Who defines the business model?
 The business model is defined by the top management of the company
 it is continuously adapted to allow the company to compete in the global market
 Why? Technological innovation and internationalization - Casadesus-Masanell&
Ricart(2009)

 The definition of the business model involves a strategic planning process:

 Development and implementation of action plans (choices) to achieve the objectives
established (consequences).

 Stages of the strategic planning:

 Analysis of the internal and external environment (SWOT, Canvas)
 Definition of the strategy
 Strategy implementation and strategic control
How to define the business model?
How to define the business model?
Different models or frameworks. Some of the most popular are:
 Business Model Canvas
It offers a visual chart with elements describing a firm's or product's value proposition,
infrastructure, customers, and finances, assisting businesses to align their activities by
illustrating potential trade-offs.
How to define the business model?
Different models or frameworks. Some of the most popular are:
 OGSM
Objectives, goals, strategies and measures (OGSM) is a goal setting and action plan
framework used in strategic planning.
We aim to show our business model in a one-sheet paper.
OGSM
Example: “EcoBag” company, eco-friendly bags manufacturer.

 Objectives:
Broad, qualitative statements about what the Organization wants to achieve. They set
direction and purpose. What is our vision and mission?
“EcoBag”: To become the leading provider of eco-friendly bags in Spain.

 Goals:
Specific, quantitative targets that need to be achieved to accomplish the objective.
They are measurable and time-bound.
“EcoBag”: To increase market share by 25% and revenue by 40% in the next 2 years.
OGSM
Example: “EcoBag” company, eco-friendly bags manufacturer.

 Strategies:
They outline how the goals will be reached (methods).
“EcoBag”: 1- Expand product line to include range of sizes and designs.
2- Enhance online presence and marketing impact.
3- To partner with environmental orgs for co-branding.

 Measures:
The metrics used to track the progress of the strategies. Are the strategies working
correctly to accomplish our goals?
“EcoBag”: 1- Track monthly sales and market share.
2- Monitor website traffic and social media engagement.
3- Evaluate partnership impacts through surveys and sales data.
OGSM
Example: “EcoBag” company, eco-friendly bags manufacturer.

Dalle-3 AI OGSM business

model visual generation.
Many mistakes.
But beautiful creation.
How is this going to evolve?
How to define the business model?

 Lean Startup Methodology

Lean startup is a methodology for developing businesses and products that aims to
shorten product development cycles and rapidly discover if a proposed business
model is viable

Central to the lean startup methodology is the assumption that when startup
companies invest their time into iteratively building products or services to meet
the needs of early customers, the company can reduce market risks and sidestep
the need for large amounts of initial project funding and expensive product
launches and financial failures.
Lean Startup Methodology
Principles:
 Minimum Viable Product (MVP): It is the version of a new product which allows a
team to collect the maximum amount of validated learning about customers with
the least effort.

 A split or an A/B testis an experiment in which "different versions of a product are

offered to customers at the same time." The goal of a split test is to observe
differences in behavior between the two groups and to measure the impact of each
version on an actionable metric.

 A pivot is a "structured course correction designed to test a new fundamental

hypothesis about the product, strategy, and engine of growth.“.
Example: Groupon starting as online activism platform.
Lean Startup Methodology
Principles:
 Build-Measure-Learn. This loop emphasizes speed as a critical ingredient to
customer development.

Video: https://www.youtube.com/watch?v=RSaIOCHbuYw
Real case: Dermavision biotech startup
 Deck presentation
 Discussion about business model proposal
 Investment interest?

Discussed during the lecture

References
 Casadesus-Masanell, R. & Ricart, J.E. (2009). Company strategy:
businessmodelreconfiguration for innovation and internationalization, IESE-
Business School, Univ. of Navarra, WP-807, p. 1-29.
 Casadesus-Masanell, R., & Ricart, J. (2010). From Strategy to Business Models and
onto Tactics. Long Range Planning, 43:199-215. [online]
http://www.businessmodelcommunity.com/fs/root/8oex1-casadesus_et_ricart.pdf
 https://dodropshipping.com/dropshipping-store-examples/
 https://alcorfund.com/insight/18-business-model-example-explained/
 https://www.investopedia.com/terms/b/businessmodel.asp
 https://en.wikipedia.org/wiki/Business_model#Examples
 https://www.businessofapps.com/data/spotify-statistics/
 https://investors.spotify.com/financials/default.aspx
 https://newsroom.spotify.com/2023-10-24/spotify-reports-third-quarter-2023-
earnings/