Business Models –
Definition, Building
Blocks, Innovation
Remus Toma
[email protected]
@RemusToma
http://ro.linkedin.com/in/remustoma
Are they right?
!   “…today, business models are one of the most sloppy
used terms in business; they are often stretched to
mean everything and end up meaning
nothing” (Magretta, 2002)
!   “…a business model is like the old saying about teenage
sex: everyone talks about it all the time; everyone boasts
about how well he or she is doing it; everyone thinks
everyone else is doing it; almost no one really
is;” (TechCrunch, 2011)
* http://tcrn.ch/P9MWpT
@RemusToma
Apparently so…
A recent study (Zott et al.
2010) showed that out of 103
business model publications:
•  37% don’t define the
concept at all
•  44% define the model but
without overlaps
•  The rest…quote others
@RemusToma
Why should we know what a
Business Model is?
!   To know what the heck we’re talking about with
investors
!   To helps focus your start-up/company employees
!   To give you a framework to think about your business
!   To obtain a shared understanding
!   To obtain a shared language
!   To be able to innovate and create great Business
Models
@RemusToma
So, what is a Business Model?
!  
The business model is a diagram that escribes the logic behind how your
business functions.
OR
!  
“A business model describes the rationale of how an organization creates,
delivers, and captures value” (Ostervalder & Pigneur, 2009:14)
!  
So, the business model comprises of several elements: product/
service, distribution, customers, financial viability
Delivers Value
Company
(value
creator)
Customer
(value
receiver)
Captures
Value
@RemusToma
What are the components of a
Business Model?
!   9 building blocks (Osterwalder & Pigneur 2002):
Pillar
The Product
Business Model Block
Value Proposition
Customer Segment
The Customer
Distribution Channel
Customer Relationship
Key Resources
Infrastructure Management Key Activities
Key Partnerships
Financial Aspects
Revenue Streams
Cost Structure
@RemusToma
Building Netflix’s Business
Model
!   Netflix allows renting an unlimited number of movies,
for an unlimited period of time, choosing from a huge
variety of movies, in exchange for a monthly payment,
and deliver them through a convenient and fast mail
delivery.
@RemusToma
1. Customer Segment
!   Who are you creating value for? Who are the customers
that you wish to reach and serve? Who are your most
important customers?
!   Identify customer needs and desires and segment the
market
!   Most common market segmentation techniques of users
with common needs:
!   By geography
!   By demographics (age, sex, income, occupation, etc.)
!   By personality, lifestyle, social class, interests.
Netflix Segmentation:
!   By behavior – how they use the product, brand loyalty, etc.
Avid movie explorers !   Etc.
that prefer convenient
delivery
@RemusToma
2. Value proposition
!   The product/service that is useful for your customer
segments -> why customers love you
!   Answers the question: what value do I deliver? Which
problems or needs are we solving/satisfying?
!   Value is what the customer gets for what he gives2, but can
be influenced by:
!   Performance
!   Customization
!   Design
!   Brand/status
!   Price
!   Etc.
Netflix VP:
Providing highdiversity, unlimited
movie rentals through
post office
@RemusToma
3. Distribution Channel
!   How do you communicate and deliver the product/
service
!   Different options, different trade-offs
Channel Types
Sales force
Owned
Direct
Netflix Distribution:
The USPS
Web sales
Owned Store
Indirect
Partner
Partner Stores
Wholesaler
@RemusToma
4. Customer Relationship
!   Chose the relationship type, based on your customer
segment
!   Types of relationships:
!   Personal assistance
!   Dedicated personal assistance
!   Self-service
!   Automated services
!   Co-creation
Netflix customer
relationship:
Automated movie
recommendations based
on client reviews
@RemusToma
5. Key Resources
!   What resources do I need for my business to function?
!   Types of key resources:
!   Physical: buildings, machines, etc.
!   Intellectual: brands, patents, copyrights, customer
databases
!   Human
!   Financial
Netflix resources:
- Patented
recommendation system
- Efficient employees
@RemusToma
6. Key Activities
!   What key activities does our business require in order
to function?
!   E.g. production, design, finding solutions, etc.
Netflix activities:
-  Internet
recommendations
-  Inventory
management
through queue
analysis
@RemusToma
7. Key Partnerships
!   What suppliers and partners does my business need to
work?
!   Why should you do a partnership?
!   Obtain resources
!   Economies of scale
!   Reduce risk
Netflix partnerships:
-  Indie Producers
-  Mainstream
producers
-  USPS Distribution
@RemusToma
8. Revenue Streams
!  
How will your business make money?
!  
What kind of revenue systems can you use?
!  
!  
One time sales: Starcraft 2
Recurrent sales:
!  
!  
!  
!  
!  
!  
!  
Usage fee – sim card telecom operators, Datasift
Subscription fees: SocialBro
Renting: Rent a car
Licensing: Google Maps for iPhone L
Brokerage fees – AirBnB
Advertising: Google
Netflix revenues:
Monthly subscription
fees
How do you set the price? Three foundations:
!  
!  
!  
Costs – lowest price you can set
Competition – undifferentiated products [gas]
Value to customer –
!   Dynamic pricing - Wizzair
@RemusToma
9. Cost Structure
!   Types of costs:
!   Fixed costs: rent,
!   Variable costs: energy, fuel, groceries (restaurants)
!   Economies of scale: decrease with volume !   Economies of scope: diversity leads to lower costs
Netflix costs:
-  USPS delivery Costs
-  Customer acquisition
costs
@RemusToma
The 9 building blocks: The
Business Model Canvas
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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.
@RemusToma
Netflix’s Business Model Canvas
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Activities:
-  Internet recommendations
-  Inventory management
through queue analysis
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rentals through
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post office
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Revenue Streams?
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Revenues:
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@RemusToma
Customers:
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prefer convenient delivery
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Costs:
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-  Customer acquisition costs
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.
‪Business Model Canvas
Explained‬
!
http://www.youtube.com/watch?v=QoAOzMTLP5s
@RemusToma
How to create great business
models? The Process
• 
Before you start burning cash, make sure you got the right BM!
1. 
Start with the customer – your insight, idea, hidden need, etc.
2. 
Move from that and think of all the components of the business model
3. 
Sketch out your business model by using the canvas and see how everything
links together
4. 
Co-create with other people, brainstorm, look for alternatives and improve
your model
5. 
Your BM is just a set of hypotheses, TEST IT WITH CLIENTS!
6. 
Reiterate on their feedback until you are able to sell a minimum viable
product (ideally)
@RemusToma
Value Innovation – Cirque du
Soleil
!   Industry conditions:
!   Long term declining industry
!   Alternative entertainment options – video games
!   Increased pressure from animal activists
!   Entertainer supply was scarce
!   Cirque du Soleil Result?
!   Profits increased by 22x in 10 years
!   More profits than the main competitors
How did they do it? Certainly not technology…
@RemusToma
Value Innovation – Red
Ocean, Blue Ocean Strategy*
Red Ocean Strategy
Blue Ocean Strategy
Compete in existing market space
Create uncontested market space
Beat the competition
Make the competition irrelevant
Exploit the existing demand
Create and capture new demand
Make the value/cost trade-off
Break the value/cost trade-off
Align the whole system of company
activities with the strategic choice of
differentiation or low cost
Align the company’s system of
activities to choose differentiation
AND low cost
Conditions for a Blue Ocean Strategy:
•  Attract a new demand
•  Offer more value for the customer
•  Have a lower cost structure
*Kim & Mauborgne (2004)
@RemusToma
Value Innovation – Blue
Ocean Strategy cont.
Sounds awesome!!! But…how?!?
1.  Look at a product or service
2.  Identify the top most important features/attributes
(what the customer really values)
3.  Sketch out these attributes and their level of
importance (strategy canvas)
@RemusToma
Value Innovation – Blue
Ocean Strategy cont.2
10
My product
8
6
4
2
0
Attribute 1
Attribute 2
Attribute 3
Attribute 4
Attribute 5
And then….
@RemusToma
Value Innovation – Blue
Ocean Strategy cont. 3
Eliminate
Raise
Reduce
Create
@RemusToma
Netflix’s strategy canvas
@RemusToma
Web Business Models*
!  
The Freemium Model – Offer a minimum product and charge for
pro features
!
Linkedin, SlideShare, etc.
!  
The Affiliate Model – Direct traffic, leads or sales to another
website
!  
Subscription Model – pay a recurring fee to access the product
!  
Virtual Goods Model – selling virtual goods online in a game or
website
!  
Advertising Model – high traffic websites sell ads for their traffic
*http://bitly.com/A8kYr
@RemusToma
That’s it!
Q&A
Thank you!
@RemusToma
References
!  
Kim W.C. Mauborgne, R. 2004. Blue Ocean Strategy. Harvard Business
Review, 82: 76-84.
!
Magretta, J. 2002. Why Business Models Matter. Harvard Business Review,
80(5): 86-92
!
Zott, C., Amit, R., & Massa, L. 2011. The business model: Recent
developments and future research. Journal of Management, 37: 1019-1042.
!  
Osterwalder A, Pigneur Y. 2010 Business Model Generation: A Handbook for
Visionaries, Game Changers, and Challengers, Switzerland: OSF.
!  
Osterwalder, A. Pigneur, Y. 2002, “An e-Business Model Ontology for
Modeling e-Business,” Proceedings of the 15th Bled Electronic Commerce
Conference
Recommended future reading: Business Model Generation:
A Handbook for Visionaries, Game Changers, and
Challengers, Osterwalder A, Pigneur Y. 2010,
@RemusToma
http://businessmodelgeneration.com/book