Business models and risks Flashcards
When should an analyst expect a business model to employ premium pricing?
When significant differentiation is possible in the product category.
What is a platform business?
- It is based on network effects.
- It can be a non-technology business.
- Value creation for customers occurs externally.
- It can be difficult to attract users in the beginning.
What are the components of the customer’s targeting?
- Geography
- Segments
- Type of business (B2C or B2B)
What are the components of the firm offering?
- Product service
- Differentiation
- Customer needs
What are the components of the firm’s channel?
- Direct
- Intermediary
- Digital
What is a firm’s channel?
It refers to how the firm is selling its product/service and how it is being delivered to its customers.
What is a direct sales strategy?
It is to sell directly to the end customer and bypass the first 2 stages.
What is an intermediary strategy?
- The wholesaler and/or retailer might work on an agency basis and earn commissions rather than taking ownership of the goods.
- It requires ceding at least some control to the intermediary.
What is dropshipping?
It is a model that enables the online marketer to have goods delivered directly to the end customer without the intermediary taking them into inventory.
What is an omnichannel strategy?
It is when both digital and physical channels are used to complete a sale.
What are the pricing components?
- Premium, parity, discount
- Differentiation
- Pricing power
What is value-based pricing?
It is to set pricing based on the value received by the customer.
What is cost-based pricing?
It is to set pricing based on costs incurred.
What is price discrimination?
It occurs when firms charge different prices to different customers.
What are the most common pricing discrimination strategies? Describe them.
- Tiered pricing: charging different prices based on volume purchased.
- Dynamic pricing: charging different prices at different times.
- Auction/reverse auction models: prices are established through bidding.
What are the most common pricing strategies for multiple products? Describe them.
- Bundling: combines multiple products or services so that customers are incentivized or required to buy them together.
- Razors-and-blades pricing: combines a low price on a piece of equipment and a high margin on repeat-purchase consumables.
- Optional product pricing: when a customer buys additional services or product features either at the time of purchase or afterward.
What are the most common pricing strategies for rapid growth? Describe them.
- Penetration pricing: it is discount pricing used where firms willingly sacrifice margins to build scale and market share.
- Freemium pricing: it allows customers a certain level of usage or functionality at no charge.
- Hidden revenue business model: It provides services to users at no charge and generates revenues elsewhere.
What is the most common alternative of ownership?
- Recurring revenue/subscription pricing
- Fractionalization: selling an asset in smaller units or selling the use of an asset at specific times.
- Leasing
- Licensing
- Franchising
What is a firm’s value proposition?
It refers to the product or service attributes that lead customers to prefer a firm’s offering over that of its competitors.
What is a value chain?
It includes only the functions performed by a single firm.
What is a supply chain?
It refers to the entire sequence of processes involved in the creation of a product, both internal and external to a firm.
What are Porter’s five primary activities?
- Inbound logistics
- Operations
- Outbound logistics
- Marketing
- Sales and services
What are the four primary support activities?
- Procurement
- Human resources
- Technology development
- Firm infrastructure
What are the main E-commerce business models variation? Describe them.
- Affiliate marketing: generates commission revenues for sales generated on others’ websites.
- Marketplace businesses: create networks of buyers and sellers without taking ownership of the goods during the process.
- Aggregators: similar to marketplaces, but the aggregator re-markets products and services under its own brand.
What are network effects?
It refers to the increase in value of a network to its users as more users join.
What is crowdsourcing?
It enables users to contribute directly to a product, service, or online content.
What are the external factors?
- Economic conditions
- Demographic trends
- Sector demand
- Industry cost characteristics
- Political, legal, and regulatory environment
- Social and political trends
What is the macro risk?
It refers to the risk from political, economic, legal, and other factors that impact all businesses in an economy, a country, or a region.
What are the main macro risks?
- GDP slowdown
- Exchange rates
- Political instability
- Gaps in the legal or financial framework
What is business risk?
It refers to the risk that a firm’s operating results will differ from expectations, independent of how the business is financed.
What are the different business risks?
- Preventable risks: risks to be avoided.
- Strategic risks: to be taken to achieve business benefits.
- External risks: outside management control and to be mitigated.
What are the industry risks? Describe them
- Cyclicality: an important factor for discretionary goods, durable goods, and housing.
- Industry structure: lower concentration in the market is generally associated with a high degree of competitive intensity.
- Competitive intensity: it influences overall industry profitability.
- Competitive dynamic within the value chain: potential profitability pressures from the interaction of buyers, suppliers, current and potential competitors, and suppliers of substitute goods.
- Long-term growth and demand outlook: these are more a determinant of industry attractiveness than of risk.
- Other industry risks: regulatory and other potential external risks.
What are the components of the business risk?
- Industry risk
- Company-specific risk
What is the company-specific risk? Describe them
- Competitive risk: risk of a loss of market share or pricing power to competitors, typically due to a lack of competitive advantage.
- Product material risk: it is the risk that the market for a new product or service will fall short of expectations.
- Execution risk: the possibility that management will be unable to deliver the expected results.
- Capital investment risk: it is the potential for sub-optimal investment by the firm and is a greater concern for mature businesses that generate CF but do not have the natural reinvestment opportunities in their current businesses.
- ESG risk
- Operating leverage: sensitivity of a firm’s operating profit to a change in revenues.
When are the company-specific risks greater?
When the company is smaller.
What are the main sources of competitive advantages?
- Cost advantages
- Product or service differentiation
- Network effects
- Switching effects
What is financial risk?
It is the risk arising from the capital structure, in particular to the level of debt and other obligations that involve fixed contractual payments.
What are the 2 components of operating leverage?
- Contribution
- EBIT
Contribution/EBIT
What are the 2 components of financial leverage?
- EBIT
- EBT
EBIT/EBT
