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AFM 241 Midterm > Week 4 > Flashcards

Week 4 Flashcards

1
Q

The presence of network effects indicates a ______

A

The presence of network effects indicates a platform

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2
Q

What platform comes from this product/service business:

Builds a solution that addresses a problem experienced by one or more target customer segments

A

Product/Service Business: Builds a solution that addresses a problem experienced by one or more target customer segments

Platform Business: Builds a “network” defined as a common user base that can communicate and share with one another

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3
Q

What platform comes from this product/service business:

Most users of the product/service do NOT care that other users also use that product or service - connecting or sharing is NOT a reason they purchase

A

Product/Service Business: Most users of the product/service do NOT care that other users also use that product or service - connecting or sharing is NOT a reason they purchase

Platform Business: Among the most important reasons a user selects one product or service over another is the ability to communicate and share with other users

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4
Q

What platform comes from this product/service business:

Does not benefit from network effects and may eventually experience diseconomies of scale from growth

A

Product/Service Business: Does not benefit from network effects and may eventually experience diseconomies of scale from growth

Platform Business: Leverages “network effects” since there is more value to users if there are more users —> more users = more value

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5
Q

What is a result of platform effects

A

Platform effects can build massive user bases

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6
Q

Platform

A

Platform - products and services that allow for the development and integration of software products and other complementary goods, effectively creating an ECOSYSTEM of value-added offerings

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7
Q

What happens when network effects are present

A

When network effects are present: the value of a product/service increases as the number of users grows. The value to users derived form network effects, which can lead to the creation of massive user bases

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8
Q

What 3 sources does network effects come from

A

The 3 sources of value for network effects come from are:
1) exchange
2) staying power
3) complementary benefits

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9
Q

Network

A

Network becomes more valuable because its users can potentially communicate and share with more people

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10
Q

How is exchange a source of value for network effects

A

Every product/service is subject to network effects fosters some kind of exchange between users

For firms leveraging technology, anything you can represent in digital storage can be exchanged (ex., messaging, music)

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11
Q

how is staying power a source of value for network effects

A

Networks with greater number of users suggest a stronger staying power - long term viability of a product/service

Since most users dont want to buy a product/service that is likely to go away, staying power is directly related to the users switching cost

Think: switching costs and total cost of ownership

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12
Q

Switching costs

A

Switching costs - incurred when moving from one product to another
- prevents users from migrating to rival product/service
- strengthens the value of network effects as a strategic resource

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13
Q

total cost of ownership

A

Total cost of ownership (TCO) - economic measure of full cost of owning a product to the customer, including purchase price, maintenance, and support

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14
Q

how are complementary benefits a third source of value for network effects

A

Allowing other firms to contribute to a platform can be a brilliant strategy because those firms will spend their time and money to offer complementary benefits to users to enhance the platform offerings

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15
Q

complementary benefits

A

Complementary benefits - products/services that add additional value to the primary product/service that makes up a network

ex. value of choosing Apple products/services over a rival are enhanced by each complementary add on of a iOS product

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16
Q

some of the most valuable firms by market capitalization have benefitted from (1) _____ and (2) ______

A

some of the most valuable firms by market capitalization have benefitted from (1) network effects and (2) are platform firms

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17
Q

customer acquisition cost (CAC)

A

Customer acquisition cost - measure how much an organization spends to acquire new customers

usually = marketing expense / # cust. acquired

18
Q

platforms create two types of markets

A

platforms create 2 types of markets:
1) ONE SIDED MARKET
2) TWO SIDED MARKET

19
Q

one sided market

A

One sided market - network that derives most of its value from a single category of users

ex. messaging platform (users are all on 1 category side)

how the network increases users -> SAME SIDE EXCHANGE BENEFITS
- Benefits derived by interaction among members of the single category

ex. users are attracted to the messaging service when more friends use it

20
Q

two sided market

A

Two sided market - network comprised of two distinct categories of participants. both categories or sides need to deliver value to the other side

ex. video game platform w. gamers (one side) and developers (one side)

how the network increases users -> CROSS-SIDE EXCHANGE BENEFITS
- An increase in the number of users on one side attracts more users on the other side
e.g., more gamers using the platform attracts more developers AND more developers games attracts more games
ex. Google search function

21
Q

what do sources do to network effects

A

sources strengthen network effects. the sources of value derived form network effects - exchange, staying power, and complementary benefits - often work together to strengthen the network effects

22
Q

How does competition differ with network effects

A
  • network makrets experience early, fierce competition caused by positive-feedback loop inherent in network effects (ex. big networks become even bigger)
  • firms are aggressive in the early stages - once a leader becomes clear, new adopters begin to favour the leading product over rivals

Markets are also often winner takes all or winner takes the exhibiting monopolistic tendencies where one firm dominates all rivals
- strong network effects = one major player
- one player can charge customers more and enjoy substantial bargaining power over partners

23
Q

What are the four types of markets

A

four types of markets
1) monopoly
2) oligopoly
3) monopolistic competition
4) pure competition

24
Q

monopoly

A

Monopoly - many buyers and one dominant seller, one firm controls the market

25
Q

oligopoly

A

Oligopoly - market is dominated by a small number of powerful sellers. A handful of firms control the market

26
Q

monopolistic competition

A

Monopolistic competition - many firms selling differentiated products at different prices

27
Q

pure competition

A

pure competition- many firms selling commodities for the same prices

28
Q

implications of differences in technology

A

Implications of differences in technology - the best product/service does not always win due to the network effects

ex. play station (more users) dominated Xbox (superior machine)

29
Q

Technological leapfrogging

A

Technological leapfrogging - competing by offering a new technology that is superior to existing offerings that the value overcomes the total resistance that older technologies might enjoy via exchange, switching cost, and complementary benefits

30
Q

Are monopolistic tendencies good for innovation

A
  • while network effects limit competition against the dominant standard. innovation within the standard may thrive. ex. investment in Windows software b/c windows is most commonly used
  • without dominant standard (or two) the investment required to successfully launch an innovation may not provide a reasonable return. ex. writing a mobile game in the early phone market was difficult with so many different camera and hardware’s available
31
Q

Freemium

A

Freemium - a product with a free version - sometimes with limited features or that stops a period of time to allow customers to try a product and hopefully entice them into making a product or purchase or subscription decision
- allows appeal to different users
- Freemium = free + premium

32
Q

why does freemium work?

A

Freemium works because:
- product prices are affected by marginal cost
- takes advantage of the psychology of free
- most internet/service products are an experience good

33
Q

optimal pricing

A

optimal pricing - low introductory price which is then increased when the customer realizes the value of the product

34
Q

business model in the sharing economy

A

business model in the sharing economy:
collaborative markets are categorized by 2 attributes

1) businesses use technology to allow diverse product and service providers to connect with consumers, offering benefits not matched by traditional markets
- far great reach
- efficiency

2) the business enables private individuals to go into business for themselves on either a full-time basis or as side gigs to a full-time job (ex. be citizen suppliers)

35
Q

how does the sharing economy enable a generation of citizen suppliers

A

the sharing economy enable a generation of citizen suppliers by:
- product owners become suppliers (ex. Rooms - Airbnb)
- New class of micro-entrepreneurs supplying personal services (car rides: uber, lyft)

36
Q

collaborative consumption

A

collaborative consumption - shared use of a good/service by a group
- individual takes possession of an item for a period of time and then returns it for use by others
- consumers collaborate as financiers pooling capital to:
back projects (GoFundMe, Kickstarter)
provide loans (LendingClub, Kiva)
- buyers & sellers collaborate in internet-enabled markets (ex. eBay)

37
Q

how does the sharing economy fuel collaborative consumption

A

the sharing economy fuel collaborative consumption
- many firms evolved during worldwide economic recession (stagnant wages boosted low-cost alternatives, new class looking for services environmental benefit by fostering reuse)
- economic pressures with trend for faster, cheaper, technology created a new opportunity for new types of businesses

38
Q

what are sources of advantage in the sharing economy

A

sources of advantage in the sharing economy
- search and discover
- scheduling of services
- payment processing
- reputation management

technology allows for peer-to-peer supply without the need for inventory (ex. Airbnb does not own hotel rooms)

early players in the market gain scale, brand, and financial resources

39
Q

Social proof

A

The rise of mobile and social media supported growth:

Social proof - positive influence created when someone finds that others are doing something

40
Q

what is a concern about the sharing economy

A

a major concern is the uncertainty around the ability of the sharing economy firms to consider their workers as independent contractors, not employees - gained attention of gov. agencies

AFM 241 Midterm (11 decks)

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