Entrepreneur training 3: Positioning & Business Models

Lecture

Today's class is about Positioning & Business Models, Customer Value Proposition.

We talked different type business models, I found a very nice cheat sheet of common business models. 

What is business model? Summation of core business decisions & trade-offs employed by a company to earn a profit. In a simple word, a business model is the box that you put into $1, and it outputs more than $1 that we can have a profit. 

We then discussed some important concepts:

• Gross profit
• Net profit
• Customer Acquisition cost
• Revenue per customer
• Lifetime Customer Value (LTV)
• Churn (2% churn rate is typical for phone companies)

Also, the teacher showed us how Walmart, Dell, Grateful Dead, 7-11, Dropbox, Airbnb, ebay, HP printers, google, skin vision, freeconference.com and so on to change the existing business model and become success. All these examples really strike me, by changing the business model, sometimes you can reshape the whole market. 

Business model is really important, by doing things differently with existing resources, you can achieve success as well. 

To success, technology is not the only thing. Change business model, channel all can make a difference. 

Case discussion

This week's case study, we discussed how to enter into a crowd, mature market - Virgin Mobile USA: Pricing for the Very First Time. This is very nice case that showed us the process how to evaluate. 

We worked through an example, which I will try to summaries here. First, let's think as a phone company, what cost we may have. 

1. Advertisement $75 - $105
2. Sales person $100
3. Subsidy for phones $150
4. Credit check $15 - $20
5. Stores $20
6. Infrastructure very high
7. Bill - printing/mail $2
8. Hotline - $4
9. Collection - $5

What they decide to do is aiming for the Youth segment, which are the ones with age 15 - 29. This is unmet need, since these people are treat as non-profitable group before by main carriers, since they don't have high buying power, they don't have nice credit history to sign a contract, they have very high churn rate. 

How Virgin mobile decide to go into this market?

1. Since aiming the youth group, they don't need Ads in CBS, CNN, instead in comics, and the ones youth likes, these will be much cheaper, therefore, they can reduce the Ads to $60
2. For sales, they decide to put the product into cool packages, and sell it as the toothpaste that hang in the store, that don't need sales person
3. Subsidy for phones, they found a company from Japan with new phones ( Kyocera) instead of big names Nokia, Moto, which saves money. They can also advertise, new, cool phones. 
4. For the youth, they choose to give them pre-paid option, which you don't need contract and credit check, removed all the fees
5. Instead of telephone stores, they decided to display the products in bestbuy, target, music stores that the youth usually go, and this also saves a lot of money
6. Since the youth have totally different calling behavior, they are more active from 5 pm to 8 am instead of business men 8 am to 5 pm. Therefore, they decided to rent Sprint's network, and collaborate with them to avoid build and maintenance fee
7. They choose online form of bills to get rid of cost for printing/mailing. Also, this will protect the privacy of the youth from their parents seeing their bills. 
8. Add FAQ online, this removes most of the hotlines. 
9. The pre-paid approach also get rid of the collection fees. 

They still have risks, this is hwo they reduce it:

1. The youth has very high churn rate. They actually providing more content for the youth, such as MTV, Music hit list, etc, these unique features are the youth pay attention most
2. How do they keep the channel partners. Target, Bestbuy may not provide the stores for them. Make them shareholders. 
3. Sprint may not rent the infrastructures. Make them shareholders
4. Kyocera may sell to others. Sign exclusive contract. 

The results, they achieved their goal to attract the youth and surprising old age groups (they like the idea of pre-paid phones). They went public, and sell to Sprints ~$500 million for the rest of the 28% share they have at last. 

Key points:

• You must have your own story, since people like stories, like Bible, fairy tales. Your business model must have nice story. 
• Educate customer is really hard, and needs tons of money. This is especially difficult for startups. 
• To success, technology is not the only thing. Change business model, channel all can make a difference.
• Targeting the right customer is really important, and then you can dig deeper as shown in the case study. 
• Positioning requires intense customer & market knowledge
• Immerse yourself in user experience to see positioning
• Observe, not just ask users
• Identify your user & your customer to a much finer level that you may have thought

You start with the specific customer target, and then you can have all the questions, where they shop, what they need. 

Acknowledgements:

All the materials are from the entrepreneurship class at UC Berkeley taught by Naeem Zafar.