I.    What is a Business Model?

The conceptual design for how and from whom a business makes money.

"A system that enables a company to grow and make money on a sustainable basis." - VC Darlene Mann, ONSET Ventures

II.    Are there articles or presentations available on the Internet relating to Business Models?

Linda Sharp and Mei Lin Fung of Marketing MATH (tm), "An Analytical Framework for the Art of Marketing", October, 1998.

"Less Than Zero Margins, If the latest Internet business model works, it will redefine commerce, Brian Taptich, The Red Herring, March, 1999.

Business Models on the Web, Professor Michael Rappa, NC State University.

"The Truth About Internet Business Models", Jeffrey F. Rayport, Reprint No. 99301.

"e-Players", Jennifer Reese, Stanford Business.

III.    Are there books about Business Models?

Perhaps these?;
Hosting Web Communities: Building Relationships, Increasing Customer Loyalty, and Maintaining A Competitive Edge, Cliff Figallo, Chapter 11, September, 1998, John Wiley & Son, ISBN: 0471282936.

Internet Yellow Pages 1997: Business Models & Market Opportunities, Jessica Nutley, Natalie Schwartz , December 1996, Cowles/Simba Information; ISBN: 0887091431.

Designing and Building Business Models Using Microsoft Excel, Andrew J. Robson, June 1995, McGraw Hill Book Co Ltd; ISBN: 0077090586.

Practical Business Models, John Edward Mulvaney.

Digital Capital, Tapscott, Ticoll, Lowy, Harvard Business School Press, 2000.

Killer Content, Strategies for Web Content and E-Commerce, Tomsen, Mai-lan, Addison-Wesley, 2000, p.80.

Electronic Commerce, Timmers, Wiley, 1999.

Advanced Business Models With Lotus 1-2-3, Stanley R. Trost, Berkeley, SYBEX, c1985.

IV.    Are there courses on Business Models?

Business Models on the Web, Ward Hanson, March 11, 1998, Stanford GSB, Executive Education Program.

Crafting the Business Model, Amir Banefatemi, Spring, 1999, The Berkeley Extension Program.

Entrepreneurial Finance, William Sahlman, Fall 98, Harvard Business School.

Emerging Internet Business Models, Lynda Applegate, Fall 1999, Harvard Business School, HBS No399-082.

Lynda Applewood, Building E-Businesses - Intensive Field Study Seminar, Harvard.

Daniel E. O'Leary, Electronic Commerce Course Cases Page.

V.    Are Business Models being discussed in conferences?

Broadband Developer's Conference, June, 30, 1999.
Reinventing Commerce at Net Speed: Stanford 99, June 20-22, 1999.

VI.    Will searching a news source provide information on Business Models?

A search at www.businesswire.com returned 80+ articles and included articles about businesses with models for web based quality printing, open source code, Internet-group buying, intellectual capital, prison labor acquisition, content development, system-on-a-chip product enabling, and e-services ... and more!

VII.    Are there research papers and case studies on Business Models?

B2B E-Commerce Hubs: Towards a Taxonomy of Business Models, Steven Kaplan and Mohanbir Sawhney

see O'Leary's course listed above.
Tome, DuBois, E-Commerce Seminar, Active Research, Stanford.

VIII.    What other web resources exist on Business Models?

Merrill Warkentin's eBusiness Models Page

The BizModel Institute

Summary of EC models and frameworks

IX.    Other Associated Items

"The Nirvana News", Max Frankel, The New York Times Magazine, July 9, 2000.

"Brave New Math Tests Limits of Accounting", Robert D. Hershey, Jr., The New York Times, March 29, 2000.

"Internet Valuations: Surveying the Landscape", Technical Report No. 82, GSB, Stanford University, Siglienti, Tefertiller, Wenstrup, and Wood.

The Fortune e-50 List, Anderson Consulting.

"Accounting Issues Hurt Companies' Earning Warnings", The Associated Press, The New York Times, July 8, 2000.

X.    What is Arshiya Ventures' response to questions about Business Models?

What types of business models are being used on the web? All sorts. See Fedewa's summary or consider strategies for cross-over marketing, branding, community building, securing customer lifetime value, making new markets and re-making industries, exploiting unique web resources (collaborative, non-geographically set work, knowledge discovery, data-mining, information structuring, virtual space, multi-media, etc!)

Which business model genres are successful? A great deal is being tried, there are many experiments. Pulling eyes, first to market, special market hook, accelerators, singular presence, stickiness, content kingship, service excellence, world re-making. Business to Business; Business to Consumer; Advertiser-Business-Consumer; Mutual Exchange; Auction; Subscription; Rental.

What mathematical models underlie the successful net businesses? That can depend on what qualifies as success. Amazon has a financial strategy geared for tremendous growth and sustaining the value of its public stock. But it is unprofitable. The Electronic Software Publishing Corporation demonstrates profit from its first day, has a world-first product and a tremendous list of satisfied customers. Each business demonstrates success. Geoffrey Moore might say the first business's shareholder value is based on a percentage of its future profits whose net present value is pretty hard to estimate in an environment where high technology makes for discontinuous value chains. The second business uses ordinary accounting; that is, addition (minus taxes!). A second aspect in response to the question concerns distinguishing models for the basic development of a new business and models for marketing within a business. Models to treat basic development for a new business will examine burn rate, equity distribution, bookings and billings. Models to treat marketing within a business will examine costs of acquisitions, sales, and customer retention against expected revenues.

How should a client make web site promotion spending decisions? Quickly!: Ray Similor, Executive Director of The Kauffman Foundation, and VC G. Yang of Institutional Venture Partners, maintain that lead entrepreneurs excel in decisiveness. The entrepreneur needs to balance her/his investment in advertising and capturing customers against the need to grow the business and maintain high quality business operations. Also, entrepreneurs should never surrender their judgment - they should choose marketing strategies they understand, appreciate and respect.

What reports would you need to determine ROI for web promotion? As in any data-informed customer enhancement initiative, one has to put into place a process that can be quantitatively monitored, assessed, and fine-tuned to regulate customer behavior and corresponding business performance. This process needs to run in Internet time! A web promotion allows on on-line, real-time, continuous feedback of web strategies and cross-over channel strategies between the web and other channels.

What information is needed for such a process? A client's contact with the business entity, the client's path to that contact, the client response when in contact, client feedback, and the business action dynamic due to its client interaction.

IX.    What else can be asked about Business Models?

Plenty.

XI.    An Interactive Interview about Internet software and Web portal business models. July, 1999.

Question: There seems to be a wide range of costs, prices, etc. that could be used for assumptions to develop revenue and expense projections. For example, take ad revenues. It appears that something like $15 CPM might be a reasonable rule of thumb, but we have heard that this can vary greatly. Do internet business plans typically build an ad revenue forecast from assumptions about numbers of clicks and number of advertisers with a CPM assumption like this?

NV: A plan can use assumptions about numbers of clicks, rates, and advertisers to forecast revenue from ads if advertising is crucial to the business model or strategy of the new business. Such rates are monitored (quantifiable) and manipulable (the quantification has instrumental applicability, business applicability). Since CPM, Cost Per Thousand of Impressions, is quantifiable, it is reasonable to use for business planning purposes. Netperceptions is a company doing a lot here. See http://www.wilsoninet.com/ads/faq.htm#CPM for input on CPM and advertising.

MLF: Revenue from CPM is a very squishy foundation for a business plan, as credibility for banner advertising is dropping sharply. See Jakob Nielsen's column http://www.useit.com/alertbox/990711.html and the follow up sidebar on Affiliate Marketing http://www.useit.com/alertbox/990711_affiliates.html. From a financing point of view, CPM revenue would be very heavily discounted beyond current years. There needs to be a strong primary source of revenue that is unrelated to CPM, that will grow and support sustainable profits. Question: About 70% of portal revenues appear to be derived from advertising, but alternate sources of revenues (e.g. licensing, royalties, affinity fees, etc.) are not usually identified in any detail. Do business plans need to specify assumptions in this area in a more detailed manner?

NV: It depends on the extent to which the business is relying upon these alternate sources of revenue. Some business models would just throw them in as an extra, other business models may be built completely around the alternative source as a main source of revenue. Indeed, this later strategy can predominate in the e-commerce arena since a lot of the game is to acquire a customer (to get them coming to the site) before anything is actually sold (advertised) to a customer. The recent article in the NYT Magazine, "Instant Company", about E-pinions, a start-up in Mountain View, implies that most of their revenue is intended initially to come from licensing. They're not selling stuff the first day they're out.

Question: Some business models (data-fed content delivery example ...) expect to market their products and services through licensing agreements to users.

NV: Sound good.

MLF: Just as software licensing agreements are being reworked in the form of ASP (Application Service Provider) subscriptions - I expect these content licensing agreements to move to subscription type arrangements too. The value (price the market will bare) will be all over the map and must be based at a minimum on a "make vs. buy" argument, and then in comparison to alternate single or multiple sources for the data.

Question: If so, what are the typical bases for these assumptions? Say for example: Assume 10 licenses per year to system at $10K per license; plus a revenue stream of $XXX per license?

NV: The assumption should be made based upon whatever the market will bear. That can be a lot. Think about a financial trader's desktop. If your company provides the best data-feed to that desk, the trader would license your service for a great deal. $10K/license/year would be cheap. What would the trader pay another financial news source for real-time information?

Question: Does this apply to "premium services" where a fee is charged to the end user?

NV: Yes

Question: What are typical e-commerce revenue rules of thumb/assumptions? I've seen programs discussed where companies are paying 5-15% of end user revenue to sites that show their ad and/or pass through users. This seems like a wide range and it's not clear exactly how these deals work. It seems a bit like credit card percentages being charged at retail (?)

NV: The situation is probably so much in flux and so innovative that the rule of thumb turns out to be wherever the deal for end user revenue is struck. One would expect the range to be wide. The subtleties in how particular sites turn out to work together will strongly impact the shape of e-commerce. But these subtleties cannot fully anticipated with a media as new as the Internet. Also, as differing industries are pulled into e-commerce, the differing assumptions they operate off of are going to come into play for e-commerce as e-commerce standardization across industries is also occurring. Again, making rates widely variable.

MLF: Very dangerous to make rules of thumb assumptions so early in the evolution of e-commerce. PLUS - its widely known that the re-up rate (i.e. signup for following years) is very low, due to the high cost and low return (refer again to the Jakob Nielsen article) Must be "back to basics" based, and derived ground up. You need to expect great skepticism to anything you project here.

Question: Typical ad/promo costs to attract viewers to a site seem to be ball-parked at $250 (again with a wide variation). It's said that radio is more effective than other media but I haven't seen anything that supports this statement and/or comparisons of various tactics.

NV: It's common knowledge that radio advertising costs less than advertising on TV or in a national magazine. If you have a budget of $20Mfor your advertising, would you want ten minutes of TV ads or much longer ad saturation on the radio? Radio is thought to be effective due to its cost-efficiency relative to other media. Should that change when what you're advertising is a web site? In any case, advertising on the radio doesn't as readily get you the glamour that a visual ad might.

MLF: Cost per lead is not a great metric, need to look at customer lifetime value and target the right people. Here's an analogy: If you're dating people with the idea of finding someone with whom to share a long term relationship and you're the kind of person who likes holidays in Hawaii, you wouldn't minimize cost per date, by going to McDonalds. Very dangerous (also too expensive) to make blanket assumptions without targeting specific customer segments. See FAQ in my website for details. www.isoe.com

Question: Are there standard fees for hosting sites? If so, how do you estimate them?

NV: Look up the rates of five ISP providers at their web site. Call five of the best, ask what they charge for hosting a big, much-visited site, and average the five rates to get an estimate.

Question: How would you build a staffing/support model for an Internet business?

NV: A virtual business should anticipate how much it will be in the virtual world and where/how its points of connection with the real-world are. Customer service and support needs to be responsible for both the virtual and real-world sides of its business. Make sure to allow a lot for state-of-the-art customer service. Ask what would it take to have a call-center support service where the support staff really knew about the business and how to serve the customer in real, Internet-time. WebVan has staff doing the warehouse food shopping for its customers at its warehouse: a real-world staffing component to the service it provides in virtual space.

Question:[Are there rules of thumb re administrative, overhead, etc. costs?] Do companies developing business plans typically use a percentage of forecasted revenues, or some other approach (e.g. estimating number of personnel required by function)?

NV: It depends on how responsive the business intends to be to its customer. That matter ultimately takes one into the business model, business mission, indeed one's very product/service. One world-class software provider is intent on selling to those which can appreciate sophisticated, highly-technical programming. This entails that HE, as CTO, is THE person on call for every customer (he wrote the world-best software product): a business model which cannot allow him to outsource the technical customer service back-up.

MLF: What do you want to do? How tightly do you want to bind your customers to you? The nirvana is a Customer Eco-system, which attracts, multiplies and grows customers. This is hard and requires investment.

Question: Are there other issues re financial projections/assumptions that are common with Internet business plans?

NV: Anticipate "Internet-time" and an intensity of revision in planning which exceeds that of other types of businesses. Expect to issue revised business plans at a fast periodic rate and have your investors and employees primed to ride on top of this level of change. Have creative planners who enjoy dreaming up a new plan every two weeks and who will change assumptions in response to a fluctuating environment. Have "executors" who are ready to implement new business development scenarios at the drop of a hat. It's part of the adventure.

MLF: Internet business plans which are essentially media plays, need to have a media business plan, as you would in starting a new magazine or newspaper, TV station or radio station. The only advantage to Internet vs. other media, is there is a lot of flux. But I would said the easy pickings are almost over, and the later crop of sustainable successes must deliver NEW value in innovative ways.