Exercise 3: Business Model

Submit Your Business Model

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The Business Model for an organization describes the key income and expense drivers for the organization, and the critical success factors (key assumptions) related to the financial sustainability of the organization.

Task Overview:
In this third and final exercise you will identify the key income (revenue) “drivers” that “monetize” (fund) your value proposition.   It is useful if at least a portion of the funds that you need to operate or scale will be based on income for products or services provided (“earned income”) because earned income reduces your dependence on contributed income (grants and/or fund raising). It is imperative that the earned income be a by-product of producing the products and/or services for your beneficiaries and not be an additional defocusing initiative that would distract you from your primary purpose.  Note that the earned income may not come from the direct beneficiaries, but rather from an indirect beneficiary (e.g., a government or NGO) that pays for the products or services based on their effective delivery.  In addition to the key income drivers, you also will identify the key expense (cost) drivers that are necessary to create these income streams. The income and expense drivers are often described using “fishbone diagrams” which list the key income and expense drivers and the % (of totals) for each driver (income and expense. Note that income drivers and expense drivers often are based on price and quantity. For example, the income from cataract surgeries depends on the number of paying beneficiaries and the amount each pays, while the expenses for the surgeries depend on the total number of surgeries and the costs for each.

After identifying the income and expense drivers, you will identify the Critical Success Factors (Assumptions) that are necessary to sustain the income drivers and control the expense drivers.

Background Resources:

Reference on business models: Richard G. Hammermesh, Paul W. Marshall, and Taz Pirohamed, “Note on Business Model Analysis for the Entrepreneur,” Harvard Business School Report 9-802-048, January 22, 2002.

Business Models

• The Nature of the Venture’s “Cash Engine”
  • Translating a social benefit venture concept into…
    • One where Revenue is > Expenses
    • Knowing how much CASH it will take to achieve

The summation of the core business decisions and trade-offs employed by a venture to earn a “surplus”

• Income (revenue) drivers (earned and contributed), and the key variables influencing each (e.g. numbers, amounts)
• Expense (cost) drivers  (for each income driver)
• Critical Success Factors
  • The most important elements of business model relative to achieving a surplus of income over expenses AND meeting the needs of the target market (beneficiaries).

Potential Sources of Income for Sustainability and Growth

• Contributed Income Model
  • Donors make (regular) contributions to fund product/service delivery (e.g. annual fund drive or web-based solicitation of contributions)
  • Can include grants (note that grants are generally consider like “investments” rather than sustainable income
• Third-party Earned Income Model:
  • Indirect beneficiaries (those who benefit from the market creation  or the impacts of the products or services) provide the income
  • e.g. A government agency or NGO pays to rebuild houses after an earthquake
• Fee Based Income Model
  • Unit Sales of any product or service
  • Fee per use or output
• Micro-financed or Deferred Payment Model
  • e. g. Cell phone services in developing countries
  • Development and marketing of software products that leverage success in the current direct market to segments of developed country markets
  • e.g. Internet and cell phone based mass transit schedules, crop planting and cultivation best practices
• Subscription Model
  • Fees to join service
  • Internet Service
• Ability to Pay Model  (Tiered-pricing Model)
  • Those that can afford to pay subsidize service delivery those that cannot
  • Different prices (and possibly products/services) for different market segments
• Market Place Models
  • A direct (or indirect) sales channel products or services
  • An “eBay” type market for products and services
  • Organizing the direct market  provide access to other target markets
  • These models then facilitate related advertising and affiliate revenue models
• Franchising/Licensing Model
  • Enable other organizations to provide your services in different markets or regions, in some cases, the national or regional governments
• Cause Related Marketing Model
  • Pay for the good or service to create market or to gain brand/company awareness
  • Pay per use or output
  • e.g. Participation through local market distribution in leading edge programs like Grameenphone or Hewlett-Packard's "e-inclusion" (e.g., digital photo entrepreneurs)

Examples of Earned Income Models

Examples of Contributed Income Models

Examples of Blended Income Models

Critical Success Factors
A business model critical success factor is an assumption or operational competency that must be true for the income and expense drivers to sustainable support the value proposition for an increasing number of beneficiaries.  The success of the business model in supporting the value proposition for the target market segmentation depends on the critical success factors remaining true.

 

Example:  Aravind Critical Success Factors

• Low-cost workflow for eye care system
• Successful training of all staff
• Maintain > 40% paying clients
• Re-invested surplus in staff training, improved processes, and new technology
• Motivate staff through work environment and competitive compensation
• Use partnerships for in-field diagnosis and for new technology development

Exercise:
3.1. Identify the key income drivers for your organization.  (Hint: from the background resources, which income models could be applied for your  products/services?)  Describe these using an Income (revenue) Fishbone Diagram for your organization. (An editable blank fishbone diagram is included below)

3.2. Identify the key expense drivers that will be required to obtain this income.  (Hint: what are the costs for product/service development, sales and marketing, and administration).  Describe these using an Expense (cost) Fishbone Diagram for your organization. (An editable blank fishbone diagram is include below).

3.3 List the (3-7) critical success factors (or key assumptions) which are the bases for your income and expense drivers.

Submit Your Business Model