Business models are critical to the success of any venture. They define how a company creates, delivers, and captures value, thus contributing directly to the profitability and longevity of the business. In this article, we will delve into three types of business models commonly used by companies, focusing on their key characteristics and suitability for different types of products. We will discuss the subscription, marketplace, and freemium models. Understanding these models is essential for students preparing for the Certified Scrum Professional – Product Owner (CSP-PO) exam.
1. Subscription Business Model
The first model we will tackle is the subscription model. In this setup, customers pay recurrent fees (typically monthly or annually) to access a product or service. Examples of companies that use this model include Netflix and Adobe.
- Characteristics: Subscription models establish long-term customer relationships with predictable revenue, which can make planning easier. However, companies must work continuously to keep subscribers engaged and satisfied to prevent churn.
- Product Suitability: Because of the need for constant engagement, this model is optimal for products that customers will use regularly, like subscription-based software, media platforms, or fitness memberships.
2. Marketplace Business Model
Next, we have the marketplace model. Here, a business operates as an intermediary between sellers and buyers, earning money from commissions or fees from transactions made through their platform. Amazon, eBay, and Uber are examples of companies with a marketplace model.
- Characteristics: This business model efficiently scales since it doesn’t require having inventory or sustaining manufacturing costs. However, these businesses must attract and maintain a critical mass of both buyers and sellers to keep the marketplace attractive and operative.
- Product Suitability: The marketplace model fits well for vast range of products. Both physical products (like electronics or clothing) and services (like ride-sharing or home rental) can successfully be sold through this model.
3. Freemium Business Model
Finally, we consider the freemium model. In this case, basic features of a product or service are offered for free, but customers must pay to access premium features or content. Examples include Spotify, LinkedIn, and many SaaS (Software as a Service) products.
- Characteristics: The freemium model attracts a broad user base due to its free offerings. This model also permits users to sample the service before paying, which can build trust and satisfaction. Nonetheless, the primary challenge of this model is persuading users to pay for premium features.
- Product Suitability: This model is usually used for software, digital content, or web-based services, provided there’s a significant distinction between the basic and premium offerings.
Summary Comparison
| Business Model | Characteristics | Ideal for |
|---|---|---|
| Subscription | Predictable revenue, needs ongoing engagement | Services/products with regular use |
| Marketplace | Scales well, needs vast pool of buyers and sellers | Wide range of products and services |
| Freemium | Builds large user base, convincing users to pay is challenging | Software, digital content, web services |
By clearly understanding these business models and their suitability for different types of products, Scrum Product Owners can make more informed decisions during product development. It allows for strategic thinking about how to structure the business that complements the product’s characteristics, contributing to its potential for success.
Practice Test
True or False: A business model defines how a business generates revenue and profit.
- True
- False
Answer: True
Explanation: The business model encapsulates the value proposition for the customer, the revenue generation mechanisms, and the cost structure of the business.
The revenue model, the cost structure, and the customer value proposition are all components of the business model of a product.
- a) True
- b) False
Answer: a) True
Explanation: A business model reflects how a business creates and captures value which in turn includes aspects like value proposition, revenue generation (revenue model), and the cost structure.
Which of the following describes the ‘Freemium’ business model?
- a) Everyone pays for the product
- b) The initial product is free, but users have to pay for premium features
- c) There’s no charge for the product at all
- d) Customers pay a subscription to get the product
Answer: b) The initial product is free, but users have to pay for premium features
Explanation: Freemium model provides basic services for free and charges for high-level features.
True or False: Understanding various business models is helpful for a product owner as it aids in defining the product vision and strategy.
- True
- False
Answer: True
Explanation: A knowledge of various business models helps the product owner make informed decisions about product development strategies and best approaches to monetize the product.
In a subscription-based business model, the customer pays:
- a) One time for the product
- b) A regular fixed amount to get access to the product
- c) Only for the extra features of the product
- d) As per the usage of the product
Answer: b) A regular fixed amount to get access to the product
Explanation: In subscription models, customers pay a subscription fee to access a product for a certain period of time.
Which of these is NOT considered a business model?
- a) E-commerce
- b) Subscription
- c) Freemium
- d) Product lifecycle
Answer: d) Product lifecycle
Explanation: The product lifecycle is a concept that pertains to the stages a product goes through from introduction to withdrawal or eventual demise, it’s not a business model.
In an E-commerce business model, companies:
- a) Provide their services for free
- b) Sell their products or services online
- c) Sell their products or services in physical stores
- d) Never interact with the customer
Answer: b) Sell their products or services online
Explanation: E-commerce model is a way of conducting business over the internet by buying and selling products, and supplying services online.
True or False: Business models are static and should not be changed once implemented.
- True
- False
Answer: False
Explanation: Business models should evolve as per changing customer needs, market demands, competition, technological development, and other factors.
The Value Proposition of a business model refers to:
- a) How much a product cost
- b) The key advantages offered by the product to the consumers
- c) How many people are using the product
- d) The marketing strategy used to promote the product
Answer: b) The key advantages offered by the product to the consumers
Explanation: The ‘Value Proposition’ in a business model signifies the reason why customers should purchase this product or service, indicating the unique advantages it offers as compared to competitors.
The Cost structure in a business model includes:
- a) Only the manufacturing cost of the product
- b) Only the marketing cost of the product
- c) All the costs incurred by the business
- d) Only the cost of product research and development
Answer: c) All the costs incurred by the business
Explanation: The cost structure includes all the costs that a business might incur while producing, marketing, distributing, and servicing a product or a service.
Interview Questions
What is a business model, in the context of developing a product?
A business model, in the context of product development, refers to how a company plans to create, deliver, and capture value from its products or services. It outlines the method of doing business and the strategies for revenue generation.
Briefly describe the Merchant business model.
The Merchant business model involves a classic retail concept. It is basically the process of buying cheap and selling high. The merchant purchases goods from a supplier and sells them to the customers with a markup for profit. It applies to both physical and digital products.
How does the Subscription business model work?
The Subscription business model involves charging a recurring fee for access to a product or service. It provides a steady stream of revenue and typically has high customer retention rates. Examples include software services like Adobe Creative Cloud, media platforms like Netflix, and even physical goods like Blue Apron meal kits.
Can you explain the Affiliate business model?
The Affiliate business model involves promoting another business’s products or services and earning a commission for every sale or lead. This model is commonly used in online retail, with examples including Amazon’s affiliate program.
How does the Merchant business model compare with the Subscription model?
The Merchant model relies on the typical buy-and-sell system, where revenue is generated through the profit margin on individual sales. The Subscription model, on the other hand, locks in customer purchases over a period of time, leading to more predictable and steady revenue.
What contrasting elements can be found between the Affiliate business model and the Merchant business model?
In the Affiliate model, you are selling someone else’s product and earning a commission, so the investment is lower and there is no need to handle inventory or shipping. On the other hand, the Merchant model requires a deeper involvement in every aspect of the business, from sourcing and storing products to managing sales and shipping.
Which business model would be most appropriate for a Scrum Product Owner managing a software application?
The Subscription model would be most appropriate as it allows customers to pay for access to the software on a recurring basis. This ensures a steady revenue stream for the company and aligns with agile principles of iterative development and customer collaboration.
Can an Affiliate business model and a Merchant business model co-exist?
Yes, an Affiliate and Merchant business model can co-exist. Many businesses also function as affiliates by selling other companies’ products on their platform along with their own offerings.
How is the product owner role impacted by the choice of business model?
The choice of business model influences the product owner’s decision-making process, backlogs prioritization, and relationship with stakeholders. For example, in the Subscription model, maintaining customer relationships and ensuring continuous value delivery would be more crucial.
In what ways does the Subscription business model align with Scrum principles?
The Subscription model aligns with Scrum principles in that customer satisfaction is key to ongoing sales and revenue. This requires frequent product updates, iterative development, and continuous feedback from customers, all of which are central to Scrum methodology.
How does the Merchant model impact the product life cycle?
In the Merchant model, each sale is treated as a separate transaction. This can lead to a short product life cycle if strategies for customer retention are not implemented effectively.
Can the business model evolve over time, and how can the Scrum framework accommodate this?
Yes, the business model can evolve over time in response to market needs, competitor activities, or innovation within the company. The Scrum framework can accommodate this through its inherent adaptability and flexibility. Changes in the business model would simply be treated as another element of product development to be prioritized in the backlog.
What is a significant challenge a product owner might face in the Affiliate business model?
A significant challenge might be the lack of control over the product’s quality or availability, as these are dictated by the affiliate company.
Compare the level of control in the Affiliate and the Merchant business models.
The level of control in the Affiliate business model is comparatively lower since the product quality, availability, and even pricing are controlled by the affiliate company. In contrast, the Merchant model allows complete control over all aspects of the product and its sale.
How does the Subscription business model impact customer relations compared to the Merchant business model?
In the Subscription model, maintaining long-term customer relationships is crucial for recurring revenue. Therefore, customer service and continuous product improvement are high priorities. However, in the Merchant business model, while customer satisfaction is important, the focus is more on individual transactions.
extutorials.com