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BA, Psychology, Harvard University'

2010

Currently on leave from

Harvard UniversitY

BA, History and Science,

Harvard UniversitY, 201 0

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BUSTNESS TDEAS

local chapters compete to reach certain levels of distinction within the Her Campus
community. The highest level is the Pink Level. To reach the Pink Level a local chapter has to demonstrate flawless writing and formatting, update their site every day,
post several times a day on social media sites, host events, and reach 40 percent of
the undergraduate female population on their campus. An example of a local chapter, the My Campus chapter at the University of Central Florida, is avdilable at www.
hercampus.com/ucf. Toward the end of 2014, Her Campus was receiving approximately 3.5 million monthly unique visitors, 15 million monthly page views, and was
operating with 20 full-time employees.
Of paramount importance to Kaplan, Wang, and Hanger from the outset was
developing an effective business model for their company. The company's core competency is developing compelling content at a low cost and displaying the content in an
attractive and accessible manner. The 4,000-plus local chapter correspondents are all
volunteers, who write for Her Campus to obtain experience and hone their journalistic
skills rather than make money. The same applies to interns in the company's Boston
headquarters. The company's mission is crystal clear: to produce, on a daily basis, the
"Collegiette's Guide to Life." The word "collegiette" can't be found in the dictionary,
at least not yet. lt's a word made up by the founders of Her Campus to describe the
women in their target audience. According to Stephanie Kaplan, a collegiette is 'oa college girl who is on top of her game-strategically career-minded, distinctly fashionable,
socially connected, academically driven, and smartly health-conscious, who endeavors
to get the most out of her college experience on every level." ln early 2012, Her Campus
received a trademark on the word "collegiette" from the U.S. Patent and Trademark office. Her Campus is now the only company that can use that word in a business context.
On the revenue side, Her Campus's business model focuses on connecting companies with college females. The key to making this work is Her Campus's unparalleled
access to college-aged women. Part of their business model is native advertising, or
sponsored content. The way sponsored content works is that Her Campus will run an
article that is sponsored by a brand and that promotes that brand to its audience. This
arrangement allows brands to connect with Her Campus's audience. Her Campus's
client list includes Victoria's Secret PINK, New Balance, Pinkberry, and many other
national brands. Her Campus also generates revenue from other types of advertising
and sponsorships, which is often visible on its website and additional platforms. Other
revenue generators include product sampling and on-campus and event-based mar-

keting programs.

ln regard to expansion, Her Campus is steadily increasing its number of My

Campus local chapters. lt is also interested in overseas markets. ln late 2013, Her
Campus acquired HerUni.com, a similar online magazine for college-aged women
in England. The acquisition of HerUni.com will strengthen Her Campus's presence
throughout the United Kingdom. The company is also thinking about broadening its
audience to include men, including the possibility of a His Campus site. The founders
would have to think carefully about how that possibility would affect their current business model and future prospects.
ln this chapter, we introduce you to the concept of the business model. A business
model is a firm's plan or recipe for how it creates, delivers, and captures value for its
stakeholders.l Business models are foundational to a firm's ability to succeed both in
the short and long term, especially when it is the first one to introduce a new product
or service to customers.2 Dropbox, for example, has what's referred to as a freemium
business model. lt offers its customers a free account with a set amount of storage

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PART 2

Quirky: How One Company Creates, Delivers,

and Captures Value for Its Stakeholders
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vetted by the Quirky community. The most promising ideas are fashioned into products that are
sold. By creating this process, Quirky has brought
down the barriers that prevent most people from
seeing their ideas realized. Quirky has just what a
good idea needs-product designers, prototype
specialists, manufacturing capabilities, and relationships with retailers to get products on store

uirky is an interesting company. lt was conceived by

Ben Kauffman, a young entrepreneur who launched
'r,,*-Hhis first company when he was 18. Kauffman's first
company, Mophie, designed accessories for Apple prod:

":i

ucts. ln 2006, Mophie won Best in Show at Macworld

for a modular case accessory system for the iPod Nano.
The next year at the same conference, Kaufman and his
company did an unusual thing. lnstead of bringing their
hottest new products to showcase, they brought next
to nothing. lnstead, they set up a booth made out of

shelves.

w Quirky captures

value for its stakeholders via the

profits that it realizes on the products that are
sold. For every product that is sold, Quirky takes
60 percent of the revenue and returns 40 percent to the original inventor and the community
members (called lnfluencers) that help shape the
idea. To minimize risk, Quirky only fully develops
products that have a certain level of pre-sales.
Quirky has relationships with a growing number
of retailers to maximize revenue from the bestselling items.

two-by-fours, and handed out scratch pads to 30,000

people, asking the Macworld community for new product

suggestions. The sketch that got the most attention, and
was repeatedly exposed to the community for improvements, was a case/bottle opener for the iPod Shuffle. The
product was built, and with this amazing story behind it,
became a hit, selling in 28 countries worldwide.
This and similar experiences became the inspiration
for Quirky, which was launched in 2009. ln a nutshell,
Quirky is an invention company that allows people to submit product ideas (mostly household items and kitchen
gadgets) that are then vetted by the Quirky community.
The best ideas are selected for prototype development
and possible sale. lt's become quite a success. Over
550,000 people are now part of the Quirky "community,"
and participate in pitching, refining, or voting on product
ideas. The process has created several hit products,
including Pivot Power (a flexible power strip that bends
to fit large three-prong plugs in each outlet) and Crates
(modular plastic milk crates used as shelving). Quirky's
products are sold via its website and in big-box stores
such as Thrget and Home Depot. The system is a winwin for everyone involved. The inventors and community
members who help with the product get a cut of the profit.
ln 2012, Quirky launched 121 new products-all invented
by ordinary people.
Quirky accomplishes what it does via its business
model. As we noted above, a business model is a firm's

plan or recipe for how it creates, delivers, and captures

value for its stakeholders. Here is how Quirky accomplishes each of these key elements:

w Quirky creates value by allowing ordinary people

to submit product ideas. Ordinary people often
have good product ideas, but don't have the
wherewithal to start a company.As a result, the
ideas generally never come to fruition. Now,
because of Quirky, anyone with an idea for a
household product or a kitchen gadget has a
shot at seeing the idea become a reality.

ffi Quirky delivers value by providing an easy-tonavigate process for ideas to be submitted and

The attractiveness of Quirky's business model is that

as the company grows, it can expand into new product
categories. Quirky is also a business that would be difficult
to copy. lt has raised over $91 million in venture capital and
as noted above, has over 550,000 people in its network. lt
has also built relationships with organizations up and down
the manufacturing and retail supply chains.

1.
2.

3.
4.

Do you think Quirky's basic business model is sound

and fair? lf you could suggest any changes, what
would they be?
To what degree does Quirky's business reflect the
attributes of a sound business idea as described in
Chapter 2?
ln what other product areas would Quirky's business
model work the best?
Think of the challenges in your own life that might
represent a product idea for Quirky. lf you don't think
of something right away, don't give up. All of us
encounter problems and challenges in our everyday
lives that might represent the basis of a promising
idea. Be prepared to describe to others one of the

challenges or problems you encounter and how a

solution to the problem could be fashioned into a
product idea to submit to Quirky.
Source: "How Quirky Uses Technology to Disrupt Manufacturing,"
Forbes, November 1,2013; "Quirky," Wikipedia, accessed June 5,
2014; Quirky website, wwwquirky.com, accessed June 5,2014-

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Standard Business Models

Examples of Entrepreneurial
Firms (or Types of Firm)
Utilizing This Model

Name

Description

Advertising Business

Business model based on providing advertisers access to highly

targeted customer niches.

Google, Facebook, YouTube

Currently synonymous with eBay, the auction business model has

been around since 500 ec. The idea is to provide a platform for
individuals and businesses to sell items in an auction format.

eBay, uBid.com

Bricks and Clicks

Business Model

A business model by which a company integrates both offline

Apple, Barnes &

Noble, J. Crew

Franchise Business
Model

A business model in which a firm that has a successful product

or service (franchisor) licenses its trademark and method of doing
business to other businesses (franchisees).

24 Hour Fitness, Panera

Bread, School of Rock

Freemium Business
Model

A business model in which a firm provides a basic version of its

service for free, and makes money by selling a premium version of
the service.

Dropbox, Evernote, Pandora

Low-Cost Business

A well-established business model that relies on driving down costs

and making money by servicing a large number of customers.

Southwest Airlines, Warby

Model
anufacturer/Retai ler
Business Model

A business model in which a manufacturer both produces and

sells (online, offline, or both) a product.

Apple, Fitbit, Tesla Motors

Peer-to-Peer
Business Model

A model in which a business acts as a matbhmaker between

individuals with a service to offer and others who want the service.

Airbnb, Getaround,

Razor and Blades

Business Model

This model involves the sales of dependent goods for different

prices-one good (a razor) is sold at a discount, with the
dependent good (blades) sold at a considerably higher margin.

Game Consoles and Games,

Mobile Phones and Air Time,
Printers and lnk Cartridges

Subscription

A business model where the customer pays a monthly, quarterly,

or yearly subscription fee to have access to a product or service.

Birchbox, Blue Apron, Netflix

A business model calling for a firm to sell its products or services,

made by others, directly to consumers at a markup from the original
price. Can be sold online or offline.

Amazon, Whole Foods

Markets, Zappos

Model

Auction Business
Model

Business Model
Traditional Retailer
Business Model

(bricks) and online (clicks) presences.

Parker

Task Rabbit

companies feature the participation of others as an integral part of their business models. An example is Apple, and in particular the Apple App Store. As of
December 2013, more than I million apps were available through the Apple App
Store, created by over 262,000 publishers. About l4O new apps are added each
day. It's a win-win situation for both Apple and the developers. The developers
get access to a platform to sell their apps, while Apple shares in the revenue
that's generated. Positive scenarios like this often allow businesses to not only
strengthen but to expand their business models. As a result of the success of its
app store, Apple launched iAd, a platform that allows app developers to sell advertising on the apps they make available via the Apple App Store. Apple shares
in the revenue generated by the advertising.
Regardless of the business model a start-up is rolling out, one thing that
new compzrnies should guard themselves against is thinking thqLt one particular business model is a "homerun" regardless of circumstances.T In this sense,
the issues discussed in Chapters 1-3 still apply, meaning, for example, that
the strength of the opportunity must be assessed and the feasibility of the idea
must be validated. The What Went Wrong feature nearby draws attention to

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TDEAS

What role do you think the industry that a start-up

is in plays in its suceess or failure as a peer-to-peer
business? Are some industries more receptive to peerto-peer business model start-ups than others? Explain
your answers.

Sources; S. Needleman and A. Loten, "Startups Want to Be the

Next Airbnb, Uber," Wall Street Journal, May 8, 2014, 8,4; N. Tiku,
"JayZ and Ashton Kutcher-Backed 'Uber for Planes' Grinds to a

Halt," ValleyWag, posted on November 20,2013, available at htlpl/

ber-f orRidejoy (the

val leywag. gawker. com / iay -z- and-ashto n-kutcher- backed

-u

planes-grind-1467083423, accessed on May 31,2014;

blog), posted on December 16, 2013, available at http://blog.ridejoy.
com/from-carpool-to-deadpool-ridejoys-startup-journey/, accessed
on May 31,2014; D. Kander, "Lessons from Failure: Borrowing Tools
from Your Neighbors," Entrepreneurship.org, available at http://www.
entrepreneurship.orglresource-center/lessons-from-failure-borrowingtools-from-your-neighbors.aspx, accessed on May 31, 201 4.

this point. Even though the peer-to-peer business model is currently hot, with
homeruns such as Airbnb and Uber, utilizing the peer-to-peer business model
is not sufficient to guarantee firm success.

Disruptive Busines$ Models

The second category is disruptive business models. Disruptive business
models, which are rare, are ones that do not fit the profile of a standard business model, and are impactful enough that they disrupt or change the way
business is conducted in an industry or an important niche within an industry.8 In Table 4.2, we describe actual disruptive business models that were
used by four different companies.
There are three types of disruptive business models. The first type is called
new market disruption. A new market disruption addresses a market that
previously wasn't served. An example is Google and its AdWords program.
AdWords allows an advertiser to buy keywords on Google's home page, which
triggers text-based ads to the side of (and sometimes above) the search results
when the keyword is used. So, if you type the words "organic snacks" into the
Google search bar, you will see ads paid for by companies that have organic
snacks to sell. The ads are usually paid for on a pay-per-click basis. The cost
of keywords varies depending on the popularity of the word. Prior to the advent of AdWords, online advertising was cost prohibitive for small businesses.
At one time Yahoo, for example, required advertisers to spend at least $5,O0O
creating a compelling banner ad and $1O,OOO for a minimum ad buy. AdWords
changed that. Its customers could set up a budget and spend as little as $ I per
day (depending on the keywords that they purchased). Thus, AdWords was a
new market-disruptive business model in that it provided a way for small businesses, in large numbers, to advertise online.
The second type of disruptive business model is referred to as a low-end
market disnrption. This is a type of disruption that was elegantly written about
by Harvard prof""*or Clayton Christensen in the book The Innouator's Dilemma.e
Low-end disruption is possible when the firms in an industry continue to improve
products or serwices to the point where they are actually better than a sizable
portion of their clientele needs or desires. This "performance oversupply" creates
a vacuum that provides an opportunity for simple, typically low-cost business
models to exist. Examples here include Southwest Airlines in the United States
and Ryanair in Europe. Southwest created its point-to-point, low-cost, no-frills
business model as an alternative to higher-end service offerings provided by legacy carriers such as United and American. By actually offering what some would
conclude is inferior service relative to its competitors, Southwest was able to attract a large clientele that still wanted a safe and comfortable ride, but were willing to trade off amenities for a lower fare. Low-end dismptive business models are
also introduced to offer a simpler, cheaper, or more convenient way to perform an
everyday task. If a start-up goes this route, the advantages must be compelling
and tl e company must strike a nerve for disruption to take place. An example of

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Many entrepreneurs
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model templates and place
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it is easy to see the individual parts and their interrelationships. One widelyused framework is the Business Model Canvas, popularized by Alexander
Osterwalder and Yves Pigneur in their book, Btrsineis Model Generation.rl The
Business Model Canvas consists of nine basic parts that show the logic of how
a firm intends to create, deliver, and capture value for its stakeholders. You
so

can view the Business Model Canvas via a simple Google search.
The business model framework used here, the Barringer/Ireland Business
Model Template, is shown in Figure 4.2.Itis slightly more comprehensive than the
Business Model Canvas in that it consists of 4 major categories and 12 individual
parts. The 12 parts make up a firm's business model. The job of the entrepreneur,
or team of entrepreneurs, is to conligure their firm's business model in a manner
that produces a viable and exciting business. The Barringer/Ireland Business
Model Template is a tool that allows an entrepreneur to describe, project, revise,
and pivot a business model until all 12 parts are decided upon. Appendix 4.1
contains an expanded version of the Barringer/Ireland Template shown here. The
12 parts are spread out, which provides space for ideas to be recorded, scratched
out, and recorded again as ideas morph and change. Feel free to copy and use the
template to help formulate the business model for an individual firm.
Next, we discuss each of the 4 categories and the 12 individual elements of
a firm's business model. We will refer frequently to Figure 4.2 throughout the
discussion.

Core Strategy
The flrst component of a business model is core strategz. A core ^strate$r
describes how the firm plans to compete relative to its competitors. " The primary elements of core strategy are: business mission, basis of differentiation,
target market, and product/market scope.

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PART

2 I

DEVELoPING SUCCESSFUL BUSINESS IDEAS

There are several rules of thumb for writing mission statements. A business's
mission statement should:

ffi Define its "reason for being"

ffi Describe what makes the company different
ffi Be rislry and challenging but achievable
ffi Use a tone that represents the company's culture and values
ffi Convey passion and stick in the mind of the reader
ffi Be honest and not claim to be something that the company "isn't"
ffimm$m m# ffi&##mmmmm&&m*ffimmm It's important that a business clearly articulate
the points that differentiate its product or service from competitors.la This
is akin to what some authors refer to as a company's value proposition. A
company's basis of differentiation is what causes consumers to pick one
co-p.ny's products over another's.l5 It is what solves a problem or satisfies a

customer need.
When completing the basis for differentiation portion of the Barringer /
Ireland Business Model Template, it's best to limit the description to two to
three points. Also, make sure that the value of the points is easy to see and
understand. For example, ZTJCA (www.zuca.com) is a backpack on rollers. It
was designed by Laura Udall as a.n alternative to traditional backpacks when
her fourth-grade daughter complained daily that her back hurt from carr5ring
her backpack. The ZUCA has two distinct points of differentiation: It relieves
back pain by putting backpacks on rollers and it is sturdy enough for either
a child or adult to sit on. The company's website frequently features photos of
kids sitting on the ZUCA seat, which anyone could imagine might be handy for
kids waiting for the school bus. These are points of differentiation that are easy
to grasp and remember. They are the reasons that some parents will choose
ZUCNs product and solution over others.
Making certain that your points of differentiation refer to benefits rather
than features is another important point to remember when determining a
firm's basis of differentiation. Points of differentiation that focus on features,
such as the technical merits of a product, are less compelling than those that
focus on benefits, which is what a product can do. For example, when Laura
Udall introduced the ZllCA, she could have focused on the features of the
product and listed its points of differentiation as follows: (1) is pulled like a
suitcase rather than worn on the back, (2) includes a sturdy aluminum frame,
and (3) is available in six colors. While features are nice, they typically don't
entice someone to buy a product. A better approach for Udall would have been
to focus on the benefits of the product: (1) relieves back pain by putting backpacks on rollers, (2) is sturdy enough for either an adult or child to sit on, and
(3) strikes the ideal balance between functionality and "cool" for kids. This set
of points focuses on benefits. It tells parents how buying the product will enhance their son or daughter's life.
ffimy$am* The identification of the target market in which the firm will
compete is extremely important.l6 As explained in Chapter 3, a target market
is a place within a larger market segment that represents a narrower group of
customers with similar interests.lT Most new businesses do not start by selling to broad markets. Instead, most start by identitring an emerging or underserved niche within a larger market.18
A firm's target market should be made explicit on the business model
template. Her Campus's target market is active college females. Zynga's target market is online game enthusiasts. A target market can be based on any
relevant variable, as long as it identifies for a firm the group of like-minded
customers that it \ rill try to appeal to. For example, Hayley Barna and Katia
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PART

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DEVEL.PING SUC.ESSFUL BUSINESS IDEAS

This example illustrates a well-thought-out and executed expansion of product/

market scope.
In completing the Barringer/lreland Business Model Template, a company
should be very clear about its initial product/market scope and project 3-5 years
in the future in terms of anticipated expansion. A bullet-point format, as shown
for Dropbox above, is acceptable. Similar to all aspects of a company's business
model, its product/market scope will affect other elements of the model.

Resources
The second component of a business model is resources. Resources are the
inputs a firm uses to produce, sell, distribute, and service a product or service.20 At a basic level, a firm must have a sufficient amount of resources to
enable its business model to work.2l For example, a firm may need a patent
(i.e., a key asset) to protect its basis of differentiation. Similarly, a business
may need expertise in certain areas (i.e., core competencies) to understand the
needs of its target market. At a deeper level a firm's most important resources,
both tangible and intangible, must be both difficult to imitate and hard to find
a substitute for in order for the company's business model to be competitive
over the long term. A tangible resource that fits this criterion is Her Campus's
network of 4,OOO-plus volunteers. As mentioned earlier, it would take a tremendous effort for a competitor to amass a similar number of volunteers. In
addition, there is no practical substitute for the work that 4,OOO-plus volunteers can do. An example of an intangible resource that fits the criterion is
Zappos's reputation for customer service. Zappos is consistently viewed very
favorably for its abitity to deliver a high level of customer service that is both
difficult to imitate and hard to find a substitute for.
Resources are developed and accumulated over a period of time.22 As a
result, when completing the Barringer/Ireland Business Plan Template, the
current resources a company possesses should be the resources that are
noted, but aspirational resources should be kept in mind. For example, it
took time for Her Campus to recruit 4,OOO-plus volunteers. The company
may have had 10O volunteers if and when it completed its first business
model template. As a result, the proper notation under the Key Assets portion of the Barringer/Ireland Business Model Template would have been "1O0
volunteers" (with the goal of adding 100 volunteers a month) or whatever the
exact number might have been.
ffiqlmm ffioxmpe*mxnmfimm A core competency is a specific factor or capability that supports a firm's business model and sets it apart from its rivals .23 A
core competency can take on various forms, such as technical know-how, an
efficient process, a trusting relationship with customers, expertise in product
design, and so forth. It may also include factors such as passion for a business
idea and a high level of employee morale. A flrm's core competencies largely
determine what it can do. For example, many firms that sell physical products do not do their own manufacturing because manufacturing is not a core
competency. Instead, their core competencies may be in areas such as product
design and marketing. The key idea is that to be competitive a business must
be particularly good at certain things, and those certain things must be supportive of all elements of its business model. For example, Netflix is particuIarly good at supply chain management, which was essential during the years
that Netflix's business model was geared primarily towards delivering DVDs to
customers via the mail. Without a core competency in supply chain manage-

ment, Netflix's entire business model would not have worked.

Most start-ups will list two to ttrree core competencies on the business
model template. Consistent \Mith the information provided above, a core competency is compelling if it not only supports a firm's initiatives, but is also difficult

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DEVELOPING SUCCESSFUL BUSINESS IDEAS

producers and programmers who are creative enough and proficient enough to
continually come up with online games that are engaging and social.
Obviously, different key resources are needed depending on the business
model that a firm conceives. In filling out the Barringer /lreland Business
Model Template, a firm should list the three to four key assets that it possesses that support its business model as a whole. In some cases,.the ongoing
success of a firm's business model hinges largely on a single key resource. For
example , Zynga has historically maintained an agreement with Facebook that
provided ZVni" a privileged position on Facebook's platform. In 2013, that
,.gre.*ent came to end, which weakene d Zynga's business model and dimmed
its future prospects.

Flnancials
The third component of a business model focuses on its financials. This is the
only section of a firm's business model that describes how it earns moneythus, it is extremely important. For most businesses, the manner in which it
makes money is one of the most fundamental aspects around which its business model is bui1t.25 The primary aspects of financials are: revenue streams,
cost structure, and financing/funding.

A firm's revenue streanns describe the ways in which

it makes money.26 Some businesses have a single revenue stream, while othffisweruame ffi*rmmw*m

ers have several. For example, most restaurants have a single revenue stream.
Their customers order a meal and pay for it when they're finished eating. Other
restaurants have several revenue streams. They may operate a restaurant,
offer a catering service, and sell products at their counter, such as bottled
barbeque sauce in the case of a barbeque restaurant. The nature of the way
businesses make money also varies. Some businesses make money via onetime customer pa)nnents, while others receive recurring revenue by selling a
subscription service. Some businesses are very creative in the ways in which
they -ik" money. For example, many providers of online games offer the basic
game for free, and generate most of their revenue from a small number of us6rs who purchase premium products such as time-saving shortcuts, special
weapons, and other features to enhance play.
The most common revenue streams are shown in Table 4.3. As noted
above, many businesses have more than one revenue stream, primarily to Ieverage the value they are creating for their customers. For example, Birchbox
has two revenue streams-its subscription service and its online store. For
$fO a month, its subscribers receive four to five product samples. If a customer wants to buy a full-sized version of one of the samples, it is available via
Birchbox's online store. For Birchbox, having two revenue streams makes perfect sense. The product samples introduce subscribers to products that they
might not have known about otherwise. If a subscriber likes a particular product and wants a full-sized version, it is available via Birchbox's website. The
arrangement is good for the subscriber and is good for Birchbox. It provides
the subscriber a convenient way to buy a product that he or she just sampled,
and provides Birchbox dual revenue streams.
The number and nature of a business's revenue streams has a direct impact on the other elements of its business model. All for-profit businesses need
at 1east one revenue stream to fund their operations. Whether additional revenue streams add or subtract value depends on the nature of the business and
the other elements of its business model. It makes sense for Birchbox to have
two revenue streams, as explained abpve.It also makes sense for a retail store,
such as abicycle shop, to not only sellbicycles (Revenue Stream #1), but to sell
bicycle accessories (Revenue Strearn #2), offer bicycle repair services (Revenue

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The additional value they provide is a wide selection, personalized service selecting and fitting the glasses, and free follow-on services if the glasses need to be
adjusted or repaired.
Next, it's important to identifir the nature of a business's costs. Most businesses have a mainly fixed-cost or variable-cost structure. Fixed costs are
costs that remain the same despite the volume of goods or services provided.
Variable costs vary proportionally \Mith the volume of goods or services produced. The reason that it's important to know this is that it impacts the other
elements of a firm's business model. Developing smartphone apps, for example, involves large fixed costs (i.e., the coding and development of the app) and
sma1l variable costs (i.e., the incremental costs associated with each additional
app that is sold). As a result, a large amount of money will be needed up front,
to fund the initial development, but not so much downstream, to fund the ongoing sales of the app. In contrast, a business such as a sub sandwich shop
may have low fixed costs and high variable costs. The initial cost to set up the
business may be modest, particularly if it is located in a leased facility, but
the cost of labor and ingredients needed to prepare and serve the sandwiches
may be high relative to the prices charged. This type of business may need a
smaller up-front investment but may require a line of credit to fund its ongoing operations. Other elements of the business model may also be affected. For
example, a business with substantial fixed costs, such as an airline, has typicatly made a major investment in key assets. A service-based compurny, such
as Blue Apron (the prepared meal delivery service highlighted in Chapter 3),
may have few key assets but may have core competencies and a partnership
network that allows it to source ingredients, design meals, and reliably deliver
the meals to its customers.
The third element of cost structure is to identi$r the business's major cost
categories. At the business model stage, it is not necessary to establish a budget or prepare pro-forma fi.nancia1 projections. It is necessary, however, to have
a sense of a firm's major categories of costs. For example, Facebook's major
categories of costs are data center costs, marketing and sa1es, research and
development, and general and administrative. This type of breakdown helps a
business understand where its major costs will be incurred. It will also provide
anyone looking at the business model template a sense of the major cost items
that a company's business model relies on.

Finally, many business models rely on a certain

amount of financing or funding to bring their business model to life. For
example, Birchbox's business model may have looked elegant on paper, but
the firm needed an infusion of investment dollars to get up and running.
Most businesses incur costs prior to the time they generate revenue. Think
of a business such as Pure Fix Cycles, the subject of the opening feature in
Chapter 1. Prior to earning revenue the company had to design its product,
arrange for manufacturing, purchase inventory, acquire customers, and
ship its product to its customers. This sequence, which is comrfion, typically
necessitates an infusion of up-front capital for the business to be feasible.
Absent the capital, the entire business model is untenable.
Some entrepreneurs are able to draw from personal resources to fund their
business. In other cases, the business may be simple enough that it is funded
from its own profits from day one. In many cases, however, an initial infusion
of funding or financing is required, as dbscribed above. In these cases, the
business model template should indicate the approximate amount of funding
that witl be needed and where the money is most likely to come from.
Similar to cost structure, at the business model stage projections do not
need to be completed to determine the exact amount of money that is needed.
ffiffimmsp,w&umgdffie*mffi&mry

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capital costs, one-time expenses, and provisions for ramp-up expenses. In

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ffip6mmme&m A company's channels describe how it delivers its product or senrice

to its customers.28 Buiinesses sell direct, through intermediaries, or through a

combination of both.
Many businesses sell direct, through a storefront and/or online. For example, Warby Parker sells its eyewear via its website and in a small number of
company-owned stores. It does not sell via intermediaries, such as distributors
and wholesalers. In contrast, Pure Fix Cycles sells direct, via its website, and
also through bicycle stores throughout the country. It utilizes distributors and
wholesalers to glt its bikes into stores. Some companies sell strictly through
intermediaries.lo, example, some of the manufacturers that sell via Zapios
and Am azofr do not maintain a storefront or sell via a website of their owrr.
They strictly rely on broadly trafficked sites such as Zappos and Amazon to
sell their products.
The same holds true for firms that seIl serwices. Hotels, for example, sell
their services (typically rooms) directly through their websites and telephone
reservation services, and also through intermediaries such as travel a$ents, tour
operators, airlines, and so forth. For example, if you were planning a trip to San
Francisco, you could book your flight, rental car, and hotel through Travelocit5r,
i".". In this instance, Travelocity and the
Expedia, or many other similar
"ett
providers.
service
the
others act as intermediaries for
aspects of its business model.
other
affects
A firm's selection of channels
selling strictly throu$h its
parker
strategy,
channels
maintains a simple
Warby
Its price point is low
stores.
puuty-owned
of
website and a small number
"ot
itself for its business
for
margins
its
of
percent
l0O
enough that it must capture
its website, via onthrou$h
cameras
its
sells
model to work. In contrast, GoPro
hundreds of retail
through
and
BestBuy.com,
Iine ouilets such as Amazon and
such as wholeintermediaries,
It
utilizes
abroad.
stores in the United States and
cost
value-driven
a
has
GoPro
ouflets.
new
flnd
it
salers and distributors, to help
partners.
channel
with
margins
its
of
some
structure, so it can afford to share
The advantage of Gopro's approach is wide dissemination of its products both
online and in retail outlets.
Some firms employ a sales force that calls on potential customers to try to
close sales. This is an expensive strategy but necessary in some instances. For
example, if a firm is selling a new piece of medical equipment that needs to be
demonstrated to be sold, fielding a sales force may be the only realistic option.
The final element of a firm's business model is key partners.
Stait-ups, in particular, typically do not have sufficient resources (or funding)
to perform ali the tasks needed to make their business models work, so they
rely on partners to perform key roles. In most cases, a business does not want
to do everything itJeff because the majority of tasks needed to build a product or deliver a service are outside a business's core competencies or areas of
expertise.
The first partnerships that many businesses forge are with suppliers. A
supplier (or vendor) is a company that provides parts or services to another
Almost all firms have suppliers who play vital roles in the function"oirp.rry.
ing of their business models. Traditionally, firms maintataed an arm's-length
rel-ationship \Mith their suppliers and viewed them almost as adversaries.
producers needing a component part would negotiate with several suppliers
to find the best pri".. Today, firms are moving away from this approach and
are developing more cooperative relationships with suppliers. More and more,
manager= ar. fo"using on supply chain management, which is the coordination
of the flow of all information, money, and material that moves through a product's supply chain. The more efflciently an organization can manage its supply
chain, the more effectively its entire business model will work.

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132

PART

2 I

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DEVELOPING SUCCESSFUL BUSINESS IDEAS

(,:

That Facilitate the Forming

Odesk, E1ance, and Guru:
- Platforms
of Partnerships with Freelancers
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i'1i freelancer is an independent contractor that has skills

in a certain area, such as website design, search en;-.i,ligine
optimization (SEO), or marketing. Starl-ups hire
freelancers for two reasons. First, they fill gaps that companies have in their experlise. For example, a business
may need to develop a social media strategy, but lack
capabilities in that area. There are freelancers who are
social media specialists, who can quickly and effectively
help a business design a social media strategy. Second,
freelancers can be hired on an "as needed" basis, so they
are typically cheaper than hiring a part-time employee. ln
addition, if a business hires a freelancer for a project and
it doesn't work out, a decision can be made to not hire the
same person again. lt is more difficult to separate from a
part-time or full-time emPloYee.
There are a growing number of Web-based platforms
that make it easy to identify and hire experienced freelancers. Odesk (www.odesk.com), Elance (www.elance'
com), and Guru (www.guru.com) are popular examples.

.ii

The platforms are services that allow freelancers to

identify themselves and allow anyone needing a freelancer to browse through the listings to find a good
fit. For example, Guru lists freelancers by category,

which includes lT & Programming, Design & Multimedia,

Writing and Translation, Sales & Marketing, and several
others. The freelancers post their photo, an explanation of their expertise, an overview of their experience
and job history, their hourly rate, and a portfolio of their
work. Elance posts statistics that reflect the freelancers'
ratings from previous jobs, the number of jobs that have
been obtained through Elance, and comments from previous clients. For example, at the time this feature was
written a freelancer named Chris S. had completed five
jobs through Elance with a perfect five-star rating from
clients. One of his clients wrote, "Chris did again a great
job on a PHPAffordPress type project. Great communication and turn around as usual." This type of feedback
provides future clients assurance that Chris might be

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worth a try for a similar project. Chris charges $46 per

hour. While that number may seem high, if Chris is a
proficient programmer and designer, and turns around
work on time, he may be well worth it. He'll also only
charge for the number of hours it takes him to complete
a job.

Over time, companies often become comfortable

with individual freelancers, and the relationship becomes
more of a partnership than an arms-length arrangement.
The platforms make money by taking a percentage of
the money that the freelancers are paid' The amounts

vary-Odesk takes 10 percent, while Elance charges

8.75 percent. There are protections built into the services to prevent freelancers from taking money and not

completing a job. Sites such as Elance and Guru, which

initially focused on lT freelancers, have expanded their
offerings. companies can now find qualified freelancers
to reliably plug almost any skill gap that they have.

1.

lmagine that you are the founder of a company and

need help setting up QuickBooks for your company.
QuickBooks is an accounting and bookkeeping platform for small businesses. Search Guru, Elance, and
Odesk for QuickBooks freelancers. Select the one that
you think represents the best combination of expertise,
experience, and cost. Summarize the key attributes of
the person you selected.
2. To yhat degree is it appropriate or inappropriate to hire
fre6lancers to fulfill some of the core competencies of
a business?
3. Make a bullet-point list of the advantages of hiring
freelancers to do short-term projects for a start-up.
4. ln what ways do you believe that a freelancer could become a partner of a company rather than an arms-length
independent contractor?

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134
'ART

2I

oaraaoprNc succESSFUL

BUSTNESS rDEAs

includes the most important costs [both

fixed and variable costs) the firm will incur
to support the execution of its business
model, and funding/financing (dealing with
how the firm will support or cover its costs)
are the parts of the financials category.
Operations is the fourth and flnal category
featured in the Barringer/Ireland Business

Model Template. The product (or service)

production part of this category details the
firm's intended production methods. The
channels part specifies how products or
serwices will be delivered to customers, while
the key partrrers part identifles others with
whom the flrm intends to collaborate as a
means of supporting its operations.

Key Terms
basis of differentiation,

t22

business model,
channels, ISO

churn, f

ll2

l5

core competency, 124

core strategz, l2O
cost structure, 127

disruptive business
models, f f B
fixed costs, l2A
key assets, 125
low-end market disruption, I l8
mission or mission statement,

t2t

new market disruption, 118

operations, 129
product/market scope, l2:o^
resources, 124
revenue streams, 12fl
standard business models, I f 5
supplier, lgo
target market, 122
variable costs, l2A

Review guestions
4-I.

What is a business model?

does a freemium business model
work?
What is the best time for a firm to develop
its business model?
What is a standard business model and
what is a disruptive business model?
What are the four major categories that
comprise the Barringer/Ireland Business
Template?
How are a firm's core strategr and its mission related to each other as parts of a
business template?
What is a company's "basis of differentiation" and what is the importance of this
part of a business template?
Why do most entrepreneurial firms initially choose to compete within a narrow
target market?
What is a company's product/market

4-2. How
4-3.
4-4.
4-5.

4-6.
4-7.
4-8.
4-9.

scope?

4-LO. Why are the resources a firm possesses a

critical part of its business model?

4-lL. What is a core competency?

4-12. How many core competencies do most
start-ups have?
4-13. What are a firm's key assets?
4-L4. What are the differences between a flrm's
physical assets and its intellectual assets?
4-15. What is a revenue stream and why is it so
important to a firm's short- and long-term
success?

4-16. How do fixed costs differ from variable

costs?

4-17. What are the primary elements of the

Operations component of the Barringer/
Ireland Business Model Template?
4-L8. Who are "key partners" and why are they
important to the success of an entrepreneurial venture?
4-19. What are some common advantages that
accrue to a firm as a result of partnering
with other companies?
4-2O. Who are "freelancers" and why are these
individuals potentially attractive as partners for an entrepreneurial venture?

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136

PART

2 I

DEVELOPING SUCCESSFUL BUSINESS IDEAS

W**x: www.Hffi#stmr.*mm's

Business

ldea:

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Launch a company that designs, builds,

and operates private bike sharing programs for clients

of all sizes, including universities, apartment complexes,
hotels, multi-family communities, and corporate campuses
across the United States.
Bike sharing is taking off across the globe. ln fact,
according to one count, at least 500 cities and towns,
worldwide, have some type of bike sharing program' The
benefits of bike sharing programs are apparent. They

Pitch:

lessen urban congestion (by taking cars off the road),

provide a nice way for tourists to meander around a
city, reduce the amount of pollution caused by cars, and
reduce parking shoftages. Most programs are run and
paid for by municipal governments. Although the programs

kEtter: @xmgst*r
small fleet of bikes. Zagster charges a monthly fee based
on the number of bikes installed. lt's up to the customer
to decide if it will charge for the service or provide the
service for free. ln most cases, Zagster's users pick up
a bike and return it to the same location, eliminating the

need and cost of multiple docking stations. The idea is

to provide bikes for pleasure and exercise rather than
short trips from Point A to Point B (which is the idea behind municipal programs). Each bike comes with a basket and a lock box that registered riders can open with a
code sent to their smartphone via text message' Using
the code, riders can unlock their bike from a station and
then lock it up wherever they want (such as a restaurant
or coffee shop) while they are using it.

vary some, in most cases users check out a bike with a

credit card, membership card, and/or by smartphone at
a docking station. There is typically no fee for the first 30
minutes or so. A deposit on a credit card ensures that the
bike is returned to a docking station. Docking stations are
scattered throughout a city or town. The main objective is
to provide people bikes for trips that are too far to walk,
but may not require acar if a bike is available.

Zagster's clients have various motives for wanting a bike

sharing program. Quicken Loans, which has 48 Zagster
bikes at its Detroit headquarters, offers the program to
its 9,200 employees as an amenity. Bike sharing programs are attractive to universities because they cut
down on the need for shuttle buses and automobile

Zagster's goal is to extend bike sharing beyond municipalities and bring the process to college campuses,

having a bike sharing program an apaftment complex

can differentiate itself from competitors.

apadment complexes, hotels, corporate campuses,

and similar venues. The company currently has programs with Yale University, Quicken Loans, The Related
Companies, Four Seasons Hotels and Resorts, and several other partners. Zagster has developed a full-service,

turnkey bike sharing solution. The company's system

provides customers with bikes, maintenance, promotional material, and the software necessary to manage a

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parking. Apartment complexes are attracted

sharing because it's difficult for their tenants

to

bike
own
bikes (particular if the tenant lives on an upper floor). By

to

4-30. Based on the material covered in this chapter, what

questions would you ask the firm's founders before
making your funding decision? What answers would
satisfy you?

4-31.|f you had to make your decision on just the information provided in the pitch and on the company's website, would you fund this company? Why or why not?

Fm**km*k; M*mEm ffiee$tit o T'w*tter:

@ffi*emgepffi*m8th

It's associated with increased physician visits, increased

Business ldea: Create a smartphone app that reminds

people to take medicine and nutritional supplements on
time, warns users of potentially dangerous interactions,
and uses gaming techniques to motivate people to
remain engaged with the app and meet their personal

hospitalizations, increased nursing home admissions,

and increases in avoidable health care costs. Some
experts have estimated that nationwide, not taking
medicine on time costs the United States health care

health goals.

system

Pitch: One of the toughest issues facing American

health care providers is motivating patients to take

Mango Health is a smartphone app designed to tackle

this problem. After downloading the app, a user simply
enters the medications and supplements s/he is taking, pertinent information such as patient name, type of

their medication on time. While 80 percent of adults in

America take a combination of prescription drugs, overthe-counter medications, and nutritional supplements,
75 percent do not take their medications or supplements
on time. Failure to take medication on time increases
health care costs and exacts a significant human toll.

$SOO

billion per year.

medication (tablets, syrup, etc.), how much is in the container, and how often the medicine and/or supplements
are to be taken. There are several additional core features. The app will tell users if any potentially dangerous

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138

pARr

2 I

DEVELopTNG succESSFUL BUSTNESS IDEAS

Etsy's platform is designed

to help people sell handmade items. This photo

contains a collection of
headbands and other hair
accessories made by an
Etsy seller.

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are also featured each day on Etsy's home page. When

a buyer enters an Etsy online store, he or she can read
reviews from past buyers and see how the seller stacks
up on a five-star scale. AHeirloom, for example, has
over 3,600 reviews and nearly a perfect five-star rating.

At the heart of Etsy's success is its business model.

A business model is a firm's plan or recipe for how it
creates, delivers, and captures value for its stakeholders. The Barringer/lreland Business Model Template,
completed for what Etsy looks like today, is shown
nearby. The following is a breakdown of each of the
four major categories of Etsy's business model. What
is particularly instructive is the way the model fits together. As you read through the description of each
category, notice how it affects the other categories and
Etsy's business model as a whole.
Core Strategy
Etsy's mission is ambitious. lt wants to "re-imagine commerce in ways that build a more fulfilling and lasting
world." To do this, Etsy has built its business around the
neighborhood feel. lts focus is on constructing a way to
shop that is meaningful to both sellers and buyers. To illustrate this point, Etsy CEO Chad Dickerson said, "Etsy,
technologically and culturally, is a platform that provides
meaning to people, and an opportunity to validate their
aft, their craft." llc further articulate Etsy's core values
Dickerson said, "At the end of each transaction you get
something real from a real person. There is existential
satisfaction to that." ln addition to this set of values, Etsy
is an advocate for small merchants and artisans. These
are two categories of businesses that have been huft by

mass production and the advent of the big-box store.

Etsy is helping bring back these businesses by providing
them a platform to sell their products to a sizeable audience of buyers.
Etsy's basis of differentiation flows from its mission
to focus on handmade goods, the number of buyers
and sellers on its site, and the sense of community that
it has created. Although its website is easy to navigate,
that's not what differentiates Etsy from its rivals. Many
online businesses have websites that are easy to navigate. What differentiates Etsy are the factors mentioned
above. lt's instructive to note that Etsy's points of differentiation are made possible by its core competencies
and key assets. From the beginning, Etsy has excelled
at helping its sellers increase sales via Web-based tools,
educational materials, and offline events. lt also set its
business up in a way that encourages its sellers to build
awareness of Etsy in general. Each seller has its own
Etsy store. As sellers promote their Etsy stores, they
introduce people to Etsy more broadly, which is a key
factor that has enabled Etsy to grow so quickly.
Etsy has two target markets-its sellers and its buyers. lts sellers are the producers of handmade goods. lts
buyers are people drawn to the site because they want
something unique, something that has a story. They
want something that they enjoy telling other people
about. lt's a different motivation for buying than shopping at Walmart or on Amazon.com. This is what Etsy
means by "re-imagining" commerce. Etsy's producV
market scope has expanded since its inception. While
the majority of items are still handmade, on October 1,
2013, Etsy announced that it would allow factory-made
goods on its site. This move, according to the company,
was necessary to allow its most successful sellers to
expand their businesses and keep them from leaving

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PART

2 I

DEVELOPING SUCCESSFUL BUSINESS IDEAS

Financials
Etsy has three revenue streams, including a 20 cent
listing fee for each item listed on its site, a 3.5 percent
commission on each item sold, and Search Ads, an
advertising program that allows Etsy sellers to promote items in their online stores. This mix of revenue
streams makes sense given Etsy's core strategy and
its resources. The larger and more engaged a community it builds, the more revenue it will earn from listing
fees and commissions. Etsy's cost structure is based
on cost containment and a high fixed/low variable cost
model. Etsy has high infrastructure costs, driven by
the network capacity and data storage necessary to
service 30 million registered buyers and one million
registered sellers, and the nearly one billion dollars of
commerce that flows through its site each year. lt also
has a staff of 400 that manages the site and maintains
the Etsy community. To support its core strategy, the
firm has people with job titles that don't exist in most
businesses, such as Head of Seller Education (currently
Danielle Maveal). Etsy's variable costs are low. lt costs
Etsy very little to add another buyer or seller to its site.
Notable is the amount of funding that Etsy has
raised-$gz.g million. The funding has been used to
build out the company's infrastructure, add employees,
invest in strategies for expansion, and fund seller education initiatives. Etsy is reported to be profitable. lf this is
the case, it is funding its operations in part through its
own revenues.

Operations
Etsy's website was built and is maintained by an inhouse staff of lT professionals. The site has a homespun
rather than a highly polished look. This is intentional,
although some critics have urged Etsy to up its game
some in terms of site design and functionality. ln terms
of channels, Etsy's main channel is its website. As
mentioned earlier, Etsy is strictly a platform that brings
buyers and sellers together. While a seller's Etsy store
resides on Etsy's website, all of the logistics involved
with the sales process are handled by the seller. This in-

cludes stocking the store, processing orders, collecting

payment, and shipping the merchandise. This arrangement relieves Etsy of the cost and responsibility of providing for those functions.
ln terms of channels, the majority of sales flow
through Etsy's website. Etsy is experimenting with some
additional channels. lt has partnered with select retail
chains, such as West Elm and Nordstrom, to sell some
Etsy products in its stores. lt also has tried some special
promotional events, such as setting up temporary physical storefronts in New York City during the Christmas
season to feature products made by Etsy sellers.
Etsy has several key partners, or groups of partners,
which improve its operations and help expand sales. ln
terms of operations, by publishing its API (Application
Programming lnterface), Etsy has enabled third-party
developers to create tools that help Etsy sellers more
efficiently manage their inventory and track their shipments. Etsy works with a number of organizations and

businesses to suppoft crafts and homemade products.

An example is Etsy's involvement in New York's annual
Renegade Craft Fair, which is an event that features and
champions the work of artisans and small merchants.
Etsy is also branching into areas that enable it to supporl small businesses and entrepreneurship in more
general ways. For example, in 2013 Etsy announced
plans to collaborate with local communities to teach
entrepreneurship skills to residents. By doing this, Etsy
is helping seed the next generation of Etsy sellers. All
of these efforts are consistent with Etsy's mission of'reimagining commerce and acquainting as many people
as possible with Etsy and the marketplace it facilitates.

Ghallenges Ahead
Etsy's primary challenge will be to maintain the integrity
of its business model while trying to grow. The complexity of this challenge is starting to show. Many Etsy sellers, for example, were not happy with the company's
decision to allow the sale of manufactured goods' But
providing this option has allowed some of Etsy's most
successful sellers to effectively grow their businesses'
A limitation of producing handmade goods is that it's
labor intensive. When artisans make something that
sells well (such as a piece of jewelry or furniture), if they
can't offload some of the actual production of the good,
their sales will be limited by the time they have to make
it themselves. Sellers complain about rising fees, which
may be an artifact of Etsy's need to produce sufficient
profits to satisfy investors. lts initial listing fee was 10
cents per item, and it's now 20 cents. Some also complain about the lack of traditional marketing and would
like to see Etsy take a more active role in driving traffic
to its site. Recall that Etsy takes the opposite approach'
It relies on its sellers to promote their Etsy stores, and
benefits when the customers of individual sellers learn
about Etsy more broadlY.

Discussion Questions
4-34. What is Etsy's core strategy, or how the firm intends
to compete in the marketPlace?
4-35. What evidence can you provide to demonstrate that
Etsy's founders, Rob Kalin, Chris Maguird, Jared
Tarbell, and Haim Schoppik, developed a disruptive
business model as the foundation for launching their
firm?
4-36. ln thinking about the firm's "basis of differentiation"
as part of its business model, what does differentiate
Etsy from its comPetitors?
4-37. What are Etsy's three core competencies and how do
these help the firm in its efforts to be successful?
Sources: Etsy home page, available at www.etsy.com, accessed
June 3, 2014; O. Malik, "Meet the Man Behind New York's Other
Billion Dollar lnternet Company. This One Makes Money," Gigaom,
available at https://gigaom.com /2O13/08/23/meet-the-manbehi nd-new-yorks-other-billion-dollar-internet-com pany-th is-onemakes-money/, posted on August 23,2013, accessed on June
3,2014; "The 'Etsy Economy' and Changing the Way We Shop,"
Entrepreneuf March 22, 2013. "Etsy," Wikipedia, www.wikipedia.
com, accessed June 4,2014.

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142

PART

2 I

OCVTIOPING SUCCESSFUL BUSINESS IDEAS

Resources
Basis of Differentiation

Business Mission
. "One for One"

Strong brand
Business structure: TOMS (for profit)
and its collaboration with Friends o{
TOMS (non profit subsidiary)
Products (shoes, eyewear, coffee)
that resonate with consumers)
TOMS volunteers

Ability to change lives

Product/Market ScoPe

Target Customer(s)
. Consumers who resonate with
TOMS one-for-one approach and

the company's combined forprofit/philanthropic persona

Shoes, eyewear, and coffee

Branded products (t-shirts, caPs)
Misc items sold via the TOMS
marketplace
TOMS products are sold worldwide.
Shoes have been distributed to 60
countries, eyewear 15, and clean
water provided in five

KeY Assets
Core Competencies
. Pioneered the one-for-one business | ' elate Mycoskie
model; diligence in execution has | 'Corporate culture
.
created a slrong brand
| Relationships with nonprofits that
. creation and nianagement of for- | trelp ToMS distribule products to

profit/philanthropiCbusiness strategyl children and people in need

is
| 'ronns volunteers
. Ability to create passion
| ' tnterns (that work in TOMS
facilities)
excitement about what TOMS
doing in others (nonprofit partners, | ' Campus clubs.
TOMi volunteers, lnterns,
| ' Ouy Without Shoes campaign
. Willingness to learn (i.e., responding
to critics who point out how TOMS
could be doing things better bY
adopting the best suggestions)

ihat

sustainable

and
is

etc.)

OPerations

Financials
Product (or

Revenue Streams
Product sales, which include shoes, eyewear, and coffee
TOMS branded products (t-shirts, sweatshirts, ca.ps, and TOMS flag$
Misc items available via the TOMS Marketplace, including Accessories,
Home & Bath Products, and a small number of Tech Products
All sales trigger a commensurate gift to people in need,

Cost Structure
Cost-driven business
Low fixed/high variable costs
Major categories of costs:
Product manufacturer,

distribution of products to
people in need, salaries and
general administrative

Financing/Funding
lnitial capital infusion of
$500,000 from founder Blake
Mycoskie
Profits from business operations
TOMS customers/supporters
volunteer their time to get products
to adults and children in need and

to spread the word about

TOMS.

service) |

Production

. Products (shoes, eyewear,

;;;;.d";r.ontri.t

*hi.h ur" cirefully selected

monitored

coffee)

&

manufactureis

. onlinu (ToMS.com, Zappos.com,

I
|

. :tc).,
Retailers (Nordstrom, Whole

|
I
or online outlets foi Je to I
to

not I
.--__-c.I
with nonprofits

ttreit iustomers (TOMS does

dropship).

. TOMS collaborates
to distribute the shoes and eyewear
and to provide clean water for those

in

need

Foods,

and I . lt l
Products distributed.to

. products are shipped directly

retailers

channels

children.and
adults in.need via Friends of
nonprofit partners, and TOMS
volunteers

lg*t,

r"yPartners

TOMS
| ' rriends of partners
| 'N-onp,rofit
volunteers
| 'rous
.

Top brands, such as Ralph Lauren

and Element Skateboard
. Affiliates (via the TOMS affiliate

program)

Toms: Barringer/lreland Business Model Template

@

2014 Bruce R. Barringer and R. Duane lreland

in part because local organizations, already embedded in

a country, know the needs better than TOMS does and
can direct the company. An example is TOMS's partnership with the Seva Foundation to implement its eyewear/
restore sight program. The Seva Foundation runs sight
programs in Nepal, Tibet, and Cambodia. lt is uniquely
equipped to help TOMS make the best use of its dollars.
TOMS's producVmarket scope now includes
shoes, eyewear, and coffee. The company also has a
"Marketplace" that sells a variety of items, including
jewelry, household items, and tech products. The company's "one for one" mission still applies, just in a different form. lf you buy a $140 Turquoise Alba Necklace, for
example, your purchase will get you the necklace and
provide 11 meals for a child in need.

Resources
TOMS has been diligent in the execution of its one-toone model. lts products are appealing, its philanthropic

efforts are making a difference, and it involves a lot of

people in what it does. These factors have enabled
TOMS to build a strong brand. lts core strategy is also
working. lt has remained sustainable without needing
donations. TOMS has also excelled at creating excitement and passion in others for what it is doing. lt does a
lot to elicit this. For example, every two weeks a group of
TOMS volunteers travels to Argentina or another part of
the world to make a "shoe drop," which is the term that
TOMS uses for distributing shoes. Anyone can apply for
the trip, and for many it is a life-changing experience'
Every shoe TOMS gives away is placed on a child's foot
by a TOMS volunteer. Volunteers pay their own travel expenses, but the trips are organized by TOMS.
TOMS also listens. lt has both proponents and critics that are vocal in their feedback. Rather than ignoring
the feedback, TOMS reacts, which encourages additional feedback. For example, one source of criticism
that TOMS has faced is that when it gives a child a pair
of shoes, it is a one-time event. The child will eventually

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144
Es

L=u=.oprNG succESSFUL

BUSTNESS TDEAS

'ART

TOIMS'g Eiusiness fltllmdet $ustainabne?

The question is, "ls TOMS's business model

sustainable for the future?" The primary threats to its

business model stem from the criticisms it receives,
its reliance on people continuing to pay a premium for
its products, and whether the one-for-one movement
will continue to resonate with volunteers and nonprofit
partners. Another threat is the nature of the products
that TOMS sells. On the one hand, selling a physical
product mitigates TOMS's risk because it does not
have to rely on donations to fulfill its mission. On the
other hand, TOMS has the dual challenge of managing
a global supply chain while at the same time leading
a worldwide philanthropic effort. The complexity of
this challenge will grow as TOMS continues to scale
its business. No company has attempted to scale a
one-to-one business model to the extent that TOMS
is contemplating.

Discussion Questions
4-38. What is TOMS's target market? How might this
market change in the future?
4-39. What revenue streams does TOMS have that support
how the firm competes? How sustainable are these
revenue streams?
4-4O. What key assets does TOMS possess and how
sustainable are those assets?
4-41. What are the major challenges TOMS faces as the

firm continues implementing its business model'as

a means of reaching its mission? Which of these
challenges is the most serious and why?
Sources: TOMS website, www.toms.com, accessed June 5,2014;
TOMS, Wikipedia, www.wikipedia'com, accessed June 5, 2O14;
A. Spaulding, S. Fernandez, and J. Sawayda, "TOMS: One for
One Movement," Daniels Fund Ethics lnitiative, University of New

Mexico, http://danielsethics.mgt'umn.edu

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146

,ART

2 I

,=u=.oprNG succESSFUL BUSINESS

TDEAS

Key
Business Mission

A business's mission or mission statement describes why it exists and what its business
model is supposed to accomplish.

Basis of Differentiation

A company's basis of differentiation is what separates it from its competitors. lt is what

causes consumers to pick one company's products or services over another's.

Target Market

A target market is a place within a larger market segment that represents a narrower
group of customers with similar interests. This is the market in which the firm will

compete.
Product/Market Scope

A company's producVmarket scope defines the products and markets on which it will

concentrate.
Core Competencies

A core competency is a specific factor or capability that supports a firm's business

model and sets it apart from its rivals.

Key Assets

Key assets are assets that a firm owns that enable its business model to work.
The assets can be physical, financial, intellectual, or human.

Revenue Streams

A firm's revenue streams describe the ways in which it makes money. Some businesses
have a single revenue stream, while others have several.

Cost Structure

A business's cost structure describes the most important costs incurred to support
its business model.

Financing or Funding

This box describes how a business will finance its business model.

Product (or Service) Production

This section focuses on how a firm's product and/or service are produced.

Channels

A company's channels describe how it delivers its product or service to its customers.

Key Partners

This box describes the key partnerships that a firm's business model relies on.

Sndnotes
1.

M. Malmstrom, J. Johansoon, and J. Wincent,

"Cognitive Constructions of l,ow-Profit and
High-Profit Business Models: A Repertory Grid
Study of Serial Entreprenettrs, " Entrepreneurshtp
Tlwory andPracttce,2OL4, in press; D.J. Teece,
"Bllsiness Models, Business Strategz and
Innovation," Lantg Range Planning 43, no.2-3
(2O1O):

7.
8.

t72-r94.

2. C. Markides and L. Sosa, "Pioneering and

First

Mover Advantages: The Importance of Business

Models," Inng Range Ptanntng, 46 no. 4-5 (2013):

325-334.
3. R. Garud, H. A. Schildt, and T. K. Lant,

"Entrepreneurial Storytelling, Future

Expectations, and the Paradox of Legitimacy,"
Organizatton Sctence, 2014, in press.
4. S. Blank and B. Dorf, Tlrc Startup Ousner's
Manual (Pescadero, CA: K&S Ranch Press, 2OL2).
5. P. Andries, K. Debackere, and B. van Looy,
"Simultaneous Experimentation as a Learning
Strategz: Business Model Development Under

Uncertainty,"strategtcEntrepreneurshtpJournal
7 , no. a QOLS): 288-310.
6. G. N. Chandler, J. C. Broberg, and T. H. Allison,
"Customer Value Propositions in Declining

9.

Industries: Differences Between Industry

Representative and High-Growth Firms, " Strategic
Entrepreneurship Journal, 2014, in press.
C. Baden-Fuller and S. Haefliger, "Business
Models and Technological Innovation," Lartg
Range Planntng 46, no. 6 (2O13): 419-426.
A. Konig, N. Kammerlander, and A. Enders,
"The Family Innovator's Dilemma: How Family
Influence Affects the Adoption of Discontinuous
Technolo$ies by Incumbent Firms," Academg oJ
Management Reuieus 38, no. 3 (2013): 418-441.
C. M. Christensen, The Innouator's Dilemma: Ttrc
Reuolutianary Book That WILL Clunge the Wag You
Do Bttstness (New York: Harper Business, 2Ol1).

10. E. M. Rusli and D. Macmillan, "LJber Gets an

Uber-Valuation," WaLL Street Journal Onltne,
www.wsj.com, June 6, 2014.
11. A. Osterwalder and Y. Pigneur, Bustness Model
Generatton: A HandbookJor Vistonartes, Game

Changers, and Challengers (New York: John Wiley

& Co.,

2O1O).

12. N. J. Foss and S. Lindenberg, 'Microfoundations

for Strategy: A Goal-Framing Perspective on
the Drivers of Value Creatiofi," Aca.demA oJ
Management PerspecttDes,27, no. 2

(2O I 3)

: 85- 1 02.

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