\(\PageIndex{1}\). (Attribution:
Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0
license)
Nine Building Blocks of the Business Model
Canvas
Customer segments: Without customers, businesses cannot
survive. Businesses must identify and understand their customers,
and they can group these customers into segments with common
characteristics.
Value propositions: A company creates value, or
benefits, for customers by solving a problem or satisfying a need.
The value proposition is the reason that customers choose one
option over another when deciding what to buy. Although certainly
not an exhaustive list, customers may value: newness, performance,
customization, design, brand, price, cost reduction, risk
reduction, accessibility, and convenience.
Channels: Channels bring the value proposition to the
customers through communication, distribution, and sales. Companies
can reach their customer segments through a mix of channels, both
direct (e.g., through sales force and web sales) and indirect
(e.g., through own stores, partner stores, and wholesalers), to
raise awareness, allow for purchase and delivery, provide customer
support, and support other important functions of the business.
Customer relationships: Companies need to maintain
relationships with their customers to acquire and retain customers
and boost sales. Strong customer relationships can significantly
impact overall customer experience. There are many categories of
customer relationships including personal assistance, self-service,
automated service, user communities, and co-creation.
Revenue streams: There are two types of revenue stream:
revenues from one-time customers and revenues from ongoing
payments. Revenue pricing mechanisms vary from fixed (e.g.,
predefined prices based on static variables) to dynamic (e.g.,
price changes based on market conditions). Revenue streams can be
generated through asset sales (e.g., selling a physical product),
usage fees, subscription fees, licensing, brokerage fees,
advertising, and temporarily selling the use of a particular asset
(e.g., lending, renting, or leasing).
Key resources: Any business needs resources—physical,
financial, intellectual, and/or human—to function. These resources
enable the company to provide their products or services to their
customers.
Key activities: Key activities are the critical tasks
that a company does to succeed and operate successfully. Different
companies focus on different activities in categories such as
production, problem-solving, and platform/network.
Key partnerships: Companies build partnerships to
optimize their business, reduce risk, or gain resources. There are
four main types of partnerships: strategic alliances between
noncompetitors, coopetition—strategic alliances between
competitors, joint ventures, and buyer-supplier relationships.
Cost structure: All businesses incur costs through
operation, whether fixed or variable. They may also face economies
of scale and scope. Companies consider their cost structures in two
strategies—cost-driven, where all costs are reduced wherever
possible, and value-driven, where the focus is on greater value
creation. Cost structures will often consider fixed costs, variable
costs, economies of scale, and economies of scope.
Business Model Canvas Application: Apple
To best illustrate the business model canvas, we can take a look
at Apple illustrated in Table \(\PageIndex{2}\).
Customer segments: Apple’s main consumer segment is the
mass market, and Apple sells globally to customers all over the
world. These customers tend to have similar needs and problems that
can be addressed through globally standardized offerings such as
the iPhone and iPad (hardware) as well as iTunes (software).
Value proposition: In a competitive marketplace, Apple
must offer a bundle of products and services that cater to the
customer segment. As one illustration, Apple iTunes offers a
seamless music experience where customers can easily find,
purchase, and download music all in one place.
Channels: Customers are able to interact with Apple in
person through retail stores and Apple stores as well as online
through the iTunes store and Apple’s company website.
Customer relationships: Apple’s customers are dedicated
to the brand and often have many Apple products, such as iPhones,
iPads, and MacBooks. The Apple lovemark has become a status
symbol.
Revenue streams: Apple earns most of its revenues from
selling products such as iPods, and the iTunes store protects them
from competition with similar features.
Key resources: Apple’s key resources include its name
brand, hardware and software, and content.
Key activities: Apple products have outstanding
marketing and hardware design.
Key partnerships: Through negotiations and contracts,
Apple’s iTunes store is one of the world’s largest online music
libraries.
Cost structure: Most of Apple’s costs come through
manufacturing and marketing, including employee salaries.
| Business Model Canvas for
Apple |
|
Key Partnerships
- Record companies
- OEMs
- People
- Content & agreements
|
Key Activities
- Marketing
- Hardware design
|
Value Proposition
- Seamless music experience
|
Customer Relationships
|
Customer Segments
|
| |
Key Resources
- Apple brand
- iPad hardware
- iTunes software
- Content & agreements
|
|
Channels
- Retail stores
- Apple stores
- Apple.com
- iTunes store
|
|
|
Cost Structure
- People
- Manufacturing
- Marketing/sales
|
Revenue Streams
- iTunes store
- Large hardware revenues
- Some music revenues
|
Table \(\PageIndex{2}\). (Attribution: Copyright Rice
University, OpenStax, under CC BY-NC-SA 4.0 license)
The business model canvas can be used to determine how to
compete, as either an initial entrant or a fast follower. An
entrepreneurial organization is often a first
mover by introducing a new product or service category
that can potentially define an innovation’s characteristics in the
minds of buyers, gaining valuable name recognition and brand
loyalty. First movers can also lock in key resources (such as
certain distribution channels) and set a technology standard.
Second movers have the potential advantage of
learning from and improving on the first mover’s efforts. For
example, second movers can take advantage of existing customers and
optimize the first mover’s product to add new features, especially
when customers are willing to switch. Research on the battle
between first and second movers indicates that they are equally
likely to win the market. One illustration of first and second
movers is in China’s competitive mobile payment industry.
Expanding around the globe
The War of Two “Horses”: First and
Second Movers in China’s Mobile Payment Industry
Over the last decade, Chinese people have been rapidly and
systematically utilizing mobile payment—that is, payment services
performed through a mobile device. This trend kicked off with
China’s first e-commerce wholesale platform Alibaba, founded by
Jack Ma from his humble apartment in Hangzhou, China, in 1999.
Responding to eBay’s growing presence in China a few years later,
Jack Ma launched taobao.com, a consumer-to-consumer (C2C) and
business-to-consumer (B2C) online marketplace. To support
taobao.com’s transactions, Jack Ma released Alipay later that year
as a “third-party online payment platform.” Mobile payment became a
reality in China when Alipay released its mobile app in 2008, which
can be used to pay water, electricity, and gas bills as well as
mobile phone fees. After 2011, when the first third-party payment
license was issued to Alipay, more Chinese consumers replaced their
credit cards and debit cards with Alipay. By 2013, Alipay overtook
PayPal as the world's largest mobile payment platform. Alipay
dominated 69.6 percent of China’s mobile payment market. Jack Ma
was the “only horse” (the surname Ma means “horse” in Chinese) in
the field and a clear first mover, but faced a solid rival in
second mover IT giant Tencent.
Ma Huateng founded Tencent Inc. in 1998, and its early years
focused on the iconic product of QQ, China’s first instant
messaging software product. Tencent expanded into other Internet
fields such as games, music, microblogging, and online shopping. By
2011, Tencent’s QQ was China’s most successful instant messaging
software with over 700 million active users, and the company
released WeChat, another instant messaging software product.
Tencent’s two software products competed in the same space, with QQ
primarily PC-based with “online” and “offline” status, and WeChat
smartphone-based without “offline” status. WeChat soon acquired
over 300 million users. Tencent is often described as a successful
“second mover,” imitating a promising business model introduced by
innovative first-mover firms and then surpassing these firms.
The two IT giants faced off in 2013 when each invested in a taxi
booking app: Didi (by Tencent) and Kuaidi (by Alibaba). In an
August 2013 5.0 version update of WeChat, users were surprised to
find a “wallet” function added to the app, but most did not know
how to use it. However, for Jack Ma and Ma Huateng, all had become
clear: the two “horses” were going to war.
Tencent offered and then linked three seemingly unrelated apps:
smartphone-based WeChat, taxi-booking app Didi, and a new wallet
function. In January 2014, WeChat wallet was linked to Didi as the
payment method. Passengers using WeChat to pay the taxi fare
received a generous subsidy from Tencent, making taxi fare lower
than bus fare. Alipay and the Kuaidi app responded in a similar
way. While widely welcomed by white-collar workers, the
money-burning campaign cost each side approximately 1.5 billion RMB
(US$244 million). For Ma Huateng, the campaign is not just about
occupying the newly born taxi-booking app market in China, but also
about penetrating Jack Ma’s precious share of the mobile payment
market by “teaching” WeChat users how to use make mobile payments.
Weeks later, Ma Huateng continued his “teaching” in the virtual red
envelope campaign during Chinese Spring Festival. The virtual red
envelope is modeled after the Chinese tradition of exchanging
packets of money among friends and family members during holidays.
WeChat introduced the “red envelope shake” to the Chinese Spring
Festival Gala, during which users were invited to shake their
smartphones for a chance to win red envelopes, and eight million
WeChat users participated in this promotion campaign. WeChat users
can save the money won to their WeChat “wallet” and then send it to
others with their own red envelope. WeChat sent 1.2 billion red
envelopes worth over half a billion RMB (US$82 million) during the
promotion. However, to use the money from the red envelope, WeChat
users needed to add their bank card to their WeChat account and
thus fully activate the WeChat payment function. Retrospectively,
Jack Ma regarded the WeChat red envelope promotion as a “Pearl
Harbor attack” on his territory.
After the Chinese Spring Festival, the money-burning war game
between first mover Alipay and second mover WeChat continued. Both
sides heavily subsidized taxi passengers on their taxi-booking apps
through 2014. In the third quarter of 2014, Alipay’s market share
reached a peak of 82.6 percent, but WeChat’s increasing presence
the in mobile payment market was unstoppable. Both sides engaged in
a new red envelope campaign during the next Spring Festival
holiday. While Alipay fought hard to defend its market share,
WeChat’s social nature smoothly transformed users into payers.
By the end of 2016, both sides saw continuous growth in user
population; however, Alipay’s market share dropped to 54.10
percent, and Tencent and WeChat’s market share rose to 37.02
percent. In that year, consumers spent 157.55 trillion RMB
(US$23.72 trillion) on mobile devices in China, and QR codes and
POS machines supporting both Alipay and WeChat could be found at
street food vendors, supermarkets, department stores, and online
markets.
Discussion Questions:
-
What tactics did Tencent use to encroach on Alibaba’s share of the
mobile payment market?
-
What key resources did WeChat use to compete with Alipay?
-
Does WeChat’s presence in the mobile payment market always
negatively affect Alipay?
-
Would you rather be a first mover or a second mover in a new
technology market?
Sources:
Sophia Yan, “6 things you never knew about Alibaba”, CNN, May 12,
2015,
http://money.cnn.com/2015/05/12/tech...cts/index.html;
Paul Mozur, “In Urban China, Cash Is Rapidly Becoming Obsolete”,
New York Times, July 16, 2017,
https://www.nytimes.com/2017/07/16/b...-payments.html;
Eva Xiao, “How WeChat Pay became Alipay’s largest rival”, Tech in
Asia, April 20, 2017, https://www.techinasia.com/wechat-pay-vs-alipay;
Anonymous Author, “WeChat”, Wikipedia, October 2 2017, https://en.Wikipedia.org/wiki/WeChat...yment_services;
Anonymous Author, “WeChat red envelope”, Wikipedia, September 19,
2017, https://en.Wikipedia.org/wiki/WeChat_red_envelope;
Anonymous Author, “Alipay”, Wikipedia; September 8, 2017, https://en.Wikipedia.org/wiki/Alipay;
Nie Chenjing, “Mobile Payment Report: Alipay Shares Occupy Half of
the Country”, Xinhuanet, March 31, 2017; http://news.xinhuanet.com/fortune/20...1120732899.htm;
Li Yanxia, “Central Bank Report: China Mobile’s payment amount
increased by nearly 50% year-on-year in 2016, March 16, 2017,
http://it.people.com.cn/n1/2017/0316...-29150183.html.
concept check
-
What are the key components of the business model canvas?
-
What are the advantages and disadvantages of being a first
mover?
