Exam Questions The Importance of Business Models Chapter 5

Questions for Chapter 5

True/False

1. A company is most likely to successfully pivot during its customer discovery phase. (pg. 121)
2. It is not necessary to focus on a target market when developing a business plan; having a general sense of the overall market is enough. (pg. 125)
3. “Must-have” features and high switching costs are signs that a company’s product or service has achieved differentiation. (pg. 124)
4. Developers encourage pivoting because they enjoy making new products. (pg. 121)
5. A business model is a hypothesis that a company is trying to prove or disprove. (pg. 121)
6. The order in which companies develop their customer value proposition, target market, and differentiation does not matter, but changing one will affect the others. (pg. 123)
7. Most investors will prefer a proven business model to a well-researched business plan. (pg. 121)
8. In the Air, Aspirin, or Addiction framework to explain product/service differentiation, addiction is a necessity. (pg. 124)
9. Customer case studies and testimonials are two ways to substantiate claims that a company makes about its product or service. (pg. 124)
10. The Cost of Customer Acquisition is a capital expense. (pg. 127)
11. Nielsen Holdings switching to Google Docs instead of Microsoft Word is an example of how generational preferences can change the customer value proposition. (pg. 124)
12. The Serviceable Available Market (SAM) is a segment of the Total Addressable Market that a company targets for its product or service. (pg. 125)
13. When outlining milestones, it is more important to calculate the total capital required to get to breakeven than how you plan to source that capital over time. (pg. 129)
14. The Total Addressable Market is based on the geography of the target customer. (pg. 125)
15. Having a single stream of revenue is preferred to having multiple streams of revenue because it means a company is more focused. (pg. 128)
16. Human resources costs remain the same at all stages of company growth. (pg. 129)
17. In the early stages of company development, partnerships with outside entities can reduce risk and uncertainty. (pgs. 129-130)
18. Whether an asset is leased, rented or borrowed, the capital expense does not change. (pg. 129)
19. A dashboard is primarily used for measuring the results of financial statements. (pg. 130)
20. Measuring the most critical elements of your business model in real-time will help you understand patterns in your business before they appear on financial statements. (pg. 130)
21. If a product or service has no direct competitors, then it does not have a competitive environment. (pg. 132)
22. Most startups cease to exist because the product doesn’t work. (pg. 130)
23. Strong online sales of a product is proof that it should be sold at a physical storefront. (pg. 129)
24. Cost drivers are affected by economies of scale or scope. (pg. 130)
25. Every entrepreneur should understand how to calculate breakeven, cost to acquire a customer, and customer lifetime value. (pg. 103)
26. Strong regulations make it easy for new entrants to compete in an industry. (pg. 132)
27. A good financial strategy incorporates multiple scenarios of financial performance. (pg. 132)

(28) Having the customer remain with the status quo solution can be considered competition. (pg. 132)

Multiple Choice

1) The most important depleting asset of any entrepreneur is (pg. 121)

a) Intellectual Property

b) Money

c) Time

d) Market Competitiveness

e) Differentiation

2) At what phase is it most optimal to pivot? (pg. 121)

a) Customer discovery

b) Execution

c) Production

d) Scale

e) None of the above

3) Which of the following represent the first step in development of the Business Model Wheel? (pg. 122)

a) Cost Drivers

b) Key Metrics

c) The Value Proposition

d) Financial Strategy

e) Customer Segmentation

4) The core of the Business Model Wheel is (pg. 122)

a) Cost Drivers and Revenue Streams

b) Key Resources, Partners, and Key Metrics

c) The Value Proposition, Differentiation, and Target Market

d) Industry Attractiveness, Competitive Environment, and Financial Strategy

e) Customer Segmentation, Marketing Channels, Distribution Channels

5) Which question does the customer value proposition not answer: (pg. 123)

a) What is it?

b) Who is it for?

c) Why do they need it?

d) How does it work?

e) Where do you sell it?

6) A customer value proposition (pg. 123)

a) does not have to be unique or different

b) requires that the product or service’s benefits outweigh the costs

c) focuses on all needs of the customer, not just the most important ones

d) explains how to market to the customer

e) focuses on the cost of a product rather than its value

7) Volkswagen’s “clean diesel” cars are an example of (pg. 125)

a) mitigating cost

b) substantiation of product claims

c) puffery

d) strong product-market fit

e) business model exploration

8) The ______ is best defined as the total market demand for a product or service. (pg. 125)

a) TAM

b) SAM

c) SOM

d) CAC

e) CLTV

9) The ______ is the segment, or segments, of the ______ that you plan to target your product or service for sale. (pg. 125)

a) TAM; SAM

b) SAM; TAM

c) SOM; CAC

d) CAC; SAM

e) CLTV; CAC

10) Initially, the Serviceable Obtainable Market for startups will be composed of (pg. 125)

a) early adopters

b) innovators

c) laggards

d) early majority

e) A & B

11) Which of the following step in development of the Business Model Wheel considers the question: What is the Serviceable Obtainable Market?” (pg. 126)

a) Cost Drivers

b) Key Metrics

c) The Value Proposition

d) Financial Strategy

e) Customer Segments

12) Marketing channels serve to (pg. 126)

a) Communicate with the target customer(s)

b) Build awareness,

c) Encourage trial and purchase of products

d) A & C

e) A, B, & C

13) Which of the following step in development of the Business Model Wheel considers the questions on CAC and CLTV?” (pg. 126-127)

a) Cost Drivers

b) Key Metrics

c) The Value Proposition

d) Marketing Channels

e) Customer Segments

14) Selling directly to the customer requires (pg. 127)

a) a sales force

b) a website

c) channel partners

d) mobile advertising

e) None of the above

15) In order for a business to be successful, the lifetime value of a customer (CLTV) must be (pg. 127)

a) equal to the cost to acquire that customer (CAC)

b) more than three times the cost to acquire that Customer (CAC)

c) equal to the customer churn

d) equal to the average revenue per customer x average customer lifetime

e) Both B & D

16) Uber’s “surge pricing” is an example of (pg, 128)

a) cost-based pricing

b) dynamic pricing

c) customer targeting

d) market testing

e) fixed pricing

17) Revenue streams refer to (pg. 128)

a) the revenue per customer for a specific product

b) the financial metrics used to identify the sources of revenue generation in a business

c) the ways in which you make money by selling your product or service

d) algorithms that set price proportionate to demand

e) the frequency and volume of purchases

18) What revenue stream is most popular with mobile app companies? (pg. 128)

a) Advertising Fees

b) Subscription Fees

c) Transaction Fees

d) Professional Fees

e) Utility Fees

19) When displayed graphically the revenue line resembles a(n) (pg. 128)

a) parabola

b) hockey stick

c) diagonal line

d) inverse curve

e) zig-zag

20) Which of the following resource categories is not an important element of your business model? (pg. 129)

a) Human resources

b) Physical resources

c) Natural resources

d) Intellectual resources

e) Financial resources

21) Underestimating the capital requirements for a business can lead to (pg. 129)

a) dilution of founders’ shares

b) more rounds of venture capital than expected

c) bankruptcy

d) increased costs

e) All of the above

22) The go-to-market strategy depends upon (pgs. 120-130)

a) the relationship between the cost of customer acquisition and the lifetime value of the customer

b) identifying the market segments and customer profiles of target customers

c) the cost-effectiveness of the distribution channel

d) the customer value proposition

e) All of the above

23) Which of the following is not an example of a partnership that can enhance a customer value proposition? (pgs. 129-130)

a) Creating alliance with a company that would otherwise be a direct competitor

b) Entering into a joint venture with a company that has existing factory line that can be used to make your product

c) Outsourcing UX design to a marketing firm that has created similar products

d) Subletting space from another company that over-estimated their space needs

e) Using a low-cost distributor whose existing customers are outside of the target geography for prospective customers

24) When it comes to costs, it is important to consider (pg. 130)

1. What are the cost drivers?
2. What is the unit cost structure?
3. Where is there leverage in the cost model?
4. Are there economies of scale or scope?
5. All of the above

25) When considering industry attractiveness, investors will not look at (pg. 132)

a) industry size

b) business trends

c) current regulations

d) the relevant industry experience of the startup team

e) potential for disruption

Open Ended Questions:

1. Explain the difference between Total Addressable Market, Serviceable Addressable Market, and Serviceable Obtainable Market. (pg. 125)

Total addressable Market (TAM) is the total market demand for a product or service.

Serviceable Addressable Market (SAM) is the segment, or segments, of the TAM that you plan to target your product or service for sale

Serviceable Obtainable Market is the portion of the SAM you can likely capture as customers.

1. What is a distribution channel? What is the difference between direct and indirect distribution? What are some factors to consider when choosing which distribution channel(s) to pursue? (pgs. 127-128)

A distribution channel is the means by which a product reaches the end-consumer. Direct distribution is when a company’s salesforce sells directly to the customers. Indirect distribution is when a company partners with intermediaries that sell its products.

Considerations for choosing a distribution channel include:

Revenue potential and cost efficiencies

How customers are currently being reached by the company and/or its industry competitors

What is most convenient for the customer

How quickly the customer needs to receive the product/service

1. Name three types of revenue streams and how they work. (pg. 128)

A revenue stream is how a company makes money by selling its product or service. Types of revenue streams include:

• Unit Sales – Sell a product or service to customers on a per unit basis
• Advertising Fees – Sell opportunities to distribute messages
• Franchise Fees – Sell and support a replicable business for others to invest in, grow, and manage locally
• Utility Fees – Sell goods and services on a per-use or as-consumed basis
• Subscription Fees – Charge a fixed price for access to your services for a period of time or series of uses
• Transaction Fees – Charge a fee for referring, enabling, or executing a transaction between parties
• Professional Fees – Provide professional services on a time-and-materials contract
• License Fees – Sell the rights to use intellectual property

1. What are the characteristics of product differentiation? (pg. 124)

Air – Air is a necessity. You need it to survive.

How the customer is solving the problem today and does your solution create enough of a benefit to convince them to switch?

Aspirin - Aspirin addresses a pain.

You are addressing an issue that has, or will have, dire consequences if not addressed?

Addiction. Addiction is neither a necessity, nor a pain reliever, but something that you feel a strong desire to use.

Addiction is difficult to predict but lucrative

Differentiation must also resonate with the customer: product or service must have key features that the customer can’t live without or should have high switching costs.

1. Assume that a company is selling a subscription to a car cleaning service for $20.00 per month and the average customer lifetime is 30 months. Their marketing department has found that running online ads at $5000 per ad attracts 100 customer and purchasing a billboard for $3000 attracts 60 customers.

Using the principles of customer lifetime value (CLTV) and Cost of Customer Acquisition (CAC), explain whether these ads are worthwhile. Is one marketing channel better than the other? (pg. 127)

CLTV = Average Revenue per Customer x Average Customer Lifetime

$20 x 30 = $600

CAC = Total Sales and Marketing expense / Number of New Customers

CAC for online ads = 5,000/100 = $50

CAC for billboard = $3000/60 = $50

Therefore, the CLTV/CAC ratio for both online ads and billboards is 12, making both marketing channels worthwhile as it is higher than 3. Since both channels have the same CAC, they are the same value – neither is better.

1. What are some ways to reduce capital expenditures early on in the lifecycle of a company? (pgs. 129-130)

• Renting instead of purchasing property, plant equipment
• Having shorter lease terms (1-2 years versus 3-5 years)
• Creating partnerships with existing companies that have expertise and/or equipment that can help deliver the product or service
• Outsourcing production of goods

1. What factors influence the competitiveness of a market? (pg. 132)

• Who are the existing market players and how many there are
• How existing players might react to the new market dynamics
• Strengths and weaknesses of each competitor
• Resources of each competitor
• Intensity of existing rivalry
• Threat of substitutes
• Potential new market entrants
• Ability/desire of customer to stay at status quo

1. How does a company choose which key metrics need to be measured and monitored? (pg. 130)

• Define business model success in terms of metrics than can be measured
• Measure value delivery to the customer – how is the customer receiving value?
• Define performance standards and measure performance
• Choose metrics that relate to revenues and costs