Business Model Test Switching cost
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Example: Most ERP solutions are implemented with customized functionality. Each ERP system has a proprietary data model. Learning to operate another ERP system is time consuming for the users. Switching to another ERP system is not easy. Switching cost is high.
How difficult is it for your customers to switch to a competitive product? 1
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Recurring revenue
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Example: Software used to be sold with a onetime paidup license fee and periodical maintenance fees. As less expensive software come to the market it became more difficult to retain the periodical maintenance fees. Small companies resisted this approach and it never picked up in the consumer market. With the introduction of Software as a Service payment on a recurring subscription base was also introduced. Now customers (businesses as well as consumers) pay recurring for using the software (and the associated IT resources).
Earning before spending
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Example: All software companies will have to make an up font investments in a minimum viable product. When that is brought to the market companies may take very different routes. Companies such as Atlassian and 37signals have managed to capture markets without having any cost of sales or need for opening new offices. As the revenue grow they can add more cost for development, production and marketing optimization.
Game chaining cost structure
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Example: Skype was an early mover in taking advantage of VoIP telephony. They competed with the telco’s that had huge infrastructure cost where Skype had basically none. The revenue Skype generated per callminutes was obviously very low (as most calls were free), but as the cost were correspondingly low they were able to build a profitable company. Software companies have difficulties gaining competitive cost structures over other similar software companies, but applying software based solutions to disrupt a physical industry can be extremely powerful (telecom, newspapers, music, film, publishers etc.)
Is each sale a one time transaction or the start of a recurring revenue stream? One time transaction
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Recurring revenue stream
Do you generate revenue before you have to spend on producing or selling your product or service? Operational cost and investments are made before revenue flows
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10 Revenue flows before operational cost and investments are incurred
Does your business model have substantially better cost structures than your competitors? Our cost structure is the same as our competitors
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10 Our cost structure is superior compared to our competitors’
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