Gennaro Cuofano's Blog, page 246

November 17, 2018

Dynamic Pricing: Is The Price Tag Legacy Coming To An End?

Dynamic pricing is the practice of having multiple price points based on several factors, such as customers segments, peak times of service and time-based consumption that allow the company is applying dynamic pricing to expand its revenue generation.

Thus, wherein a static or fixed pricing a company applies the same price level to any customer and market condition, in a dynamic pricing strategy a company applies several prices based on a few critical factors for the business.

When price tags didn’t even exist

Today we go to any store find a price tag and assume that is the value of that item we’re purchasing. There’s no question asked, neither interaction in many cases with the clerk. Yet there was a time when price tags didn’t exist.

Finding the origin of things is always hard. Before the 19th-century price tags didn’t exist. In other words, before buying anything you needed to bargain and haggle with the clerk to finalize the purchase.

When price tags got introduced, they did represent an incredible innovation. Indeed, stores could finally manage more inventories with fewer clerks. That’s because clients needed to walk to the clerk ask for price and after haggling, a bit agree on the purchase.

This might have been time-consuming in terms of the clerks required to manage the inventories, the training needed to have clerks know the price ranges, and what was allowed. And the time it could take to customers to bargain the price.

As price tags have become the norm, where the same prices are applied to anyone, we find it odd when on the web the same thing changes in price. In many cases, we look for a flight ticket, which price is different, an item on a popular e-commerce platform that according to where and when we browse shows us a slightly different price.

This makes us wonder whether the era of price tags is over in favor of what is called dynamic pricing. Also, many dynamic pricing strategies are already used in many of the products or services you might buy. It’s just that you don’t realize that.

What is dynamic pricing?

Dynamic pricing is the practice where prices for goods or services change based on several factors. Think of the case in which there is a surge in demand for a service (Uber for example), and the price of it rises accordingly.

Therefore, there are certain times of the day or certain periods where the same service or item can be sold for more. Also, at a certain interval of time, the demand for a service might be higher. Think of the case of more people trying to purchase a ticket for a concert which might drive price up.

Is dynamic pricing legal?

As fixed prices have become the norm after the 19th century, people often wonder whether dynamic pricing is legal. Yet it is when price discrimination depends on economic factors that are affected by demand and offer. In other cases, if price discrimination might be based on gender, race or religion that becomes illegal.

Technological changes are enabling dynamic pricing

Think of the case in which you enter a store to purchase a coffee an pay $2. Yet a person enters the same coffee shop and purchase the same coffee for $1. Would you feel good about it? Chances are you’d feel ripped and perceive the so-called dynamic pricing as a fraud.

Think of a different scenario. You’re purchasing an item on e-commerce, that item price is set according to several factors. The algorithm that drives the offering on the e-commerce platform has quite some data about your behavior, spending habit, it knows your location, and it knows the time of purchase.

Based on all those variables it determines the price of the good you’re buying. You would perceive it as all done algorithmically and automatically by a machine, which is not thinking. You might perceive it as a technological advancement.

Besides, if you don’t feel like to buy, you can see quite the e-commerce and get back when and if prices are lower. The fact that technology nowadays allows platforms to embed algorithms makes it easy for those companies to leverage dynamic prices and makes it easier for consumers to accept this practice.

How can you apply dynamic pricing to your business?

If you’re evaluating dynamic pricing for your business, then it makes sense to understand whether your business model might be better off with this approach. For instance, do you serve several segments that have entirely different budget levels?

Think of a company that serves both consumers or business clients. The former will have a budget that is way lower compared to the latter. In that case, you can achieve higher revenue by simply repackaging your product or service in a different format.

Therefore, for the customer segment with the highest budget, it might make sense to have your service at a certain time of the day. Thus the price for that segment will be higher. In other cases, your product or service might have peaked.

Think of the case of more people consuming electricity at a certain time of the day. Based on simple demand and offer electricity will cost more. Think also of a coffee shop for which customers purchasing from the early hours of the morning are willing to pay more. You can create a fast track that makes the price higher for those customers.

Think also of the case of e-commerce that does business around the world. In certain countries (like the US and Canada) the value of the service is higher and the spending ability as well. Therefore, based on the IP of the user accessing your store prices will change to reflect local spending habits.

In short, there are several ways in which you can apply dynamic pricing to your business, and it boils down to a few scenarios:

peak or surge pricing: based on peak hours or periods where the service gets charged more
segmented pricing: based on the spending ability of some customers compared to others
changing conditions: applied for instance when sales start to slow down due to macroeconomic factors, to keep up with the trend and adjust them upward again when the market gets better
time-based pricing: offer faster service for a higher charge
penetration pricing: lower the price of service as a sort of marketing expense to penetrate a market

Resources for your business:

What Is a Business Model? 30 Successful Types of Business Models You Need to Know
What Is a Business Model Canvas? Business Model Canvas Explained

Handpicked popular case studies from the site:

The Power of Google Business Model in a Nutshell
How Does Google Make Money? It’s Not Just Advertising!
How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
How Amazon Makes Money: Amazon Business Model in a Nutshell
How Does Netflix Make Money? Netflix Business Model Explained
How Does Spotify Make Money? Spotify Business Model In A Nutshell
The Trillion Dollar Company: Apple Business Model In A Nutshell

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Published on November 17, 2018 17:05

How Does Tiffany Make Money? A Quick Glance At Tiffany Business Model

With over four billion dollars in net sales in 2017, Tiffany is still an iconic brand, that managed to keep its brand awareness and a perceived sense of luxury and quality thanks also to strategic marketing, PR, and media relations activities. Most of those activities are focused around the iconic Flagship Store located in 727 of Fifth Avenue, which accounted for less than ten percent of the company’s worldwide sales in 2017.

Tiffany business model

Tiffany business model is based on three primary products that range from jewelry collections, designer jewelry, and engagement jewelry. With its iconic brand, Tiffany made over four billion dollars in net sales in 2017. Tiffany operates in four main geographical areas reported separately:

Americas
Asia-Pacific
Japan
and Europe

Jewelry represented 91%, 92% and 93% of worldwide net sales in 2017, 2016 and 2015.

A vast range of jewelry products

Tiffany sells three main kinds of products:

Jewelry collections that comprise a wide range of products like Tiffany Victoria, Tiffany Soleste, Tiffany Keys, and Return to Tiffany, among others
Engagement jewelry comprise engagement rings (about 60% of the total collection for this category) and wedding bands
Designer jewelry comprise jewelry that is attributed to one of the Company’s “named” designers: Elsa Peretti, Paloma Picasso, and Jean Schlumberger

The key to Tiffany success? Advertising, Marketing, PR and Media Relations

Tiffany’s brand has managed to keep its iconicity for decades. Today the company still invests massive resources in marketing and PR programs to maintain and enhance its brand awareness. The critical association that Tiffany tries to establish in the mind of its customers in the sense of luxury. That is not by change that Tiffany silver products cost way much than any other competitor. Thus, Tiffany has been able to create this powerful sense of luxury and quality in its customer’s minds.

This kind of association requires massive investments of resources, Indeed, in 2017, 2016 and 2015, the Company spent $314.9 million, $299.0 million and $302.0 million, representing 7.6%, 7.5% and 7.4% of worldwide net sales in the following activities:

advertising
marketing
and public and media relations,

Other key activities are about creating new product offerings and engaging in-store and online environments. Tiffany is also working on a multichannel strategy that together with print media leverages on digital and social media.

Tiffany control over its supply chain

A key ingredient for Tiffany is represented by its ability to maintain control in its supply chain by leveraging on internal jewelry manufacturing and direct diamond sourcing. For instance, Tiffany manufactures jewelry in New York, Rhode Island, and Kentucky, which produces about 60% of the jewelry sold by the organization.

The iconic flagship store in New York City

The iconic store located at 727 Fifth Avenue, with about 45,500 gross square feet and its “The Blue Box Cafe” opened in 2017, are both a key ingredient to Tiffany marketing and public relations efforts. Sales in this store represent less than 10% of worldwide net sales.

What’s next for Tiffany?

Other vital activities Tiffany will be focusing on the following areas:

Amplify an evolved brand message
Deliver an exciting omnichannel customer experience
Cultivate a more efficient operating model
Inspire an aligned and agile organization to win
To achieve sustainable sales growth

Compensation composition for executive management

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Source: Tiffany Annual Report 2017

Tiffany top three institutional investors

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Source: Tiffany Annual Report 2017

Business strategy lessons learned from Tiffany

Tiffany has been able over the years to keep its brand awareness strong, and nonetheless its higher prices it managed to keep its sales grow over the years. A few of the lessons to learn from Tiffany:

If you want to give a perception of luxury and quality, create a sense of scarcity through pricing
invest in PR and media relations by creating a strong brand in the minds of people. This requires an important investment of resources to create a continuous buzz but also sustained
keep a tight control on the supply chain, by sourcing the best products and internalize manufacturing to have as much control as possible on the quality of the final outcome

Resources for your business:

What Is a Business Model? 30 Successful Types of Business Models You Need to Know
What Is a Business Model Canvas? Business Model Canvas Explained

Handpicked popular case studies from the site:

The post How Does Tiffany Make Money? A Quick Glance At Tiffany Business Model appeared first on Four-Week MBA.

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Published on November 17, 2018 14:11

November 16, 2018

What is Free Cash Flow? In Free Cash Flow We Trust

Free cash flow is the amount of cash a company generates through its operations, once you take off the expenses to run the operations and the capital expenditure. Capital expenditures comprise expenses incurred to maintain or increase the assets that make a company operations possible and successful.

In free cash flow we trust

When you look at the financials of tech companies, be it Tesla, Amazon or any other so-called unicorn startups or tech company an interesting aspect is how bad they perform if you measure them in terms of bottom line. Indeed, when you look at revenue growth, many of those companies seem to be doing fine. Yet when you look at the net profit (the money left after you deduct all the expenses from operating the business plus tax and interests), you are left with nothing, if not a net loss.

Does it mean those tech companies are worth nothing if they are not able to have a net profit? Not necessarily but of course the bottom line is still an important metric. When we enter the startup and tech world, we often need other parameters to measure their impact, for a few reasons.

Ecosystems take time to build

Often, tech companies are opening up new spaces, industries and operate with new business models. Those industries, areas and business models are not stand-alone, and they often need several pieces to come together before a company can start being profitable. Think for instance how Salesforce began to operate with – at the time – new business model for enterprise SaaS, which relied on a subscription-based revenue model. While Salesforce grew consistently and quickly in terms of revenues, it was unprofitable for quite some time:

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Indeed, Salesforce in 2018 finally posted a net income, after years of net losses. Today the SaaS business model has become the norm for most tech startups and a massive industry. Yet it took years to build a context which would allow a single company, like Salesforce to make a profit:

[image error]Software as a service (SaaS) is a model where a third-party provider hosts the infrastructure and applications and make them available through the Internet. This model leverages on web-based software and on-demand applications that run centrally on the server of the provider, while the company purchasing the service will use those applications based on need and without the upfront cost.
Growth over profitability

Another critical element is about growth. As startups try to dominate a niche, space, industry, and marketplace, they emphasize growth rather than profitability.

[image error]Spotify is a two-sided marketplace where artists and music fans encounter on a single platform. Founded in 2008 with the belief that music should be universally accessible with a seamless experience based on streaming audio and video. It generated over €4 billion in 2017, of which almost 90% based on premium memberships and 10% based on a free service which is ad-supported. The company recorded an operating loss of €378 million in 2017.

In many cases, tech companies are not only offering new products but also adopting new business models that open up spaces that before didn’t exist. In this scenario, market domination becomes the rule.

Thus, metrics like users acquisition become the primary elements those companies focus on to judge whether the business is going in the right direction. When you focus on growth, profitability will in many cases be affected negatively. Thus, to build a more sustainable business model, often companies – that have been focusing on growth for years – will have to slow down a bit and allow its bottom line to keep up with the growth pace.

Free cash flow as a north star

If you looked at Amazon financials in the early 2000s, you cloud notice a negative bottom line. Indeed, Amazon between 2001 and 2002 was operating with a net loss of over a hundred million dollars. However, already in 2002 Amazon was generating cash from its operations. Indeed, Amazon has been able over the years to create a built-in cash machine mechanism for its business model to generate a massive amount of cash independently from its profit margins:

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Thus, if we were looking at Amazon purely from its bottom line, we would assume the company would not be worth much. Yet Amazon – at the time of this writing – is among the tech companies with the highest market capitalization in the world. Amazon managed to disrupt several industries and grow at fast speed thanks to its cash conversion cycle and its ability to generate cash from its operations.

Do we need to forget about the bottom line?

When Google showed its numbers back in the 2000s not only it was a company growing at a fast speed; it was also extremely profitable. Indeed, besides the year 2000; in 2003 Google had already passed the billion revenue mark and had over a hundred million in net profit.

The same applies to Facebook. When the company made its IPO back in 2012, it had already a billion in net profit and over three billion in revenues. Both those companies would become the largest tech giants of our days. They had created new businesses, technologies and operated new business models; yet they were highly profitable. Thus, looking at the bottom line in combination with other metrics more focus on cash generation is still critical.

However, it is essential to make a critical differentiation. Where a company is not able to be profitable due to its inability to figure out a sustainable business model, that makes it way riskier than other companies that instead are not profitable because they decided to emphasize on cash generation and growth.

In other words, the fact the Amazon chooses to keep its profit margin low is a strategic decision. Compared to an upcoming startup, that instead is operating at a net loss only because it can’t figure out yet a business model. In the latter scenario, the bottom line still matters!

Resources for your business:

What Is a Business Model? 30 Successful Types of Business Models You Need to Know
What Is a Business Model Canvas? Business Model Canvas Explained

Handpicked case studies:

The post What is Free Cash Flow? In Free Cash Flow We Trust appeared first on Four-Week MBA.

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Published on November 16, 2018 06:51

November 14, 2018

Alphabet (Google) business model evolution

Google business model is changing over the years. Even though advertising is still its cash cow, Google has been diversifying its revenues in other areas. While in 2015 90% of Google revenues came from advertising, in 2017, advertising revenues represented 86%. Other revenues grew from about 10% in 2015 to almost 13% in 2017.

It is critical to notice a few important aspects about Google business model:

monetization strategy: how the revenue composition is changing
profitability: how operating margin is evolving
cost structure: how the TAC rate is changing

Evolution of Google monetization strategy

Google monetization strategy has been changing over the years. Even though Google still follows an advertising business model at its core. Alphabet (this is how Google got rebranded) has been diversifying its revenues in several areas.

Revenue breakdown 2015

Google properties
52,357

Google Network
15,033

Other revenues
7,154

Other Bets revenues
445

Revenue breakdown 2016

Google properties
63,785

Google Network
15,598

Other revenues
10,080

Other Bets revenues
809

Revenues breakdown 2017

Google properties
77,788

Google Network
17,587

Other revenues
14,277

Other Bets revenues
1,203

It is interesting to observe how Google revenue composition is changing over the years. Advertising revenues changed from 90% in 2015, to 86% in 2017.

Evolution of Google profitability

At its core, Google has been a highly profitable company since its IPO. Indeed, when investors looked under the hood of Google the found a company which was highly profitable, it was growing at lightspeed, and it was meant to dominate the digital space.

Operating Margin Evolution

Operating income
Revenues
Operating Margin

2013
15,403
55,519
28%

2014
16,496
66,001
25%

2015
19,360
74,989
26%

2016
23,716
90,272
26%

2017
26,146
110,855
24%

Over the years Google managed to keep its operating margins pretty high. Indeed Google‘s operating margins or the percentage of revenues that are represented by operating income has gone from 28% in 2013 to 24% in 2017.

Google cost structure evolution

One key ingredient of Google success is its ability to keep the traffic acquisition costs at a level that guarantees its search pages a proper distribution (each day people perform more than three billion queries through Google search algorithms) while being able to monetize its pages:

[image error]TAC stands for traffic acquisition cost, and that is the rate to which Google has to spend resources on the percentage of its revenues to acquire traffic. Indeed, the TAC Rate shows Google percentage of revenues spent toward acquiring traffic toward its pages, and it points out the traffic Google acquires from its network members. In 2017 Google recorded a TAC rate on Network Members of 71.9% while the Google Properties TAX Rate was 11.6%.

Evolution of Google TAC Rate

TAC to distribution partners (as % of Google Properties Revenues)
TAC to Google Network Members (as % of Google Members Revenues)

2013
7.90%
68.10%

2014
8.10%
67.80%

2015
7.80%
68.10%

2016
9.20%
69.90%

2017
11.60%
71.90%

It is critical to distinguish between the acquisition costs of Google on its search pages and that outside its search pages. Indeed, to get traffic on its search pages, Google has to close deals with partners to guarantee a continuous stream of traffic. Instead, to allow businesses part of the Google AdWords (now Google Ads) platform to be featured within web properties part of Google AdSense, Google shares its revenues with the publishers that allow Google to place banners on their properties. Therefore, Google has way higher costs in a percentage of segment revenues on its members’ properties, than on its properties.

Keeping this distinction in mind is critical to have a deep understanding of the Google business model.

Resources for your business:

Handpicked case studies:

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Published on November 14, 2018 14:36

November 13, 2018

The Advertising Economy: Inside Facebook Money-Making Machine

Facebook is a cash machine worth billions that can generate revenues at higher margins than Google considering it has lower traffic acquisition costs. One of its secrets is its ability to attract billion of people each day and keep them hooked to its products (be it Facebook, Instagram, or WhatsApp).

Facebook advertising which comprised over ninety percent of revenues in 2017 consist primarily:

Display Advertising: banner ads, interstitials, video ads, and rich media ads that aim to reach large numbers of consumers within a particular audience segment. Display advertising counts small brands and large brands, such as Walmart U.S. and Diageo.
Performance-based Advertising. Performance-based advertising involves advertisers that seek specific user behaviors. Those can comprise:

clicks on a search
ad or a keyword-based content ad
a response to an email campaign
or an online purchase

The impressions economics: served vs. viewed impressions

In 2015 Facebook clarified:

Not all ad impressions are created equal. Increasingly, advertisers, publishers and advertising industry groups are adopting the position that it’s better to measure viewed impressions rather than served impressions.

As Facebook explains:

If an ad is served, it means that a publisher has told its system to deliver an ad. As long as the system registers delivery of the ad, it’s counted as a success. What happens next is less certain. The ad could appear someplace where lots of people see it, like the top of a website homepage. Or it might be served without anyone ever seeing it. For instance, the ad could appear far down at the bottom of a web page (below the fold). Or a person could visit a site and then leave before the ad has fully rendered.

and it continued:

Viewed impressions add an extra layer of analytical rigor, as well as common sense. They more accurately define delivery and help ensure that people have seen the ads they’re supposed to see…
…We measure an ad impression the moment an ad enters the screen of a desktop browser or mobile app. If an ad doesn’t enter the screen, we don’t count it as an ad impression.

More precisely:

An impression is counted as the number of times an instance of an ad is on screen for the first time. (Example: If an ad is on screen and someone scrolls down, and then scrolls back up to the same ad, that counts as 1 impression. If an ad is on screen for someone 2 different times in a day, that counts as 2 impressions.) Since impressions are counted the same way for ads that contain either images or video, a video is not required to start playing for the impression to be counted. Though this method of counting video impressions differs from industry standards for video ads, it ensures consistency in reporting impressions when ad campaigns contain both videos and images.

Facebook advertising system in a nutshell

As explained by Facebook:

When advertisers create an ad campaign with Facebook, they specify the types of users they would like to reach based on information that users chose to share about their age, location, gender, relationship status, educational history, workplace, and interests.

Indeed, in terms of market segmentation, Facebook is among the most powerful tools for marketers. You can access the demographics of billion of people at a fingertip:

For example, a self-storage company ran a campaign to reach students on college campuses prior to summer break. Additionally, advertisers indicate the maximum price they are willing to pay for their ad and their maximum budget.

Usually, advertising campaigns can be run either on CPM (cost per mille) or a CPC (cost per click) basis:

Advertisers choose to pay for their ads based on either cost per thousand impressions (CPM) on a fixed or bidded basis or cost per click (CPC) on a bidded basis. Our system also supports guaranteed delivery of a fixed number of ad impressions for a fixed price. Facebook’s ad serving technology dynamically determines the best available ad to show each user based on the combination of the user’s unique attributes and the real-time comparison of bids from eligible ads.

The Facebook cash cow is mobile advertising

[image error]In the first nine months of 2018, mobile advertising was estimated at 92% of the total advertising on Facebook products. Active monthly users decreased from 376 million to 375 million in Europe. In the US and Canada, users increased from 241 million to 242 million. At the same time, average revenue per user grew worldwide. Besides all the buzz of 2018, the Facebook business model seems (for now) unshakable.

Nonetheless of all the buzz of 2017-18 around Facebook and the various data breaches from third parties Facebook revenues grew primarily driven by mobile advertising, which in the first months of 2018 represented over 92% of its revenues.

Marketers fooled by engineers: when the attention merchant decides the rules of the game

One interesting aspect of digital advertising is its ability to introduce complex algorithms and engineered systems to be able to track the marketing activity of any business. However, those digital businesses that took over the digital world, like Google and Facebook still live the attention merchant paradox.

Where those platforms are the ones creating the rules of the game. They are also the ones that determine what metrics matter. When Facebook engineers sell marketers impressions and likes, all they are selling is a metrics which value is dubious.

Yet as that metric is tracked and packaged within a complex algorithm it gives marketers and businesses, in general, the impression that is all data-driven and so it has a clear ROI. However, with a better look, you might realize that those engineers have become better than marketers at selling. Thus, a paradox of this generation is that finally marketers got fooled by engineers!

Resources for your business:

What Is a Business Model? 30 Successful Types of Business Models You Need to Know
What Is a Business Model Canvas? Business Model Canvas Explained
Marketing vs. Sales: How to Use Sales Processes to Grow Your Business
What Is a Value Proposition? Value Proposition Canvas Explained
What Is Business Development? The Complete Guide To Business Development

Handpicked case studies:

How Does Facebook Make Money? Facebook Hidden Revenue Business Model Explained
The Power of Google Business Model in a Nutshell
How Does Google Make Money? It’s Not Just Advertising!
How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
How Does Twitter Make Money? Twitter Business Model In A Nutshell
How Amazon Makes Money: Amazon Business Model in a Nutshell
How Does Netflix Make Money? Netflix Business Model Explained

Facebook Revenue Change Over The Years

Advertising
Payments and other fees

2010
1,868
106

2011
3,154
557

2012
4,279
810

2013
6,986
886

2014
11,492
974

2015
17,079
849

2016
26,885
753

2017
39,942
711

References for the analysis:

Facebook Ads Study
Facebook Annual Report 2017
Facebook 8Q 2018

The post The Advertising Economy: Inside Facebook Money-Making Machine appeared first on Four-Week MBA.

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Published on November 13, 2018 13:10

November 12, 2018

How Do Banks Make Money? Banks Business Model In A Nutshell

Banks like JPMorgan, Bank of America and Goldman Sachs make money with consumer banking, investment baking, commercial banking, and asset and wealth management. Those banks collect fees for the services provided. Also, banks earn on the interests of money borrowed. A critical metric to assess the success of any bank is its ability to attract assets under management. For instance, in 2017 JPMorgan managed over two trillion of assets, while Goldman Sachs managed almost one and a half trillion and Bank of America over a trillion.

How does JPMorgan make money?

JP Morgan Net Revenues in 2017

Consumer & Community Banking
$46.48B

Corporate & Investment Bank
$34.49B

Commercial Banking
$8.60B

Asset & Wealth Management
$12.91B

Corporate
$1,14B

JPMorgan operates four major reportable business segments:

Consumer & Community Banking
Corporate & Investment Bank
Commercial Banking
Asset & Wealth Management.
Corporate

[image error]

The strongest segment for JPMorgan is the consumer and community banking with over $46 billion in revenues a 17% return on equity (ROE) and a net income of $9.4 billion. This segment comprises a customer base of 61 million U.S. households and 4 million small businesses. Those customers had 97 million debit and credit card accounts and spent over $900 billion on those cards in 2017.

The primary operating segments of JPMorgan Chase are summarized below:

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Source: JPMorgan Chase Annual Report (2017)

How does Goldman Sachs make money?

Goldman Sachs Net Revenues in 2017

Investment Banking
$ 7.37B

Institutional Client Services
$11.90B

Investing & Lending
$6.58B

Investment Management
$6.21B

Goldman Sachs is a leading global investment banking, securities and investment management firm. Goldman provides a wide range of financial services that are reported under four business segments:

Investment Banking
Institutional Client Services
Investing& Lending
Investment Management

The four primary segments and the services offered for each are described below:

[image error]

Source: Goldman Sachs Annual Report (2017)

The Institutional Client Services services are the largest segment of the bank. I comprise fixed income, currency and commodities client execution. This segment is followed by investment banking, investing and lending and investment management.

If we look at Goldman Sachs revenues based on the primary services provided:

[image error]

Source: Goldman Sachs Annual Report (2017)

Investment banking together with market making are the primary sources of income. The market is making consists on having a reserve of certain financial instruments so that when a buyer or seller of that financial instrument is willing to make a transaction, she/he will be able to do so, even in the absence of a buyer/seller on the other side. Indeed, the market maker is the one acting as a counterpart, thus making the transaction possible. This ensures market liquidity and smooth transactions even when none is queuing on that transaction.

Those market-making revenues consist of revenues (excluding net interest) from client execution activities related to interest rate products, credit products, mortgages, currencies, commodities and equity products.

How does Bank of America make money?

Bank of America net revenues in 2017

Consumer Banking
$34,5B

Global Wealth & Investment Management
$18,6B

Global Banking
$20B

Global Markets
$15,9B

All Other
-0.78B

Bank of America has four business segment:

Consumer Banking
Global Wealth & Investment Management
Global Banking
Global Markets

The largest segment is Consumer Banking which comprises. Deposits and Consumer Lending, including traditional savings accounts, money market savings accounts, CDs and IRAs, noninterest-and interest-bearing checking accounts.

Deposits generate fees such as account service fees, non-sufficient funds fees, overdraft charges, and ATM fees, as well as investment and brokerage fees from Merrill Edge accounts.

Consumer Lending generates interchange revenue from:

credit and debit card transactions
late fees
cash advance fees
annual credit card fees

[image error]

Source: Bank of America Annual Report (2017)

Below the primary segments and all the related activities of Bank of America:

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Who manages the most assets under management among JP Morgan, Bank of America and Goldman Sachs banks?

Total Assets Managed

JPMorgan
Bank of America
Goldman Sachs

2016
$1,771B
$886B
$1,379B

2017
$2,034B
$1,080B
$1,494B

Massive banks like JPMorgan, Bank of America, and Goldman Sachs manage from billion to trillion of assets. Indeed, a key metric to assess the success of any bank is its ability to attract client’s assets. In short, banks manage those assets for the clients and earn commissions on the asset management performed.

For, instance, in 2017 JPMorgan managed over two trillion of assets, while Goldman Sachs managed almost one and a half trillion and Bank of America over a trillion. This metric of the assets under management is critical to assess the business model sustainability of those banks as it is also a measure of trust clients might have toward those banks.

Who makes more revenues among JP Morgan, Bank of America and Goldman Sachs banks?

Total Net Revenues

JP Morgan
Bank of America
Goldman Sachs

2016
$95.66B
$83.70B
$30.60B

2017
$99.62B
$87.35B
$32.07B

At revenue level, JPMorgan made almost $100 billion in 2017, compared to over $87 billion of Bank of America and over $32 billion of Goldman Sachs.

References:

Goldman Sachs Annual Report 2017
JPMorgan Annual Report 2017
Bank of America Annual Report 2017

Resources for your business:

Handpicked case studies:

The Power of Google Business Model in a Nutshell
How Does Google Make Money? It’s Not Just Advertising!
How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
How Does Twitter Make Money? Twitter Business Model In A Nutshell
How Amazon Makes Money: Amazon Business Model in a Nutshell

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Published on November 12, 2018 12:51

November 11, 2018

The Most Used Business Models In The European Startup Ecosystem

According to the European Startup Monitor (2016), the most used business models in the European ecosystem are IT/software development, followed by SaaS and Industrial technology/production/hardware. The greatest challenge is related to sales and customer acquisition.

An overview of the European startup ecosystem

As reported by the European Startup Monitor:

To provide an overview of the industries in which the startups are operating, the respondents were asked to match their startup to one of eighteen industry categories. The results indicate the relevance of the digital economy for innovative European startups; the digital economy accounts for five of the seven major categories. Most startups stated that their venture belongs to the IT/software development sector (15.0%) followed by software as a service (12.2%) and industrial technology/production/ hardware (8.3%) . The most frequent categories on the level of individual countries are IT/ software development (8 countries) and software as a service (8 countries).

What is the most popular business model for European Startups?

Most Popular Business Models of European Startups (2016)

IT/software development
15%

Software as a Service (SaaS)
12.2%

Industrial technology/production/hardware
8.3%

Consumer mobile/web application
6.8%

E-commerce
6.6%

Bio-, nano-, and medical technology
5.8%

Finance/finance technology (FinTech)
5.2%

Online marketplace
4.9%

Education
4.8%

Consulting company/agency
4.6%

Online service portal
4.2%

Green technology
4.0%

Food
3.4%

Media and creative industries
3.3%

Games
1.3%

Offline services
1.3%

Stationary wholesale and retail
0.6%

Other
7.9%

What is the prevailing business model for each country?

Prevailing business model by country

Austria
SaaS

Belgium: SaaS
SaaS

Cyprus
Industrial technology/production/hardware, Consumer mobile/web application

Finland: SaaS
SaaS

France
Consumer mobile/web application; IT/software development

Germany
IT/software development

Greece
Industrial technology/production/hardware

Hungary
IT/software development

Ireland
SaaS

Israel
IT/software development; SaaS

Italy
IT/software development

Netherlands
Other categories

Poland
IT/software development; SaaS

Portugal
IT/software development

Slovenia
IT/software development

Spain
SaaS

Switzerland
Finance technology (FinTech)

United Kingdom
e-commerce

Other EU countries
SaaS

What is the major challenge?

Greatest challenges for European Startups

Other
0.8 %

Team development
3.1 %

Acquisition of staff
5.6 %

Processes/internal organization
5.7 %

Profitability
5.7 %

Internationalization
6.3 %

Cashflow/liquidity
7.6 %

Raising of capital
12.1 %

Growth
16.6 %

Product development
17.1 %

Sales/customer acquisition
19.5 %

Sales and customer acquisition is the biggest challenge European startups have. As pointed out many times over on this blog, sales and distributions are among the most challenging part for any startup. At the same time, it is also the reason why many startups fail and many others do not succeed.

Reference for the data: European Startup Monitor

Resources for your business:

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Published on November 11, 2018 12:12

November 10, 2018

What Is SaaS? Software As A Service Business Model In A Nutshell

Software as a service (SaaS) is a model where a third-party provider hosts the infrastructure and applications and make them available through the Internet. This model leverages on web-based software and on-demand applications that run centrally on the server of the provider, while the company purchasing the service will use those applications based on need and without the upfront cost.

SaaS is a subcategory of a broader phenomenon and industry, based on cloud services. This also comprises other models like IaaS (infrastructure as a service) and PaaS (platform as a service).

The software industry before the internet

The main rule of software applications between the 1970s and 1980s was centralization. In short, a company provided a centralized mainframe-based system. At that stage company needed massive resources to install, manage and maintain the software and the hardware infrastructure required to run those applications. That implied a high risk and expense from businesses willing to implement those solutions at the enterprise level. That means a software market only available to large corporations with large budgets. That changed in the late 1990s when an organization could centrally run, maintain and operate the hardware and software, while any company, small or large could plug in any device to access the applications and services.

That also implied the need for more computational power. Thus, as computers got more powerful. And the internet faster, those applications could finally be run by any organization to automate and improve their services. Things like difficulty of deployment and high costs of ownership made it impossible for small businesses to take advantage of that technology.

When the on-demand becomes possible

The internet has opened up new business models, especially in the media industry. Where content could be consumed at the fixed schedule (think of TV and Radio) with the Internet, higher computing power, lower infrastructural costs, it becomes finally possible to consume content on-demand. Companies like Netflix, Spotify, and many others have become the rule. Those business models make possible for small organizations to run applications to automate their marketing processes at little cost. This is a paradigm shift, as finally companies of any size could use applications once used only by Fortune 500 companies, all becomes outsources, scalable and tailored to the business operations.

The rise of the cloud economy

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Source: financesonline

After the success of a few large players that reached billion in market capitalization, more and more startups joined in. As of the time of this writing, thousands of small companies around the world compete to offer SaaS solutions for any corporate need a company might have. But most of all from healthcare, legal, fintech, transportation and many others provide services based on the cloud.

Other large tech companies, like Amazon, Microsoft, Google and IBM are competing to dominate the cloud space:

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It all started from the CRM industry

One of the companies that lead the way in the SaaS industry was Salesforce. That is a CRM application (customer relationship management) which for a monthly fee allows automating internal processes of small and large organizations. It is worth then to look at the player the opened up the way to this industry.

SaaS origin story: Salesforce

When we started the company in 1999, we had a vision that businesses would move to the cloud and subscription-based services. Salesforce led the industry as the first to bring cloud, social and then mobile to CRM.

Marc Benioff, founder of Salesforce, incorporated the company in Delaware in February 1999 and introduced its service offering in February 2000. The aim was clear, to offer a hosted service at low-cost, easy-to-use and quick to deploy the application.

This also implied a high level of customization, integration with other software applications. While this idea might seem trivial today, it was quite visionary back then. Indeed, before a concept like that would be successful, it also needed ecosystems to be built around the cloud. Before this concept would take off would take a few years.

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Salesforce business model today
[image error]Salesforce main revenue generation strategy is based on a subscription-based cloud service. Over 92% of Salesforce revenues come from four categories of cloud CRM (Customer Relationship Management) services, that span from the sales cloud to a marketing cloud. The remaining revenues are primarily driven by professional services. In 2017 the company generated $8.39 billion in revenues.

With a subscription-based business model, Salesforce has finally been able to build a multi-billion company that in 2018 surpassed the ten billion dollars mark in revenues.

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The company also reached profitability in 2017, with $179 million in net profit and $127 million as of January 2018.

Those results have been possible thanks to the ecosystems that have finally been built around the cloud applications.

The power of ecosystems

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Salesforce integrations capabilities

The key ingredient of SaaS services is that instead of installing and maintaining software, you can access it via the Internet, freeing the company for software and hardware maintenance costs. However, a lack of other tools that could be integrated with the cloud solution still made it relatively valuable.

Think of the case of a company that had built several systems to collect the data of its customers, each relying on a different logic and framework. That data would be valuable as soon as it got offered within the context for which it has been thought.

However, with the rise of cloud computing and SaaS services all over the world, integrations have become the norm. In short, a company can finally go on Salesforce or any other cloud service and find countless numbers of applications that can be integrated. While this might seem trivial at first sight, it is also what had made this industry finally viable.

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Published on November 10, 2018 10:16

How Your Company Can Benefit From Strategic Meetings Management?

Strategic meeting management, a concept which was coined back in the year 2004, by the Global Business Travel Association (previously known as the Groups and Business Committee of the National Business Travel Association), has gained widespread adoption in the corporate world. Businesses, as well as corporations all over the globe, have adopted this method of managing global meetings and event planning, which primarily focuses on increasing profitability while reducing costs.

Event management, planning, and execution is a multifaceted activity involving the interest of various internal (company decision makers, manager, etc.) and external (experts from event planning industry) stakeholders. An SMM program is designed with a goal to align the interest of both the internal and external stakeholders, while at the same time keeping factors such as risk mitigations, adherence to regulation and cost in mind.

Functions of SMM

For those who are new to the concept of strategic meeting management and are looking to incorporate SMM program within their ecosystem, a meeting program generally comprises of four essential functions:

Planning and Managing Event

One of the most basic and well-known uses of an SMM program is event management and planning. An SMM program helps organizations plan a range of activities starting from the scope of meeting to booking accommodations and flights.

Connecting Disparate Elements

A meeting consists of some parties involved in its overall planning and execution. By using the SMM program, a company can synchronize and connect these different parties by streamlining the process of resource procurement. For example, a venue sourcing tool – part of SMM programs – can be utilized for sending RFP’s which in turn can help in easy sourcing of things such as travel, accommodation etc.

Keeping a Financial Check

One of the key advantages which an SMM program offers is helping organizations with the management of their finances. With an SMM program in place, an organization’s decision makers know in advance about the enablement cost of an event or meeting and thus can decide on the components to include or exclude. Strategic meeting management program can further help in expense reconciliation as well as can keep a company’s overall budget in place.

Risk Management

Strategic meeting programs further tend to help organizations mitigate risks and keep them aware of contractual obligations they hold towards vendors or suppliers. They also allow organizations to keep track of delegates and their schedule so that the organizers know about an attendees schedule and hence can make sure that meetings don’t coincide.

Why Should You Choose an SMM program?

While there are many benefits an SMM program can have for your organization, we list below the top 4 which have maximum impact.

Strategic Meeting Management Helps In Generating Maximum ROI

The term maximizing ROI sounds boring, but it is one of the most important advantages you can fetch from an efficient SMM program. While most of you might consider this process focussed towards optimizing cost, an SMM, in turn, enables organizations to design and conduct an event with clear goals in mind, aimed towards delivering quality. The ROI here is measured in terms of satisfaction achieved by an attendee which in turn will help them produce better results for the organization.

Strategic Meeting Management Gives You An Increased Visibility of Spends

An effective SMM program provides you with greater transparency as well as visibility into the spends which are going on in conducting a global enterprise meeting. Generally, with SMM, there is a single centralized database of spends where the organization’s stakeholder can have a look at what a particular department is making spends or where is their money going (to vendors, contractors, etc.). This, in turn, provides them with more significant insights into the finances and gives them an opportunity to optimize these costs as well as decide on what costs can be reduced without actually hampering the event quality.

Strategic Meeting Management Helps You With Compliances

Any event conducted needs to be compliant with both the internal as well as external policies. Internal policies are the company-specific rules which are put in place by the company stakeholders and can range from the maximum budget allocated, to the frequency of such meetings. External policies are policies specific to a region for, eg. U.S. Corrupt Practices Act, or compliances relating to pharmaceutical industries.

SMM having an integrated and transparent nature allows you to abide by these policies at all times and thus prevents your chances of running into a compliance roadblock.

Strategic Meeting Management AssistS with Risk Mitigation

With SMM all the contractual obligations, permissions, and authorizations are stored and recorded in a single central database. This makes it easier for you to review and remember each commitment you have and prevents any risk of delaying or defaulting on payments or defiance of regulations.

Strategic Meeting Management Might Boost Productivity and Data Quality

By bringing all the vital processes of enterprise meeting management such as procurement and selection, proposal and approval, transportation and accommodation, etc. under one umbrella SMM program streamlines the entire process and thus boosts response time which further increases productivity.

The system also stores the analytics and data in one central database and thus can check and remove redundancies if any, thereby increasing data quality.

By streamlining all the processes of strategic management and optimizing the cost associated with same, SMM makes it easy for organizations to secure the highest ROE (Return on Event), thereby boosting overall company profitability and margins.

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Guest contribution by Ethan Scott – he started his career in the publishing industry at a very young age. It was 2014 until Ethan realized that he needed to explore the terrains of writing and seek his passion for it. He worked, partnered and contributed to 20+ websites and blogs and constantly thrived by working on them.

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Published on November 10, 2018 09:35

November 9, 2018

Why To Use Big Data To Grow Your Business

At present, nearly 53% of businesses use big data analytics, which is a 17% increase since 2015. The telecom and financial services are the two industries to have adopted big data with the technology and healthcare industries being the third and fourth respectively. By 2020, it is estimated that the volume of big data will rise from 4.4 zettabytes to approximately 44 trillion gigabytes! This volume will shatter all the former data trends and set a completely new business world.

With a majority of businesses and industries utilizing big data analytics for streamlining processes, enrolling in a big data certification will be of great value for any professional to develop the right skill set.

Let’s take a look at how big data can transform and aid the growth of a business.

Improved Business Performance

Analyzing the potential of a business has become simpler and more efficient with the help of big data. With actionable insights generated from the data analytics, projects can be administered with a more strategic inclination. Obvious market trends can be recognized by utilizing big data and decisions can be executed accordingly. Efficient management and operational policies depend on how well a company plans and executes strategies. The reports generated by data analytics help optimize resources by revealing factors which can be enhanced. It enables a company to have more flexibility and make informed decisions by considering the consequences and risks of a business situation.

Innovative Marketing Strategies

With the introduction of social media, marketing strategies have witnessed a pivotal shift. With social media analytics generated with the help of big data, businesses can now understand the opinions and sentiments of their consumers better, which ultimately helps them devise better-directed marketing strategies. Modern big data techniques such as sentiment analytics, text analytics, and interpreting traffic data can help produce various insights about a potential consumer.

Moreover, data analytics assists in building product innovation to increase customer acquisition for a more intimate relationship between customers and organizations. Big data helps to actively monitor and improve the brand reputation and recommend suitable measures.

Drive Down Expenses

Big data analytics can recognize domains that require developments and helps a business drive down its expenses. It also identifies several business opportunities that may have been neglected and unexplored such as demographic indicators and untapped consumer segments. It also assists while hiring by analyzing a potential candidate’s profile to check whether they fit the specifications. By doing so, the profitability and growth factor increases. Big data analytics also brings down the cost for companies by determining less profitable units and designing an efficient utilization of the current resources. Furthermore, with the arrival of self-service big data analytics that empowers businesses to manage information, it has further helped bring the expenses down.

Customer Retention

Big data enables a business to engage with customers in real-time and have a one-on-one conversation. Data analytics helps a business to determine which marketing strategies, campaigns, and offers are a success among their customers and work towards enhancing them. Big data also helps track interactions and generate insightful information on how a business can develop its customer retention and acquisition strategies.

For instance, when a customer enters a bank, the cashier or the clerk can utilize big data analytics to monitor their profile in real time. This way, the clerk can determine the consumer’s preferences, and advise appropriate services and products to the customer.

Generate Better Revenue

From $122 billion in 2015 to an estimated $210 billion in 2020 in revenue, big data analytics is set to touch new heights. It equips a business with valuable insights by analyzing the market and understanding the customers. However, the generated data is not only relevant for the business but also the other parties involved. Businesses can market the non-personalised data to bigger firms and companies operating in the same industry. To obtain more benefits of big data, companies can also educate their employees about big data management, which will help them become more efficient and productive.

Risk Analysis

With big data analytics, businesses can chalk out a data framework to analyze any kind of possible internal or external threats, even before they occur. The information serves as a tool for businesses to keep any sensitive data secure by exercising the appropriate methods. This is a major reason why numerous industries are focussed on implementing big data analytics to their processes. However, if a business deals with credit and debit card or financial information, then they should pay extra attention. For big data to be a successful component of a business’s growth, certain factors such as social and economic standards of the business must be taken into account. Big data helps with predictive analytics, which helps constantly scan and analyze newspaper reports, social media feeds, or other things that are relevant to the business. This way, a business will be able to keep up with the latest industry developments and trends.

Key takeaway

With the arrival of big data in businesses, it’s safe to modify the saying ‘survival of the fittest’ to ‘survival of the smartest’! The fast-paced business environment has lifted the global economy. Plus with ultra-modern technological advancement such as big data, every business, be it a small company or big corporation, is compelled to use it and grow their business further!

Guest contribution by Abhinav Rai: Data Analyst at UpGrad, an online education platform providing industry oriented programs in collaboration with world-class institutes, some of which are MICA, IIIT Bangalore, BITS and various industry leaders which include MakeMyTrip, Ola, Flipkart etc.