Library/CFA (Chartered Financial Analyst)/JuiceNotes 2024: Corporate Issuers - CFA Level I/Business Models

Business Models

50 questions available

Channels and Core Pricing Models5 min

A business model defines the logic of a firm's value creation. A key aspect is the distribution channel. Traditional channels involve a chain from Manufacturer to Wholesaler to Retailer to End-Customer. Direct sales bypass intermediaries. Drop shipping allows retailers to sell without inventory, while omnichannel models integrate digital and physical touchpoints. Pricing strategies are fundamental, with value-based pricing focusing on the customer's perceived benefit and cost-based pricing focusing on covering costs. Price discrimination allows firms to capture more surplus through tiered pricing (volume discounts), dynamic pricing (time/demand based), and auctions.

Key Points

Channels connect manufacturers to customers via wholesalers, retailers, or direct sales.
Drop shipping eliminates the seller's need for inventory.
Omnichannel combines digital and physical sales channels.
Pricing can be value-based or cost-based.
Price discrimination includes tiered, dynamic, and auction-based pricing.

Complex Pricing Strategies5 min

Companies with multiple products or growth targets use specialized pricing. Bundling combines products to incentivize purchase. The 'razors and blades' model sells durable equipment cheaply to lock customers into buying high-margin consumables. Optional product pricing involves selling core products with add-on purchases. For growth, penetration pricing accepts low margins to build market share. Freemium models offer basic services for free while charging for premium features. Hidden revenue models provide free services to users, generating income from third parties (e.g., advertisers).

Key Points

Bundling packages multiple items together.
Razors and blades: Low capex cost, high opex margin.
Penetration pricing sacrifices margin for scale.
Freemium offers tiered access with a free entry level.
Hidden revenue models monetize non-paying user bases.

Ownership Alternatives and Structural Variations6 min

Businesses can separate usage from ownership. Subscription models provide recurring revenue. Fractionalization splits asset ownership into smaller units. Leasing shifts ownership burdens to a lessor. Licensing grants access to intangible assets, while franchising allows others to sell products under a brand. Variations include private label manufacturing (producing for other brands), value-added resellers (VARs) who customize products, and affiliate marketing which earns commissions on referrals. Marketplaces connect buyers and sellers without owning stock, while aggregators re-market services under their own brand.

Key Points

Alternatives to ownership: Subscriptions, Leasing, Fractionalization, Licensing, Franchising.
Private label manufacturers produce goods marketed by others.
Value Added Resellers (VARs) handle installation and customization.
Marketplaces do not take ownership of goods.
Affiliate marketing generates revenue via commissions.

Platform Models and Firm Specific Factors4 min

Modern models often rely on network effects, where a network becomes more valuable as more users join. Platform businesses create value outside the firm by facilitating interactions. Crowdsourcing leverages user contributions for content or products. Firm-specific factors include asset-light models, which shift high-cost asset ownership to others, and pay-in-advance models, which reduce working capital needs by collecting revenue before incurring costs.

Key Points

Network effects increase value with user growth.
Platform businesses facilitate external value creation.
Crowdsourcing relies on user contributions (e.g., Wikipedia).
Asset-light models reduce capital intensity.
Pay-in-advance models improve working capital.

Questions

Question 1

Which pricing model involves setting prices based on the perceived worth of the product to the customer rather than the cost of production?

Business Models

Questions

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